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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________
Commission File No. 0-10018
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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 registrant (1) has filed all reports 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, 1998, 118,722,290 shares of DSC Communications Corporation
Common Stock, $.01 par value, were outstanding, and the aggregate market price
of the shares held by nonaffiliates were approximately $2,238,026,122. (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 1998 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, 1997 are incorporated by reference in 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, 1997
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 75075-5813. 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
U.S. 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.
In December 1997, the Company acquired Celcore, Inc. (subsequently
renamed DSC/Celcore, Inc.), based in Memphis, Tennessee, a manufacturer of
Global Systems for Mobile Communications ("GSM") and Advanced Mobile Phone
Service ("AMPS") switch systems, for approximately $167 million, which included
cash, the assumption of stock options and acquisition costs.
In early 1998, the Company sold its fixed wireless local loop business
to a syndicate of venture capitalists for a
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minority ownership interest in a newly-formed company, Airspan Communications
Corporation ("Airspan"), and a promissory note issued by Airspan. Due to the
uncertainty regarding the ultimate recovery of the investment and the note, the
Company recorded a $22 million asset write-down in 1997.
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 WorldCom, Inc. The
Company is also a major manufacturer of high-capacity cellular switches for
Motorola, Inc., a leading supplier of wireless communication systems throughout
the world. International customers include DDI Corporation of Japan, Tele
Danmark, Deutsche Telekom in Germany, Cable & Wireless PLC and Mercury
Communications, Ltd. in the United Kingdom, British Telecommunications PLC,
Telefonos de Mexico, S.A. de C.V. and AAP Communications, Pty. Ltd. of
Australia.
This Annual Report on Form 10-K contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, which
involve risks and uncertainties. Actual results may differ materially from the
results discussed in or implied by the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those set forth
throughout this document, incorporated herein and detailed from time to time in
the filings with the Securities and Exchange Commission.
PRODUCTS
The percentage of consolidated revenue from the Company's product
groups was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Switch Systems 42% 42% 48%
Access Systems 37% 33% 28%
Transport Systems 20% 23% 23%
</TABLE>
SWITCH SYSTEMS. The Company develops, manufactures and markets
advanced switching and Intelligent Network ("IN") solutions for the worldwide
telecommunications marketplace. The Company's switching systems connect and
route calls and provide signaling for wireline and wireless networks. They also
furnish long-distance switching and switching to support high-speed
communications such as data, image and video. The Company's primary switching
products include tandem and cellular switching systems.
Driven by the demand for advanced features in the 1980s, worldwide
standards bodies developed the IN concept. As a result, service logic for
deploying enhanced services may be
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independent of the switching systems. Carriers can now realize the benefits of
rapid service introduction, service customization and cost-effective service
deployment. Currently active in wireless and wireline networks in Asia,
Europe, Japan and North America, the Company's compatible family of
INfusion(TM) products addresses the signaling, service commissioning and
service delivery requirements of current and emerging Intelligent Networks
throughout the world.
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 Megahub(R) high capacity, 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 Megahub line, scaleable from 10,000 to
120,000 traffic carrying ports, serves both North American and
international markets. The tandem product family also works with the
INfusion Intelligent Service Peripheral ("ISP") to provide IN
services.
Wireless Switches. Since 1984, the Company has provided
switching platforms to Motorola which, when integrated with a variety
of I/O peripherals and mobility management software, become wireless
switching systems. These systems, currently supporting cellular and PCS
applications in 37 countries worldwide, use 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 that are integral to the Company's overall switching products
family, including the large installed base of tandem switching systems.
In addition, the Company now provides Celcore's GSM and AMPS switch
systems. Celcore's focus is developing and supplying cellular systems
for low-subscriber density applications in emerging markets.
Signal Transfer Points (STPs). Signal Transfer Points are
network signaling hubs that provide access to CCS7 signaling networks
and that route signaling messages between IN nodes and other networks.
Deploying an STP provides efficient access to centralized node
services, improved CCS7 link utilization and economics and streamlined
network routing and control management.
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Based on the same MegaHub(R) architecture as the tandem family
of switches, and supporting SS7 and C7 signaling protocols, the
Company's INfusion STPs are installed in local, long-distance and
cellular networks throughout the world. The INfusion STP delivers the
real-time processing capacity and signaling throughput required to
handle heavy message traffic created by the growing number of
intelligent network services in today's wireless and wireline
networks. Features such as Global Title Translation, Gateway
Screening and Local Number Portability enable the network carrier to
cost-effectively expand message types to include IN and mobility
functions, to improve network protection and reliability, and to
address growing regulatory requirements.
INfusion SCE (Service Creation Environment). The SCE provides
the capability to create services from a library of reusable
components and is used to develop and test IN services and their
supporting logic. With its intuitive Graphic User Interface for
service creation and comprehensive simulation capabilities, the
INfusion SCE allows rapid creation, verification and deployment of IN
services.
INfusion SMS (Service Management System). The SMS provides
the tools to deploy, provision and activate SCE-created IN services.
It also manages the master database for IN services by distributing
changes to affected network elements and synchronizing the distributed
databases.
INfusion SCP (Service Control Point) and SCPm. These are
scaleable service delivery platforms that execute SCE-created
services. Designed to allow multiple services on a single platform,
the INfusion SCP and SCPm support a variety of wireline and wireless
services such as Number Translation, Calling Card Validation, Virtual
Private Networks ("VPN"), Home Location Register ("HLR") and Short
Message Service Center ("SMSC").
INfusion ISP (Intelligent Service Peripheral). The ISP
executes SCE-created services that require the exchange of information
with the caller (Intelligent Peripheral or IP capabilities) or
database look-up (SCP functions). The INfusion ISP supports number
translation, enhanced routing and calling card services for the
Company's tandem switches.
INfusion Intelligent Network Applications. The Intelligent
Network, by concentrating network intelligence into dedicated nodes,
introduces a method of creating services based on Service Independent
Building Blocks ("SIBBs"). Taking advantage of this IN design concept
of
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reusable components, the Company offers a variety of pre-packaged,
SIBB-based, wireline and wireless services that minimize development
time and allow rapid introduction of IN services. Developed by the
Company or in conjunction with its "Partners IN Vision," the portfolio
of services include HLR, Authentication Center, SMSC, Location-Based
Services, Calling Card and VPN.
The Company's major competitors in switching and intelligent network systems
are Lucent Technologies, Inc. ("Lucent"); Northern Telecom Ltd. ("Nortel"); AB
Telefon LM Ericsson ("Ericsson"); and Tandem Computers, Inc.
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 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 such products to serve telecommunications service carriers in the United
States and abroad.
Litespan(R)-2000/2012. In 1991, the Company began shipments of
Litespan-2000, a second generation digital loop carrier product that
enables local exchange carriers and other service providers to utilize
fiber optics in the local loop. Over a single pair of optical fibers,
Litespan 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. This year, the Company expanded the Litespan
offering with the Litespan-2012 product. Its OC-12 transport
capability and broadband interfaces enable delivery of very high rate
services such as DS3 and OC3, to end users, making the Litespan-2012
system a desirable choice for managing growth in networks. The
Litespan-2000 platform allows telecommunications service providers to
introduce the high-capacity technology of fiber optics into the local
loop and support basic services in a cost-effective manner. The
Company believes that upon completed development and introduction of
high-speed data services, such as asymmetrical digital subscriber line
("ADSL"), demand for access platforms such as Litespan will increase.
The Company currently has multi-year agreements with most of the RHCs
for purchases of Litespan systems.
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Litespan-Broadband(TM). The Litespan-Broadband system
provides an Asynchronous Transfer Mode ("ATM")-based, interactive,
fiber switched solution capable of delivering video, data and voice
services to residences and businesses. The Company will offer
Litespan-Broadband systems as a migratory path for new and current
Litespan customers as they upgrade to interactive, broadband
full-service networks. These new ATM-based networks will enable
carriers to offer a multitude of new revenue-generating services over a
single integrated platform.
Litespan(R)-120. The Company evolved the Litespan system to
address access applications in international markets. The
Litespan-120 product is a flexible access multiplexer that may be
deployed as a loop carrier or primary mux, using copper, fiber or radio
feeders. It 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 systems
began in late 1995. Network deployments are taking place in Latin
America and Eastern Europe. There is also additional field testing
under way.
Companion products from the Company's access products portfolio
include the Starspan(R) optical fiber system, 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 setting or a metropolitan
communications network.
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 (1)DSC DEXCS, iMTN(R), iDCS(TM), microDX(R),
(2)DSC DEX ECS1 and DSC DEX ECS3 models, has enabled
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(1) DSC DEXCS is a trademark of DSC Communications Corporation.
(2) DSC DEX is a trademark of DSC Communications Corporation.
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carriers and service providers to make their central offices and
long-distance facilities more efficient and less labor-intensive,
worldwide.
DSC DEXCS. The DEXCS system is a fully featured 3/1/0 SONET
cross-connect. The system provides scaleable growth to the industry's
largest narrow-band cross-connect. The DEXCS cross-connect also
provides the unique capability to bridge between the traditional
telephony network and the emerging cell based data networks (frame
relay and ATM).
iMTN (Integrated Multi-Rate Transport Node). The iMTN system
provides broadband routing, distribution and management throughout the
network. The iMTN cross-connect also provides the unique capability of
optical interfaces up to OC48 for the public telecommunications
network's evolution to the North American SONET, international
Synchronous Digital Hierarchy ("SDH") fiber optic standards and ATM
transport requirements. Early applications of iMTN systems include
network video broadcast and high-volume voice/data transfer. The iMTN
product has been deployed both domestically and internationally.
iDCS (Integrated Digital Cross-Connect System). The iDCS
system addresses the smaller size wide-band transmission requirements
for management of voice and data circuits in the telecommunications
network. This product also meets the domestic requirements of SONET
and international specifications of SDH. The iDCS cross-connect
provides optical and electrical interfaces to other telephone company
equipment, and economically manages circuit traffic throughout the
network.
microDX(R). The microDX product offers sophisticated
cross-connect features to sites of varying size and remoteness. For
example, with the Company's microDX system, cell sites, wireless hubs
and private networks can inexpensively incorporate high-end
cross-connect features. The microDX cross-connect 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.
Transmission and Network Management. The Company's broad
product spectrum in Telecom Transmission and Network Management is
further developed at DSC Communications A/S, the Danish subsidiary,
acquired at the end of 1994. The FOCUS family of products encompasses
second generation high speed add/drop multiplexers and cross-connects
for international use. The optical fiber transport systems
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include (3)DSC FOCUS AC0 primary multiplexers; DSC FOCUS AC1, an
ultra-compact SDH transmission family designed for STM-1 and STM-4;
and DSC FOCUS AC4 high speed SDH transport family with a capacity of
up to 120,000 simultaneous telephone channels per optical fiber pair,
when enhanced with WDM technology (defined below). Traffic continuity
is ensured by the selection of various network protection schemes.
Through the Danish optical amplifier technology, the Company is a
world leader in long-distance optical transmission at high data rates
without repeaters. Easy and efficient network management at all
levels is provided by the DSC FOCUS NM2100 network management family,
extending from local equipment management with PCs to nationwide
network management utilizing several distributed high-performance
computers. Traffic path setup and surveillance, automatic traffic
rerouting and network optimization are some of the built-in features.
The latest result of the Company's optical expertise is Wavelength
Division Multiplexing (WDM) technology that allows a number of high
speed data channels to be transmitted at the same time through a
single fiber. In addition, the Company manufactures a stand-alone
WDM system that can be used with existing transmission equipment of
any make.
The Company also develops, manufactures, and markets a variety of
digital transmission products such as echo cancellers 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 transmission equipment market in which the Company's Danish
subsidiary targets its products are Alcatel, Ericsson and Siemens AG.
REGULATION
The telecommunications industry is subject to regulation in the United
States and other countries. These regulations, some of which apply directly to
the Company and others of which govern the Company's customers and competitors,
may also have an impact on the Company's business.
In the U.S., federal and state regulatory agencies, including the
Federal Communications Commission ("FCC") and various state commissions
(usually either Public Utility Commissions, Public Service Commissions, or
Corporation
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(3) DSC FOCUS is a trademark of DSC Communications Corporation.
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Commissions, collectively the "PUCs") regulate most of the Company's domestic
customers. In early 1996, the Telecommunications Act of 1996 (the "1996
Legislation") was passed. The 1996 Legislation seeks to increase competition
in telecommunications by making it easier for competitors to enter new markets,
particularly the market for local exchange services. This legislation could
increase the demand for systems, software and services as new entrants build
networks and existing network operators respond to the changing competitive
environment by constructing new or enhancing existing networks. However, such
competition may be slower to develop than Congress anticipated. An FCC Order
preempting state PUC regulation of interconnection charges, the setting of
uniform rules for such charges, and the imposition of requirements with respect
to the duty of incumbent local exchange carriers to provide unbundled network
elements has been overturned in several respects by the Court of Appeals for
the Eighth Circuit. The case is not expected to be heard by the U.S. Supreme
Court until the October 1998 term. In the meantime, much of these matters will
be the responsibility of the various state PUCs insofar as they deal with
intrastate service.
In addition, the 1996 Legislation contains provisions that permit the
RHCs, subject to satisfying certain conditions, to manufacture
telecommunications equipment. Prior to the 1996 Legislation, the RHCs were
restricted by the terms of the Modified Final Judgment ("MFJ") that resulted in
the divestiture of the RHCs by AT&T Corporation. The MFJ prohibited the RHCs
from, among other things, manufacturing telecommunications equipment and
providing interLATA long distance services. On December 31, 1997, a federal
district court in Texas determined that the conditions on RHC entry into these
areas that were contained in the 1996 Legislation amounted to an
unconstitutional bill of attainder. Although the impact of that ruling has
been stayed pending appeal, it could, if upheld, allow the RHCs to enter the
manufacturing market more quickly than they could under the 1996 Legislation.
One or more RHCs may decide to manufacture telecommunications equipment, to
design and provide telecommunications software, or to form alliances with other
manufacturers. This could result in increased competition for the Company and
reduce the RHCs' purchases from the Company.
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
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the carriers have further agreed, in order to win relaxation of profit limits,
that the carriers would invest large sums to further upgrade the digital and
optical capabilities of the network. The Company believes that the new methods
of price regulation could increase the demand for its products that 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 due
primarily to increased investment in infrastructure by newly privatized
entities and new competitors. The entry that went into effect on February 5,
1998 of the World Trade Organization's Agreement on Basic Telecommunications
Services, intended to facilitate the entry of foreign investment in the
telecommunications sector, should encourage this trend.
The Company's products may need to comply with various technical
requirements and regulations. Failure by the Company to obtain timely
approval of products could have an adverse effect on the Company's business. In
addition, the Communications Assistance for Law Enforcement Act ("CALEA"),
which currently is scheduled to become effective in October 1998, requires
carriers to retool their telecommunications networks to assist law enforcement
agencies to intercept communications. Manufacturers of telecommunications
network equipment are obligated to cooperate by making available, at reasonable
prices on a reasonably timely basis, features and modifications necessary for
carriers to comply. Enforcement orders may be entered against carriers and
manufacturers who fail to comply. At this time the exact technical
requirements that the federal government will expect equipment manufacturers to
meet, the cost of complying with those requirements, and whether sufficient
money will be
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appropriated to reimburse carriers for the full costs of compliance has not
been fully determined.
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.
INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
The information required for this section is set forth in the
"International Operations and Major Customers" footnote on page 42 of the
Company's 1997 Annual Report to Shareholders, which information is incorporated
herein by reference. Customers who accounted for at least 10% of the Company's
consolidated revenue in 1997 were Motorola and Bell Atlantic/Nynex.
BACKLOG
The Company's backlog, calculated as the aggregate of the sales price
of orders received from customers less revenue recognized, was approximately
$901 million and $811 million on December 31, 1997 and December 31, 1996,
respectively. Approximately $318 million of orders included in the December
31, 1997 backlog are scheduled for delivery after December 31, 1998. 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
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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 $252.1 million, $210.1 million, and $189.8 million, for the years
ended December 31, 1997, 1996, and 1995 respectively. Additionally,
approximately $50.0 million, $37.0 million, and $26.8 million, of software
development costs were capitalized in the Consolidated Balance Sheets in 1997,
1996, and 1995, respectively. Also in 1997, the Company recorded a $135.0
million charge related to in-process research and development in connection
with the acquisition of Celcore.
COMPETITION
The Company currently faces significant competition in its markets and
expects that the level of price and product competition will increase. In
addition, as a result of both the trend toward global expansion by foreign and
domestic competitors and technological and public policy changes, the Company
anticipates that new and different competitors will enter its markets. These
competitors may include entrants from the telecommunications, software and data
networking industries. 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
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, but not limited to,
product features, innovation, quality, reliability, service, support, price and
the retention and attraction of qualified design and development personnel.
See "Products" for a discussion of competitors by product.
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. Recent changes in
silicon wafer and other electronic component technologies have required the
Company to evaluate the
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feasibility of "lifetime" purchases of certain component materials. Such
"lifetime" purchases may or may not be sufficient to fulfill customer demand.
Alternatively, the Company could be required to find second sourcing of these
component materials or modify existing product designs. Although the Company
has not experienced any material adverse effects from the inability to obtain
timely delivery of needed components, an unanticipated failure of any
significant supplier to meet the Company's requirements for an extended period,
or an interruption of the Company's ability to secure comparable components
could have an adverse effect on the Company's revenue and profitability. In
addition, the Company's products contain a number of subsystems or components
acquired from other manufacturers on an OEM basis. These OEM products are
often available only from a limited number of manufacturers. In the event that
an OEM product was no longer available from a current OEM vendor, second
sourcing would be required and could delay customer deliveries which could have
an adverse effect on the Company's revenue and profitability.
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION
The Company's proprietary technology is a key component of the value
of its products. The Company has an established program to protect its
proprietary information through patent, trademark, copyright and trade secret
procedures. The Company currently has patents issued to it and numerous patent
applications pending in the United States and foreign countries. There is no
guarantee that the pending applications will mature into issued patents or that
the patents issued will be held valid or will provide competitive advantage to
the Company in the respective jurisdictions if challenged or circumvented. The
laws of some foreign countries do not extend the same level of protection for
intellectual property as do the laws of the United States. While the Company
believes that the protection of its intellectual property by patents,
copyrights and trade secrets has value, it also believes the continued
innovative skills, technological expertise and management abilities of its
employees underlies the success of the Company.
Because of the rapid rate of technological innovation in the
telecommunications industry, the high numbers of patents being applied for
internationally and delays in various patent offices, it is not possible to
anticipate whether each of the Company's products or any of their respective
components may be covered by a patent applied for or issued to a third party.
From time to time, the Company receives notice from third parties regarding
patent or other intellectual property claims. If infringement is alleged, the
Company believes that, based upon industry practice,
Page 13
<PAGE> 15
any necessary license or right from a third party may be obtained on terms that
would not have a material adverse effect on the Company's financial condition
or its results of operations. Nevertheless, there can be no assurance that the
necessary licenses would be available on acceptable terms, if at all, or that
the Company would prevail in any challenge by a third party. The inability to
obtain certain licenses or other rights or to obtain such licenses or rights on
favorable terms, or litigation arising out of such other parties' assertion,
could have a material adverse effect on the Company's business, operating
results and financial condition.
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, 1997, the Company had a total of 6,681 employees.
Page 14
<PAGE> 16
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 1,470,000 655,000 Corporate offices; administration; engineering, research
and development; manufacturing and assembly; customer service
and support; and warehousing.
Copenhagen, 223,000 20,100 Administration; manufacturing and assembly; engineering,
Denmark research and development; and warehousing.
Aguadilla, Puerto Rico -- 164,000 Manufacturing; assembly; and warehousing.
Petaluma, California -- 162,000 Engineering, research and development; and assembly.
Feltham and -- 87,000 Engineering, research and development; customer sales
Ashford, England and service; and warehousing.
San Jose, Costa Rica -- 97,000 Manufacturing; assembly; and warehousing.
Drogheda, Ireland -- 122,000 Manufacturing and assembly; engineering, research and
development; and warehousing.
Memphis, Tennessee -- 50,255 Administration; engineering, research and development; and
assembly.
</TABLE>
In late 1997, the Company began construction on a new customer service
facility on the Plano campus. This facility, which will replace current leased
facilities, will be approximately 200,000 square feet developed on approximately
16 acres of land. The Company owns approximately 291 acres of land in Plano,
Texas and approximately 28 acres of land in Copenhagen, Denmark, of which 119
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.
Page 15
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
In August, 1996, the Company filed suit against Samsung Information
Systems America, Inc., Samsung Electronics Co., Ltd. and James L. Bunch and
later added additional defendants Leo Putchinski, Kevin Gallagher, Jim Olivier,
Nancy Korman, Martin Wu, David Fox, Bhushan Gupta and Michael Bray
(collectively the "Defendants"). The suit arises out of research and
development that the Company was and is doing on a next-generation switching
system. Many of the Defendants to this suit were long-term employees of the
Company and were involved in the research and development of the Company's
next-generation switching system. In the summer and early fall of 1996,
Samsung hired each of these individuals and placed them into similar positions
researching and developing Samsung's next-generation switching system.
Page 16
<PAGE> 18
The Company alleges claims for breach of contract, theft of trade
secrets, unfair competition and tortious interference with contract and
prospective contractual relations. Based on these claims, the Company is
seeking damages in an amount that is not yet specified. The Company is also
seeking an injunction against the Defendants to prevent them from using the
Company's trade secrets. The Company obtained a Temporary Restraining Order
against Defendant Bunch on August 14, 1996.
On December 31, 1996, the Defendants filed a counterclaim against the
Company, alleging a variety of causes of action, including a claim 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.
The Company believes that it has valid and substantial claims against
the Defendants and valid defenses to the Defendants' counterclaims.
On October 8, 1996, the Company filed suit against Pulse
Communications, Inc. ("Pulsecom") alleging contributory copyright infringement
and misappropriation of trade secrets relating to the manufacture and sale of a
POTS line card advertised as compatible with the Company's Litespan-2000
system. The Company sought damages and an injunction barring further
infringement of the Company's intellectual property rights by Pulsecom and its
agents. Pulsecom filed a counterclaim alleging that the Universal Voice Grade
line card manufactured by the Company for the Litespan-2000 system infringes U.
S. Patent No. 5,263,081 assigned to Pulsecom. The Company's claims against
Pulsecom were dismissed by the trial court on June 10, 1997. Pulsecom's claims
against the Company were dismissed August 29, 1997. Both parties have filed
appeals. Based on the facts known at this time, the Company believes it has a
valid defense to Pulsecom's claim and that the ultimate outcome of the dispute
will not have a material adverse effect on the Company's consolidated financial
position.
On May 25, 1994, the Company filed suit against DGI Technologies, Inc.
("DGI"), a Texas corporation, in the United States District Court for the
Northern District of Texas, Dallas Division. The Company alleged that DGI
misappropriated the Company's trade secrets regarding digital trunk interface
cards and microprocessor cards. The Company sought damages for DGI's prior
actions and permanent injunctive relief. DGI brought counterclaims for alleged
violations of federal antitrust statutes, tortious interference, industrial
espionage, misappropriation of trade secrets, trespass, conversion and unfair
competition. DGI's antitrust counterclaims were based upon allegations that
the Company's claims constituted "sham" litigation, that the Company's
statements to customers about the impact of their use of DGI products on the
Company's warranties were unlawful attempts to exclude competition, and that
the Company had unlawfully tied the sale of its microprocessors to the sale of
other products. The balance of DGI's counterclaim was based upon certain
investigative procedures employed by the Company in connection with this
controversy. DGI asked the court to award unspecified actual damages, treble
damages under antitrust statutes, punitive damages, injunctive relief and
attorneys' fees, and sought declaratory relief that DGI's sales of
microprocessors did not violate any proprietary rights of the Company or any
applicable law.
The case was tried in January 1997 and the jury returned a verdict.
The Court entered a final judgment on November 18, 1997. The judgment enjoined
DGI from selling its microprocessor cards and included a net monetary judgment
of $300,000 in the Company's favor. Both parties have filed appeals to the
Fifth Circuit Court of Appeals.
On December 22, 1997, Catherine Millet, the Company's former Vice
President of advanced planning in the Access Products Division and her new
employer, Advanced Fibre Communications ("AFC"), sued the Company in Roseville,
California State Court for declaratory judgment against the Company. Millet is
attempting to keep the Company from enforcing rights in its trade secrets and
intellectual property which Millet will inevitably be
Page 17
<PAGE> 19
required to use in her new position with AFC. Ms. Millet is performing the
identical job function in advanced product planning that she performed for the
Company in regard to the same line of products. The Company had previously
sued AFC for theft of trade secrets in U. S. District Court. That case was
resolved at trial.
The Company plans to vigorously defend its trade secrets and
intellectual property in this matter. In a related action, the Company has
brought an action for patent infringement against AFC in Federal Court in
Texarkana, Texas.
The Company is also party to other routine legal proceedings
incidental to its business.
The Company does not believe the ultimate resolution of these matters
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 1997.
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, 1998, the executive officers of the
Company are as follows:
Page 18
<PAGE> 20
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION(S) WITH COMPANY
---- --- --------------------------------
<S> <C> <C>
Allen R. Adams 48 Senior Vice President
Wylie D. Basham 59 Senior Vice President
James L. Donald 66 Chairman of the Board, President,
and Chief Executive Officer
Gerald F. Montry 59 Senior Vice President, Chief
Financial Officer, and Director
Michael J. Pisterzi 38 Vice President
</TABLE>
Allen R. Adams joined the Company in 1979, as Director of Hardware and
Systems Development. Since 1979, Mr. Adams has held a variety of project and
design engineering positions. In May 1996 he was appointed Senior Vice
President, Corporate Strategic Planning and Business Development.
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 and intelligent networking activity. In August 1997,
Mr. Basham was named Senior Vice President, Product Group Operations.
James L. Donald became President and a Director of the Company in
March 1981. He was elected Chief Executive Officer in August 1981. Mr. Donald
was elected Chairman of the Company's Board of Directors in 1989.
Gerald F. Montry joined the Company in 1986 as Senior Vice President
and Chief Financial Officer. In 1989, Mr. Montry was elected to the Company's
Board of Directors.
Michael J. Pisterzi joined the Company in 1993 as Director, Access
Sales, for the Central U.S. Region. In October 1994, he was appointed Regional
Vice President, Central U.S. Region. In September 1995, Mr. Pisterzi was
appointed to lead the sales effort to the Bell Operating Companies as Vice
President, Telco Sales. He now serves as Vice President, North American Sales
and Global Customer Services.
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>
1997: High Low
- ---- ---- ---
<S> <C> <C>
4th Quarter $30 11/16 $20 23/32
3rd Quarter 32 1/8 21 11/16
2nd Quarter 26 7/16 18 5/8
1st Quarter 24 1/4 18
</TABLE>
<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
</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, 1998, was $19 1/16 per share. As of December 31, 1997, there were
4,694 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 1997 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 25 of the Company's 1997 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 26 through
44 of the Company's 1997 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 1998 Annual Meeting of
Stockholders on page 1 under the heading "ELECTION OF DIRECTORS", and on page
12 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 15 of
the definitive proxy statement of the Company, filed in connection with its
1998 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 3 through 12, and "Compensation of Directors" on page 13 of the
definitive proxy statement of the Company, filed in connection with its 1998
Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from the information set forth under the heading "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" on page 14 of the definitive proxy statement
of the Company, filed in connection with the 1998 Annual Meeting of
Stockholders.
Page 21
<PAGE> 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the information set forth under the heading "Compensation of Directors"
on page 13 of the definitive proxy statement of the Company, filed in
connection with the 1998 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, 1997 and 1996: Consolidated
Balance Sheets
For the Years Ended December 31, 1997, 1996, and 1995:
- 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, 1997, 1996, and 1995:
- 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.
Page 22
<PAGE> 24
3. Exhibits:
3.1 Restated Certificate of Incorporation of DSC
Communications Corporation dated October
27, 1997 (16)
3.2 Amended and Restated By-laws of the Company (13)
4.1 Rights Agreement, Dated as of April 25, 1996,
Between the Company and KeyCorp Shareholder
Services, Inc. as Rights Agent (10)
4.2 Form of Letter to the Company's Stockholders, Dated
May 28, 1996, Relating to the Adoption of
the Rights Agreement Described in Exhibit 4.1 (10)
4.3 Indenture, Dated August 12, 1997, between DSC
Communications Corporation and the Bank of New
York, as Trustee (14)
10.1 Employment Agreement Between the Company and James
L. Donald, Dated January 1, 1990 (3)
10.2 Executive Income Continuation Plan, Dated January
1, 1990, Between the Company and James L. Donald (3)
10.3 Insurance Ownership Agreement, Dated January 1,
1990, Between the Company and James L. Donald (3)
10.4 The Company's Amended and Restated 1984 Employee
Stock Option Plan (2)
Page 23
<PAGE> 25
10.5 The Company's Amended and Restated 1988 Employee
Stock Option Plan (2)
10.6 The Company's 1993 Employee Stock Option and
Securities Award Plan (4)
10.7 The Company's 1993 Non-Employee Directors Stock
Option Plan (4)
10.8 The Company's 1997 Non-Employee Directors Stock
Option and Restricted Stock Plan (15)
10.9 The Company's Restoration Plan, Dated July 1, 1988
(1)
10.10 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 (2)
10.11 The 1990 Optilink Stock Option and Cash Payment
Plan, Dated May 15, 1990 (3)
10.12 The Company's 1994 Long-Term Incentive Compensation
Plan, Effective as of January 1, 1994 (5)
10.13 DSC Communications Corporation Executive Deferred
Income Plan (6)
10.14 Note Purchase Agreement Between the Company and
Certain Financial Institutions, dated
April 15, 1995 (7)
Page 24
<PAGE> 26
10.15 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 (9)
10.16 Promissory Note for 250 Million Danish Kroner dated
July 23, 1996 to Den Danske Bank (11)
10.17 Line Letter for 250 Million Danish Kroner dated
July 23, 1996 issued by Den Danske Bank (11)
10.18 Promissory Note for 300 Million Danish Kroner dated
July 23, 1996 to Den Danske Bank (11)
10.19 Line Letter for 300 Million Danish Kroner dated
July 23, 1996 issued by Den Danske Bank (11)
10.20 Guaranty dated July 23, 1996 (11)
10.21 Subordination Agreement dated July 23, 1996 (11)
10.22 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 (12)
10.23 First Amendment (Effective September 27, 1996) to
Multicurrency Credit Agreement Dated May
8, 1996 (12)
10.24 Form of Amended and Restated Severance Compensation
Agreement Between the Company and Certain of its
Officers and schedule thereto (18)
10.25 The Company's Annual Incentive Bonus Plan, Dated
January 1, 1996 (8)
10.26 The Company's Supplemental Executive Retirement
Plan, Dated July 1, 1997 (18)
10.27 Amended and Restated Agreement and Plan of Merger
among the Company, CI Acquisition Company and
Celcore, Inc., Dated October 29, 1997 (17)
Page 25
<PAGE> 27
13.1 1997 Annual Report to Shareholders (for EDGAR
filing purposes only)
21.1 Subsidiaries of the Registrant (18)
23.1 Consent of Ernst & Young LLP (18)
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 The Company's Amended and Restated 1984
Employee Stock Option Plan; 10.5 The Company's Amended and Restated 1988
Employee Stock Option Plan; 10.6 The Company's 1993 Employee Stock Option and
Securities Award Plan; 10.7 The Company's 1993 Non-Employee Directors Stock
Option Plan; 10.8 The Company's 1997 Non-Employee Directors Stock Option Plan;
10.9 The Company's Restoration Plan, Dated July 1, 1988; 10.10 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; 10.12 The Company's 1994
Long-Term Incentive Compensation Plan, Effective as of January 1, 1994; 10.13
DSC Communications Corporation Executive Deferred Income Plan;
Page 26
<PAGE> 28
10.24 Form of Amended and Restated Severance Compensation Agreement Between the
Company and Certain of its Officers and schedule thereto; 10.25 The Company's
Annual Incentive Bonus Plan, Dated January 1, 1996; 10.26 The Company's
Supplemental Executive Retirement Plan, Dated July 1, 1997.
(b) Reports on Form 8-K:
Form 8-K, dated November 3, 1997
Item 5. Other Events - Press Release related to acquisition of
Celcore, Inc.
Item 7. Financial Statements and Exhibits
Form 8-K, dated November 13, 1997
Item 5. Other Events - Press Release related to the collection of the
$140 million judgment from Next Level
Communications.
Item 7. Financial Statements and Exhibits
Form 8-K, dated December 19, 1997
Item 2. Acquisition or Disposition of Assets - Amended and Restated
Agreement and Plan of Merger relating to the Celcore, Inc.
acquisition.
Page 27
<PAGE> 29
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1988
(2) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1990 Annual
Meeting of Stockholders
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1990
(4) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1993 Annual
Meeting of Stockholders
(5) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1994 Annual
Meeting of Stockholders
(6) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
(7) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995
(8) Incorporated by reference from the definitive proxy statement
of the Company, filed in connection with the 1996 Annual
Meeting of Stockholders
(9) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996
(10) Incorporated by reference from the Company's Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
May 13, 1996
(11) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996
Page 28
<PAGE> 30
(12) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996
(13) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
(14) Incorporated by reference from the Company's Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
August 26, 1997
(15) Incorporated by reference from the Company's Registration
Statement on Form S-8, File No. 333-39469, filed with the
Securities and Exchange Commission on November 4, 1997
(16) Incorporated by reference from the Company's Registration
Statement on Form S-4, File No. 333-39591, filed with the
Securities and Exchange Commission on November 5, 1997
(17) Incorporated by reference from the Company's Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
December 19, 1997
(18) Filed herewith
Page 29
<PAGE> 31
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. Except for the historical information contained herein, the
matters discussed or incorporated by reference in this Annual Report on Form
10-K herein, including the matters relating to future performance, are
forward-looking statements that are dependent upon a number of risks and
uncertainties that could cause actual results to differ materially from those
in the forward looking statements. These risks and uncertainties include, but
are not limited to, economic conditions, product demand and industry capacity,
competitive products and pricing, manufacturing efficiencies, research and new
product development, protection of intellectual property, patents and
technology, ability to attract and retain highly qualified personnel, quarterly
earnings fluctuations from factors such as a shift in the mix of products
delivered including the amount of software content and the impact of sales
price changes, availability of components and critical manufacturing equipment,
facility construction and startups, the regulatory and trade environment, the
timing and ultimate receipt of orders from certain customers which continue to
constitute a large portion of the Company's revenue, the successful integration
of strategic acquisitions, effects of consolidation among the Company's
customer base, the success of underlying technologies in which the Company has
chosen to target its products, the successful completion of certain multi-year
projects which include requirements to develop new technologies including
hardware, software and installation of infrastructure systems, effects of
customer purchasing budgets, which have historically resulted in weaker demand
for the Company's products in the first half of the year, and other risks
indicated from time to time in the Company's 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)
March 31, 1998 /s/ JAMES L. DONALD
--------------------------------
James L. Donald, Chairman of the
Board, President, Chief Executive
Officer, and Director
<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, 1998
- ---------------------------
James L. Donald, Chairman
of the Board, President, Chief
Executive Officer, and Director
(Principal Executive Officer)
/s/ Raymond J. Dempsey March 31, 1998
- ---------------------------
Raymond J. Dempsey
Director
/s/ Sir John Fairclough March 31, 1998
- ---------------------------
Sir John Fairclough
Director
/s/ James L. Fischer March 31, 1998
- ---------------------------
James L. Fischer
Director
/s/ Robert S. Folsom March 31, 1998
- ---------------------------
Robert S. Folsom
Director
/s/ William O. Hunt March 31, 1998
- ---------------------------
William O. Hunt
Director
/s/ Gerald F. Montry March 31, 1998
- ---------------------------
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/ KENNETH R. VINES March 31, 1998
- ------------------------------
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, 1997 $ 7,062 $ 7,626 $ 1,770(1) $ 2,491(2) $13,967
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
</TABLE>
(1) The 1995 amount includes amounts related to the acquisition of DSC
Communications A/S. The 1997 amount includes amounts related to the
acquisition of Celcore Inc. Additionally, the 1996 and 1997 amounts
include transfers from "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>
10.24 Form of Amended and Restated Severance Compensation
Agreement between the Company and Certain of its Officers
and schedule thereto
10.26 The Company's Supplemental Executive Retirement Plan, Dated
July 1, 1997
13.1 1997 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 10.24
AMENDED AND RESTATED
SEVERANCE COMPENSATION AGREEMENT
AMENDED AND RESTATED SEVERANCE COMPENSATION AGREEMENT dated as of
[Date1], between DSC COMMUNICATIONS CORPORATION, a Delaware corporation (the
"Company"), and [FirstName] [LastName] (the "Executive").
WHEREAS, the Company's Board of Directors 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 has previously entered into an Amended and
Restated Severance Compensation Agreement with the Executive dated as of
[Date2], as from time to time amended (the "Prior Severance Agreement"); and
WHEREAS, the Company's Board of Directors has determined that it is in
the best interest of the Company and its stockholders to clarify and modify the
Prior Severance Agreement and to enter into this Amended and Restated Severance
Compensation Agreement (the "Agreement") incorporating such modifications and
clarifications and replacing and superseding the Prior Severance Agreement.
NOW, THEREFORE, this Agreement sets forth the severance compensation
which the Company agrees it will pay to the Executive if the Executive's
employment with the Company terminates under certain circumstances described
herein following a Change in Control (as defined herein) and the other benefits
the Company will provide the Executive following a Change in Control.
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
earlier of (i) the termination of Executive's employment for any reason prior
to a Change in Control; and (ii) three years after the date of a Change in
Control.
2. CHANGE IN CONTROL.
For purposes of this Agreement, Change in Control shall mean:
(a) 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,
as amended (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 (i) the then-outstanding
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shares of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) 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 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 privilege), (B) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (C) any acquisition by any corporation pursuant to
a reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in subclauses (i), (ii) and
(iii) of clause (c) of this sentence are satisfied; or
(b) if individuals who, as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; 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 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; or
(c) approval by the stockholders of the Company of a
reorganization, merger or consolidation, unless following such reorganization,
merger or consolidation (i) more than 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 securities of the Company), (ii) 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
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<PAGE> 3
indirectly, 20% or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities, as the case may be) beneficially owns,
directly or indirectly, 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 (iii) 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
(d) (i) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company or (ii) the first to occur of (A) 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 (B)
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, (1) more than 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), (2) 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, 20% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities, as the case may
be) beneficially owns, directly or indirectly, 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 (3) 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.
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<PAGE> 4
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) The Executive shall be entitled to the compensation provided
in Section 4 of this Agreement if all of the following conditions are
satisfied:
(i) there is a Change in Control of the Company while the
Executive is still an employee of the Company;
(ii) the Executive's employment with the Company is terminated
within two years after the Change in Control; and
(iii) the Executive's termination of employment is not a result of
(A) the Executive's death; (B) the Executive's Disability (as defined
in Section 3(b) below; (C) the Executive's Retirement (as defined in
Section 3(c) below); (D) the Executive's termination by the Company
for Cause (as defined in Section 3(d) below); or (E) the Executive's
decision to terminate employment other than for Good Reason (as
defined in Section 3(e) below).
(b) If, as a result of the Executive's incapacity due to physical
or mental illness, the Executive shall have been unable, with or without a
reasonable accommodation, to perform his duties with the Company on a full-time
basis for six months and within 30 days after a Notice of Termination (as
defined in Section 3(f) below) is thereafter given by the Company, the
Executive shall not have returned to the full-time performance of the
Executive's duties, the Company may terminate the Executive's employment for
"Disability". If there is a Change in Control of the Company while the
Executive is still an employee and if the Executive's employment with the
Company is terminated for Disability within two years after the Change in
Control, the Executive shall be entitled to receive in a lump sum cash payment
within five days after his Date of Termination (as defined in Section 3(g)
below) the following:
(i) two times his annual base salary, at the annual rate in effect
immediately prior to the Date of Termination; plus
(ii) his earned but unpaid base salary through his Date of
Termination; plus
(iii) an annual incentive award for the current fiscal year prorated
through the Date of Termination equal to the greater of (A) the annual
incentive award (whether paid or payable in cash or in securities of
the Company) awarded to the Executive with respect to the Company's
most recent fiscal year ending prior to the Date of Termination or (B)
the average annual incentive award (whether paid or payable in cash or
in securities of the Company) made to the Executive with respect to
the Company's most recent three fiscal years ending prior to the Date
of Termination; plus
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<PAGE> 5
(iv) interest on the amounts payable pursuant to clauses (i), (ii)
and (iii) above calculated from the Date of Termination until paid at
a rate equal to the prime rate as published in The Wall Street Journal
on the Date of Termination plus three percentage points.
(c) 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) The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, "Cause" shall mean: (i) the
Executive's conviction of a felony involving moral turpitude; or (ii) the
Executive's serious, willful gross misconduct or willful gross neglect of
duties (other than any such neglect resulting from the Executive's incapacity
due to physical or mental illness or any such neglect after the issuance of a
Notice of Termination by the Executive for Good Reason, as such terms are
defined in subsections (e) and (f) below), which, in either case, has resulted,
or in all probability is likely to result, in material economic damage to the
Company; provided no act or failure to act by the Executive will constitute
"Cause" under clause (ii) if the Executive believed in good faith that such act
or failure to act was in the best interest of the Company.
Any termination of the Executive's employment by the Company for Cause
shall be authorized by a vote of at least a majority of the non-employee
members of the Board of Directors of the Company (the "Board") within 12 months
of a majority of such non-employee members of the Board having actual knowledge
of the event or circumstances providing a basis for such termination. In the
case of clause (ii) of the second sentence of this subsection (d), the
Executive shall be given notice by the Board specifying in detail the
particular act or failure to act on which the Board is relying in proposing to
terminate him for Cause and offering the Executive an opportunity, on a date at
least 14 days after receipt of such notice, to have a hearing, with counsel,
before a majority of the non-employee members of the Board, including each of
the members of the Board who authorized the termination for Cause. The
Executive shall not be terminated for Cause if, within 30 days after the date
of the Executive's hearing before the Board (or if the Executive waives a
hearing, within 30 days after receiving notice of the proposed termination), he
has corrected the particular act or failure to act specified in the notice and
by so correcting such act or failure to act he has reduced the economic damage
his act or failure to act has allegedly caused the Company to a level which is
no longer material or has eliminated the probability that such act or failure
to act is likely to result in material economic damage to the Company. No
termination for Cause shall take effect until the expiration of the correction
period described in the preceding sentence and the determination by a majority
of the non-employee members of the Board that the Executive has failed to
correct the act or failure to act in accordance with the terms of the preceding
sentence.
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<PAGE> 6
Anything herein to the contrary notwithstanding, if, following a
termination of the Executive's employment by the Company for Cause based upon
the conviction of the Executive for a felony involving moral turpitude such
conviction is finally overturned on appeal, the Executive shall be entitled to
the compensation provided in Sections 4(a) and 4(c). In lieu of the interest
provided in clause (iv) of the first sentence of Section 4(a) and the interest
provided in the second sentence of Section 4(c), however, the compensation
provided in Sections 4(a) and 4(c) shall be increased by a ten percent rate of
interest, compounded annually, calculated from the date such compensation would
have been paid if the Executive's employment had been terminated without Cause.
(e) 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, after any Change in Control and without
the Executive's express written consent, any of the following:
(i) a significant diminution in the Executive's duties and
responsibilities, or 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 annual rate of
base salary as in effect on the date hereof or as the same may be
increased from time to time during the term of this Agreement or the
Company's failure to increase (within 12 months of the Executive's
last increase in his annual rate of base salary) the Executive's
annual rate of base salary after a Change in Control of the Company in
an amount which at least equals, on a percentage basis, the greater of
(A) the average percentage increase in the annual rate of base salary
for all officers of the Company effected in the preceding 12 months;
or (B) the Consumer Price Index as published by the United States
Government (or, in the event such index is discontinued, any similar
index published by the United States Government as designated in good
faith by the Executive); provided, however, that nothing contained in
this clause (ii) shall be construed under any circumstances as
permitting the Company to decrease the Executive's annual rate of base
salary;
(iii) (A) any failure by the Company to continue in effect any
benefit plan or arrangement (including, without limitation, the
Company's Employee Stock Purchase Plan, the DSC Communications
Corporation Savings & Retirement Plan, the DSC Communications
Corporation Executive Deferred Income Plan, the DSC Communications
Corporation Restoration Plan, the DSC Communications Corporation
Supplemental Executive Retirement Plan and life insurance, medical,
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<PAGE> 7
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"), (B) 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 of any material fringe benefit or perquisite of office
enjoyed by the Executive at the time of a Change in Control of the
Company, unless in the case of either subclause (A) or (B) above,
there is substituted a comparable plan or program that is economically
equivalent, in terms of the benefit offered to the Executive, to the
Benefit Plan being altered, reduced, affected or ended;
(iv) (A) 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 compensation policy of the Company, and credits and the
right to receive performance awards and similar long and short-term
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"), (B)
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, unless in the case
of either subclause (A) or (B) above, there is substituted a
comparable plan or program that is economically equivalent, in terms
of the benefit offered to the Executive, to the Incentive Plan being
altered, reduced, affected or ended, or (C) any failure by the Company
with respect to any fiscal year to make an award to the Executive
pursuant to each such Incentive Plan or such substituted comparable
plan or program equal to or greater than the greater of (1) the award
(whether paid or payable in cash or in securities of the Company) made
to the Executive pursuant to such Incentive Plan or such substituted
comparable plan or program with respect to the immediately preceding
fiscal year or (2) the average annual award (whether paid or payable
in cash or in securities of the Company) made to the Executive
pursuant to such Incentive Plan or such substituted comparable plan
with respect to the prior three fiscal years (or such lesser number of
prior fiscal years that the Executive was employed by the Company or
that the Incentive Plan (together with any substituted comparable
plan) was maintained);
(v) (A) 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 Employee Stock Option Plan, 1988 Employee Stock
Option Plan, 1993 Employee Stock Option and Securities Award Plan, and
any other plan or arrangement to receive and exercise stock options,
stock appreciation rights or securities awards) 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,
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<PAGE> 8
(hereinafter referred to as "Securities Plans"), (B) 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, unless in the case of either subclause (A)
or (B) above, there is substituted a comparable plan or program that
is economically equivalent, in terms of the benefit offered to the
Executive, to the Securities Plan being altered, reduced, affected or
ended, or (C) any failure by the Company in any fiscal year to grant
stock options, stock appreciation rights or securities awards to the
Executive pursuant to such Securities Plans with respect to an
aggregate number of securities of the Company of each kind that is
equal to or greater than the greater of (1) the aggregate number of
securities of the Company of that kind covered by stock options, stock
appreciation rights or securities awards granted to the Executive
pursuant to such Securities Plans in the immediately preceding fiscal
year or (2) the average annual aggregate number of securities of the
Company of that kind covered by stock options, stock appreciation
rights, or securities awards granted to the Executive pursuant to such
Securities Plans in the prior three fiscal years; and provided further
the material terms and conditions of such stock options, stock
appreciation rights, and securities awards granted to the Executive
after the Change in Control (including, but not limited to, the
exercise price, vesting schedule, period and methods of exercise,
expiration date, forfeiture provisions and other restrictions) are
substantially similar to the material terms and conditions of the
stock options, stock appreciation rights, and securities awards
granted to the Executive under the Securities Plans immediately prior
to the Change in Control of the Company;
(vi) a relocation of the Company's principal executive offices to a
location more than 50 miles outside of Plano, Texas, or the
Executive's relocation more than 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 the
number of annual paid vacation days to which the Executive is entitled
for the year in which 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;
(x) the Company or its successor no longer is required to have its
common stock registered pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended;
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<PAGE> 9
(xi) any failure by the Company or its successor to enter into an
agreement with the Executive that is substantially similar to this
Agreement with respect to a Change in Control of the Company or its
successor occurring thereafter; or
(xii) any purported termination of the Executive's employment by the
Company pursuant to Section 3(b), 3(c) or 3(d) above which is not
effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f) below (and, if applicable, Section 3(d)
above), 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 clause (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) Any termination of the Executive by the Company pursuant to
Section 3(b), 3(c) or 3(d) above, or by the Executive pursuant to Section 3(e)
above, shall be communicated by a Notice of Termination to the other party
hereof. 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" shall mean (i) if the Executive's
employment 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), (ii) if the Executive's employment is terminated by
the Executive for Good Reason, the date specified in the Notice of Termination,
and (iii) 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 written agreement of 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).
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4. SEVERANCE COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(a) If pursuant to Section 3(a) above the Executive is entitled to
the compensation provided in this Section 4, then the Company shall pay to the
Executive in a lump sum cash payment within five days after the Date of
Termination the following:
(i) the Severance Amount as defined in Section 4(b) below; plus
(ii) his earned but unpaid base salary through his Date of
Termination; plus
(iii) an annual incentive award for the current fiscal year prorated
through the Date of Termination equal to the greater of (A) the annual
incentive award (whether paid or payable in cash or in securities of
the Company) awarded to the Executive with respect to the Company's
most recent fiscal year ending prior to the Date of Termination or (B)
the average annual incentive award (whether paid or payable in cash or
in securities of the Company) made to the Executive with respect to
the Company's most recent three fiscal years ending prior to the Date
of Termination; plus
(iv) interest on the amounts payable pursuant to clauses (i), (ii)
and (iii) above calculated from the Date of Termination until paid at
a rate equal to the prime rate as published in The Wall Street Journal
on the Date of Termination plus three percentage points, compounded
annually.
(b) "Severance Amount" shall mean an amount equal to three times
the Base Amount (as defined below) determined with respect to the Base Period
(as defined below); provided, however, in no event shall the Severance Amount
be less than three times the Executive's annual rate of base salary at the
higher of the annual rate in effect (i) immediately prior to the Date of
Termination or (ii) on the date six months prior to the Date of Termination.
For purposes of this subsection (b):
(i) "Base Amount" means the Executive's average annual
Compensation (as defined below) for taxable years of the Executive in
the Base Period. If the Executive's Base Period includes a short
taxable year, Compensation for such short or incomplete taxable year
shall be annualized before determining the average annual Compensation
for the Base Period. In annualizing Compensation, the frequency with
which payments are expected to be made over an annual period shall be
taken into account. Thus, any amount of Compensation for such a short
or incomplete taxable year that represents a payment that will not be
made more often than once per year is not annualized. Set forth on
Appendix A, which is attached hereto and made a part hereof, are two
examples illustrating the calculation of the Base Amount.
(ii) "Base Period" means the most recent five taxable years of the
Executive ending prior to the Date of Termination. If the Executive
was not an employee of
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<PAGE> 11
the Company (or a predecessor entity or a related entity, as such
terms are defined in clause (iii) below) for this entire five-year
period, the Executive's Base Period is the portion of such five-year
period during which the Executive was an employee of the Company or a
predecessor entity or a related entity.
(iii) "Compensation" means the compensation which was payable by the
Company, by a predecessor entity, or by a related entity and which was
includible in the gross income of the Executive (or either was
excludible from such gross income as "foreign earned income" within
the meaning of Section 911 of the Internal Revenue Code of 1986, as
amended (the "Code"), or would have been includible in such gross
income if the Executive had been a United States citizen or resident).
Notwithstanding the preceding sentence, Compensation shall be
determined without regard to any compensation deferral election under
any plan, program or arrangement, qualified or nonqualified,
maintained or contributed to by the Company, a predecessor entity or a
related entity, including but not limited to a cash-or-deferred
arrangement described in Code Section 401(k), a cafeteria plan
described in Code Section 125 or a nonqualified deferred compensation
plan. A "predecessor entity" is any entity which, as a result of a
merger, consolidation, purchase or acquisition of property or stock,
corporate separation, or other similar business transaction transfers
some or all of its employees to the Company or to a related entity or
to a predecessor entity of the Company. The term "related entity"
includes any entity treated as a single employer with the Company in
accordance with subsections (b), (c), (m) and (o) of Code Section 414.
(c) If pursuant to Section 3(a) above the Executive is entitled to
the compensation provided in this Section 4, then notwithstanding the terms and
conditions of the DSC Communications Corporation Supplemental Executive
Retirement Plan (the "SERP"), the Executive shall be entitled to receive a
"deferred vested benefit" under the SERP, and for purposes of calculating such
"deferred vested benefit" (i) the Executive shall be credited with three
additional years of "benefit service" under the SERP, and (ii) for purposes of
calculating his "highest average annual earnings" under the SERP, the Executive
shall be deemed to have "earnings" in each of three calendar years of deemed
employment with the Company equal to the greater of (A) his "earnings" for the
calendar year ending immediately prior to the Date of Termination or (B) his
average annual "earnings" for the most recent three calendar years ending prior
to the Date of Termination (or such lesser number of calendar years ending
prior to the Date of Termination that the Executive was employed by the
Company). If the Executive is eligible for retirement on a "retirement date"
under the SERP, his "deferred vested benefit" shall be in lieu of and in
substitution for any other benefit payable to the Executive under the SERP
because of his retirement on a "retirement date". The terms "deferred vested
benefit", "benefit service", "highest average annual earnings", "earnings" and
"retirement date" as used in this subsection (c) shall have the same meanings
as defined and used in the SERP. The Company shall also pay the Executive
interest on his deferred vested benefit calculated from the Date of Termination
until the deferred vested benefit is paid to the Executive at a rate equal to
the prime rate as published in The Wall
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<PAGE> 12
Street Journal on the Date of Termination plus three percentage points,
compounded annually.
(d) If the Executive is entitled to receive a deferred vested
benefit under the SERP pursuant to Section 4(c) above, the Company shall also
pay the Executive an additional payment (the "SERP Gross-Up Payment") equal to
his deferred vested benefit, determined in accordance with Section 4(c) above,
multiplied by the following:
1
____________________ minus 1
(1 minus Rates)
where "Rates" means the sum of the Cumulative FIT Gross-Up Rate, the FICA Rate
and the SIT Rate. For purposes of the preceding sentence, the following terms
have the respective meanings set forth below:
(i) "Cumulative FIT Gross-Up Rate" means the rate determined as
the following:
1
1 minus ______________________________
(1 + FIT Gross-Up Rate)
(ii) "FICA Rate" means the rate of tax under the Federal Insurance
Contributions Act (including but not limited to the tax rate
attributable to the old-age, survivors, and disability insurance and
the tax rate attributable to the hospital insurance) imposed on income
on the date of payment of the Executive's deferred vested benefit.
(iii) "FIT Gross-Up Rate" means the gross-up rate required to
calculate the amount by which the Executive's deferred vested benefit,
determined in accordance with Section 4(c) above, must be increased to
defray the following: (A) the amount of federal income tax imputed on
the Executive's deferred vested benefit on the date of payment; (B)
the amount of federal income tax imputed on the investment income
earned on the Executive's after-tax deferred vested benefit during the
period commencing on the date of payment of the Executive's deferred
vested benefit and ending on the last day of the month in which the
Executive attains age 65 and assuming an investment earnings rate of
7.5 percent ; and (C) the amount of federal income tax imputed on the
annuity payments that would be paid to the Executive if the Executive
purchased an annuity at age 65, with annuity payments commencing with
the month following his attainment of age 65, using the after-tax
accumulated value of his deferred vested benefit. For purposes of
determining the FIT Gross-Up Rate, federal income tax shall be
determined using the highest individual federal income tax rate in
effect on the date of payment of the Executive's deferred vested
benefit. Actuarial equivalence and annuity
- 12 -
<PAGE> 13
purchase rates shall be computed using a 7.5 percent interest rate and
the mortality tables adopted by the plan administrator of the SERP for
purposes of calculated deferred vested benefits under the SERP.
(iv) "SIT Rate" means the highest individual state income tax rate
in the Executive's state of residence on the date of payment of the
Executive's deferred vested benefit.
Set forth on Appendix B, which is attached hereto and made a part hereof, is an
example illustrating the calculation of the SERP Gross-Up Payment. The
determination of the amount of the SERP Gross-Up Payment shall be made by the
Company's independent auditors (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive. The
determination made by the Accounting Firm shall be subject to review by the
Executive's tax advisor, and, if the Executive's tax advisor does not agree
with the determination reached by the Accounting Firm, then the Accounting Firm
and the Executive's tax advisor shall jointly designate a nationally recognized
public accounting firm which shall make the determination. All fees and
expenses of the accountants and tax advisors retained by both the Executive and
the Company shall be borne solely by the Company. Any determination by such
jointly designated public accounting firm shall be binding upon the Company and
the Executive. The Company shall also pay the Executive interest on his SERP
Gross-Up Payment calculated from the Date of Termination until the SERP
Gross-Up Payment is paid to the Executive at a rate equal to the prime rate as
published in The Wall Street Journal on the Date of Termination plus three
percentage points, compounded annually.
(e) If pursuant to Section 3(a) above the Executive is entitled to
the compensation provided in this Section 4, then the Executive will be
entitled to continued participation in all employee benefit plans or programs
available to Company employees generally in which the Executive was
participating on the Date of Termination, such continued participation to be at
Company cost and otherwise on the same basis as Company employees generally,
until the earlier of (i) the date, or dates, he receives equivalent coverage
and benefits under the plans and programs of a subsequent employer (such
coverages and benefits to be determined on a coverage-by-coverage or
benefit-by-benefit basis) or (ii) two years from the Date of Termination;
provided (A) if the Executive is precluded from continuing his participation in
any employee benefit plan or program as provided in this sentence, he shall be
paid, in a lump sum cash payment, within 30 days following the date it is
determined he is unable to participate in any employee benefit plan or program,
the after-tax economic equivalent of the benefits provided under the plan or
program in which he is unable to participate for the period specified in this
sentence, and (B) the economic equivalent of any benefit foregone shall be
deemed to be the lowest cost that would be incurred by the Executive in
obtaining such benefit for himself (including family or dependent coverage, if
applicable) on an individual basis. The Executive shall be eligible for group
health plan continuation coverage under and in accordance with the Consolidated
Omnibus Budget Reconciliation
- 13 -
<PAGE> 14
Act of 1985, as amended, when he ceases to be eligible for continued
participation in the Company's group health plan under this subsection (e).
5. 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) Except as otherwise provided in Section 4(c) above with
respect to benefits that would otherwise be payable to the Executive under the
SERP because of the Executive's retirement on a retirement date under the SERP,
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.
6. OPTIONS, SECURITIES AWARDS, AND INCENTIVE AWARDS.
(a) In the event of a Change in Control of the Company, then
notwithstanding the terms and conditions of any Securities Plan or other plan,
agreement or arrangement, the Company agrees to accelerate, vest, and make
immediately exercisable in full all unexercisable installments of all options
to acquire securities of the Company, to vest all unvested awards of securities
of the Company and to waive any resale or other restrictions or rights of
repurchase applicable to securities underlying such options or applicable to
awards of securities of the Company, in each case which are held by the
Executive on the date of such Change in Control, including without limitation
any options or securities obtained by the Executive pursuant to any Securities
Plan or securities obtained by the Executive pursuant to any Incentive Plan.
(b) Any options or securities obtained by the Executive pursuant
to any Securities Plan or securities obtained by the Executive pursuant to any
Incentive Plan shall have a limited right of surrender allowing the Executive
to surrender such options or securities within the 30-day period following a
Change in Control and to receive a cash payment in exchange for the surrender
of such options or securities. The amount of such payment shall be equal to
the sum of (i) the product of the number of securities multiplied by the
greater of (x) the fair market value of the securities of the Company on the
date prior to the Change in Control or (y) the per share price paid to
shareholders in connection with such Change in Control (alternatively, the
"Securities Price") and (ii) the product of (a) the number of securities
covered by options multiplied by (b) the Securities Price reduced by the
exercise price. Notwithstanding the foregoing, if any such payment
- 14 -
<PAGE> 15
would result in liability under Section 16 of the Exchange Act, the right of
surrender shall commence upon the earliest date it can be exercised by the
Executive without liability and continue for thirty days thereafter.
(c) In the event of a Change in Control of the Company, then
notwithstanding the terms and conditions of any Incentive Plan, the Company
agrees (i) to immediately and fully vest all unvested awards, units, and
benefits which have been awarded or allocated to the Executive under the
Incentive Plans; and (ii) upon the exercise of such awards or units or the
distribution of such benefits, to pay all amounts due under the Incentive Plans
solely in cash.
7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 7) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) All determinations required to be made under this Section 7,
including whether and when a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the the Accounting Firm which shall provide
detailed supporting calculations both to the Company and the Executive within
15 business days after the receipt of notice from the Executive that there has
been a Payment, or such earlier time as is requested by the Company. The
determination of tax liability made by the Accounting Firm shall be subject to
review by the Executive's tax advisor, and, if the Executive's tax advisor does
not agree with the determination reached by the Accounting Firm, then the
Accounting Firm and the Executive's tax advisor shall jointly designate a
nationally recognized public accounting firm which shall make the
determination. All fees and expenses of the accountants and tax advisors
retained by both the Executive and the Company shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall
be paid by the Company to the Executive within five days after the receipt of
the determination. Any determination by such jointly designated public
accounting firm shall be binding upon the Company and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination
- 15 -
<PAGE> 16
hereunder, it is possible that Gross-Up Payments will not have been made by the
Company that should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Executive
hereafter is required to make a payment of any Excise Tax, any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. Upon notice by the Executive of any audit or other proceeding that
may result in a liability to the Company hereunder, the Executive shall
promptly notify the Company of such audit or other proceeding; and the Company
may, at its option, but solely with respect to the item or items that relate to
such potential liability, choose to assume the defense of such audit or other
proceeding at its own cost, provided that (i) the Executive shall cooperate
with the Company in such defense and (ii) the Company will not settle such
audit or other proceeding without the consent of the Executive (such consent
not to be unreasonably withheld). The highest effective marginal tax rate
(determined by taking into account any reduction in itemized deductions and/or
exemptions attributable to the inclusion of the additional amounts payable
under this Section 7 in the Executive's adjusted gross or taxable income) based
upon the state and locality where the Executive is resident at the time of
payment of such amounts will be used for purposes of determining the federal
and state income and other taxes with respect thereto.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify the Executive to the fullest
extent permitted by applicable law consistent with the Company's Certificate of
Incorporation and By-Laws in effect as of the date hereof with respect to any
acts or non-acts he may have committed on behalf of the Company during the
period in which he was an officer, director and/or employee of the Company or
any subsidiary thereof, or of any other entity of which he served as an
officer, director or employee at the request of the Company (each, an
"Indemnifiable Event").
(b) Notwithstanding anything in the Company's Certificate of
Incorporation, the By-Laws or this Agreement to the contrary, if so requested
by the Executive, the Company shall advance (within two business days of such
request) any and all Expenses, as hereinafter defined, relating to a Claim, as
hereinafter defined, to the Executive (an "Expense Advance"), upon the receipt
of a written undertaking by or on behalf of the Executive to repay such Expense
Advance if a judgment or other final adjudication adverse to the Executive (as
to which all rights of appeal therefrom have been exhausted or lapsed)
establishes that the Executive, with respect to such Claim, is not eligible for
indemnification. A Claim shall include any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative or other, including without limitation, an action by or in the
right of any other corporation of any type or kind, domestic or foreign, or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
whether predicated on foreign, federal, state or local law and whether formal
or informal. Expenses shall include attorney's fees and all other costs,
charges and expenses paid or incurred in connection with investigating,
defending,
- 16 -
<PAGE> 17
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
(c) The Company agrees to obtain a directors' and officers'
liability insurance policy covering the Executive and to continue and maintain
such policy. The amount of coverage shall be reasonable in relation to the
Executive's position and responsibilities during his employment by the Company.
9. SUCCESSORS.
(a) The Company will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation 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 4 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.
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
- 17 -
<PAGE> 18
If to the Executive:
[FirstName] [LastName]
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 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.
The provisions of this Agreement modify and supersede the provisions
of the Prior Severance Agreement between the Executive and the Company. In
furtherance of the foregoing, the Amended and Restated Severance Compensation
Agreement dated as of [Date2] between the Executive and the Company is hereby
terminated and of no further force or effect. Except as otherwise provided in
the preceding sentences, this Agreement is not intended to and shall not limit
or terminate any other agreement or arrangement between the Executive and the
Company presently in effect or hereafter entered into.
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.
- 18 -
<PAGE> 19
14. SURVIVORSHIP.
The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations and to the extent that any
performance is required following termination of this Agreement. Without
limiting the foregoing, Sections 7, 8 and 15 shall expressly survive the
termination of this Agreement.
15. LEGAL FEES AND EXPENSES.
If a claim or dispute arises concerning the rights of the Executive
under this Agreement, regardless of the party by whom such claim or dispute is
initiated, the Company shall, upon presentation of appropriate vouchers, pay
all legal expenses, including reasonable attorneys' fees, court costs, and
ordinary and necessary out-of-pocket costs of attorneys, billed to and payable
by the Executive or by anyone claiming under or through the Executive, in
connection with the bringing, prosecuting, arbitrating, defending, litigating,
negotiating, or settling such claim or dispute. In no event shall the
Executive be required to reimburse the Company for any of the costs or expenses
incurred by the Company relating to arbitration or litigation. Pending the
outcome or resolution of any claim or dispute, the Company shall continue
payment of all amounts due the Executive without regard to any dispute.
16. EFFECTIVE DATE.
This Agreement shall become effective upon execution.
17. 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.
18. NO GUARANTEE OF EMPLOYMENT.
Neither this Agreement nor 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.
19. NO ASSIGNMENT BY EXECUTIVE.
Except as otherwise provided in Section 9(b), 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 of creditors,
pledge, attachment, garnishment, levy, execution or encumbrances of any kind.
- 19 -
<PAGE> 20
20. 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 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.
21. WITHHOLDING.
All amounts paid pursuant to this Agreement shall be subject to
withholding for taxes (federal, state, local or otherwise) to the extent
required by applicable law.
22. 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.
23. NUMBER AND GENDER.
The use of the singular shall be interpreted to include the plural and
the 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
Date: By:
--------------------------- ---------------------------------
James L. Donald
Chairman of the Board, President
and Chief ExecutiveOfficer
Date: EXECUTIVE:
---------------------------
------------------------------------
[FirstName] [LastName]
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<PAGE> 21
APPENDIX A
Example 1 - Executive was employed by the Company for 2 years
and 4 months preceding his taxable year in which a Change in Control
of the Company occurs. The Executive's Compensation from the Company
was $30,000 for the 4-month period, $120,000 for the first full year,
and $150,000 for the second full year. The Executive's Base Amount is
$120,000
[(3 X $30,000) + $120,000 + $150,000].
-------------------------------------
[ 3 ]
Example 2 - Assume the same facts as in Example 1, except that
the Executive also received a $60,000 sign-on bonus when his
employment with the Company commenced at the beginning of the 4-month
period. The Executive's Base Amount is $140,000
[($60,000) + (3 X $30,000)) + $120,000 + $150,000].
---------------------------------------------------
[ 3 ]
Since the sign-on bonus will not be paid more often than once
per year, the amount of the bonus is not increased in annualizing the
Executive's Compensation for the 4-month period.
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<PAGE> 22
APPENDIX B
Example - If the Cumulative FIT Gross-Up Rate is 56.52%, the FICA Rate
is 1.45%, and the SIT Rate is 6%, the Executive's SERP Gross-Up
Payment is equal to his deferred vested benefit multiplied by the
following:
1
_____________________________ minus 1
(1 - (.5652 + .0145 + .06))
which equals 1.775464890.
If the Executive's deferred vested benefit payable under Section 4(c)
is $1,500,000, his SERP Gross-Up Payment would be $1,500,000 x
1.775464890, which equals $2,663,197.
- 22 -
<PAGE> 23
SCHEDULE TO
SEVERANCE COMPENSATION AGREEMENTS
Adams, Allen
Basham, Wylie D.
Bischoff, John W.
Brunt, George B.
Hinshaw, David L.
Montry, Gerald F.
Ornes, Christian J.
Simpson, George
Vines, Kenneth R.
<PAGE> 1
EXHIBIT 10.26
DSC COMMUNICATIONS CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE> 2
DSC COMMUNICATIONS CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Table of Contents
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE 1 Introduction 2
1.1 Purpose of the Plan, Effective Date 2
1.2 Plan Administrator, Plan Year 2
1.3 The Employers 2
1.4 Supplements 2
ARTICLE 2 Plan Participants 3
2.1 Participation 3
2.2 Notice of Participation 3
2.3 Cessation of Participation 3
ARTICLE 3 Retirement Dates, Employment Termination Date 3
3.1 Normal Retirement Date 3
3.2 Deferred Retirement Date 4
3.3 Early Retirement Date 4
3.4 Disability Retirement Date 4
3.5 Retirement Date 4
3.6 Employment Termination Date 4
ARTICLE 4 Service, Earnings 4
4.1 General 4
4.2 Benefit Service 4
4.3 Leave of Absence 5
4.4 Earnings 5
4.5 Highest Average Annual Earnings 5
4.6 Determination of Bases of Benefits 6
ARTICLE 5 Retirement Income 6
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
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<S> <C>
5.1 Normal or Deferred Retirement 6
5.2 Early Retirement 6
5.3 Disability Retirement 7
5.4 Form of Payment 7
5.5 Annuity Commencement Date 7
ARTICLE 6 Deferred Vested Benefits; Death Before
Retirement or Termination 8
6.1 Deferred Vested Benefit 8
6.2 Death Before Retirement 9
ARTICLE 7 Payment of Retirement Income and Other Benefits 9
7.1 Normal Form of Payment of Benefits 9
7.2 Optional Forms of Payment of Benefits 9
7.3 Rules as to Election and Discontinuance of Optional Forms of Payment of Benefits 10
7.4 Payment of Small Amounts 11
7.5 Missing Persons 11
ARTICLE 8 Forfeitures 11
8.1 Termination for Just Cause 11
8.2 Restrictive Covenants 12
8.3 Loan Offset 15
ARTICLE 9 Reemployment 15
9.1 Rehired Participant 15
9.2 Redetermination of Benefits 15
ARTICLE 10 General Provisions 16
10.1 Notices 16
10.2 Nonalienation of Plan Benefits 16
10.3 Payment with Respect to Incapacitated Persons 16
10.4 No Employment or Benefit Guaranty 16
10.5 Litigation 16
10.6 Actuarial Equivalent 17
10.7 Evidence 17
10.8 Gender and Number 17
10.9 Waiver of Notice 17
10.10 Applicable Law 17
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
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<S> <C>
10.11 Severability 17
10.12 Withholding for Taxes 17
10.13 Successors 17
10.14 Effect on Other Employee Benefit Plans 17
10.15 Gross-Up Payments 18
ARTICLE 11 Relating to Plan Administration 18
11.1 Plan Administrator's Duties 18
11.2 Action by Plan Administrator 19
11.3 Information Required for Plan Administration 19
11.4 Decision of Plan Administrator Final 20
11.5 Review of Benefit Determinations 20
11.6 Interested Plan Administrator 20
11.7 Indemnification 20
ARTICLE 12 No Funding of Plan Benefits 21
ARTICLE 13 Relating to the Employers 21
13.1 Action by Employers 21
13.2 Additional Employers 21
ARTICLE 14 Amendment and Termination 22
14.1 Amendment 22
14.2 Termination 22
14.3 Vesting on Termination 23
</TABLE>
<PAGE> 5
DSC COMMUNICATIONS CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE 1
Introduction
1.1 Purpose of the Plan, Effective Date. DSC
Communications Corporation Supplemental Executive Retirement Plan (the "plan")
has been established effective as of July 1, 1997 (the "effective date") by DSC
Communications Corporation (the "company") to provide retirement and other
benefits for certain eligible employees in consideration for each such eligible
employee's agreement to be bound by the restrictive covenants contained in
section 8.2 hereof. In consideration for the employers' (as defined in section
1.3 below) maintaining this plan for the benefit of the participant and paying
benefits hereunder, the participant agrees to be bound by the restrictive
covenants contained in section 8.2 and further agrees that such restrictive
covenants are reasonable, necessary and enforceable. The plan is intended to
be a plan that is unfunded and that is maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees.
1.2 Plan Administrator, Plan Year. The plan is
administered by the Executive Plan Committee of the company. The plan is
administered on the basis of a plan year (the "plan year") which for the
initial plan year is the short plan year beginning on the effective date and
ending on December 31, 1997 and thereafter is the twelve-month period beginning
each year on January 1 and ending on the next following December 31. Article
11 describes certain specific powers, duties and responsibilities of the plan
administrator with respect to the administration of the plan.
1.3 The Employers. With the consent of the company, the
plan may be adopted in accordance with the provisions of section 13.2 by any
subsidiary of the company for the benefit of its eligible employees. For this
purpose, a "subsidiary" means any corporation more than 50 percent of the
voting stock of which is directly or indirectly owned by the company. The
company and its subsidiaries that adopt the plan are referred to herein
collectively as the "employers" and individually as an "employer." The term
"DSC Companies" includes the employers and all subsidiaries that have not
adopted the plan (and each such corporation is sometimes referred to herein
individually as a "DSC Company").
1.4 Supplements. From time to time supplements may by
amendment be attached to and form a part of this plan. Such supplements may
modify or supplement the provisions of the plan as they apply to particular
groups of employees or groups of participants, shall specify the persons
affected by such supplements and shall supersede the other provisions of the
plan to the extent necessary to eliminate inconsistencies between the plan
provisions and the provisions of such supplements.
- 2 -
<PAGE> 6
ARTICLE 2
Plan Participants
2.1 Participation. As of the effective date and each
January 1 thereafter, the Nominating Committee of the company may recommend to
the plan administrator and the plan administrator may select eligible employees
of the employers to accrue benefits under the plan and thereby to become
participants in the plan. "Eligible employees" means those employees who are
management or highly compensated employees. The Nominating Committee and the
plan administrator shall consider such factors as they consider pertinent in
recommending for selection and in selecting eligible employees to participate
in the plan.
2.2 Notice of Participation. Each employee will be
notified of the date he becomes a plan participant.
2.3 Cessation of Participation.
(a) Subject to Article 9, an employee of an employer who
becomes a participant in the plan in accordance with section 2.1 above shall
cease to participate in the plan on his employment termination date (as defined
in section 3.6) provided he has no vested interest in a plan benefit on such
date or on any date that his vested accrued benefit is distributed in a lump
sum payment.
(b) It is the intent of the company that the plan be
exempt from Parts 2, 3, and 4 of Subtitle B of Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), as an unfunded
plan that is maintained by an employer primarily for the purpose of providing
deferred compensation for a select group of management of highly compensated
employees (the "ERISA exemption"). Notwithstanding anything to the contrary in
this Article 2 or in any other provision of the plan, the plan administrator
may in its sole discretion exclude any one or more employees from eligibility
to participate or from participation in the plan, may exclude any participant
from continued participation in the plan, and may take any further action it
considers necessary or appropriate if the plan administrator reasonably
determines in good faith that such exclusion or further action is necessary in
order for the plan to qualify for, or to continue to qualify for, the ERISA
exemption.
ARTICLE 3
Retirement Dates, Employment Termination Date
3.1 Normal Retirement Date. A participant's "normal
retirement date" will be the first day of the calendar month next following the
month in which he attains age 65 years ("normal retirement age").
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3.2 Deferred Retirement Date. A participant's "deferred
retirement date" will be the first day of the calendar month next following the
date of his retirement from the employ of all of the DSC Companies after his
normal retirement date.
3.3 Early Retirement Date. A participant's "early
retirement date" will be the first day of the calendar month next following the
date of his retirement from the employ of all of the DSC Companies before his
normal retirement date but after (i) he has attained age 55 and (ii) the sum of
his years of benefit service and attained age equals 70 or more.
3.4 Disability Retirement Date. A participant's
"disability retirement date" will be the first day of the calendar month next
following the date of his retirement from the employ of all of the DSC
Companies before his normal and early retirement dates and after he has both
incurred a disability and completed five years of benefit service. For
purposes of the plan, a participant will be considered to have incurred a
disability if he qualifies for and is or will be receiving benefits under his
employer's long term disability income plan. For the purpose of determining
the duration of a participant's disability, the plan administrator from time to
time may require that a participant qualifies for and is receiving disability
benefits under a long-term disability income plan maintained by the DSC
Companies.
3.5 Retirement Date. Reference to the "retirement date"
of a participant who retires under the plan means his normal retirement date,
if his retirement occurs on that date, but otherwise means his deferred
retirement date, his early retirement date or his disability retirement date,
whichever applies in his case.
3.6 Employment Termination Date. Reference to the
"employment termination date" of a participant whose employment with all of the
DSC Companies terminates before he qualifies for retirement on a retirement
date means the date his employment with all of the DSC Companies is terminated.
ARTICLE 4
Service, Earnings
4.1 General. A participant's eligibility for, and amount
of, benefits payable under the plan will be based on his benefit service and
highest average annual earnings, as determined in accordance with the following
provisions of this Article 4, Article 9 and any applicable supplement to this
plan.
4.2 Benefit Service. Subject to the provisions of
Article 9, a participant's "benefit service" means the total of the period or
periods of benefit service granted to him. Each participant shall be granted
one- twelfth of a year of benefit service for each full or partial calendar
month of his employment by the employers commencing with his date of hire and
ending with his date of termination of employment or retirement as an employee
of an employer. Determinations of benefit service shall be subject to the
following:
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<PAGE> 8
(a) If a participant had a period or periods of
employment with a DSC Company that has not adopted the plan such period or
periods of employment with such DSC Company will be disregarded in determining
his benefit service unless and to the extent specified otherwise by the
company.
(b) A period of concurrent employment with two or more
employers will be considered as employment with only one of them during that
period.
(c) Unless otherwise specified by the company, an
employee's employment with a predecessor company will be disregarded in
determining his benefit service if the employee is transferred to employment
with an employer or the predecessor company becomes an employer and if the
employee becomes a participant. A "predecessor company" means any corporation
or other entity the stock, assets or business of which was acquired by an
employer after the effective date, whether by merger, consolidation, purchase
of assets or otherwise, and any predecessor thereto designated by the company.
(d) Separate periods of an employee's employment with an
employer shall be aggregated for purposes of determining his benefit service.
(e) A leave of absence (as defined in section 4.3) will
not interrupt continuity of employment for purposes of the plan.
4.3 Leave of Absence. A "leave of absence" as used in
the plan means:
(a) A leave of absence required by law or granted by an
employer on account of service in military or governmental branches described
in any applicable statute granting reemployment rights to employees who enter
such branches, or any other military or governmental branch designated by the
company.
(b) Any other absence from active employment with a DSC
Company that is approved and not treated by it as a termination of employment.
4.4 Earnings. For purposes of the plan, a participant's
"earnings" for a calendar year means his base salary for such calendar year
plus the greater of (i)Ethe bonuses paid to him during such calendar year (but
excluding any award under the DSC Long-Term Incentive Plan) or (ii)Ethe
commissions paid to him during such calendar year; provided such amounts are
paid to him for services rendered to the employers as an employee; and provided
further such amounts shall include any portion that is not includible in
taxable income because of a deferral election under this or any other plan,
program or arrangement maintained or contributed to by an employer. Earnings
shall not include any award paid under the DSC Long-Term Incentive Plan or any
portion of any such award deferred under any other plan, program or arrangement
maintained or contributed to by an employer.
4.5 Highest Average Annual Earnings. The "highest
average annual earnings" of a participant shall be the average annual earnings
paid to the participant during the
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three calendar years for which his earnings were highest during his period of
employment as an employee of an employer. Such average shall be computed by
dividing the total of the participant's earnings for such three calendar years
by the number of years in such three calendar years for which he had earnings;
provided if such three calendar years includes a period of the participant's
disability (as defined in section 3.4 above) and the participant is eligible to
retire on a disability retirement date, the participant's earnings for such
period of disability shall be considered to be the earnings the participant
would have received for such period had he worked his normal work schedule (as
in effect immediately preceding his disability) during such period, received
base salary therefore at the rate of his base salary in effect immediately
preceding the period of his disability and terminated employment on the earlier
of his annuity commencement date (as defined in section 5.5) or his disability
recovery date (as defined in section 5.3).
4.6 Determination of Bases of Benefits. A participant's
benefit service, earnings, highest average annual earnings, and any other
factor relating to benefits payable to him under the plan shall be determined
by the plan administrator pursuant to the foregoing provisions of this Article
4, Article 9 and any supplement to the plan on the basis of the records of the
employers and on the basis of reasonable estimates where such records are not
sufficient to provide all required data and information.
ARTICLE 5
Retirement Income
5.1 Normal or Deferred Retirement. Subject to the
conditions and limitations of the plan, if a participant retires on his normal
retirement date or a deferred retirement date he will be entitled to a monthly
retirement income for life or for a period of ten years, whichever is longer,
commencing on (or as soon as reasonably practicable after) his retirement date,
and each payment of such monthly retirement income shall be in an amount equal
to one-twelfth of sixty percent of his highest average annual earnings
multiplied by a fraction, the numerator of which is his number of full and
fractional years of benefit service (not in excess of fifteen years) and the
denominator of which is fifteen. A participant must give the plan
administrator at least 60 days advance written notice of his retirement date in
order to have his benefit commencement processed timely.
5.2 Early Retirement. Subject to the conditions and
limitations of the plan, if a participant retires on an early retirement date
he will be entitled to a monthly retirement income for life or for a period of
ten years, whichever is longer, commencing on (or as soon as reasonably
practicable after) his retirement date. A participant must give the plan
administrator at least 60 days advance written notice of his retirement date in
order to have his benefit commencement processed timely. The amount of his
monthly retirement income will be computed in accordance with the benefit
formula in section 5.1 (as in effect as of his early retirement date) based
upon his highest average annual earnings and benefit service as at his early
retirement date and further reduced by one-quarter of one percent for each
month that the
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date of commencement precedes the first day of the calendar month next
following the date on which he would attain age 65.
5.3 Disability Retirement.
(a) Subject to the conditions and limitations of the
plan, if a participant retires on a disability retirement date, he will be
entitled to a monthly retirement income for life or a ten-year certain period,
whichever is longer, commencing on the first day of the month next following
his attainment of age 65. The amount of his monthly retirement income will be
computed in accordance with the benefit formula in section 5.1 (as in effect as
of his disability retirement date) based upon his highest average annual
earnings as at his annuity commencement date (as defined in section 5.5) and
based on the benefit service he would have had if he had continued as an active
employee until his annuity commencement date.
(b) If the participant recovers from his disability prior
to his attainment of age 65, unless he is then reemployed by the DSC Companies,
he shall be deemed to have terminated employment with the DSC Companies on the
date he recovered from his disability (his "disability recovery date"). The
amount of his monthly benefit will be computed in accordance with the benefit
formula in section 5.1 (as in effect as of his disability recovery date) based
upon his highest average annual earnings as at his disability recovery date and
based on the benefit service he would have had if he had continued as an active
employee until his disability recovery date. If the participant is eligible to
retire on an early retirement date based on his attained age and the years of
benefit service credited to him in accordance with the preceding sentence, then
he will be considered to have retired on an early retirement date and his
monthly benefit will be payable for life or for a period of ten years,
whichever is longer, commencing on the first day of the month next following
his disability recovery date but subject to the further reduction described in
section 5.2 for early commencement prior to attainment of age 65. If the
participant is not eligible to retire on an early retirement date, then he will
be considered to have terminated employment and, unless the participant is
eligible for a deferred vested benefit under section 6.1 below, he will not be
eligible for any benefit under the plan.
5.4 Form of Payment. If a participant becomes entitled
to receive a retirement income benefit under the foregoing provisions of this
Article 5, payment of such benefit shall be made in accordance with, and
subject to, the applicable provisions of Article 7.
5.5 Annuity Commencement Date. A participant's "annuity
commencement date" means the date as of which the initial payment of the
retirement income to which he is entitled under the plan is payable.
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ARTICLE 6
Deferred Vested Benefits;
Death Before Retirement or Termination
6.1 Deferred Vested Benefit. Subject to the conditions
and limitations of the plan, if within twenty-four months after a "change of
control" of the company occurs the participant's employment with all of the DSC
Companies is terminated by the company without "just cause" (as defined in
section 8.1 below) or the participant quits or resigns from the employ of all
of the DSC Companies for "good reason" (as defined below), the participant will
be eligible to receive a deferred vested benefit. The deferred vested benefit
will be the lump sum actuarial equivalent of a monthly retirement income
payable to the participant commencing on the first day of the calendar month
next following the month in which he attains age 65 and continuing for life,
computed in accordance with the benefit formula in section 5.1 (as in effect as
of his employment termination date) based upon his highest average annual
earnings and benefit service as at his employment termination date. The lump
sum actuarial equivalent shall be computed using a 7-1/2 percent interest rate
and the mortality tables adopted by the plan administrator for this purpose.
The deferred vested benefit will be payable to the participant as soon as
reasonably practicable after his termination of employment and in any event
will be paid by the first anniversary of his employment termination date. A
"change of control" shall be deemed to have occurred if (a)Ethere shall be
consummated (i)Eany consolidation or merger of the company in which the company
is not the continuing or surviving corporation, or pursuant to which shares of
common stock of the company, par value $.01 per share ("common stock"), would
be converted into cash, securities, or other property other than a merger of
the company in which the holders of the company's common stock immediately
prior to the merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (ii)Eany sale,
lease, exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the company, or
(b)Ethe stockholders of the company shall approve any plan or proposal for the
liquidation or dissolution of the company, or (c)Eany person (as such term is
used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (other than the trustee of any employee benefit
plan sponsored by the company) shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of twenty percent or more of the
company's outstanding common stock, or (d)Eduring any period of two consecutive
years, individuals who at the beginning of such period constitute the entire
Board of Directors of the company shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
company's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period. "Good reason" means (i) demotion (i.e., reassignment
to a position of materially lesser rank or status), (ii)Ereduction in annual
base salary, (iii) reduction in benefits (unless such reduction is made
uniformly in a plan of general application to all of the company's
substantially similar employees), or (iv) reassignment to a location that is
more than 50 miles from the participant's then current location without his
consent. Notwithstanding anything to the contrary in the first sentence of
this section 6.1, a participant will not be eligible for a deferred vested
benefit under this section 6.1 if his employment with all of the DSC Companies
terminates due to his death or after he qualifies for retirement on a
retirement date (as defined in section 3.5 above) under the plan.
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<PAGE> 12
6.2 Death Before Retirement. If a participant's
employment with all of the DSC Companies terminates due to his death or after
he qualifies for retirement on a retirement date but prior to his annuity
commencement date (as defined in section 5.5), his designated beneficiary will
be eligible to receive a pre-retirement death benefit. The pre-retirement
death benefit will be the lump sum actuarial equivalent of a monthly retirement
income payable to the participant for a period of ten years commencing on the
first day of the month next following the later of the participant's 65th
birthday (assuming he had survived until then) or his death and computed in
accordance with the benefit formula in section 5.1 (as in effect as of the
participant's death) based upon his highest average annual earnings and benefit
service as at his death. If the participant dies after he qualifies for
retirement on a disability retirement date, the pre-retirement death benefit
payable to the participant's designated beneficiary will be based upon the
benefit service the participant would have had if he had continued as an active
employee until his death and his highest average annual earnings as determined
under section 4.5 above, including the earnings he is deemed to have received
during his period of disability. The pre-retirement death benefit will be
payable to the participant's designated beneficiary as soon as reasonably
practicable after the participant's death. To the extent required by
applicable law, a participant's designation of a beneficiary other than his
spouse will not be given effect unless the spouse of the participant consents
in writing to such designation on a form acceptable to the plan administrator.
If a participant fails to designate a beneficiary before his death, or if the
beneficiary designated by a participant dies before the date of the
participant's death or before payment of the pre-retirement death benefit, the
pre-retirement death benefit will be paid to the participant's surviving
spouse, if any, and otherwise to his estate.
ARTICLE 7
Payment of Retirement Income and Other Benefits
7.1 Normal Form of Payment of Benefits. Except as
otherwise specifically provided, payment of participants' monthly retirement
income benefits under Article 5 shall be made to them, and payment of monthly
benefits shall be made to their beneficiaries, if eligible for such benefits,
by the employers in the form of a monthly benefit payable to the participant
during his lifetime and, if the participant dies within a period of ten years
from his annuity commencement date, a continuing monthly payment of the same
amount to a person or persons designated by the participant for the balance of
such ten year period.
7.2 Optional Forms of Payment of Benefits. In lieu of
the normal form and amount of monthly benefit specified in section 7.1, and
subject to the provisions of section 7.3, a participant may elect a retirement
income of actuarially equivalent value in one of the following forms:
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(a) Joint and Survivor Form. A smaller monthly benefit
payable to the participant during his lifetime and, if another person he had
designated is living at the time of his death, payment of the same amount, 75
percent or 50 percent of that amount to such other person as long as such other
person lives.
(b) Life Annuity Form. A larger monthly benefit payable
to the participant during his lifetime and no benefit payable on or after his
death.
7.3 Rules as to Election and Discontinuance of Optional
Forms of Payment of Benefits. A participant's election of an optional form of
benefit specified in section 7.2 shall be subject to the following rules, to
the extent appropriate:
(a) An election must be in writing, signed by the
participant and approved by the plan administrator. To the extent required by
applicable law, the participant's election will not be given effect unless the
spouse of the participant consents in writing to such election on a form
acceptable to the plan administrator.
(b) A participant may make an election of an optional
form of benefit at any time up to twelve months prior to his retirement date.
(c) A participant who has elected an optional form of
benefit may revoke it at any time up to twelve months prior to his annuity
commencement date by filing a written revocation with the plan administrator;
his benefits will then be paid in the normal form unless he timely elects
another optional form of benefit in accordance with paragraph (b) above. With
the consent of the plan administrator, a participant who has elected an option
may change it at any time up to twelve months prior to his retirement date. A
revocation or change of an option may be made without the consent of the person
the participant had designated in the option as his beneficiary. However, to
the extent required by applicable law, the participant's revocation or change
of an option will not be given effect unless the spouse of the participant
consents in writing to such revocation or change on a form acceptable to the
plan administrator.
(d) If a participant who had elected an optional form of
benefit dies before his annuity commencement date, such option automatically
will be cancelled and no benefits will be paid to any person under such option.
(e) If the person designated by a participant in his
election of an option under subsection 7.2(a) dies before the participant's
annuity commencement date, the option automatically will be cancelled and the
participant's monthly benefit will be paid to him in the normal form unless a
new election can be and is made by the participant pursuant to the foregoing
provisions of this section.
(f) If after a participant has commenced receiving
monthly benefits under section 7.1, but prior to the participant's death, the
person or persons designated by the participant under that section die, the
option shall remain in effect and, unless the participant
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designates another person to receive any benefits payable under that option
after his death, such benefits shall be payable to his surviving spouse, if
any, and otherwise to his estate.
(g) If after a participant has commenced receiving
monthly benefits under subsection 7.2(a), but prior to the participant's death,
the person or persons designated by the participant under that subsection die,
the option shall remain in effect and no benefits will be paid to any person
after the participant's death.
(h) Any election of an optional form that cannot be given
effect because it does not satisfy the conditions of this section 7.3 will be
null and void and of no effect.
7.4 Payment of Small Amounts. If the lump sum
actuarially equivalent value of the monthly retirement income payable to any
participant under the plan is less than $3,500, then payment of such amount
shall be made in a lump sum on the participant's annuity commencement date. In
addition, the purchase for a participant or beneficiary and distribution to
that person of an annuity contract or annuity certificate to provide his
benefits shall constitute the complete payment of that person's benefits under
the plan.
7.5 Missing Persons. Each participant and each other
person entitled to benefits under the plan must file with the plan
administrator from time to time in writing his post office address and each
change of post office address. Any communication, statement or notice
addressed to a participant or a person entitled to benefits at his last post
office address as shown on the employers' records will be binding on the
participant and any person entitled to benefits for all purposes of the plan.
None of the employers or the plan administrator are required to search for or
locate any participant or other person entitled to benefits under the plan.
ARTICLE 8
Forfeitures
8.1 Termination for Just Cause. Notwithstanding any
other provision of the plan, a participant shall forfeit all right and
entitlement to any benefit under the plan, and the employers shall not be
obligated to make or continue to make any payment of any plan benefit to or on
behalf of such participant, if the participant's employment with a DSC Company
is terminated for "just cause" (or if the participant quits or resigns from a
DSC Company before such termination for "just cause" can occur). For purposes
of this Article 8, "just cause" means any of the following, as determined by
the plan administrator: (i)Egross negligence or willful misconduct by the
participant in the performance of the participant's duties for a DSC Company,
(ii)Efraud, embezzlement, misappropriation or other material dishonesty against
or with respect to any DSC Company or any conviction or admission of a felony
or other offense involving dishonesty, fraud or moral turpitude, (iii)Ethe
participant's willful, knowing or reckless unauthorized dissemination of
"proprietary information" (as defined in section 8.2 below), (iv)Eany other
breach by the participant of the restrictive covenants contained in
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section 8.2 or any other material breach by the participant of any other
agreement relating to employment with a DSC Company to which the participant is
a party or bound, (v)Ethe participant's material failure to perform or the
participant's refusal to perform his duties for any DSC Company, or such duties
as are reasonably requested by an immediate supervisor or the Board of
Directors of a DSC Company and which are commensurate with his position,
(vi)Eparticipant conduct that has brought or could reasonably bring any DSC
Company into substantial public disgrace or disrepute or (vii)Eviolation by the
participant of any policy of the DSC Company that then employs him.
8.2 Restrictive Covenants.
(a) The participant acknowledges and agrees that
(i)Ethrough his continuing services to the DSC Companies, he will learn
valuable trade secrets and other proprietary information relating to the
business of the DSC Companies, (ii)Ethe participant's services to the DSC
Companies are unique in nature, and (iii)Ethe DSC Companies would be
irreparably damaged if the participant were to provide services to any person
or entity in violation of the restrictions contained in this section 8.2
Accordingly, in consideration for the employers' maintaining this plan for the
benefit of the participant and paying benefits hereunder, the participant
agrees that at all times during which the participant is employed by a DSC
Company and for the period following termination of the participant's
employment that the participant is entitled to receive or is receiving a
monthly retirement income or deferred vested benefit hereunder, the participant
shall not, directly or indirectly, without the written consent of the company:
(i) anywhere in the United States or any other location
where a DSC Company is doing business (or planning to do
business in the reasonably near future), engage or participate
in, as an employee, owner, partner, shareholder, officer,
director, member, advisor, consultant, agent or (without
limitation by the specific enumeration of the foregoing)
otherwise, or permit his name to be used by or render services
of any type for, any "competitor(s)" (as herein defined);
provided, however, that nothing in this section 8.2 shall
prevent the participant from acquiring or owning, as a passive
investment, up to five percent of the outstanding securities
of a competitor which are publicly traded in any recognized
national securities market;
(ii) take any action which could reasonably be expected to
divert from a DSC Company any opportunity which would be
within the scope of such DSC Company's business;
(iii) directly or indirectly, solicit or attempt to solicit
any person or entity who is or has been (A)Ea customer of a
DSC Company at any time within two years prior to the date of
termination of the participant's employment to purchase any
product or service which may be provided by a DSC Company or
(B)Ea customer, supplier, licensor, licensee or other business
relation of a DSC Company conducting business with a DSC
Company at any time within two
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<PAGE> 16
years prior to the date of termination of participant's
employment to cease doing business with the DSC Company; or
(iv) solicit any officers, employees, representatives or
agents of a DSC Company to terminate their association with
the DSC Company.
As used herein, "competitor(s)" means any entity in the business of
telecommunication switches, access or transport products, or which
otherwise reasonably and logically competes with the business of the
DSC Companies as conducted at the time of enforcement of this section
8.2 (if such enforcement occurs prior to the termination of the
participant's employment) or at the time of the termination of the
participant's employment (if enforcement of this section 8.2 occurs at
or following such time) or under development at either such time, as
the case may be, and expected to be introduced or undertaken in the
next one-year period.
(b)(i) The participant understands and acknowledges, that by
virtue of his position with a DSC Company, he may have access
to certain "proprietary information" (as defined below) of the
DSC Companies, the disclosure of which may damage the DSC
Companies.
(ii) "Proprietary information" shall mean trade secrets,
confidential knowledge, data or any other proprietary
information. By way of illustration but not limitation,
proprietary information includes (A) trade secrets,
inventions, mask works, ideas, processes, methods, formulas,
source and object codes, discoveries, developments, designs,
techniques, know-how and negative know-how (hereinafter
collectively referred to as "inventions"); and (B)Einformation
regarding plans for research, development, new products,
marketing and selling business plans, budgets and unpublished
financial statements, licenses, prices and costs, suppliers
and customers; and (C)Einformation regarding the skills and
compensation of other employees of the DSC Companies. The
term "trade secret" shall mean any idea or knowledge that is
sufficiently valuable to give one entity any advantage over
its competitors. This includes but is not limited to
knowledge of failed development efforts, knowledge of the
effectiveness of development tools or processes or other
information, including any formula, pattern, compilation,
program, device, method, technique or process, that
(A)Ederives independent economical value, actual or potential,
from not being generally known to the public or to other
persons who can obtain economic value from its disclosure or
use; and (B)Eis the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.
(iii) The participant agrees to not disclose, either
directly or indirectly, any proprietary information of the DSC
Companies to any person or entity not employed by the DSC
Companies, except as may be specifically authorized in
writing.
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<PAGE> 17
(iv) The participant agrees to not disclose, either
directly or indirectly, any proprietary information of third
parties, to which the participant may become privy during his
employment at the DSC Companies, to any person or entity not
employed by the DSC Companies, except as may be specifically
authorized in writing.
(c) The participant agrees that all proprietary information
made or conceived by the participant either in whole or in part, during his
period of employment with the DSC Companies, and which are along the business,
work or investigations of the DSC Companies, or which result from or are
suggested by any work performed by the participant at the DSC Companies,
constitute "proprietary rights" (as herein defined) of the DSC Companies.
"Proprietary rights" means the ownership interest in proprietary information.
The participant further agrees:
(i) to promptly and completely communicate to management
of the DSC Companies all proprietary information made or
conceived by the participant during employment at the DSC
Companies.
(ii) to maintain current and appropriate notes, sketches
and other records of proprietary information made or conceived
by the participant during employment at the DSC Companies,
which documents shall belong to the DSC Companies.
(iii) to assist the DSC Companies in every necessary way to
obtain and enforce their proprietary rights. This particular
covenant shall survive the participant's period of employment
with the DSC Companies. The DSC Companies agree to reimburse
the participant for reasonable compensation and expenses for
such efforts expended following the participant's period of
employment with the DSC Companies.
(iv) California Labor Code Section 2870 provides for
certain rights that pertain to California employees. To the
extent that section applies to the participant, the
participant acknowledges that he has been advised to consult
independent legal counsel prior to disclosing proprietary
information to the DSC Companies.
(d) Notwithstanding any other provision of the plan, the
participant acknowledges and agrees that he shall forfeit all right and
entitlement to any benefit under the plan, and the employers shall not be
obligated to make or continue to make any payment of any plan benefit to or on
behalf of such participant, if the participant breaches the restrictive
covenants contained in this section 8.2. The participant further acknowledges
and agrees that (i)Ethe covenants of section 8.2 (a)Eare reasonable as to time,
geographic scope and the scope of the activity to be restrained and do not
impose a greater restraint than is necessary to protect
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<PAGE> 18
the business interests of the DSC Companies, and (ii)Ethe restrictive covenants
of this section 8.2 are enforceable.
8.3 Loan Offset. If at the time payments are to be made
hereunder the participant is indebted to or obligated to any DSC Company, then
the payments remaining to be made to or on behalf of the participant may, at
the discretion of the plan administrator, be reduced by the amount of such
indebtedness or obligation, provided, however, that an election by the plan
administrator not to reduce any such payment shall not constitute a waiver of
its claim or prohibit or otherwise impair the plan administrator's right to
offset future payments for such indebtedness or obligation.
ARTICLE 9
Reemployment
9.1 Rehired Participant. If a former participant or a
participant whose employment with all of the DSC Companies had terminated but
who has not received all benefits due him under the plan, is reemployed by a
DSC Company, the following provisions shall apply, notwithstanding any other
provisions of the plan:
(a) He shall become an active participant on the date he
again becomes an employee of an employer.
(b) If he is reemployed by an employer and becomes a
participant, his prior benefit service shall be added to his benefit
service earned after his reemployment, except if as a result of his
prior termination of employment he has received his entire benefit due
under the plan in the form of a lump sum payment, his prior benefit
service shall not be reinstated and shall be disregarded for purposes
of the plan.
9.2 Redetermination of Benefits. If a former participant
who is reemployed by an employer again becomes a participant in accordance with
subsection 9.1(a), no benefits shall be payable to him under the plan during
the period of his reemployment if he was not receiving benefits at the time of
his reemployment. If he was receiving benefits at the time of his
reemployment, payment of his benefits shall be suspended for any calendar month
within the period of his reemployment. Benefits payable to or with respect to
a participant under the plan after his period of reemployment ends shall be
redetermined in accordance with the provisions of the plan as then in effect.
However, if the benefit service he was entitled to at the time of his initial
termination of employment has been added to the benefit service earned after
his reemployment pursuant to section 9.1, such benefits shall be reduced by the
actuarial equivalent of the benefits, if any, previously paid to him under the
plan.
- 15 -
<PAGE> 19
ARTICLE 10
General Provisions
10.1 Notices. Any notice or document relating to the plan
required to be given to or filed with the plan administrator or any DSC Company
shall be considered as given or filed if delivered or mailed by registered or
certified mail, postage prepaid, to the plan administrator, in care of the
company.
10.2 Nonalienation of Plan Benefits. The rights or
interests of any participant or any participant's beneficiaries to any benefits
or future payments under the plan shall not be subject to attachment or
garnishment or other legal process by any creditor of any such participant or
beneficiary nor shall any such participant or beneficiary have any right to
alienate, anticipate, commute, pledge, encumber or assign any of the benefits
or rights which he may expect to receive (contingently or otherwise) under the
plan, except as otherwise provided in Article 8 or as may be required by the
tax withholding provisions of the Internal Revenue Code or a state's income tax
act or pursuant to a qualified domestic relations order (as defined in Section
206(d)(3)(B)(i) of ERISA).
10.3 Payment with Respect to Incapacitated Persons. If
any person entitled to benefits under the plan is under a legal disability or,
in the plan administrator's opinion, is incapacitated in any way so as to be
unable to manage his financial affairs, the plan administrator may direct the
payment of such benefits to such person's legal representative or to a relative
or friend of such person for such person's benefit, or the plan administrator
may direct the application of such benefit for the benefit of such person in
any manner which the plan administrator may select that is consistent with the
plan. Any payments made in accordance with the foregoing provisions of this
section shall be a full and complete discharge of any liability for such
payments.
10.4 No Employment or Benefit Guaranty. None of the
establishment of the plan, any modification thereof, the creation of any fund
or account, or the payment of any benefits shall be construed as giving to any
participant or other person any legal or equitable right against the employers
or the plan administrator except as provided herein. Under no circumstances
shall the maintenance of this plan constitute a contract of employment or shall
the terms of employment of any participant be modified or in any way affected
hereby. Accordingly, participation in the plan will not give any participant a
right to be retained in the employ of any DSC Company.
10.5 Litigation. In any action or proceeding regarding
any plan benefits or the administration of the plan, employees or former
employees of the employers, their beneficiaries and any other persons claiming
to have an interest in the plan shall not be necessary parties and shall not be
entitled to any notice of process. Any final judgment which is not appealed or
appealable and which may be entered in any such action or proceeding shall be
binding and conclusive on the parties hereto and on all persons having or
claiming to have any interest in the plan. Acceptance of participation in the
plan shall constitute a release of the employers, the Nominating Committee, the
plan administrator, and their agents from any and all liability and obligation
not involving willful misconduct or gross neglect.
- 16 -
<PAGE> 20
10.6 Actuarial Equivalent. A benefit shall be actuarially
equivalent to any other benefit if the value of the same is equal to the value
of such other benefit computed on the basis of the actuarial rates, tables and
procedures adopted by the plan administrator for this purpose. The interest
rate adopted by the plan administrator for the calculation of deferred vested
benefits is set forth in section 6.1
10.7 Evidence. Evidence required of anyone under the plan
shall be signed, made or presented by the proper party or parties and may be by
certificate, affidavit, document or other information which the person acting
thereon considers pertinent and reliable.
10.8 Gender and Number. Words denoting the masculine
gender shall include the feminine and neuter genders, the singular shall
include the plural and the plural shall include the singular wherever required
by the context.
10.9 Waiver of Notice. Any notice required under the plan
may be waived by the person entitled to notice.
10.10 Applicable Law. The plan shall be construed in
accordance with the laws of the State of Texas.
10.11 Severability. Whenever possible, each provision of
the plan shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the plan is held to be invalid, illegal
or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, and the plan shall be reformed,
construed and enforced in such jurisdiction so as to best give effect to the
intent of the company under the plan.
10.12 Withholding for Taxes. Notwithstanding any other
provisions of the plan, any employer may withhold from any payment to be made
under the plan such amount or amounts as may be required for purposes of
complying with the tax withholding provisions of the Internal Revenue Code of
1986, as amended, any state or local income tax act or any applicable similar
laws.
10.13 Successors. The plan is binding on all persons
entitled to benefits hereunder and their respective heirs and legal
representatives, on the plan administrator and its successor and on the
employers and their successors, whether by way of merger, consolidation,
purchase or otherwise.
10.14 Effect on Other Employee Benefit Plans. Any benefit
paid or payable under this plan shall not be included in a participant's or
employee's compensation for purposes of computing benefits under any employee
benefit plan maintained or contributed to by a DSC Company except as may
otherwise be required under the terms of such employee benefit plan.
- 17 -
<PAGE> 21
10.15 Gross-up Payments. Not later than fifteen days prior
to the due date (including extensions) for the participant's filing of any tax
return reflecting amounts subject to Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), the independent public accountants then
regularly retained by the company in consultation with tax counsel acceptable
to the participant shall determine if, in such accountants' reasonable opinion,
any amount payable to the participant under the plan would constitute an
"excess parachute payment" within the meaning of Section 280G of the Code,
subject to the excise tax imposed by Section 4999 of the Code, or any similar
or successor provisions of the Code (together with any interest or penalties
related thereto, the "Excise Tax"). If such determination is so made, the
company shall pay to the participant the amount (a "gross-up payment") of such
Excise Tax and all Excise Tax, federal and state income tax, payroll (such as
Social Security and Medicare) tax, or other taxes with respect to the gross-up
payment. If, at a later date, the Internal Revenue Service assesses a
deficiency against the participant on the basis that the Excise Tax with
respect to any amount paid to the participant under the plan is greater than
that which was determined at the time such amounts were paid, the company shall
pay to the participant a gross-up payment with respect to such Excise Tax, plus
any professional fees or expenses incurred by the participant as a result of
such assessment. Upon notice by the participant of any audit or other
proceeding that may result in a liability to the company hereunder, the
participant shall promptly notify the company of such audit or other
proceeding; and the company may, at its option, but solely with respect to the
item or items that relate to such potential liability, choose to assume the
defense of such audit or other proceeding at its own cost, provided that
(i)Ethe participant shall cooperate with the company in such defense and
(ii)Ethe company will not settle such audit or other proceeding without the
consent of the participant (such consent not to be unreasonably withheld). The
highest effective marginal tax rate (determined by taking into account any
reduction in itemized deductions and/or exemptions attributable to the
inclusion of the additional amounts payable under this Section 10.15 in the
participant's adjusted gross or taxable income) applicable to individuals
resident in Texas at the time of payment of such amounts will be used for
purposes of determining the federal and state income and other taxes with
respect thereto.
ARTICLE 11
Relating to Plan Administration
11.1 Plan Administrator's Duties. The Executive Plan
Committee of the company is the plan administrator. Except as otherwise
specifically provided and in addition to the powers, rights and duties
specifically given to the plan administrator elsewhere in the plan, the plan
administrator shall have the following discretionary powers, rights and duties:
(a) To construe and interpret the plan, to decide all
questions of plan eligibility, to determine the amount, manner and time of
payment of any benefits under the plan, and to remedy ambiguities,
inconsistencies or omissions in its sole and complete discretion.
- 18 -
<PAGE> 22
(b) To adopt such rules of procedure as may be necessary
for the efficient administration of the plan and as are consistent with the
plan, and to enforce the plan in accordance with its terms and such rules.
(c) To make determinations as to the right of any person
to a benefit, to afford any person dissatisfied with such determination the
right to a hearing thereon, and to direct payments or distributions in
accordance with the provisions of the plan.
(d) To furnish the employers and participants with such
information as may be required by them for tax or other purposes in connection
with the plan.
(e) To enroll participants in the plan, distribute and
receive plan administration forms and comply with all applicable governmental
reporting and disclosure requirements.
(f) To employ agents, attorneys, accountants, actuaries
or other persons (who also may be employed by a DSC Company), and to allocate
or delegate to them such powers, rights and duties as the plan administrator
considers necessary or advisable to properly carry out the administration of
the plan (including but not limited to the preparation of recommendations of
actuarial assumptions which shall be reviewed by the plan administrator),
provided that any such allocation or delegation and the acceptance thereof must
be in writing.
(g) To report at least annually to the Board of Directors
of the company or to such person or persons as the Board of Directors of the
company designates as to the administration of the plan, any significant
problems which have developed in connection with the administration of the plan
and any recommendations which the plan administrator may have as to the
amendment of the plan or the modification of plan administration.
11.2 Action by Plan Administrator. During a period in
which two or more plan administrative committee members are acting, any action
by the plan administrator will be subject to the following provisions:
(a) The committee may act by meeting (including a meeting
from different locations by telephone conference) or by document signed without
meeting, and documents may be signed through the use of a single document or
concurrent documents.
(b) A committee member by writing may delegate part or
all of his rights, powers, duties and discretion to any other committee member,
with such other committee member's consent.
(c) No member of the committee shall be liable or
responsible for an act or omission of other committee members in which the
former has not concurred.
11.3 Information Required for Plan Administration. The
employers shall furnish the plan administrator with such data and information
as the plan administrator considers necessary or desirable to perform its
duties with respect to plan administration. The
- 19 -
<PAGE> 23
records of an employer as to an employee's or participant's period or periods
of employment, termination of employment and the reason therefor, leaves of
absence, reemployment and earnings will be conclusive on all persons unless
determined to the plan administrator's satisfaction to be incorrect.
Participants and other persons entitled to benefits under the plan also shall
furnish the plan administrator with such evidence, data or information as the
plan administrator considers necessary or desirable for the plan administrator
to perform its duties with respect to plan administration.
11.4 Decision of Plan Administrator Final. Subject to
applicable law and section 11.5, any interpretation of the provisions of the
plan and any decision on any matter within the discretion of the plan
administrator made by the plan administrator in good faith shall be binding on
all persons. A misstatement or other mistake of fact shall be corrected when
it becomes known and the plan administrator shall make such adjustment on
account thereof as the plan administrator considers equitable and practicable.
11.5 Review of Benefit Determinations. If a claim for
benefits made by a participant or his beneficiary is denied, the plan
administrator shall within 90 days (or 180 days if special circumstances
require an extension of time) after the claim is made furnish the person making
the claim with a written notice specifying the reasons for the denial. Such
notice shall also refer to the pertinent plan provisions on which the denial is
based, describe any additional material or information necessary for properly
completing the claim and explain why such material or information is necessary,
and explain the plan's claim review procedures. If requested in writing within
60 days after receipt by the participant of the written notification of the
denial of his claim, the plan administrator shall afford each claimant whose
claim has been denied a full and fair review of the plan administrator's
decision and, within 60 days (120 days if special circumstances require
additional time) of the request for reconsideration of the denied claim, the
plan administrator shall notify the claimant in writing of the plan
administrator's final decision.
11.6 Interested Plan Administrator. If a member of the
plan committee is also a participant in the plan, he may not decide or
determine any matter or question concerning his benefits unless such decision
or determination could be made by him under the plan if he were not a committee
member.
11.7 Indemnification. No person (including any present or
former plan administrative committee member or Nominating Committee member, and
any present or former director, officer or employee of any employer) shall be
personally liable for any act done or omitted to be done in good faith in the
administration of the plan. Each present or former director, officer or
employee of any employer to whom the plan administrator or an employer has
delegated any portion of its responsibilities under the plan, each present or
former plan administrative committee member, and each present or former
Nominating Committee member shall be indemnified and saved harmless by the
employers (to the extent not indemnified or saved harmless under any liability
insurance or other indemnification arrangement with respect to the plan) from
and against any and all claims of liability to which they are subjected by
reason of any act done or omitted to be done in good faith in connection
- 20 -
<PAGE> 24
with the administration of the plan, including all expenses reasonably incurred
in their defense if the employers fail to provide such defense.
ARTICLE 12
No Funding of Plan Benefits
Nothing herein shall require the employers to segregate or set
aside any funds or other property for the purpose of paying any benefits under
the plan. Nothing contained in this plan, and no action taken pursuant to its
provisions by the employers or the plan administrator shall create, nor be
construed to create, a trust of any kind or a fiduciary relationship between
the employer and the participant, his designated beneficiary, or any other
person. Benefits hereunder shall be paid from assets which shall continue, for
all purposes, to be a part of the general, unrestricted assets of the
employers. The obligation of the employers hereunder shall be an unfunded and
unsecured promise to pay money in the future. To the extent that the
participant or his designated beneficiary acquires a right to receive payments
from the employer under the provisions hereof, such right shall be no greater
than the right of any unsecured general creditor of the employer; no such
person shall have nor acquire any legal or equitable right, interest or claim
in or to any property or assets of the employer. The preceding provisions of
this Article 12 shall not, however, prevent the employer or the plan
administrator from purchasing an annuity contract or insurance contract to
provide any benefits hereunder and from expressly transferring in writing such
annuity contract or insurance contract to the participant or his designated
beneficiary, with his or his designated beneficiary's consent, whichever is
applicable, in exchange for such person's rights under this plan and in full
satisfaction thereof. It is intended that the plan be unfunded for tax
purposes and for purposes of Title I of ERISA.
ARTICLE 13
Relating to the Employers
13.1 Action by Employers. Any action required or
permitted of an employer under the plan shall be by resolution of its Board of
Directors or by a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolution of its Board of Directors or such
committee.
13.2 Additional Employers. Any DSC Company that is not an
employer may adopt the plan and become an employer hereunder by filing with the
plan administrator a certified copy of a resolution of the Board of Directors
of the DSC Company providing for its adoption of the plan and a certified copy
of a resolution of the Board of Directors of the company consenting to such
adoption.
- 21 -
<PAGE> 25
ARTICLE 14
Amendment and Termination
14.1 Amendment. While the employers expect and intend to
continue the plan, the company must necessarily reserve and hereby does reserve
the right to amend the plan from time to time. Any amendment of the plan will
be by resolution of the Board of Directors of the company or any committee of
the Board of Directors to whom such authority has been delegated.
Notwithstanding the preceding sentence, the plan administrator may amend the
plan in the following respects without the approval of the Board of Directors
of the company: (i) amendments required by law; (ii) amendments that relate to
the administration of the plan and that do not materially change the cost of
the plan; and (iii) amendments that are designed to resolve possible
ambiguities, inconsistencies, or omissions in the plan and that do not
materially increase the cost of the plan. No amendment shall reduce the value
of a participant's benefits to less than the amount he would be entitled to
receive if he had resigned from the employ of all of the DSC Companies on the
day of the amendment. If the plan is proposed to be amended within twenty-four
months after a change of control (as defined in section 6.1 above) of the
company occurs, then for purposes of determining whether such proposed
amendment satisfies the preceding sentence, the value of a participant's
deferred vested benefit under section 6.1 shall be computed using the actuarial
assumptions adopted by the plan administrator for the purpose of calculating
deferred vested benefits and in effect immediately before such change of
control of the company occurred.
14.2 Termination. The plan will terminate as to all
employers on any date specified by the company if advance written notice of the
termination is given to the plan administrator and any other employers. The
plan will terminate as to an individual employer on the first to occur of the
following:
(a) The date it is terminated by that employer if advance
written notice of the termination is given to the company, the plan
administrator and the other employers.
(b) The date that employer is judicially declared
bankrupt or insolvent.
(c) The dissolution, merger, consolidation or
reorganization of that employer, or the sale by that employer of all or
substantially all of its assets, except that:
(i) in any such event arrangements may be made
with the consent of the company whereby the plan will
be continued by any successor to that employer or any
purchaser of all or substantially all of its assets
without a termination thereof, in which case the
successor or purchaser will be substituted for that
employer under the plan; and
(ii) if any employer is merged, dissolved or in
any way reorganized into, or consolidated with, any
other employer, the plan as applied to the
- 22 -
<PAGE> 26
former employer will automatically continue in effect
without a termination thereof.
Notwithstanding the foregoing, if any of the events described above should
occur but some or all of the participants employed by an employer are
transferred to employment with one or more of the other employers coincident
with or immediately after the occurrence of such event, the plan as applied to
those participants will automatically continue in effect without a termination
thereof.
14.3 Vesting on Termination. On termination of the plan
as respects all employers (and, at the discretion of the company, on a
termination of the plan as respects any employer that does not result in the
termination of the plan as respects all employers), the rights of all affected
participants to benefits accrued to the date of such termination shall be fully
vested and shall be subject to forfeiture only as provided in Article 8 and
shall be payable as provided in Article 7 as if each such affected participant
had retired on his normal retirement date immediately before such termination
of the plan. Notwithstanding the foregoing, the benefit payable to each
affected participant shall be computed on an actuarially equivalent basis using
the then current age of such participant as determined on the date of plan
termination.
- 23 -
<PAGE> 27
IN WITNESS WHEREOF, the company has executed this plan on the
27th day of October, 1997.
James L. Donald
Chief Executive Officer
DSC Communications Corporation
ATTEST:
By:
Its:
(SEAL)
- 24 -
<PAGE> 1
EXHIBIT 13.1
DSC Communications Corporation and Subsidiaries
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997(A) 1996(B) 1995 1994(C) 1993
---------- ---------- ---------- ---------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS FOR THE
YEAR:
Revenue ............................... $1,575,479 $1,380,891 $1,422,018 $1,003,125 $ 730,774
Gross profit .......................... 662,272 455,144 685,899 490,392 317,969
Operating income (loss) ............... 10,033 (12,043) 279,418 213,999 110,176
Net interest income (expense) ......... (6,920) (2,209) 8,548 14,231 (565)
Net gains from
litigation settlements ............... 161,500 8,105 -- -- --
Net income (loss) ..................... $ 48,863 $ (7,555) $ 192,680 $ 162,626 $ 81,660
========== ========== ========== ========== ===========
Basic income (loss)
per share ........................... $ 0.42 $ (0.07) $ 1.68 $ 1.45 $ 0.83
========== ========== ========== ========== ===========
Diluted income (loss)
per share ........................... $ 0.41 $ (0.07) $ 1.63 $ 1.39 $ 0.77
========== ========== ========== ========== ===========
FINANCIAL POSITION AT YEAR-END:
Cash and marketable
securities ........................... $ 617,842 $ 334,039 $ 569,264 $ 271,322 $ 313,808
Working capital ....................... 1,122,713 769,956 738,965 393,034 406,752
Property and equipment,
net .................................. 443,610 403,596 370,522 282,963 179,783
Total assets .......................... 2,439,515 1,925,655 1,865,275 1,268,536 900,417
Long-term debt, including current...... 661,808 307,674 243,539 42,578 70,412
Shareholders' equity (D) .............. 1,215,820 1,147,636 1,124,079 851,100 617,800
OTHER FINANCIAL INFORMATION:
Shareholders' equity
per share of common
stock outstanding .................... $ 10.30 $ 9.79 $ 9.72 $ 7.50 $ 5.61
Return on average
shareholders' equity ................. 4.1% (0.7%) 19.5% 22.1% 19.9%
Ratio of current assets to
current liabilities .................. 3.4 2.8 2.5 2.1 3.1
Ratio of debt to
shareholders' equity ................. 54.4% 26.8% 21.7% 5.0% 11.4%
</TABLE>
(Continued)
<PAGE> 2
DSC Communications Corporation and Subsidiaries
Item 6: SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
1997(A) 1996(B) 1995 1994(C) 1993
------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Average shares used to compute
income (loss) per share (in thousands):
Basic ........................................ 117,358 116,108 114,557 111,906 98,884
Diluted ...................................... 119,496 116,108 118,214 116,891 105,851
Shareholders of record at
year end ....................................... 4,694 5,242 3,768 3,611 3,462
Total employees at year
end ............................................ 6,681 6,367 5,860 5,414 4,041
</TABLE>
- --------------------------------------------------------------------------------
(A) Unusual items in 1997 included a $135.0 million write-off of in-process
research and development related to the December 1997 acquisition of
Celcore, for which there was no tax benefit, an asset write-down of $22.0
million in connection with the January 1998 disposition of the Company's
fixed wireless local loop business and net gains of $161.5 million from
litigation settlements. Without these unusual items in 1997, operating
income, net income and diluted income per share would have been $167.0
million, $99.2 million and $0.83 per share, respectively. See Notes to
Consolidated Financial Statements and Management's Discussion and Analysis
for further discussion.
(B) Non-cash special charges of $96.0 million were recorded in 1996 related
primarily to a reduction in the carrying value of certain assets for several
of the Company's products. Without the special charges in 1996, operating
income, net income and diluted income per share would have been $84.0
million, $52.0 million and $0.45 per diluted share, respectively. See Notes
to Consolidated Financial Statements and Management's Discussion and
Analysis for further discussion.
(C) 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.
(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
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 Except for the historical information contained herein, the matters
discussed or incorporated by reference in the Annual Report herein, including
the matters relating to future performance, are forward looking statements that
are dependent upon a number of risks and uncertainties that could cause actual
results to differ materially from those in the forward looking statements.
These risks and uncertainties include, but are not limited to, those described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other risks indicated from time to time in the Company's
filings with the Securities and Exchange Commission.
HIGHLIGHTS
In 1997, DSC Communications Corporation achieved improved operating
results and a record level of revenue. Revenue grew 14% in 1997, while net
income, excluding unusual items, nearly doubled from 1996. The Company also
maintained its strong financial position with over $617 million in cash and
marketable securities; working capital of $1.1 billion; a ratio of current
assets to current liabilities of 3.4 to 1; $2.4 billion in total assets; and a
debt to equity ratio of just over 50%.
In addition to the Company's improved operating performance, 1997 was
highlighted by several significant events:
O In August, the Company issued $400 million of 7% convertible
subordinated notes. The notes are convertible, at the option of the
holder, into the Company's common stock at $49.73 per share.
O In November, the Company received net proceeds of approximately $126
million from the settlement of litigation with Next Level
Communications Corporation ("NLC").
O The Company sold shares of Advanced Fibre Communications, Inc.
("AFC"), previously received in a settlement of litigation, for a
net gain of approximately $35.5 million.
O In December, the Company acquired a GSM and AMPS wireless systems
manufacturer, Celcore, Inc. ("Celcore"), for approximately $167
million.
In early 1998, the Company sold its fixed wireless local loop business.
As a result, the Company recorded a $22.0 million asset write-down in 1997.
FINANCIAL CONDITION AND LIQUIDITY
The Company ended 1997 and 1996 with the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
(in millions)
<S> <C> <C>
Cash and cash equivalents......................................... $ 277.2 $ 155.1
Marketable securities............................................. 340.6 178.9
Non-debt working capital, excluding
cash and cash equivalents and
marketable securities........................................... 537.5 469.0
Long-term debt, including
current maturities.............................................. 661.8 307.7
</TABLE>
<PAGE> 4
In 1997, the Company's financial position was enhanced by the proceeds
received from the issuance of the $400 million convertible subordinated notes
and the receipt of net proceeds of approximately $161.5 million associated with
the NLC litigation settlement and the sale of the AFC shares. The acquisition of
Celcore was funded with approximately $150.5 million in cash.
The Company generated $231.0 million of cash from operations in 1997,
compared to a use of cash of $64.8 million in 1996. Net income for 1997 before
non-cash charges for acquired in-process research and development and the
write-down of assets in connection with the 1998 disposition of a business was
approximately $205.9 million. Operating asset changes included inventory growth
of $35.6 million and receivables growth of $19.4 million. In order to reduce the
risk of collection associated with the Company's longer-term receivables, among
other reasons, the Company has historically sold both current and long-term
receivables primarily without recourse. The net proceeds collected from the
receivable sales in 1997 and 1996 was approximately $111.2 million and $122.1
million, respectively. The Company may from time to time continue to sell
receivables in the future.
Cash used for investing activities of $480.5 million in 1997 included
capital expenditures of $143.1 million and $150.5 million of cash used in the
acquisition of Celcore. The capital expenditures for 1997 included capital
additions in Costa Rica, the establishment of manufacturing facilities in
Ireland and facilities expansion in Texas. The Company anticipates that capital
expenditures in 1998 could be in the range of $150 million to $170 million,
which will include the construction of a new customer service facility on the
Plano campus. However, the timing and extent of any future capital expenditures
is dependent upon future business growth.
The convertible subordinated notes, if not converted into common stock,
are due on August 1, 2004. The notes are redeemable, at the Company's option, in
whole or in part, at any time on or after August 1, 2000, at a premium of 104%
of par value which declines annually to par value at the maturity date. Interest
on the notes is payable semi-annually on February 1 and August 1 of each year,
commencing in February 1998. Also during 1997, the Company repaid $32.7 million
of its long-term borrowings, which included a $28.1 million scheduled annual
principal payment on the loan obtained during 1995. Annual maturities of senior
long-term debt for the next five years range from approximately $33 million to
$55 million. See "Long-Term Debt" in Notes to Consolidated Financial Statements
for further discussion.
The Company has an unsecured $160 million revolving credit agreement
with several banks which expires in May 2001. This facility provides for
borrowings and issuances of letters of credit in various currencies. The maximum
borrowings available under the facility are reduced by the value of outstanding
letters of credit issued by the banks on behalf of the Company. At December 31,
1997, outstanding letters of credit issued under the agreement totaled $7.7
million, and there have been no borrowings under this agreement.
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, should the Company's earnings in the future deteriorate,
waivers or amendments to these agreements could become necessary.
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.
<PAGE> 5
The Company believes that its existing cash and short-term investments
and available credit facilities will be adequate to support the Company's
near-term financial resource needs, including working capital requirements,
capital expenditures, operating lease obligations and debt payments, although
there can be no assurance that this will be the case. 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> 6
RESULTS OF OPERATIONS
1997 Compared to 1996
Revenue for 1997 increased 14% to $1.6 billion compared to $1.4 billion
in 1996. Net income, excluding unusual items in both years, was $99.2 million,
or $0.83 per diluted share in 1997, a 91% increase from net income of $52.0
million, or $0.45 per diluted share in 1996. Including the effects of the
unusual items in both periods, net income was $48.9 million, or $0.41 per
diluted share in 1997, compared to a net loss of $7.6 million, or $0.07 per
diluted share in 1996. Results for 1997 included the impact of Celcore
operations from the date of acquisition in December 1997.
Unusual items in 1997 included net gains of approximately $161.5
million (included in Other Income, Net) resulting from the NLC and AFC
litigation settlements, as previously discussed. Also, the Company recorded a
$135.0 million charge for in-process research and development related to the
acquisition of Celcore as well as a $22.0 million asset write-down in connection
with the January 1998 disposition of a business . See "Other Income, Net",
"Business Acquisition" and "Asset Write-Down" in Notes to Consolidated Financial
Statements for further discussion.
During 1996, the Company recorded non-cash special charges of $96.0
million primarily to reduce the recorded value of assets associated with certain
of the Company's newer products 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. See "Special Charges" in Notes to
Consolidated Financial Statements for further discussion.
Revenue growth in 1997 was the result of increased demand for the
Company's switching and access products. Switching products revenue increased
14% from the 1996 level and accounted for 42% of consolidated revenue in both
1997 and 1996. This increase was the result of higher deliveries across the
majority of the switching product family, including intelligent
networking/signal transfer point solutions and cellular products. Access
products revenue increased 26% over the prior year due primarily to continued
strong demand for the Company's Litespan-2000 digital loop carrier systems. As a
result, access products accounted for 37% of consolidated revenue in 1997
compared to 33% in 1996. Revenue from the Company's transport products,
including the European transmission products, was 20% of consolidated revenue in
1997 compared to 23% in 1996.
The Company's European transmission business, which accounted for 8% of
consolidated revenue in 1997 as compared to 9% in 1996, continued to incur
operating losses in 1997. While the level of operating losses declined in 1997
compared to 1996, continued improvement and ultimate profitability is dependent
upon successful market acceptance and deployment of these products. The Company
believes that once volume deliveries of these products begins to increase, the
Company's future operating performance will be favorably impacted.
The litigation between the Company, Bell Atlantic and Lucent
Technologies, Inc. was settled in March 1997. In conjunction with the
settlements, Bell Atlantic agreed to purchase a significant amount of product,
at a minimum annual purchase level, from the Company over a five-year period
beginning in 1998.
Gross profit in 1997 was $662.3 million, or 42% of revenue compared to
$537.6 million, or 39% of revenue in 1996, excluding special charges. The
improvement was due to a number of factors, including a shift in the mix of
products sold, increased software content and cost reduction efforts. As has
been experienced in the past, the Company's gross margin percentage and
operating performance could vary significantly from period to period in the
future due to changes in the relative mix of product deliveries, software
content and the impact of sales price changes.
<PAGE> 7
Research and development expenses in 1997 increased to $252.1 million,
or 16% of revenue, compared to $210.1 million, or 15% of revenue, in 1996. 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. Research and
development expenses are also expected to increase in 1998 due to the inclusion
of Celcore's expenses in the Company's consolidated results for the full year.
Selling, general and administrative expenses totaled $232.2 million, or
15% of revenue, in 1997 compared to $233.6 million, or 17% of revenue, in 1996.
This improvement resulted from the Company's continuing focus on controlling
expenses, particularly international selling expenses and certain general and
administrative costs. The Company continues to actively pursue claims primarily
related to its intellectual property rights, and as a result, legal expenses
grew in 1997 and may continue to increase as this litigation progresses. See
"Litigation" under "Commitments and Contingencies" in Notes to Consolidated
Financial Statements for further discussion.
Depreciation, amortization and lease expenses increased from $121.5
million in 1996 to $134.6 million in 1997. Capital expenditures in 1997 of
$143.1 million, along with expected capital additions in the range of
approximately $150 million to $170 million in 1998 and future increases in
leasing activities, will continue to increase depreciation, amortization and
lease expenses in 1998 and future years.
Interest income and expense both increased in 1997 as a result of the
issuance of the $400 million principal amount of convertible subordinated notes
in August 1997. Other Income, Net in 1997 and 1996 includes gains from
litigation settlements. See "Other Income, Net" in Notes to Consolidated
Financial Statements for further discussion.
The high income tax expense relative to income before income taxes for
1997 is due to the non-deductibility of certain expenses for income tax
purposes, primarily the $135 million in-process research and development charge.
Excluding this and other unusual items, the Company's effective tax rate for
1997 would have been 37.1% compared to 38% in 1996. This decrease was primarily
attributable to the tax impact of earnings in foreign tax jurisdictions. 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 1998, the Company's
effective tax rate could increase depending on a subsequent review of the
realization of the additional tax loss carryforward.
1996 Compared to 1995
Revenue for 1996 and 1995 was $1.4 billion and the Company incurred a
net loss during 1996 of $7.6 million, or $0.07 per diluted 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 $0.45 per diluted share, compared to $192.7 million, or $1.63
per diluted 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 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
<PAGE> 8
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.
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.
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.
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.
Depreciation and amortization expense increased from $81.2 million in
1995 to $94.0 million in 1996.
Interest expense increased in 1996 as a result of the $225 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, Net in 1996 includes amounts received from a settlement of certain
litigation during the year. See "Other Income, Net" in Notes to Consolidated
Financial Statements for further discussion. The Company provided an income tax
benefit at a 38% effective rate for 1996.
RISKS AND UNCERTAINTIES
The Company has taken action to understand the nature and extent of the
work required to make its products, systems and infrastructure Year 2000
compliant. A Year 2000 project team has been appointed to bring its products,
systems and infrastructure into compliance. The Company has also initiated
discussions with all of its significant vendors to determine the extent to which
the Company's systems and infrastructure are vulnerable to those third parties
which fail to remedy their own Year 2000 issues. Certain of the Company's
products are currently Year 2000 compliant and the remainder of the products are
targeted to be Year 2000 compliant by mid-1998. While the Company does not
believe the Year 2000 issue will pose significant operational problems, if the
Year 2000 compliance modifications are not made, or completed timely, the Year
2000 issue could have a material adverse impact on the Company's business. The
Year 2000 compliance activities will be performed as a part of the Company's
normal sustaining activity and will not result in significant incremental costs
to the Company. It is
<PAGE> 9
estimated that the total Year 2000 costs, including costs previously incurred
and future costs, will be in the range of $15 million to $20 million. The
estimated cost and date on which the Company believes it will be Year 2000
compliant are based on management's best estimates, yet there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
The Company is exposed to market risk from changes in foreign currency
exchange rates. The Company, in management of this exposure, enters into forward
foreign exchange contracts primarily to hedge certain receivables and firm
contracts for deliveries of products and services and are denominated in the
same currency as the underlying transaction. The terms of the forward contracts
generally match the terms of the underlying transaction. The forward contracts
are not held for speculative or 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. At December 31, 1997, the U.S.
dollar equivalent of the forward foreign exchange contracts was $73.3 million,
primarily consisting of Japanese Yen contracts. The Company does not believe
that an immediate 10% change in foreign currency exchange rates would have a
material impact on the Company's financial position or results of operations.
See "Fair Value of Financial Instruments" in Notes to Consolidated Financial
Statements for further discussion.
While the forward exchange contracts in place are geared toward
protecting the dollar value of foreign currency cash receipts and disbursements
associated with firm commitments, the exchange rate environment throughout the
world at any given time may affect the level of overall potential business
activity in a particular region. As has occurred in the Asia-Pacific region, the
decline in the value of the local currencies may, if not reversed, affect future
product sales as a result of many factors, including the Company's products
becoming more expensive to purchase in a customer's local currency. To date, the
Company has not experienced a material reduction in the level of business
activity in foreign markets.
The Company is also exposed to market risk from changes in interest
rates. As of December 31, 1997, the Company's investment portfolio consisted of
fixed income securities with a weighted-average maturity of 13 months. In
addition, the Company's variable rate debt consisted of $80.3 million of
long-term notes. The Company does not believe that an immediate 10% change in
interest rates would have a material impact on the Company's financial position
or results of operations.
The Company's future operating results may be affected by a number of
factors, including, but not limited to, the introduction and market acceptance
of new products on a timely basis as previously discussed; mix of products sold;
the impact of sales price changes; the timing and ultimate receipt of orders
from certain customers which continue to constitute a large portion of the
Company's revenue; the successful enhancement of existing products;
manufacturing lead times; significant fluctuations in foreign currency exchange
rates; the successful integration of strategic acquisitions; effects of
consolidation among the Company's customer base; the success of underlying
technologies in which the Company has chosen to target certain of its products;
the successful completion of certain multi-year projects which include
requirements to develop new technologies including hardware, software and
installation of infrastructure systems; effects of customer purchasing budgets,
which have historically resulted in weaker demand for the Company's products in
the first half of the year; and changes in general worldwide economic
conditions, any of which could have an adverse impact on operating results. The
industry in which the Company operates requires substantial investment in
product development, capital and, at times, inventory prior to customer
acceptance of new products or enhancements to existing products.
<PAGE> 10
One of the keys to the Company's overall success has been anticipating the
appropriate timing of such activities. Delays in product completion and/or
slower than expected market acceptance of certain products, including iMTN and
newer products of the Company's Danish operations, have in the past negatively
impacted the Company's operating performance and also, in certain cases,
resulted in adjustments to carrying values of assets. Future operating
performance could be impacted should timing of further product development
and/or market acceptance be delayed. Additionally, the success of the Celcore
acquisition is dependent upon the development and market acceptance of Celcore's
new GSM system.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" ("FAS 128"). The Company has adopted FAS 128 and in accordance with
the rules set forth, has restated its income (loss) per share amounts for all
prior periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("FAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. The required disclosures for FAS 130
will be included in the Company's quarterly report on Form 10-Q for the first
quarter of 1998. The adoption of FAS 130 will have no impact on the Company's
consolidated results of operations, financial position or cash flows and any
effect will be limited to the presentation of its disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. FAS 131 is
effective for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The adoption of FAS
131 will have no impact on the Company's consolidated results of operations,
financial position or cash flows and any effect will be limited to the
presentation of its disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company continues to evaluate the applicability of
SOP 97-2 to its business but does not currently believe SOP 97-2 will have a
material impact on its business or operating performance.
<PAGE> 11
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,
------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue ............................................... $ 1,575,479 $ 1,380,891 $ 1,422,018
Cost of revenue:
Special charges related to inventories
and associated assets ............................. -- 82,500 --
Other ............................................... 913,207 843,247 736,119
----------- ----------- -----------
Total cost of revenue ............................. 913,207 925,747 736,119
----------- ----------- -----------
Gross profit ........................................ 662,272 455,144 685,899
----------- ----------- -----------
Operating costs and expenses:
Research and product development .................... 252,089 210,091 189,751
Selling, general and administrative ................. 232,220 233,576 207,188
In-process research and development ................. 135,000 -- --
Asset write-down .................................... 22,000 -- --
Special charges for excess facilities
and equipment ..................................... -- 13,500 --
Other operating costs ............................... 10,930 10,020 9,542
----------- ----------- -----------
Total operating costs and expenses ................ 652,239 467,187 406,481
----------- ----------- -----------
Operating income (loss) ............................... 10,033 (12,043) 279,418
Interest income ....................................... 27,148 24,146 27,147
Interest expense ...................................... (34,068) (26,355) (18,599)
Other income, net ..................................... 159,053 2,066 1,984
----------- ----------- -----------
Income (loss) before income taxes ................... 162,166 (12,186) 289,950
Income tax expense (benefit) .......................... 113,303 (4,631) 97,270
----------- ----------- -----------
Net income (loss) ................................. $ 48,863 $ (7,555) $ 192,680
=========== =========== ===========
Basic income (loss) per share ......................... $ 0.42 $ (0.07) $ 1.68
=========== =========== ===========
Diluted income (loss) per share ....................... $ 0.41 $ (0.07) $ 1.63
=========== =========== ===========
Average shares used in per share computation:
Basic ............................................. 117,358 116,108 114,557
=========== =========== ===========
Diluted ........................................... 119,496 116,108 118,214
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 12
DSC Communications Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents ................................ $ 277,200 $ 155,101
Marketable securities .................................... 340,642 178,938
Receivables .............................................. 436,093 411,947
Inventories .............................................. 374,247 343,566
Deferred income taxes .................................... 79,879 61,086
Other current assets ..................................... 86,969 52,240
---------- ----------
Total current assets ................................... 1,595,030 1,202,878
---------- ----------
PROPERTY AND EQUIPMENT, NET ................................ 443,610 403,596
CAPITALIZED SOFTWARE DEVELOPMENT COSTS ..................... 72,341 51,634
COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, NET ... 159,594 146,025
OTHER ...................................................... 168,940 121,522
---------- ----------
Total assets ......................................... $2,439,515 $1,925,655
========== ==========
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable ......................................... $ 110,135 $ 100,730
Accrued liabilities ...................................... 301,044 297,101
Income taxes payable ..................................... 28,536 2,019
Current portion of long-term debt ........................ 32,602 33,072
---------- ----------
Total current liabilities .............................. 472,317 432,922
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION ..................... 629,206 274,062
NONCURRENT INCOME TAXES AND OTHER LIABILITIES .............. 122,172 70,495
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, issued - 123,050
in 1997 and 122,241 in 1996; outstanding - 118,061
in 1997 and 117,252 in 1996 ........................... 1,231 1,222
Additional capital ....................................... 755,963 730,743
Unrealized gains (losses) on securities,
net of income taxes .................................... 194 (147)
Accumulated translation adjustment ....................... 2,494 8,743
Retained earnings ........................................ 499,049 450,186
---------- ----------
1,258,931 1,190,747
Treasury stock, at cost, 4,989 shares in 1997 and 1996 ... (43,111) (43,111)
---------- ----------
Total shareholders' equity ............................. 1,215,820 1,147,636
---------- ----------
Total liabilities and shareholders' equity ........... $2,439,515 $1,925,655
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 13
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................... $ 48,863 $ (7,555) $ 192,680
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
In-process research and development .......................... 135,000 -- --
Asset write-down ............................................. 22,000 -- --
Special charges .............................................. -- 96,000 --
Depreciation and amortization ................................ 102,092 93,982 81,218
Amortization of capitalized software
development costs ......................................... 29,328 24,193 21,591
Deferred income taxes ........................................ (9,491) (50,359) (31,888)
Income tax benefit related to stock options .................. -- 6,872 49,987
Gain from the sales of stock received
from 1996 litigation settlement ........................... (35,494) -- --
Other ........................................................ 8,671 4,955 938
Changes in operating assets and liabilities (net of acquisition and
disposition):
Increase in current and
long-term receivables ....................................... (19,409) (159,747) (33,149)
Increase in inventories ...................................... (35,556) (95,705) (129,234)
Increase in other assets ..................................... (47,852) (20,908) (1,603)
Increase in current payables
and accruals ................................................ 14,176 23,766 67,178
Increase in noncurrent income taxes
and other liabilities .......................................... 18,689 19,726 10,241
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES ..................................... 231,017 (64,780) 227,959
--------- --------- ---------
</TABLE>
(Continued)
<PAGE> 14
DSC Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisition, net of acquired cash..................... (150,468) -- --
Purchases of property and equipment............................ (143,056) (122,419) (154,748)
Additions to capitalized software development costs............ (50,035) (37,006) (26,829)
Purchases of marketable securities............................. (685,887) (1,100,142) (1,014,304)
Proceeds from sales and maturities of marketable
securities.................................................. 525,096 1,233,847 927,234
Purchase of long-term investment security...................... -- -- (17,500)
Proceeds from sales of stock received from 1996
litigation settlement....................................... 35,494 -- --
Other.......................................................... (11,618) (6,581) (341)
---------- ----------- -----------
NET CASH USED FOR INVESTING
ACTIVITIES.............................................. (480,474) (32,301) (286,488)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt ........................ -- (82,532) 43,647
Proceeds from sale of convertible notes........................ 389,237 -- --
Borrowings under long-term debt
arrangements.................................................. -- 95,709 241,019
Payments on long-term debt..................................... (32,701) (33,065) (42,249)
Proceeds from the sale of common stock
under stock programs ......................................... 14,817 12,458 20,481
Other.......................................................... 203 1,047 1,254
---------- ----------- -----------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES ................................... 371,556 (6,383) 264,152
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................................. 122,099 (103,464) 205,623
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ....................................................... 155,101 258,565 52,942
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD........................................................ $ 277,200 $ 155,101 $ 258,565
========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................. $ 18,201 $ 23,018 $ 12,691
========== =========== ===========
Income taxes paid.............................................. $ 79,179 $ 57,912 $ 64,289
========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 15
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, 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
SHARES ISSUED UPON
EXERCISE OF OPTIONS .............. 390 4 3,729 -- -- -- -- 3,733
SHARES ISSUED UNDER STOCK
PURCHASE PLANS ................... 441 5 11,079 -- -- -- -- 11,084
VALUATION OF STOCK OPTIONS
ASSUMED IN ACQUISITION ........... -- -- 4,800 -- -- -- -- 4,800
RESTRICTED SHARES ISSUED
TO EMPLOYEES, NET OF
UNEARNED COMPENSATION
AND FORFEITURES .................. (22) -- 5,612 -- -- -- -- 5,612
NET CHANGE IN UNREALIZED
GAINS (LOSSES) ON SECURITIES,
NET OF INCOME TAXES .............. -- -- -- 341 -- -- -- 341
TRANSLATION ADJUSTMENT ............ -- -- -- -- (6,249) -- -- (6,249)
NET INCOME ........................ -- -- -- -- -- 48,863 -- 48,863
------- ------ -------- ------- ------ -------- -------- ----------
BALANCES, DECEMBER 31, 1997 ......... 118,061 $1,231 $755,963 $ 194 $2,494 $499,049 $(43,111) $1,215,820
======= ====== ======== ======= ====== ======== ======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 16
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.
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
<PAGE> 17
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, 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,
-------------------------
1997 1996
--------- ----------
<S> <C> <C>
Raw Material........................................................... $ 88,796 $ 127,495
Work in Process........................................................ 17,840 25,724
Finished Goods......................................................... 267,611 190,347
--------- ----------
$ 374,247 $ 343,566
========= ==========
</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
Computer equipment and software, office
furniture and other...................................... 3-10 Years
</TABLE>
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.
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. Cost in Excess of Net
Assets of Businesses Acquired, Net was $159.6 million and $146.0 million at
December 31, 1997 and 1996, 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 $43.4 million and $34.0
million at December 31, 1997 and 1996, respectively. See "Business Acquisition"
for further discussion.
Impairment of Long-Lived Assets
When indications of a possible impairment in the carrying values of the
Company's long-lived assets are present, the Company reviews the original
<PAGE> 18
assumptions and rationale utilized in the establishment of the carrying values
and estimated lives. The carrying values would be adjusted to fair value if
significant facts and circumstances altered the Company's original assumptions
and rationale.
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.
Unamortized capitalized software development costs determined to be in excess of
the net realizable value of the product are expensed immediately.
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 $72.3 million and $51.6 million at December 31,
1997 and 1996, respectively, net of accumulated amortization costs of $45.5
million and $33.4 million, respectively.
All other research and development expenditures are charged to
research and development expense in the period incurred, including costs of
in-process technology related to business acquisitions acquired prior to the
establishment of technological feasibility.
Income Taxes
The liability method as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("FAS 109"), is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Income tax benefits related to stock option exercises are credited to
Additional Capital when recognized.
Provision is made for U.S. income taxes, net of available credits, on
the earnings of foreign subsidiaries which are in excess of amounts being held
for reinvestment in overseas operations.
Foreign Currency Translation
For those foreign subsidiaries which have a functional currency other
than the U.S. dollar, assets and liabilities are translated using year-end
exchange rates, and revenue and expense items are translated at the average
exchange rates in effect during the year. The resulting translation adjustments
for these subsidiaries are included in Shareholders' Equity.
For the Company's foreign subsidiaries which have the U.S. dollar as
their functional currency, monetary assets and liabilities are translated at
year-end exchange rates while non-monetary items are translated at historical
rates. Revenue and expense items are translated at the average exchange rates in
effect during the year, except for depreciation and cost of revenue, which are
translated at historical rates. The resulting translation adjustments are
included in Other
<PAGE> 19
Income, Net in the Consolidated Statements of Operations and were not material
in 1997, 1996 or 1995.
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 deferred and included as part
of the value of the underlying transaction being hedged. If the underlying
transaction being hedged fails to occur prior to the maturity of the financial
instrument, the Company immediately recognizes the gain or loss on the
associated financial instrument.
Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" ("FAS 128"), which replaces the presentation of
primary and fully diluted earnings per share with the presentation of basic and
diluted earnings per share. Basic income (loss) per share is computed by
dividing net income available to common shareholders by the weighted average
common shares outstanding for the period. Diluted income (loss) per share is
computed giving effect to all potentially dilutive common shares. Potentially
dilutive common shares may consist of incremental shares issuable upon the
exercise of stock options adjusted for the assumed repurchase of the Company's
common stock, at the average market price, from the exercise proceeds and also
may include incremental shares issuable in connection with convertible
securities. In periods in which a net loss has been incurred, all potentially
dilutive common shares are considered antidilutive and thus excluded from the
calculation. All income (loss) per share computation amounts for all prior
periods have been restated to conform to the requirements of FAS 128.
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.
<PAGE> 20
BUSINESS ACQUISITION
In December 1997, the Company acquired all of the outstanding stock of
Celcore, Inc. ("Celcore"), a manufacturer of GSM and AMPS wireless switch
systems. The purchase price of approximately $166.7 million included cash, the
value of assumed stock options and acquisition costs. Prior to consummation of
the acquisition, the Company had loaned Celcore $6.2 million, which would have
been repayable had the acquisition not occurred. The Company's 1997 consolidated
results include the operations of Celcore from the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting. The fair market value of Celcore's assets and liabilities has been
included in the Consolidated Balance Sheet at December 31, 1997. The purchase
price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Cost in excess of net assets of business acquired................. $ 20,233
Acquired technology............................................... 12,200
Other liabilities, net............................................ (720)
In-process research and development............................... 135,000
---------
Total........................................................ $ 166,713
=========
</TABLE>
The acquired in-process research and development was charged to expense
at the acquisition date since the technology has not reached technological
feasibility and was determined to have no alternative use. The valuation of the
intangible assets was made by applying the income approach which considers the
present value of future cash flows. The weighted-average expected life of the
cost in excess of net assets of business acquired and acquired technology is
approximately twelve years.
The following unaudited pro forma summary combines the consolidated
results of operations of the Company and Celcore as if the acquisition had
occurred at the beginning of 1997 and 1996 after giving effect to certain pro
forma adjustments, including the amortization of cost in excess of net assets of
business acquired and acquired technology, a reduction in interest income
related to the cash used in the acquisition and the estimated income tax effects
of these adjustments. This pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company and Celcore had been a single
entity during 1997 and 1996, nor is it necessarily indicative of the results of
operations which may occur in the future. Anticipated efficiencies from the
consolidation of Celcore and the Company are not fully determinable and
therefore have been excluded from the amounts presented below.
<TABLE>
Year Ended December 31,
--------------------------
1997 1996
------- -------
(in thousands,
except per share data)
(unaudited)
<S> <C> <C>
Revenue..................................................... $ 1,585,401 $ 1,384,571
Net income (loss)........................................... 23,045 (30,516)
Basic income (loss) per share............................... $ 0.20 $ (0.26)
Diluted income (loss) per share............................. $ 0.19 $ (0.26)
</TABLE>
<PAGE> 21
ASSET WRITE-DOWN
On January 30, 1998, the Company completed the sale of its fixed
wireless local loop business to a syndicate of venture capitalists for a
minority ownership interest in a newly formed company, Airspan Communications
Corporation ("Airspan"), and a promissory note issued by Airspan. Due to the
uncertainty regarding the ultimate recovery of the investment and the note, the
Company recorded a $22.0 million asset write-down in 1997. This business
incurred an after-tax loss of approximately $19.6 million, or $0.16 per diluted
share, which is included in the Company's consolidated results of operations in
1997.
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,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Available for sale securities:
U.S. Treasury securities
and obligations of U.S.
government agencies............................................. $ 166,901 $ 90,114
Certificates of deposits......................................... 116,939 28,996
Corporate debt securities........................................ 50,340 45,680
Asset-backed securities.......................................... 6,462 14,148
----------- -----------
$ 340,642 $ 178,938
=========== ===========
</TABLE>
The amortized cost of available for sale securities approximated their
fair value at both December 31, 1997 and 1996. Gross realized gains and losses
on sales of available for sale securities were immaterial in 1997, 1996 and
1995. The estimated fair value of available for sale securities by contractual
maturity at December 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Due in one year or less.............................. $ 276,679
Due after one year through three years............... 47,539
Due after three years................................ 16,424
---------
$ 340,642
=========
</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, 1997 and 1996. 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.
<PAGE> 22
RECEIVABLES
Receivables consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Current:
Trade............................................................. $ 433,690 $ 402,906
Leases and notes.................................................. 8,524 14,356
--------- ---------
442,214 417,262
Allowance for doubtful accounts................................... (6,121) (5,315)
--------- ---------
$ 436,093 $ 411,947
========= =========
Long-term:
Leases, notes and other........................................... $ 40,929 $ 44,711
Allowance for doubtful accounts................................... (7,846) (1,746)
--------- ---------
$ 33,083 $ 42,965
========= =========
</TABLE>
To meet market competition, the Company finances sales of equipment to
certain of its customers through sales-type and operating leases and notes
receivable. The repayment terms vary from one to seven years.
The components of the receivables from sales-type leases and notes
receivable are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Total minimum lease
payments receivable................................................... $ 42,338 $ 73,403
Less: Unearned income.................................................. (6,468) (14,390)
--------- ---------
Total receivables....................................................... 35,870 59,013
Less: Current receivables.............................................. (8,524) (14,356)
--------- ---------
Total long-term receivables............................................. $ 27,346 $ 44,657
========= =========
</TABLE>
Future minimum lease payments to be received on sales-type leases and
notes receivable are as follows (in thousands):
<TABLE>
<S> <C>
1998 ............................................................... $ 10,633
1999 ............................................................... 12,823
2000 ............................................................... 8,921
2001 ............................................................... 6,264
2002 ............................................................... 2,821
Thereafter.............................................................. 876
-----------
$ 42,338
===========
</TABLE>
<PAGE> 23
PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Land............................................................ $ 49,457 $ 49,052
Buildings and leasehold
improvements.............................................. 211,060 190,731
Manufacturing, development and
test equipment............................................ 354,192 301,576
Computer equipment and software,
office furniture and other.................................. 256,234 223,312
---------- ----------
870,943 764,671
Less: Accumulated depreciation
and amortization.......................................... (427,333) (361,075)
---------- ----------
$ 443,610 $ 403,596
========== ==========
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
---------- -----------
<S> <C> <C>
Warranty and related............................................ $ 77,099 $ 76,739
Payroll and related............................................. 47,926 49,137
Taxes other than income......................................... 37,135 31,277
Customer prepayments and advances............................... 21,102 42,489
Other........................................................... 117,782 97,459
---------- -----------
$ 301,044 $ 297,101
========== ===========
</TABLE>
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
In 1997, the Company adopted a Supplemental Executive Retirement Plan
("SERP") for certain key executives. A participant's eligibility for, and amount
of, benefits payable under the plan are based on years of service and average
annual earnings, as defined. At December 31, 1997, the actuarial present value
of accumulated benefit obligations related to the SERP was $9.4 million, which
is included in Noncurrent Income Taxes and Other Liabilities on the Consolidated
Balance Sheet. Approximately $1.4 million was charged to operations in 1997.
CREDIT AGREEMENTS
The Company has an unsecured $160.0 million revolving credit facility
with several banks which expires in May 2001. This facility provides for
borrowings and issuances of letters of credit in various currencies. 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 letters of
credit issued under this agreement at December 31, 1997 were $7.7 million,
including $4.7
<PAGE> 24
million issued to support various foreign subsidiary credit agreements. This
facility contains various financial covenants and there have been no borrowings
under this agreement. Two of the Company's foreign subsidiaries also have credit
agreements providing for short-term borrowings of up to $8.7 million.
LONG-TERM DEBT
Total long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Senior debt:
Fixed rate:
Unsecured 9.0% notes,
due 1996 - 2003................................. $ 168,750 $ 196,875
Unsecured 8.75% note,
due 1995 - 2000.................................. 8,254 11,988
Variable rate:
Unsecured note,
due 2000 - 2001.................................. 43,808 50,649
Unsecured note,
due 1999 - 2011.................................. 36,507 42,208
Subordinated debt:
Convertible 7.0% notes,
due 2004......................................... 400,000 --
Other debt.......................................... 4,489 5,954
--------- ---------
Total............................................. 661,808 307,674
Less: current maturities............................ 32,602 33,072
--------- ---------
Total long-term debt.............................. $ 629,206 $ 274,602
========= =========
</TABLE>
During 1997, the Company issued $400.0 million principal amount of 7.0%
convertible subordinated notes (the "Convertible Notes") due August 1, 2004.
Interest on the Convertible Notes is payable semi-annually on February 1 and
August 1 of each year, commencing in February 1998. The Convertible Notes are
convertible into approximately 8.0 million shares of the Company's common stock,
at the option of the holder, at a conversion price of $49.73 per share. The
Convertible Notes are redeemable at the Company's option, in whole or in part,
at any time on or after August 1, 2000 at a premium of 104% of par value which
declines annually to par value at the maturity date.
The variable rate notes are denominated in Danish Kroner and 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, 1997, these rates ranged from 4.3% to 4.7%.
The aggregate maturities of long-term debt are as follows: 1998 - $32.6
million; 1999 - $33.2 million; 2000 - $55.3 million; 2001 - $53.2 million; 2002
- - $30.5 million; thereafter - $457.0 million.
The majority of the Company's senior debt agreements contains various
financial covenants, including among other things, minimum net worth,
maintenance of certain fixed charge ratios and maximum allowable indebtedness to
net worth.
<PAGE> 25
INCOME TAXES
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal..............................................$ 106,914 $ 35,169 $ 115,193
Puerto Rico and State................................ 6,161 5,656 9,057
Foreign.............................................. 9,719 4,903 4,908
------------- ------------- -------------
Total current.................................... 122,794 45,728 129,158
------------- ------------- -------------
Deferred:
Federal.............................................. 4,915 (33,766) (27,202)
Foreign................................................... (14,406) (16,593) (4,686)
------------- ------------- ------------
Total deferred................................... (9,491) (50,359) (31,888)
------------- ------------- ------------
Total tax expense (benefit)......................$ 113,303 $ (4,631) $ 97,270
============= ============= ============
</TABLE>
The income tax benefits related to the exercise of stock options of
$6.9 million and $50.0 million in 1996 and 1995, respectively, reduced taxes
currently payable and were credited to Additional Capital. The income tax
benefit related to the exercise of stock options was not material in 1997.
Income (loss) before income taxes for the years ending December 31,
1997 and 1996, included U.S. pretax income of $183.3 million and $34.9 million
and foreign pretax losses of $21.1 million and $47.1 million, respectively.
Foreign pretax earnings in 1995 were not material.
The effective income tax rate on pretax income (loss) differed from the
federal income tax statutory rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax charge (credit):
At statutory rate ................. $ 56,758 $ (4,265) $ 101,483
Foreign and U.S. tax
effects attributable
to foreign operations ........... 4,930 (1,135) 1,363
Tax credit utilization ............ -- -- (4,606)
Net operating losses
utilized ........................ -- -- (3,500)
State income taxes,
net of federal
tax effect ...................... 2,340 769 2,530
Nondeductible in-process
research and development
expense ......................... 49,275 -- --
--------- --------- ---------
$ 113,303 $ (4,631) $ 97,270
========= ========= =========
</TABLE>
<PAGE> 26
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, 1997 and
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Deferred Tax Assets:
Asset valuation reserves not yet
deductible for tax ................................... $ 54,905 $ 46,752
Accrued liabilities not yet
deductible for tax ................................... 56,355 54,384
Federal and foreign loss carryforward .................. 33,849 19,185
Tax credit carryforward ................................ -- 4,749
Other .................................................. 11,308 3,093
--------- ---------
Deferred asset ..................................... 156,417 128,163
--------- ---------
Deferred Tax Liabilities:
Capitalized software development
costs ................................................ (34,329) (25,138)
Deferred revenue ....................................... (4,431) (4,955)
Depreciation ........................................... (8,653) (6,580)
Other .................................................. (6,466) (9,243)
--------- ---------
Deferred liability ................................. (53,879) (45,916)
--------- ---------
Deferred tax asset, net of
deferred liability ................................... 102,538 82,247
Less valuation allowance ............................. (10,800) --
--------- ---------
Net deferred tax asset ......................... $ 91,738 $ 82,247
========= =========
</TABLE>
Of the Company's $91.7 million and $82.2 million net deferred tax asset
at December 31, 1997 and 1996, $79.9 million and $61.1 million are shown
separately as part of current assets in the Consolidated Balance Sheets at
December 31, 1997 and 1996, respectively. The remaining balance is included in
other noncurrent assets and liabilities for both years. The Company believes it
will have sufficient taxable earnings in the future to realize its net deferred
tax asset at December 31, 1997 and, as a result, with the exception of Celcore's
deferred tax asset discussed below, the Company believes that a deferred tax
asset valuation allowance is not required.
Celcore, which was acquired in December 1997, had approximately $28.0
million of preacquisition net operating loss carryforwards and $2.8 million of
book expenses that will be deductible in the future. Realization of the deferred
tax asset associated with these tax loss carryforwards is dependent upon Celcore
generating sufficient taxable income prior to their expiration. Although the
Company believes Celcore will generate taxable earnings in the future to fully
utilize the net operating loss carryforwards, FAS 109 requires that a valuation
allowance be established if it is more likely than not that the realization of
the tax benefits will not occur. Celcore has had cumulative losses in recent
years which FAS 109 indicates is significant evidence that a valuation allowance
could be required for Celcore's deferred tax asset. Accordingly, the Company has
established a valuation allowance for this asset.
Due to the change of ownership requirements in Federal tax law,
utilization of the Celcore net operating loss carryforwards is limited to
approximately $8.5 million a year beginning in 1998. These loss carryforwards
expire between the years 2010 and 2013 if not used. Utilization of the $28.0
million of loss carryforwards from Celcore will reduce the excess of purchase
price over net assets acquired.
<PAGE> 27
Included in Noncurrent Income Taxes and Other Liabilities at December
31, 1997 and 1996 are $51.4 million and $45.9 million, respectively, for
noncurrent taxes related primarily to foreign jurisdictions.
At December 31, 1997, the Company had foreign net operating loss
carryforwards of approximately $70.7 million which expire in the years 2000
through 2002.
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.
INCENTIVE COMPENSATION
The Company has incentive awards plans administered by the Compensation
Committee of the Board of Directors which provide for payment of cash and stock
awards to officers and key employees based upon achievement of specific goals by
the Company and the participating employees. For 1997, cash of $2.3 million and
approximately 387,000 shares of restricted stock (valued at $7.0 million and
vesting over two years) were awarded under the plans. No payments were made
under the plans in 1996. In 1995, cash of $6.4 million and approximately 74,000
shares of restricted stock (valued at $2.5 million and vesting over two years)
were awarded under the plans. The cash awards are expensed in the year of award
and the value of the restricted shares are expensed ratably over the vesting
period. 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 Long-Term Incentive Compensation Plan ("LTIP"). The units
vest to the officers over five years beginning in 1996, and the value of a unit
is determined annually based on the Company's operating performance, as defined
in the plan. The value of these units at December 31, 1997 was $0.8 million
which was charged to operations in 1997. Under a previous LTIP which terminated
at the end of 1995, approximately $7.2 million payable in cash was charged to
operations in 1995 and approximately 146,000 shares of restricted stock were
issued in January 1996. The restricted shares, which vested 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 in both 1997 and 1996.
COMMON AND PREFERRED STOCK
Description and Dividends
At December 31, 1997, the Company was authorized to issue 500,000,000
shares of common stock, $0.01 par value, and 5,000,000 shares of preferred
stock, $1.00 par value. Since inception, the Company has not declared or paid a
cash dividend.
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.
<PAGE> 28
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 1997, approximately 441,000 shares were issued to employees
under the employee stock purchase plans. At December 31, 1997, approximately
$4.8 million had been contributed by employees that will be used to purchase
shares at the end of the offering period in August 1998. At December 31, 1997,
the Company could issue up to 6,979,000 shares under the employee stock purchase
plans of which approximately 5,159,000 shares had been purchased and issued and
approximately 522,000 shares were subscribed for issuance in August 1998
assuming no further withdrawals from the plans.
Stock Options
The Company has stock option plans that provide for the issuance of up
to 31,642,000 shares of common stock to employees and directors, including
6,150,000 shares approved by the shareholders in April 1997 and approximately
1,247,000 shares in connection with the 1997 Celcore acquisition. The Company's
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. At December 31, 1997, plan options covering 9,909,000 shares had been
granted and were outstanding, options granted under the plans covering
11,812,000 shares had been exercised, 1,056,000 restricted shares had been
issued (net of forfeitures), 901,000 shares had expired and options covering
7,964,000 shares were available for grant. With the exception of the options
assumed in the Celcore acquisition, 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.
In connection with the acquisition of Celcore, the Company assumed all
of Celcore's outstanding stock options, converted using the acquisition exchange
ratio, which resulted in exercise prices ranging from $1.44 to $15.74 per share.
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, 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 --
1997 Transactions
Issuances and grants .................................. 1,799,000 --
Price per share ..................................... $ 1.44-$31.63 --
Weighted-average exercise
Price per share ................................... $ 16.43 --
Exercises ............................................. 390,000 --
Price per share ..................................... $ 2.31-$16.19 --
Weighted-average exercise
Price per share ................................... $ 9.87 --
Forfeitures and expirations............................ 850,000 --
Price per share ..................................... $ 6.46-$52.25 --
Weighted-average exercise
Price per share ................................... $ 20.02 --
</TABLE>
<PAGE> 30
<TABLE>
<S> <C> <C>
December 31, 1997--
Shares issuable
Upon exercise ........................................................... 9,909,000 --
Price per share............................................................ $ 1.44-$52.25 --
Weighted-average exercise
Price per share.......................................................... $ 20.59 --
Expiration................................................................. 1998-2007 --
</TABLE>
Restricted Stock
The Company's Board of Directors authorized the issuance of restricted
shares of the Company's common stock to certain key employees and directors
under its 1997, 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
2000.
The Company issued 31,000, 338,000 and 110,000 shares of restricted
stock to employees and directors in 1997, 1996 and 1995, respectively, and
increased common stock and additional capital by the fair market value of the
stock at the date of issuance ($0.7 million, $11.3 million and $3.8 million in
1997, 1996 and 1995, respectively), net of unearned compensation. At December
31, 1997, 1996 and 1995, unearned compensation related to the restricted shares
was $2.2 million, $8.7 million and $4.3 million, respectively. The unearned
compensation will be charged to expense ratably over the vesting period.
Approximately 53,000, 18,000 and 2,000 restricted shares were forfeited in 1997,
1996 and 1995, respectively, totaling $1.6 million, $0.5 million and $0.03
million, respectively.
Reserved Stock
Common stock has been reserved for the following purposes (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
------ ------
<S> <C> <C>
Options outstanding............................................ 9,909 9,350
Options available for grant
under the stock option plans................................. 7,964 1,492
Convertible subordinated notes................................. 8,044 --
Stock purchase plans........................................... 1,820 2,261
Other.......................................................... 112 --
------ ------
27,849 13,103
====== ======
</TABLE>
Stock-based Compensation Pro Forma Disclosures
Although the Company has elected to continue to apply the provisions of
APB 25 for expense recognition purposes, SFAS 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 1997, 1996 and 1995:
risk-free interest rates of 5.8%, 5.9% and 6.5%, respectively; stock price
volatility factors of 60%, 56% and 61%, respectively; and expected option lives
of 2, 3 and 7 years, respectively. The Company does not have a history of paying
dividends, and none have been assumed in
<PAGE> 31
estimating the fair value of the options. The weighted-average fair value per
share of options granted in 1997 and 1996 was $8.84 and $8.94, respectively.
Options assumed in the Celcore acquisition were not included in the FAS
123 valuation assumptions listed above nor were they included in the pro forma
calculation below as the value of these options were included in the purchase
price of Celcore.
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:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
(in millions, other than per share data)
<S> <C> <C> <C>
Net income (loss)........................ $ 23.6 $ (25.9) $ 187.4
Basic income (loss)
per share.............................. $ 0.20 $ (0.22) $ 1.64
Diluted income (loss)
per share.............................. $ 0.20 $ (0.22) $ 1.60
</TABLE>
At December 31, 1997, approximately 6,009,000 of the Company's
outstanding stock options with exercise prices ranging from $1.44 to $24.125 per
share had a weighted-average exercise price per share of $12.79 and a
weighted-average remaining contractual life of 8 years. The remaining options
outstanding had a weighted-average exercise price of $32.60 per share with a
weighted-average remaining contractual life of 8 years.
OTHER INCOME, NET
Other Income, Net for the year ended December 31, 1997 included
approximately $126.0 million in proceeds related to the final judgment in favor
of the Company in a lawsuit against Next Level Communications, net of litigation
expenses and associated costs. Also included in Other Income, Net for the year
ended December 31, 1997 was a net gain of approximately $35.5 million related to
the sale of shares of common stock received in the litigation settlement with
Advanced Fibre Communications, Inc. ("AFC").
Included in Other Income, Net for the year ended December 31, 1996 was
approximately $10.0 million in proceeds related to the AFC settlement. Other
Income, Net also included the litigation expenses and applicable costs
associated with this litigation.
<PAGE> 32
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,
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,
including current maturities, at December 31, 1997 and 1996 was approximately
$649.8 million and $320.6 million, respectively. The fair values of the
Company's off-balance-sheet financial instruments are based on current
settlement values (forward foreign exchange contracts) and fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing (guarantees and
letters of credit). There were no significant differences between the carrying
amounts and fair values of any off-balance-sheet financial instruments at
December 31, 1997 and 1996. See "Commitments and Contingencies" for the carrying
amounts of the Company's off-balance-sheet financial instruments.
COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain facilities and equipment which require
future rental payments. These rental arrangements do not impose any financing or
dividend restrictions on the Company or contain contingent rental provisions.
Certain of these leases have renewal and purchase options generally at the fair
value at the renewal or purchase option date.
Future minimum rental commitments under operating leases with
noncancelable lease terms in excess of one year were as follows at December 31,
1997 (in thousands):
<TABLE>
<S> <C>
1998...............................................................$ 28,935
1999............................................................... 22,021
2000............................................................... 15,351
2001............................................................... 12,435
2002............................................................... 11,042
Thereafter......................................................... 27,360
-------------
$ 117,144
=============
</TABLE>
Operating lease rental expense was $32.5 million, $27.5 million and
$28.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Contingent Liabilities
In 1995, the Company sold certain receivables and leases which
contained recourse provisions. As a result, the Company could be obligated to
repurchase a portion of these receivables, the terms of which allow the Company
to limit its risk of loss to approximately $7.8 million at December 31, 1997.
The Company also has guarantees of approximately $73.9 million outstanding at
December 31, 1997 supporting bid and performance bonds to customers and others,
of which approximately $3.0 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.
<PAGE> 33
At December 31, 1997, the Company had forward foreign exchange
contracts of $73.3 million.
Litigation
On May 25, 1994, the Company filed suit against DGI Technologies, Inc.
("DGI"), a Texas corporation, in the United States District Court for the
Northern District of Texas, Dallas Division. The Company alleged that DGI
misappropriated the Company's trade secrets regarding digital trunk interface
cards and microprocessor cards. The Company sought damages for DGI's prior
actions and permanent injunctive relief. DGI brought counterclaims for alleged
violations of federal antitrust statutes, tortious interference, industrial
espionage, misappropriation of trade secrets, trespass, conversion, and unfair
competition. DGI's antitrust counterclaims were based upon allegations that the
Company's claims constituted "sham" litigation, that the Company's statements to
customers about the impact of their use of DGI products on the Company's
warranties were unlawful attempts to exclude competition, and that the Company
unlawfully tied the sale of its microprocessors to the sale of other products.
The balance of DGI's counterclaim was based upon certain investigative
procedures employed by the Company in connection with this controversy. DGI
asked the court to award unspecified actual damages, treble damages under
antitrust statutes, punitive damages, injunctive relief, and attorneys' fees,
and sought declaratory relief that DGI's sales of microprocessors did not
violate any proprietary rights of the Company or any applicable law.
The case was tried in January 1997 and the jury returned a verdict. The
Court entered a final judgment on November 18, 1997. The judgment enjoined DGI
from selling its microprocessor cards and included a net monetary judgment of
$0.3 million in the Company's favor. Both parties have filed appeals to the
Fifth Circuit Court of Appeals.
In August, 1996, the Company filed suit against Samsung Information
Systems America, Inc., Samsung Electronics Co., Ltd. and James L. Bunch and
later added additional defendants Leo Putchinski, Kevin Gallagher, Jim Olivier,
Nancy Korman, Martin Wu, David Fox, Bhushan Gupta and Michael Bray (collectively
the "Defendants"). The suit arises out of research and development that the
Company was and is doing on a next-generation switching system. Many of the
Defendants to this suit were long-term employees of the Company and were
involved in the research and development of the Company's next-generation
switching system. In the summer and early fall of 1996, Samsung hired each of
these individuals and placed them into similar positions researching and
developing Samsung's next-generation switching system.
The Company alleges claims for breach of contract, theft of trade
secrets, unfair competition, tortious interference with contract and
prospective contractual relations. Based on these claims, the Company is
seeking damages in an amount that is not yet specified. The Company is also
seeking an injunction against the Defendants to prevent them from using the
Company's trade secrets. The Company obtained a temporary restraining order
against Defendant Bunch on August 14, 1996.
On December 31, 1996, the Defendants filed a counterclaim against the
Company, alleging a variety of causes of action, including a claim 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.
The Company believes that it has valid and substantial claims against
the Defendants and valid defenses to the Defendants' counterclaims.
<PAGE> 34
On October 8, 1996, the Company filed suit against Pulse
Communications, Inc. ("Pulsecom") alleging contributory copyright infringement
and misappropriation of trade secrets relating to the manufacture and sale of a
POTS line card advertised as compatible with the Company's Litespan-2000 system.
The Company sought damages and an injunction barring further infringement of the
Company's intellectual property rights by Pulsecom and its agents. Pulsecom
filed a counterclaim alleging that the Universal Voice Grade line card
manufactured by the Company for the Litespan-2000 system infringes U. S. Patent
No. 5,263,081 assigned to Pulsecom. The Company's claims against Pulsecom were
dismissed by the trial court on June 10, 1997. Pulsecom's claims against the
Company were dismissed August 29, 1997. Both parties have filed appeals. Based
on the facts known at this time, the Company believes it has a valid defense to
Pulsecom's claim and that the ultimate outcome of the dispute will not have a
material adverse effect on the Company's consolidated financial position.
On December 22, 1997, Catherine Millet, the Company's former Vice
President of advanced planning in the Access Products Division and her new
employer, AFC, sued the Company in Roseville, California State Court for
declaratory judgment against the Company. Millet is attempting to keep the
Company from enforcing rights in its trade secrets and intellectual property
which Millet will inevitably be required to use in her new position with AFC.
Ms. Millet is performing the identical job function in advanced product planning
that she performed for the Company in regard to the same line of products. The
Company had previously sued AFC for theft of trade secrets in U. S. District
Court. That case was resolved at trial.
The Company plans to vigorously defend its trade secrets and
intellectual property in this matter. In a related action, the Company has
brought an action for patent infringement against AFC in Federal Court in
Texarkana, Texas.
The Company is also party to other routine legal proceedings incidental
to its business.
The Company does not believe the ultimate resolution of these matters
will have a material adverse effect on its consolidated financial position.
<PAGE> 35
INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
income (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss)................................ $ 48,863 $ (7,555) $ 192,680
Denominator for basic income (loss) per share:
Weighted average shares
outstanding.................................... 117,358 116,108 114,557
Effect of dilutive securities:
Stock options.................................... 2,138 -- 3,657
---------- ---------- -----------
Denominator for diluted income
(loss) per share.................................. 119,496 116,108 118,214
Basic income (loss) per share...................... $ 0.42 $ (0.07) $ 1.68
========== ========== ===========
Diluted income (loss) per share.................... $ 0.41 $ (0.07) $ 1.63
========== ========== ===========
</TABLE>
Of the total stock options outstanding at December 31, 1997 and 1996,
approximately 3.5 million and 3.4 million shares of common stock, respectively,
were not included in the computation of diluted income (loss) per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would have been antidilutive.
In addition, approximately 8,000,000 shares of common stock issuable
upon conversion of the 7% convertible notes issued in August 1997 were not
included in the computation of diluted income per share in 1997 because the
effect would have been antidilutive.
<PAGE> 36
INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
International Operations
The Company operates in a single industry segment, the telecommuni-
cations equipment marketplace.
A summary of the Company's operations by geographic area is presented
below (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue from unaffiliated
customers:
United States.................... $ 1,313,426 $ 1,163,520 $ 1,188,357
Europe........................... 149,378 145,850 155,562
Other International.............. 112,675 71,521 78,099
Eliminations..................... -- -- --
-------------- --------------- ---------------
Consolidated..................... $ 1,575,479 $ 1,380,891 $ 1,422,018
============== =============== ===============
Intercompany revenue between
geographic areas:
United States.................... $ 121,724 $ 73,002 $ 65,856
Europe........................... 31,368 30,171 15,357
Other International.............. 113,748 47,720 5,373
Eliminations..................... (266,840) (150,893) (86,586)
-------------- --------------- ---------------
Consolidated..................... $ -- $ -- $ --
============== =============== ===============
Operating income (loss):
United States (a)................ $ 23,446 $ 23,674 $ 284,525
Europe........................... (29,510) (46,292) (14,090)
Other International.............. 15,178 10,345 4,139
Eliminations..................... 919 230 4,844
-------------- --------------- ---------------
Consolidated..................... $ 10,033 $ (12,043) $ 279,418
============== =============== ===============
Identifiable assets at December 31:
United States.................... $ 1,967,746 $ 1,496,663 $ 1,546,378
Europe........................... 361,068 362,329 296,157
Other International.............. 111,167 67,781 22,916
Eliminations..................... (466) (1,118) (176)
-------------- --------------- ---------------
Consolidated..................... $ 2,439,515 $ 1,925,655 $ 1,865,275
============== =============== ===============
</TABLE>
(a) Included in operating results for the U.S. region for 1997 was the
Celcore in-process research and development charge of $135.0 million
and the $22.0 million asset write-down related to the January 1998
business disposition. 1996 operating results for the U.S. region
included $96.0 million of special charges related primarily to a
reduction in the carrying value of certain assets for several of the
Company's newer products. Operating income for 1997 and 1996 for the
U.S. region, excluding unusual items, would have been $180.4 million
and $119.7 million, respectively.
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 11% of consolidated revenue in
1997, and less than 10% for both 1996 and 1995. Export sales in 1997 consisted
of sales to the Asian region, primarily Japan, of $119.7 million and other
export sales of $49.4 million.
<PAGE> 37
Major Customers
Two customers accounted for at least 10% of the Company's consolidated
revenue in 1997. In the aggregate, the revenue from these customers was
approximately 37% of 1997 consolidated revenue. In 1996 and 1995, three
customers accounted for at least 10% of the Company's consolidated revenue. In
the aggregate, the revenue from these customers was 39% and 42% of consolidated
revenue in 1996 and 1995, respectively.
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.
<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,
1997 and 1996 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, 1997. 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 also 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, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 26, 1998
<PAGE> 39
DSC Communications Corporation and Subsidiaries
QUARTERLY RESULTS
(Unaudited)(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
FOURTH(A) THIRD SECOND(B) FIRST(B) Fourth Third(C)(D) Second(D) First
----------- --------- --------- -------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ...................... $ 445,105 $ 401,288 $ 382,883 $ 346,203 $ 390,560 $ 326,003 $ 356,431 $ 307,897
Gross profit ................. 193,315 173,126 156,556 139,275 150,202 28,457 147,019 129,466
Net income (loss) ............ $ (37,570) $ 28,256 $ 41,817 $ 16,360 $ 17,548 $ (57,890) $ 21,262 $ 11,525
=========== ========= ========= ========= ========= ========= ========= =========
Basic income (loss)
per share ................... $ (0.32) $ 0.24 $ 0.36 $ 0.14 $ 0.15 $ (0.50) $ 0.18 $ 0.10
=========== ========= ========= ========= ========= ========= ========= =========
Diluted income (loss)
per share ................... $ (0.32) $ 0.24 $ 0.35 $ 0.14 $ 0.15 $ (0.50) $ 0.18 $ 0.10
=========== ========= ========= ========= ========= ========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
(A) Unusual items recorded in the fourth quarter of 1997 included a $135.0
million write-off of in-process research and development related to the
acquisition of Celcore, for which there was no tax benefit, an asset
write-down of $22.0 million in connection with the January 1998 disposition
of the Company's fixed wireless local loop business and a net gain of $126.0
million from a litigation settlement. See "Business Acquisition", "Asset
Write-Down" and "Other Income, Net" in Notes to Consolidated Financial
Statements and Management's Discussion and Analysis for further discussion.
(B) In the first and second quarters of 1997, the Company recorded gains of
$35.5 million from a litigation settlement. Approximately $4.0 million was
recorded in the first quarter of 1997 with the remaining $31.5 million
recorded in the second quarter of 1997. See "Other Income, Net" in Notes to
Consolidated Financial Statements and Management's Discussion and Analysis
for further discussion.
(C) 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.
(D) 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, Net" in Notes to Consolidated Financial Statements for further
discussion.
<PAGE> 1
Exhibit 21.1
DSC COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
Subsidiaries Incorporated in
------------ ---------------
<S> <C>
DSC Communications (Asia Pacific) PTE LTD Singapore
DSC Communications (Cayman) Ltd. Cayman Islands
DSC Communications (Far East) Limited Hong Kong
DSC Communications (India) Private Limited India
DSC Communications (Nederland) B.V. (1)
DSC Communications A/S Denmark
DSC Communications Canada Inc. Canada
DSC Communications de Venezuela S.A. Venezuela
DSC Communications France S.A. France
DSC Communications Ireland Ireland
DSC Communications Ireland Holdings Ltd. Ireland
DSC Communications Italia S.r.l. Italy
DSC Communications Limited United Kingdom
DSC Communications Polska Sp.Z.o.o. Poland
DSC Communications PTY. Ltd. Australia
DSC Communications Technics Ltd. United Kingdom
DSC Communications TMN A/S(2) Denmark
DSC Communications TMN I/S Denmark
DSC Comunicaciones de Costa Rica, S.A. Costa Rica
DSC Comunicaciones, S.A. de C.V. Mexico
DSC Finance Corporation Delaware
DSC Finance PTY Ltd. Australia
DSC Global Export Ltd. Barbados
DSC International Corporation Delaware
DSC Japan Inc. (3) Japan
DSC Kommunikationsdienste GmbH Germany
DSC Korea, Inc. Delaware
DSC Local Networks (Europe) Limited United Kingdom
DSC Marketing Services, Inc. Delaware
DSC of Puerto Rico, Inc. Delaware
DSC of the Virgin Islands, Inc. Virgin Islands
DSC Taiwan, Inc. Delaware
DSC Telecom Inc. Nevada
DSC Telecom L. P.(4) Texas
DSC Telecommunications Corporation Delaware
DSC Telecomunicacoes Ltda. Brazil
DSC/Celcore Inc. Delaware
Fibcom India Limited(5) India
</TABLE>
- --------
(1) Incorporated in The Netherlands and Delaware; name changed in The
Netherlands 10/11/96; name change in Delaware in process
(2) Participant in a partnership, TMN Udvikling I/S, with Copenhagen
Telephone and Jutland Telephone
(3) Jointly-owned with Mitsubishi Corporation
(4) Texas Limited Partnership
(5) Jointly-owned company with Indian Telephone Industries Ltd. and The
Industrialisation Fund for Developing Countries
<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 26, 1998 included
in the 1997 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-3 (Nos. 333-39917 and 333-39903) and 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, 33-61425, 333-41963, 333-41929, 333-41951, 333-41957, 333-39469,
333-31215 and 333-45149) of our report dated January 26, 1998 with respect to
the financial statements and schedule of DSC Communications Corporation
incorporated by reference in this Annual Report (Form 10-K).
/s/ Ernst & Young LLP
Dallas, Texas
March 26, 1998
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 277,200
<SECURITIES> 340,642
<RECEIVABLES> 436,093
<ALLOWANCES> 0
<INVENTORY> 374,247
<CURRENT-ASSETS> 1,595,030
<PP&E> 870,943
<DEPRECIATION> 427,333
<TOTAL-ASSETS> 2,439,515
<CURRENT-LIABILITIES> 472,317
<BONDS> 629,206
0
0
<COMMON> 1,231
<OTHER-SE> 1,214,589
<TOTAL-LIABILITY-AND-EQUITY> 2,439,515
<SALES> 1,575,479
<TOTAL-REVENUES> 1,575,479
<CGS> 913,207
<TOTAL-COSTS> 913,207
<OTHER-EXPENSES> 420,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,068
<INCOME-PRETAX> 162,166
<INCOME-TAX> 113,303
<INCOME-CONTINUING> 48,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 48,863
<EPS-PRIMARY> .42
<EPS-DILUTED> .41
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