<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 0-10018
DSC COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1025763
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Coit Road, Plano, Texas 75075
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 519-3000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of Shares Outstanding
Title of Each Class as of April 30, 1998
- ----------------------------- -----------------------------
Common Stock, $0.01 Par Value 118,773,396
Page 1 of 17
<PAGE> 2
Item 1. Financial Statements.
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 258,082 $ 277,200
Marketable securities ................................ 306,605 340,642
Receivables .......................................... 339,733 436,093
Inventories .......................................... 426,432 374,247
Deferred income taxes................................. 97,276 79,879
Other current assets ................................. 113,387 86,969
----------- -----------
Total current assets ............................ 1,541,515 1,595,030
----------- -----------
PROPERTY AND EQUIPMENT, at cost ........................... 889,275 870,943
Less accumulated depreciation
and amortization ................................... (440,211) (427,333)
----------- -----------
449,064 443,610
----------- -----------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS .................... 78,439 72,341
COST IN EXCESS OF NET ASSETS OF
BUSINESS ACQUIRED, NET .................................. 157,031 159,594
OTHER ..................................................... 154,416 168,940
----------- -----------
Total assets .................................... $ 2,380,465 $ 2,439,515
=========== ===========
Liabilities And Shareholders' Equity
CURRENT LIABILITIES:
Accounts payable ..................................... $ 134,073 $ 110,135
Accrued liabilities .................................. 271,593 301,044
Income taxes payable ................................. 4,310 28,536
Current portion of long-term debt .................... 32,622 32,602
----------- -----------
Total current liabilities ....................... 442,598 472,317
----------- -----------
LONG-TERM DEBT, net of current portion .................... 625,869 629,206
NONCURRENT INCOME TAXES
AND OTHER LIABILITIES .................................... 122,643 122,172
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, issued -
123,741 in 1998 and 123,050 in 1997;
outstanding - 118,752 in 1998 and
118,061 in 1997 ................................... 1,237 1,231
Additional capital ................................... 761,340 755,963
Unrealized gains on securities,
net of income taxes ................................. 215 194
Accumulated translation adjustment ................... 729 2,494
Retained earnings .................................... 468,945 499,049
----------- -----------
1,232,466 1,258,931
Treasury stock, at cost, 4,989 shares ................ (43,111) (43,111)
----------- -----------
Total shareholders' equity ........................ 1,189,355 1,215,820
----------- -----------
Total liabilities and
shareholders' equity ...................... $ 2,380,465 $ 2,439,515
=========== ===========
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
Page 2 of 17
<PAGE> 3
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue ........................................ $ 314,838 $ 346,203
Cost of revenue ................................ 223,824 206,928
----------- -----------
Gross profit ................................. 91,014 139,275
----------- -----------
Operating costs and expenses:
Research and product development ............. 69,253 54,781
Selling, general and administrative .......... 59,400 58,051
Other operating costs ........................ 3,633 2,472
----------- -----------
Total operating costs and expenses ......... 132,286 115,304
----------- -----------
Operating income (loss) ...................... (41,272) 23,971
Interest income ................................ 8,329 5,038
Interest expense ............................... (14,054) (5,824)
Other income (expense), net .................... (787) 3,202
----------- -----------
Income (loss) before income taxes .......... (47,784) 26,387
Income tax expense (benefit) ................... (17,680) 10,027
----------- -----------
Net income (loss) .......................... $ (30,104) $ 16,360
=========== ===========
Basic income (loss) per share .................. $ (0.25) $ 0.14
=========== ===========
Diluted income (loss) per share ................ $ (0.25) $ 0.14
=========== ===========
Average shares used in per share computation:
Basic ..................................... 118,212 117,020
Diluted ................................... 118,212 119,075
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
Page 3 of 17
<PAGE> 4
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................. $ (30,104) $ 16,360
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization .................. 26,259 23,949
Amortization of capitalized software
development costs ........................... 8,219 6,524
Deferred income taxes .......................... (17,680) 125
Decrease in current and long-term receivables ...... 103,542 45,065
Increase in inventories ............................ (45,090) (14,694)
Increase (decrease) in income taxes payable ........ (24,226) 4,874
Other, including changes in other current
assets and other liabilities ..................... (22,476) 2,453
--------- ---------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES ....................... (1,556) 84,656
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................ (29,127) (30,339)
Purchases of marketable securities ................. (244,290) (93,281)
Proceeds from sales and maturities of marketable
securities ....................................... 279,496 71,900
Additions to capitalized software
development costs ................................ (14,117) (8,722)
Other .............................................. (10,300) 729
--------- ---------
NET CASH USED FOR
INVESTING ACTIVITIES ....................... (18,338) (59,713)
--------- ---------
</TABLE>
(Continued)
Page 4 of 17
<PAGE> 5
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term borrowings ................. (1,097) (816)
Proceeds from the sale of common stock
under stock plans .............................. 2,191 493
Other ............................................ (23) (1,094)
--------- ---------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES ..................... 1,071 (1,417)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .................... (295) (569)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................. (19,118) 22,957
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ... 277,200 155,101
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 258,082 $ 178,058
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .................................... $ 12,560 $ 1,027
========= =========
Income taxes paid ................................ $ 27,893 $ 830
========= =========
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE> 6
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1998 and 1997 and December 31, 1997
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements reflect,
in the opinion of management, all adjustments necessary to present fairly the
Company's financial position, results of operations and cash flows. Such
adjustments are of a recurring nature unless otherwise disclosed herein. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations promulgated by the
Securities and Exchange Commission. However, the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. Quarterly consolidated financial results may not be indicative of
annual consolidated financial results.
The Company has not paid or declared a cash dividend on its common stock since
its organization.
Certain prior year's financial statement information has been reclassified to
conform with the current year financial statement presentation.
These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1997 Annual Report to Shareholders for the year ended December 31, 1997.
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" in the first quarter of 1998. This standard
requires disclosure of comprehensive income, defined as net income plus
nonowner changes in shareholders' equity, such as accumulated translation
adjustments and unrealized gains (losses) on certain marketable securities. For
the first quarter of 1998 and 1997, total comprehensive income (loss) amounted
to ($31.8) million and $23.0 million, respectively. The primary difference
between comprehensive income and net income in the first quarter of 1997 was the
unrealized appreciation of an investment in common stock received from a
litigation settlement.
INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ----------
<S> <C> <C>
Raw Materials....................... $ 100,709 $ 88,796
Work in Process..................... 25,598 17,840
Finished Goods...................... 300,125 267,611
--------- ----------
$ 426,432 $ 374,247
========= ==========
</TABLE>
Page 6 of 17
<PAGE> 7
CREDIT AGREEMENTS AND LONG-TERM DEBT
The Company has an unsecured $160.0 million revolving credit facility with
several banks which expires in May 2001. This facility provides for borrowings
and issuances of letters of credit in various currencies. The maximum borrowings
available under the facility are reduced by the value of outstanding letters of
credit issued by the banks on behalf of the Company. The letters of credit
issued by the banks under this agreement at March 31, 1998 totaled $6.7 million,
including $4.3 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 borrowings of up to $18.2
million with local banks.
The Company's senior debt agreements contain various financial covenants,
including among other things, minimum net worth, maintenance of certain fixed
charge ratios and maximum allowable indebtedness to net worth. In 1998, the
Company and its senior lenders agreed to amendments to the senior loan
agreements modifying certain of these financial covenants. As a result, the
Company is in compliance with all of the provisions of its senior loan
agreements. In addition, the variable interest rate on certain senior borrowings
(approximately $78.1 million outstanding at March 31, 1998) was increased from a
maximum of 0.69% above Danish index rates to 0.80% above the index rate and
maturities of $31.0 million of these borrowings were reduced from 2011 to 2001.
The Company also agreed to increase the interest rate on other senior borrowings
(approximately $168.8 million outstanding at March 31, 1998) from 9.0% to 9.6%
and agreed to issue the lenders, contingent upon the Company's future credit
rating, warrants to purchase the Company's common stock. The warrants, if
issued, would be exercisable by the lenders for up to ten years at the fair
market value of the Company's common stock at the date of issuance, which, based
on the market price at March 31, 1998, would equate to approximately 185,000
warrants.
OTHER INCOME (EXPENSE), NET
Other income (expense), net in the first quarter of 1997 included a net gain of
approximately $4.0 million from the sale of a portion of common stock received
from a settlement of litigation in 1996.
INCOME TAXES
The Company provided an income tax benefit of $17.7 million for the first
quarter of 1998 at the estimated annual effective income tax rate for 1998 of
37%. The income tax benefit and related increase in the deferred tax asset were
recorded based on the Company's operating history as well as a current
assessment that the Company will generate taxable earnings in the future.
The Company's income taxes include federal, foreign and state (including Puerto
Rico) income taxes. The effective income tax rate is based upon estimates for
the full year for a number of variables including, among other things,
forecasted income in the United States and foreign jurisdictions. The effective
tax rate could change as estimates of these and other variables are finalized at
the end of the year.
Page 7 of 17
<PAGE> 8
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>
March 31, March 31,
1998 1997
----------- ----------
<S> <C> <C>
Numerator:
Net income (loss)............................... $ (30,104) $ 16,360
Denominator for basic income (loss) per share:
Weighted average shares outstanding............. 118,212 117,020
Effect of dilutive securities:
Stock options and awards........................ -- 2,055
----------- ----------
Denominator for diluted income
(loss) per share................................ 118,212 119,075
Basic income (loss) per share.......................... $ (0.25) $ 0.14
=========== ==========
Diluted income (loss) per share........................ $ (0.25) $ 0.14
=========== ==========
</TABLE>
In the first quarter of 1998 and 1997, the number of stock options and awards
excluded from the computation of income (loss) per share because of their
antidilutive effect was 12.2 million and 4.4 million shares, respectively. In
addition, approximately 8.0 million shares of common stock issuable upon
conversion of the 7% convertible notes were excluded from the calculation of
income (loss) per share in first quarter of 1998 due to their antidilutive
effect.
COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
The Company has guarantees of $67.3 million outstanding at March 31, 1998
supporting bid and performance bonds to customers and others, of which $2.4
million were collateralized by letters of credit issued under the Company's
credit facility. Additionally, in the past, the Company has sold customer
receivables and leases under agreements which contain recourse provisions. The
Company could be obligated to repurchase a portion of the sales-type and
operating lease receivables which were previously sold on a partial recourse
basis, the terms of which allow the Company to limit its risk of loss to
approximately $7.8 million at March 31, 1998. The Company believes it has
adequate reserves for any ultimate losses associated with these contingencies.
At March 31, 1998, the Company had forward foreign exchange contracts of $39.9
million outstanding.
Litigation
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
Page 8 of 17
<PAGE> 9
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 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
Page 9 of 17
<PAGE> 10
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.
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, Inc. ("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 10 of 17
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Except for the historical information contained herein, the matters discussed or
incorporated by reference in this Quarterly Report on Form 10-Q herein,
including the matters relating to future performance, are forward-looking
statements that are dependent upon a number of risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. These risks and uncertainties include, but are not
limited to, 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.
Results of Operations
For the three months ended March 31, 1998, the Company reported revenue of
$314.8 million and a net loss of $30.1 million, or $0.25 per diluted share,
compared to revenue of $346.2 million and net income of $16.4 million, or $0.14
per diluted share, for the three months ended March 31, 1997.
The revenue decline in the first quarter of 1998 occurred primarily within the
access and switch product groups. These declines more than offset an increase in
transport revenues, including increased revenues from the Company's European
optical transmission business and broadband digital cross-connect business. The
Company believes that the confluence of several factors in the first quarter led
to the lower than anticipated revenue levels in the switch and access product
groups. Among these factors was merger and restructuring activity among certain
of the Company's larger long-distance customers, softness in deliveries of
wireless switch platforms, effects of the Asian economic crisis and lower than
anticipated levels of access line card shipments. Although there can be no
assurance, the Company expects improvements in these market conditions during
the last half of 1998.
Gross profit as a percentage of revenue was 29% for the 1998 first quarter
compared to 40% in the same period of 1997. Gross profit in the first quarter of
1998 was negatively impacted by lower than anticipated business volumes and
shifts in the mix of products sold, including a lower level of higher margin
Litespan-2000 line card shipments relative to lower margin base infrastructure
system shipments. 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, as was experienced in the
first quarter of 1998, software content and the impact of sales price changes.
The Company's European transmission business continued to incur operating losses
in the first quarter of 1998 and the newly acquired cellular infrastructure
business also had an operating loss. The ultimate profitability of these
businesses is dependent upon successful market acceptance and deployment of
these products.
Page 11 of 17
<PAGE> 12
Research and product development expenses were $69.3 million, or 22% of revenue,
for the three month period ended March 31, 1998 compared to $54.8 million, or
16% of revenue, for the three month period ended March 31, 1997. 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, including the cellular
infrastructure business acquired in December 1997. Selling, general and
administrative expenses totaled $59.4 million, or 19% of revenue, for the three
month period ended March 31, 1998 compared to $58.1 million, or 17% of revenue,
for the same period in 1997. The Company's active pursuit of claims related to
its intellectual property rights have resulted in increased legal expenses which
may continue at a high level as this litigation progresses. See "Litigation"
under "Commitments and Contingencies" in Notes to Condensed Consolidated
Financial Statements for further discussion.
Interest income and interest expense were at higher levels in the first quarter
of 1998 compared to the 1997 first quarter primarily as a result of the
convertible debt offering in August 1997. Other income (expense), net in the
first quarter of 1997 included a net gain related to a litigation settlement of
approximately $4.0 million. See "Other Income (Expense), Net" in Notes to
Condensed Consolidated Financial Statements for further discussion.
See "Income Taxes" in Notes to Condensed Consolidated Financial Statements for
information on the Company's income taxes during 1998.
Financial Condition and Liquidity
The Company's cash and cash equivalents at March 31, 1998 were $258.1 million
compared to $277.2 million at December 31, 1997, and marketable securities were
$306.6 million at March 31, 1998 compared to $340.6 million at December 31,
1997.
Cash of $1.6 million was used in operating activities. Cash use resulting from
the Company's net loss, inventory growth and a significant U.S. income tax
payment offset cash generated from a reduction in receivables. The inventory
growth of approximately $45.1 million was due to production levels based on
forecasted demand exceeding first quarter shipment levels. In order to reduce
the risk of collection associated with the Company's receivables, among other
things, the Company has historically sold both current and long-term receivables
primarily without recourse. The net proceeds collected from the receivable sales
in the first quarter of 1998 were $59.5 million. The Company may from time to
time continue to sell receivables in the future.
Investing activities during the three months ended March 31, 1998 included
additions to property and equipment of $29.1 million. The Company anticipates
that capital expenditures for 1998 could be in the range of $150 million to $170
million. This amount includes expected capital additions related to the new
customer service facility currently being constructed on the Plano campus.
However, the timing and extent of any future capital expenditures is dependent
upon future business growth.
As discussed in "Credit Agreements and Long-Term Debt" in Notes to Condensed
Consolidated Financial Statements, the Company has an unsecured $160.0 million
revolving credit agreement. There have been no borrowings under this credit
facility.
Page 12 of 17
<PAGE> 13
Outstanding letters of credit, which totaled $6.7 million at March 31, 1998,
reduce the amount of available borrowings. Two of the Company's foreign
subsidiaries also have credit agreements providing for borrowings of up to $18.2
million with local banks.
As discussed in "Credit Agreements and Long-Term Debt" in Notes to Condensed
Consolidated Financial Statements, in 1998, certain financial covenants in the
Company's senior loan agreements were modified and, as a result, the Company
continues to be in compliance with the provisions of its senior loan agreements.
The Company believes it will remain in compliance with the provisions of its
loan agreements for the foreseeable future. However, should the Company's
operating results continue to deteriorate in the future, additional amendments
or waivers to these agreements could become necessary.
Additionally, maturities of $31.0 million on a senior note were reduced from
2011 to 2001. As a result, total long-term debt maturities in 2001 have
increased from $53.2 million to $84.2 million. See "Credit Agreements and
Long-Term Debt" in Notes to Condensed Consolidated Financial Statements for
further discussion.
The Company is party to certain litigation, as disclosed in "Litigation" under
"Commitments and Contingencies" in Notes to Condensed Consolidated Financial
Statements, the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial position.
The Company believes that its existing cash and short-term investments and
available credit facilities will be adequate to support the Company's financial
resource needs, including working capital requirements, capital expenditures,
operating lease obligations and debt payments. In order to remain competitive in
the future, the Company believes that it will become increasingly necessary to
offer financing alternatives to both domestic and international customers. To
the extent such financing becomes significant or other business requirements
arise, additional financing could become necessary.
Risks and Uncertainties
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
Page 13 of 17
<PAGE> 14
results. The industry in which the Company operates requires substantial
investment in product development, capital and, at times, inventory prior to
customer acceptance of new products or enhancements to existing products. One of
the keys to the Company's overall success has been anticipating the appropriate
timing of such activities. Delays in product completion and/or slower than
expected market acceptance of certain newer products 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.
Page 14 of 17
<PAGE> 15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Stockholders was held on April 30, 1998.
The following matters were voted on by the stockholders:
1. Election of three Class II Directors. Sir John Fairclough, William O. Hunt
and Gerald F. Montry were elected to the Board of Directors as Class II
Directors for terms extending through the 2001 Annual Meeting of
Stockholders. The vote was 102,621,440 shares in favor of Sir John
Fairclough, with 5,452,263 votes withheld, 102,608,880 shares in favor of
William O. Hunt, with 5,464,823 votes withheld and 102,623,007 shares in
favor of Gerald F. Montry, with 5,450,696 votes withheld.
Page 15 of 17
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
27.1 Financial Data Schedule - March 31, 1998 (for EDGAR filing purposes
only).
27.2 Restated Financial Data Schedule - March 31, 1997 and March 31, 1996
(for EDGAR filing purposes only).
B. Reports on Form 8-K.
Form 8-K, dated February 17, 1998
Item 2. Acquisition or Disposition of Assets - disposition
of fixed wireless local loop business
Item 7. Financial Statements and Exhibits - Amended and
Restated Asset Purchase Agreement, Pro Forma
Financial Statements
Form 8-K, dated April 2, 1998
Item 5. Other Events - press release announcing results for
the first quarter 1998 to be lower than previously
anticipated
Item 7. Financial Statements and Exhibits - Press Release
Form 8-K, dated April 3, 1998
Item 5. Other Events - press release announcing James L.
Donald's intention to retire
Item 7. Financial Statements and Exhibits - Press Release
Page 16 of 17
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSC COMMUNICATIONS CORPORATION
Dated: May 15, 1998 By: /s/ Kenneth R. Vines
-------------------------------
Kenneth R. Vines
Vice President, Finance,
duly authorized officer
and principal accounting
officer
Page 17 of 17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
27.1 Financial Data Schedule - March 31, 1998
27.2 Restated Financial Data Schedule - March 31, 1997
and March 31, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 258,082
<SECURITIES> 306,605
<RECEIVABLES> 339,733
<ALLOWANCES> 0
<INVENTORY> 426,432
<CURRENT-ASSETS> 1,541,515
<PP&E> 889,275
<DEPRECIATION> 440,211
<TOTAL-ASSETS> 2,380,465
<CURRENT-LIABILITIES> 442,598
<BONDS> 625,869
0
0
<COMMON> 1,237
<OTHER-SE> 1,188,118
<TOTAL-LIABILITY-AND-EQUITY> 2,380,465
<SALES> 314,838
<TOTAL-REVENUES> 314,838
<CGS> 223,824
<TOTAL-COSTS> 223,824
<OTHER-EXPENSES> 72,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,054
<INCOME-PRETAX> (47,784)
<INCOME-TAX> (17,680)
<INCOME-CONTINUING> (30,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,104)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-01-1996
<CASH> 178,058 228,414
<SECURITIES> 199,884 303,191
<RECEIVABLES> 360,130 239,136
<ALLOWANCES> 0 0
<INVENTORY> 356,663 328,035
<CURRENT-ASSETS> 1,232,905 1,173,239
<PP&E> 783,548 706,205
<DEPRECIATION> 375,669 (322,296)
<TOTAL-ASSETS> 1,957,374 1,843,779
<CURRENT-LIABILITIES> 448,367 446,839
<BONDS> 266,263 209,738
0 0
0 0
<COMMON> 1,223 1,208
<OTHER-SE> 1,171,349 1,135,793
<TOTAL-LIABILITY-AND-EQUITY> 1,957,374 1,843,779
<SALES> 346,203 307,897
<TOTAL-REVENUES> 346,203 307,897
<CGS> 206,928 178,431
<TOTAL-COSTS> 206,928 178,431
<OTHER-EXPENSES> 57,253 111,506
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,824 7,086
<INCOME-PRETAX> 26,387 18,589
<INCOME-TAX> 10,027 7,064
<INCOME-CONTINUING> 16,360 11,525
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,360 11,525
<EPS-PRIMARY> .14 0.10
<EPS-DILUTED> .14 0.10
</TABLE>
