<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM F-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
ALCATEL ALSTHOM
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
REPUBLIC OF FRANCE 4813 INAPPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
54, rue La Boetie
75008 Paris
France
011-331-40-76-10-10
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
Krish Prabhu
Alcatel Network Systems, Inc.
1225 North Alma Road
Richardson, Texas 75081
USA
(972) 996-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
ROGER S. AARON, ESQ. SERGE TCHURUK JAMES L. DONALD
Skadden, Arps, Slate, Meagher & Chairman of the Board and Chairman of the Board,
Flom LLP Chief Executive Officer President and
919 Third Avenue Alcatel Alsthom Chief Executive Officer
New York, New York 10022 54, rue La Boetie DSC Communications Corporation
USA 75008 Paris 1000 Coit Road
(212) 735-3000 France Plano, Texas 75075
011-331-40-76-10-10 USA
(972) 519-3000
JOHN J. KENDRICK, JR.
4680 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
USA
(214) 871-2105
</TABLE>
----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING OF REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE
<S> <C> <C> <C> <C>
American Depositary Shares evidenced by 110,020,000 N/A $4,758,365,000 $1,403,718
American Depositary Receipts, each
American Depositary Share evidencing
Ordinary Shares, Nominal Value 40FF each
of Alcatel Alsthom(3).....................
</TABLE>
(1) Represents the maximum number of American Depositary Shares issuable upon
consummation of the merger of Net Acquisition, Inc., a wholly owned
subsidiary of Alcatel Alsthom ("Alcatel"), with and into DSC Communications
Corporation (the "Merger"), such amount includes all exercisable options
granted under employee stock option plans and rights to acquire Alcatel
American Depositary Shares under DSC Communications Corporation's 7%
Convertible Notes due August 1, 2004.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as
amended, on the basis of $43.25, the average of the high and low prices of
the Alcatel American Depositary Shares on the New York Stock Exchange on
July 23, 1998, multiplied by 110,020,000, the maximum number of Alcatel
American Depositary Shares issuable upon and following the consummation of
the Merger.
(3) These shares may be represented by the Registrant's American Depositary
Shares, each of which represents one-fifth of an Ordinary Share. A separate
Registration Statement on Form F-6 (Registration No. 333- ) will be
filed for the registration of American Depositary Shares evidenced by
American Depositary Receipts issuable upon deposit of Ordinary Shares.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
DSC COMMUNICATIONS CORPORATION
1000 Coit Road
Plano, Texas 75075
(972) 519-3000
July 28, 1998
Dear Fellow Stockholders:
Enclosed are a Notice of Special Meeting, a Proxy Statement/Prospectus and a
Proxy in connection with a special meeting of stockholders (the "Special
Meeting") of DSC Communications Corporation ("DSC") to be held at 10:00 a.m.
local time on August 27, 1998 at DSC Communications Corporation Building PB6,
3400 Plano Parkway, Plano, Texas 75075. At the Special Meeting you will be asked
to consider and vote on a proposal to approve and adopt an Agreement and Plan of
Merger, as amended (the "Merger Agreement"), by and among DSC, Alcatel Alsthom,
a company organized under the laws of the Republic of France ("Alcatel"), and
Net Acquisition, Inc., a direct wholly owned subsidiary of Alcatel ("Newco"),
pursuant to which Newco will be merged with and into DSC (the "Merger"), and DSC
will become a wholly owned subsidiary of Alcatel.
The terms of the Merger Agreement provide that each issued and outstanding
share of common stock, par value $.01 per share (the "Common Stock"), of DSC
will, upon the terms and subject to the conditions set forth in the Merger
Agreement, be converted into 0.815 of an Alcatel American Depositary Share
(collectively, the "ADSs"). The closing price of the ADSs as reported on the
NYSE Composite Tape on July 27, 1998 was $43. Outstanding options to acquire
shares of Common Stock issued under DSC's stock option plans will generally be
cancelled by DSC for cash in the case of optionees who have agreed to such
cancellation, or in the case of certain optionees who have not agreed to such
cancellation, may become options to purchase ADSs.
Details of the matters to be considered at the Special Meeting are set forth
in the accompanying Proxy Statement/Prospectus which you should read carefully
in its entirety. The Board of Directors of DSC has established July 23, 1998 as
the record date for determining holders of shares of Common Stock entitled to
notice of, and to vote at, the Special Meeting, and only record holders of
shares of Common Stock at the close of business on such record date are entitled
to notice of, and to vote at, the Special Meeting. A complete list of
stockholders entitled to vote at the Special Meeting will be available for
examination by any of DSC's stockholders at the offices of Baker & McKenzie,
4500 Trammell Crow Center, 2001 Ross Avenue, Suite 4500, Dallas, Texas 75201,
for purposes germane to the Special Meeting, during normal business hours for a
period of 10 days prior to the Special Meeting.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF DSC HAS UNANIMOUSLY
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF STOCKHOLDERS OF
DSC, AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND
RECOMMENDS THAT ALL STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO ADOPT THE
MERGER AGREEMENT AND APPROVE THE MERGER. IN ADDITION, THE BOARD OF DIRECTORS OF
DSC HAS RECEIVED THE WRITTEN OPINION OF GOLDMAN, SACHS & CO. DATED JUNE 3, 1998
TO THE EFFECT THAT, AS OF SUCH DATE, THE EXCHANGE RATIO PURSUANT TO THE MERGER
AGREEMENT WAS FAIR FROM A FINANCIAL POINT OF VIEW TO HOLDERS OF COMMON STOCK.
To be certain that your shares are voted at the Special Meeting, whether or
not you plan to attend in person, please sign, date and return the enclosed
proxy as soon as possible. Your vote is important. You may attend the Special
Meeting and vote in person if you wish, whether or not you have executed and
returned your proxy. You may revoke your proxy at any time prior to its use.
Sincerely,
[LOGO]
JAMES L. DONALD
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
------------------------
NOTICE OF SPECIAL MEETING
TO BE HELD ON AUGUST 27, 1998
------------------------
To the Stockholders of DSC Communications Corporation:
Notice is hereby given that a special meeting of stockholders (the "Special
Meeting") of DSC Communications Corporation, a Delaware corporation ("DSC"),
will be held at 10:00 a.m., local time, on August 27, 1998, at DSC
Communications Corporation Building PB6, 3400 Plano Parkway, Plano, Texas 75075
for the following purposes:
1. To consider and vote upon a proposal to (i) adopt the Agreement and Plan
of Merger, dated as of June 3, 1998, as amended (the "Merger Agreement"),
by and among DSC, Alcatel Alsthom, a corporation organized under the laws
of the Republic of France ("Alcatel"), and Net Acquisition, Inc., a
Delaware corporation and a direct, wholly owned subsidiary of Alcatel
("Newco"), pursuant to which Newco will be merged with and into DSC, with
DSC continuing as the surviving corporation in the merger (the "Merger")
and (ii) approve the Merger.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The accompanying Proxy Statement/Prospectus contains information regarding
the business to be considered at the Special Meeting. A copy of the Merger
Agreement is attached as Annex A to the accompanying Proxy Statement/Prospectus
and a copy of the amendment dated as of July 21, 1998 to the Merger Agreement is
included as Annex B to the accompanying Proxy Statement/Prospectus.
Only stockholders of record at the close of business on July 23, 1998, the
record date established by the Board of Directors in connection with the Special
Meeting, are entitled to notice of, and to vote at, the Special Meeting. A list
of stockholders will be made available at the offices of Baker & McKenzie,
located at 4500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201 at
least 10 days prior to the date of the Special Meeting for examination by any
stockholder for any purpose germane to the Special Meeting.
You are cordially invited to attend the Special Meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO SIGN AND DATE THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. If you
attend the Special Meeting, you may vote in person if you wish, whether or not
you have executed and returned your proxy. A proxy may be revoked at any time
prior to its use.
THE BOARD OF DIRECTORS OF DSC HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, ARE
FAIR TO AND IN THE BEST INTERESTS OF STOCKHOLDERS OF DSC, AND HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE MERGER. THE BOARD OF DIRECTORS OF DSC
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT
AND APPROVE THE MERGER. IN ORDER TO ASSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND MAIL THE ENCLOSED PROXY WHICH IS BEING
SOLICITED BY THE BOARD OF DIRECTORS OF DSC, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING. YOUR COOPERATION IS APPRECIATED.
By Order of the Board of Directors
[LOGO]
GEORGE B. BRUNT
Vice President, Secretary
and General Counsel
Plano, Texas
July 28, 1998
<PAGE>
DSC COMMUNICATIONS CORPORATION PROXY STATEMENT
------------------
ALCATEL ALSTHOM PROSPECTUS
------------------
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is being
furnished to holders of Common Stock, par value $.01 per share (the "Common
Stock"), of DSC Communications Corporation, a Delaware corporation ("DSC"), in
connection with the solicitation of proxies by the Board of Directors of DSC
(the "DSC Board") for use at the special meeting of stockholders (the "Special
Meeting") of DSC, including any adjournments or postponements thereof, scheduled
to be held at 10:00 a.m. local time on August 27, 1998 at DSC Communications
Corporation Building PB6, 3400 Plano Parkway, Plano, Texas 75075. At the Special
Meeting, holders of Common Stock as of the close of business on July 23, 1998,
the record date established by the DSC Board in connection with the Special
Meeting (the "Record Date"), will be asked to consider and vote upon a proposal
to (i) adopt the Agreement and Plan of Merger, dated as of June 3, 1998, as
amended (the "Merger Agreement"), by and among DSC, Alcatel Alsthom, a
corporation organized under the laws of the Republic of France ("Alcatel"), and
Net Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of
Alcatel ("Newco"), pursuant to which Newco will be merged with and into DSC (the
"Merger"), with DSC continuing as the surviving corporation (the "Surviving
Corporation") in the Merger and (ii) approve the Merger. Only holders of record
of Common Stock on the Record Date are entitled to notice of, and to vote at,
the Special Meeting. As of the close of business on the Record Date, there were
119,067,374 shares of Common Stock outstanding held by 4,188 holders of record.
The Merger requires the approval at the Special Meeting of the holders of not
less than a majority of the shares of Common Stock outstanding and entitled to
vote thereon. A copy of the Merger Agreement is attached hereto as Annex A and a
copy of the first amendment, dated as of July 21, 1998, (the "First Amendment")
to the Merger Agreement is attached hereto as Annex B, and each such document is
incorporated herein by reference.
In the Merger, each share of Common Stock issued and outstanding immediately
prior to the effective time of the Merger (the "Effective Time") (other than
shares of Common Stock held directly or indirectly by DSC or Newco) will be
converted into 0.815 (the "Exchange Ratio") of an Alcatel American Depositary
Share (collectively, the "ADSs"), each of which ADS represents one-fifth of an
ordinary share, nominal value FF40 per share of Alcatel (the "Alcatel Shares").
In addition, in connection with the Merger, outstanding options to purchase
shares of Common Stock issued under DSC stock option plans will generally be
cancelled for cash by DSC in the case of optionees who have agreed to such
cancellations, or in the case of certain optionees who have not agreed to such
cancellation, may become options to purchase ADSs. See "THE MERGER--Form of the
Merger; Consideration." Immediately following the Merger, the Surviving
Corporation will be a wholly owned subsidiary of Alcatel.
This Proxy Statement/Prospectus also constitutes the prospectus of Alcatel
with respect to the ADSs to be issued in connection with the Merger. ADSs are
listed for trading on the New York Stock Exchange, Inc. (the "NYSE") under the
symbol "ALA." On July 27, 1998, the closing price per ADS was $43. The Common
Stock is listed for trading on the Nasdaq National Market (the "NNM") under the
symbol "DIGI." On July 27, 1998, the closing price of the Common Stock on the
NNM was $33 13/32 per share. Holders of Common Stock should obtain current
market quotations for the Common Stock and the ADSs. See "COMPARATIVE STOCK
PRICES AND DIVIDENDS."
This Proxy Statement/Prospectus, the accompanying form of proxy (the
"Proxy") and the other enclosed documents are first being mailed to stockholders
of DSC on or about July 28, 1998. Any stockholder who has given a Proxy may
revoke such Proxy at any time prior to its use. See "THE SPECIAL
MEETING--Proxies."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF COMMON STOCK IN CONNECTION WITH THEIR
CONSIDERATION OF THE MERGER.
------------------------
NEITHER THE MERGER NOR THE SECURITIES TO BE ISSUED IN THE MERGER PURSUANT TO
THIS PROXY STATEMENT/PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES
COMMISSION. NEITHER THE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
PASSED UPON THE FAIRNESS OR MERITS OF THE MERGER OR UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is July 28, 1998.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, IN
CONNECTION WITH THE MERGER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DSC, ALCATEL
OR NEWCO. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES TO WHICH IT RELATES IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS
NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR
IN THE AFFAIRS OF DSC OR ALCATEL SINCE THE DATE HEREOF. THE INFORMATION
CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH RESPECT TO DSC AND ITS
SUBSIDIARIES HAS BEEN PROVIDED BY DSC. THE INFORMATION CONTAINED (OR
INCORPORATED BY REFERENCE) HEREIN WITH RESPECT TO ALCATEL AND ITS SUBSIDIARIES
HAS BEEN PROVIDED BY ALCATEL.
AVAILABLE INFORMATION
Alcatel and DSC are each subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, each files certain reports and other information with the
Securities and Exchange Commission. Reports and other information filed by
Alcatel or DSC with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 or at its regional offices
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains an Internet "website" that contains reports and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov. ADSs are listed on the NYSE under the symbol "ALA", and
reports and other information concerning Alcatel may be inspected and copied at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005. The DSC Common Stock is listed on the NNM under the symbol "DIGI",
and reports and other information concerning DSC may be inspected and copied at
the offices of the Nasdaq Stock Market, Inc., 1735 K. Street, N.W., Washington,
D.C. 20006.
Alcatel has filed with the Commission a Registration Statement on Form F-4
(including all amendments and supplements thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), and the
rules and regulations promulgated thereunder, with respect to the ADSs to be
issued pursuant to the Merger Agreement. This Proxy Statement/Prospectus, which
forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Reference is made to the Registration Statement
and related exhibits for further information with respect to Alcatel and DSC and
the securities offered hereby. For the complete text of any document, the
material provisions of which are described herein, reference is made in each
instance to the copy of the document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Statements contained herein,
including in any document incorporated herein by reference, concerning the
provisions of such documents are not necessarily complete, and in each instance,
reference is made to the copy of the document so filed, each such statement
being qualified in its entirety by such reference.
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are
incorporated in this Proxy Statement/Prospectus by reference:
For DSC (Commission File No. 0-10018 ), its:
(1) Annual Report on Form 10-K for the year ended December 31, 1997.
(2) Proxy Statement, dated March 31, 1998, which was mailed to DSC's
stockholders in connection with the Annual Meeting of Stockholders held
on April 30, 1998.
(3) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(4) The description of Common Stock as set forth in DSC's Registration
Statement on Form 8-A, dated October 27, 1981, including all amendments
and reports filed for the purpose of updating such description.
(5) The description of the Preferred Stock Purchase Rights as set forth in
DSC's Registration Statement on Form 8-A, dated May 13, 1996, including
all amendments and reports filed for the purpose of updating such
description.
(6) Current Report on Form 8-K dated June 4, 1998.
(7) Current Report on Form 8-K dated April 3, 1998.
(8) Current Report on Form 8-K dated April 1, 1998.
For Alcatel (Commission File No. 1-11130 ), its:
(1) Annual Report on Form 20-F for the year ended December 31, 1997.
(2) Report of Foreign Private Issuer on Form 6-K for the month ended June
1998.
All reports and other documents subsequently filed by DSC or Alcatel
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the
date of the Special Meeting shall be deemed to be incorporated by reference
herein and to be part hereof from the date of filing of such reports and
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/ Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Proxy
Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS SPECIFICALLY ARE
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS), ARE AVAILABLE WITHOUT CHARGE, UPON
WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO DSC, FROM DSC
COMMUNICATIONS CORPORATION, 1000 COIT ROAD, PLANO, TEXAS 75075, ATTENTION:
GENERAL COUNSEL, TELEPHONE (972) 519-3000, AND IN THE CASE OF DOCUMENTS RELATING
TO ALCATEL, FROM ALCATEL
iii
<PAGE>
ALSTHOM, C/O ALCATEL NETWORK SYSTEMS, 1225 NORTH ALMA ROAD, RICHARDSON, TEXAS
75081, ATTENTION: GENERAL COUNSEL, TELEPHONE (972) 996-5000. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS REQUESTED, ANY SUCH REQUEST SHOULD BE MADE BY
AUGUST 20, 1998.
FORWARD-LOOKING STATEMENTS
Certain information contained or incorporated by reference in this Proxy
Statement/Prospectus consists of forward-looking statements. Without limitation
of the foregoing, when used in this report, the words "aim(s)", "expect(s)",
"feel(s)", "will", "may", "believes", "anticipate(s)", "should", "could",
"would" and similar expressions are intended to identify certain forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which could cause the actual results to differ
materially from those projected. Such factors include, among others, the risk
factors set forth under "RISK FACTORS," as well as the following: general
economic and business conditions; industry trends; overseas expansion; the loss
of major customers or suppliers; the timing of orders received from customers;
cost and availability of raw materials; changes in business strategy or
development plans; availability and quality of management; and availability,
terms and deployment of capital. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. Alcatel and DSC assume no obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Alcatel is a French SOCIETE ANONYME organized under the laws of the Republic
of France. Most of Alcatel's directors and officers, as well as certain of the
experts named herein, are not residents of the United States, and a substantial
portion of the assets of Alcatel and its directors and officers are located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States upon such persons or to
realize against them upon judgments of courts of the United States predicated
upon any civil liability provisions of the U.S. Federal securities laws. If an
original action is brought in France, predicated solely upon the U.S. Federal
securities laws, French courts may not have the requisite jurisdiction to grant
the remedies sought and actions for enforcement in France of judgments of U.S.
courts, rendered against French persons referred to in the second sentence of
this paragraph, would require such French persons to waive their right under
Article 15 of the French Civil Code to be sued in France only. Alcatel believes
that no such French persons have waived such right with respect to actions
predicated solely upon U.S. Federal securities laws. In addition, actions in the
United States under the U.S. Federal securities laws could be affected under
certain circumstances by the French law of July 16, 1980, which may preclude or
restrict the obtaining of evidence in France or from French persons in
connection with such actions.
CURRENCY TRANSLATIONS AND EXCHANGE RATES
In this Proxy Statement/Prospectus, unless otherwise indicated, all amounts
are expressed in U.S. dollars ("dollars", "U.S. dollars", "$", USD or US$) or
French francs ("francs" or "FF"). For the convenience of the reader, this Proxy
Statement/Prospectus contains translations into U.S. dollars of certain franc
amounts at the exchange rate on December 31, 1997 of 6.019 francs per dollar.
This exchange rate differs, although not materially, from the noon buying rate
in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate") on July 27, 1998 of 5.98 francs per dollar.
Fluctuations in the exchange rate between the dollar and the franc will
affect the dollar equivalent of the franc price of Alcatel Shares traded on the
Paris stock exchange (the "BOURSE") and, as a result, are likely to affect the
market price of the ADSs on the NYSE. Such fluctuations will also affect the
dollar
iv
<PAGE>
amounts received by holders of ADSs on the conversion by the Depositary (as
defined herein) into dollars of cash dividends, if applicable, paid in francs on
the Alcatel Shares represented by ADSs.
The following table sets forth, for the periods and dates indicated, the
average, high, low and period-end Noon Buying Rates for dollars expressed in
francs per dollar.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AVERAGE(1) HIGH LOW PERIOD-END
- -------------------------------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
1993...................................................................... FF 5.69 FF 6.06 FF 5.30 FF 5.92
1994...................................................................... 5.51 5.97 5.11 5.34
1995...................................................................... 4.99 5.40 4.75 4.90
1996...................................................................... 5.12 5.29 4.90 5.19
1997...................................................................... 5.85 6.35 5.19 6.02
1998 (through July 27, 1998).............................................. 6.02 6.35 5.72 5.98
</TABLE>
- ------------------------
(1) The average of the Noon Buying Rates on the last business day of each month
during the relevant period.
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................... 1
The Companies..................................................................... 1
Recent Events..................................................................... 1
The Special Meeting............................................................... 2
The Merger........................................................................ 3
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
DATA................................................................................ 7
Selected Historical Financial Data................................................ 7
Selected Unaudited Pro Forma Combined Condensed Financial Data Under U.S. GAAP.... 10
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA......................... 11
COMPARATIVE STOCK PRICES AND DIVIDENDS................................................ 12
RISK FACTORS.......................................................................... 14
Fixed Exchange Ratio Despite Possible Change in Stock Prices...................... 14
Integration of DSC................................................................ 14
Telecommunications Industry and Technology; Regulation............................ 14
Competition....................................................................... 15
Year 2000 Risks................................................................... 15
International Operations.......................................................... 15
Exchange Rate Fluctuations........................................................ 15
THE COMPANIES......................................................................... 16
Alcatel........................................................................... 16
DSC............................................................................... 17
Newco............................................................................. 17
THE SPECIAL MEETING................................................................... 18
Time and Place; Purpose........................................................... 18
Record Date....................................................................... 18
Proxies........................................................................... 18
Required Vote; Quorum............................................................. 19
Appraisal Rights.................................................................. 19
Availability of Independent Accountants........................................... 19
THE MERGER............................................................................ 20
Background of the Merger.......................................................... 20
Recommendation of the DSC Board; Reasons for the Merger........................... 22
Opinion of DSC's Financial Advisor................................................ 24
Alcatel's Reasons for the Merger.................................................. 27
Form of the Merger; Consideration................................................. 28
Effective Time.................................................................... 28
Conversion of Shares.............................................................. 28
Employee Stock Options and Employee Benefit Matters............................... 29
Interests of Certain Persons in the Merger........................................ 30
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Fractional Shares................................................................. 34
Conditions to the Consummation of the Merger...................................... 35
Certain U.S. Federal Income Tax Consequences...................................... 35
Accounting Treatment.............................................................. 37
Certain Securities Laws Considerations............................................ 37
Stock Exchange Listing............................................................ 37
Rights Agreement.................................................................. 37
Merger Agreement Amendment........................................................ 38
Convertible Notes................................................................. 38
ALCATEL AND DSC UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS UNDER U.S. GAAP..... 39
DESCRIPTION OF ALCATEL SHARES......................................................... 47
General........................................................................... 47
Changes in Share Capital.......................................................... 47
Stockholders' Meeting and Voting Rights........................................... 47
Dividend and Liquidation Rights................................................... 48
Holding and Transfer of Alcatel Shares............................................ 49
DESCRIPTION OF ALCATEL AMERICAN DEPOSITARY SHARES..................................... 50
American Depositary Receipts...................................................... 50
Deposit and Withdrawal of Alcatel Shares.......................................... 50
Dividends, Other Distributions and Rights......................................... 51
Record Dates...................................................................... 52
Voting of the Underlying Alcatel Shares........................................... 52
Notices and Reports............................................................... 53
Inspection of Transfer Books...................................................... 53
Amendment and Termination of the Deposit Agreement................................ 53
Charges of Depositary............................................................. 54
Transfer of ADRs.................................................................. 54
CERTAIN PROVISIONS OF THE MERGER AGREEMENT............................................ 55
Effective Time; Closing........................................................... 55
Appraisal Rights.................................................................. 55
Merger Consideration.............................................................. 55
Exchange of Share Certificates.................................................... 55
Company Stock Options and Company Employee Stock Purchase Plans................... 56
Representations and Warranties.................................................... 56
No Solicitation; Recommendation................................................... 57
Rights Agreement.................................................................. 58
Regulatory Approvals.............................................................. 58
Conditions to the Consummation of the Merger...................................... 58
Termination and Fees.............................................................. 59
Expenses.......................................................................... 61
Conduct of Business Pending the Merger............................................ 61
Amendments; Modifications and Waiver.............................................. 62
</TABLE>
vii
<PAGE>
<TABLE>
<S> <C>
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 63
Duties of Directors............................................................... 63
Size and Classification of the Board of Directors................................. 64
Removal of Directors; Filling Vacancies on the Board of Directors................. 64
Stockholder Nominations........................................................... 65
Action by Written Consent......................................................... 66
Stockholder Meetings.............................................................. 66
Stockholder Proposals............................................................. 67
Required Vote for Authorization of Certain Actions................................ 67
Appraisal Rights.................................................................. 68
Preemptive Rights................................................................. 68
Stock Repurchases................................................................. 68
Anti-Takeover Statutes............................................................ 69
Limitation on Directors' Liability................................................ 69
Indemnification of Officers and Directors......................................... 70
Cumulative Voting................................................................. 70
Conflict-of-Interest Transactions................................................. 71
Dividends......................................................................... 71
Loans to Directors................................................................ 72
Stockholder Suits................................................................. 72
REGULATORY APPROVALS.................................................................. 73
SECURITY OWNERSHIP OF CERTAIN DSC BENEFICIAL OWNERS AND MANAGEMENT.................... 74
LEGAL MATTERS AND EXPERTS............................................................. 76
OTHER INFORMATION AND STOCKHOLDER PROPOSALS........................................... 76
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Annex A Agreement and Plan of Merger A-1
Annex B First Amendment to the Agreement and Plan of Merger B-1
Annex C Opinion of Goldman, Sachs & Co. C-1
</TABLE>
viii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
"Acceptable Confidentiality Agreement".................................................................. 57
"Accrued Benefit"....................................................................................... 34
"Acquisition Proposal".................................................................................. 57
"ADRs".................................................................................................. 6
"ADSs".................................................................................................. i
"Alcatel"............................................................................................... i
"Alcatel Articles of Association"....................................................................... 47
"Alcatel Board"......................................................................................... 27
"Alcatel Shares"........................................................................................ i
"Alcatel Telecom"....................................................................................... 16
"Alternative Termination Fee"........................................................................... 60
"ANS"................................................................................................... 14
"Antitrust Division".................................................................................... 4
"Antitrust Law"......................................................................................... 58
"BOURSE"................................................................................................ iv
"Certificate of Merger"................................................................................. 28
"Certificates".......................................................................................... 56
"Closing"............................................................................................... 55
"Closing Date".......................................................................................... 59
"Code".................................................................................................. 4
"Commission"............................................................................................ i
"Common Stock".......................................................................................... i
"Confidentiality Agreement"............................................................................. 57
"Convertible Notes"..................................................................................... 3
"Custodian"............................................................................................. 50
"Deposit Agreement"..................................................................................... 50
"Depositary"............................................................................................ 50
"Deposited Securities".................................................................................. 51
"DGCL".................................................................................................. 3
"Donald Agreement"...................................................................................... 32
"DSC"................................................................................................... i
"DSC Board"............................................................................................. i
"DSC Bylaws"............................................................................................ 64
"DSC Certificate"....................................................................................... 64
"EC Merger Regulations"................................................................................. 59
"EBITDA"................................................................................................ 25
"Effective Time"........................................................................................ i
"Engagement Letter"..................................................................................... 27
"equivalent per share price"............................................................................ 12
"ESPPs"................................................................................................. 29
"Excess ADSs"........................................................................................... 34
"Exchange Act".......................................................................................... ii
"Exchange Agent"........................................................................................ 6
"Exchange Ratio"........................................................................................ i
"Executive Income Continuation Trust"................................................................... 34
"Fair market value"..................................................................................... 29
"Financially Superior Proposal"......................................................................... 57
"Floor Price"........................................................................................... 5
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
"French Corporation Law"................................................................................ 47
"French GAAP"........................................................................................... 7
"FTC"................................................................................................... 4
"GEC"................................................................................................... 1
"GEC Alsthom"........................................................................................... 1
"Goldman Sachs"......................................................................................... 4
"HSR Act"............................................................................................... 4
"Indemnified Party"..................................................................................... 30
"Indemnifying Parties".................................................................................. 30
"Indenture"............................................................................................. 38
"Lehman Brothers"....................................................................................... 20
"LTIP".................................................................................................. 33
"LTM"................................................................................................... 25
"Material Adverse Consequence".......................................................................... 59
"Material Adverse Effect"............................................................................... 59
"Merger"................................................................................................ i
"Merger Agreement"...................................................................................... i
"Merger Proposal"....................................................................................... 2
"Named Executive Officers".............................................................................. 29
"Newco"................................................................................................. i
"NNM"................................................................................................... i
"Noon Buying Rate"...................................................................................... iv
"NYSE".................................................................................................. i
"Option"................................................................................................ 29
"P/E"................................................................................................... 25
"Pre-Release"........................................................................................... 50
"Pre-Releasee".......................................................................................... 50
"Principal Office"...................................................................................... 50
"Proxy"................................................................................................. i
"Proxy Statement/Prospectus"............................................................................ i
"Record Date"........................................................................................... i
"Registration Statement"................................................................................ ii
"RHCs".................................................................................................. 1
"Rights"................................................................................................ 37
"Rights Agent".......................................................................................... 6
"Rights Agreement"...................................................................................... 6
"Securities Act"........................................................................................ ii
"Selected Companies".................................................................................... 25
"Selected Focus Companies".............................................................................. 25
"Selected Transactions"................................................................................. 26
"SERP".................................................................................................. 33
"Severance Agreements".................................................................................. 30
"Severance Plan"........................................................................................ 31
"Special Meeting"....................................................................................... i
"Substitute Option"..................................................................................... 29
"Surviving Corporation"................................................................................. i
"Termination Fee"....................................................................................... 60
"T.I.N."................................................................................................ 37
"U.S. GAAP"............................................................................................. 7
"U.S. Holder"........................................................................................... 35
"Year 2000 Problems".................................................................................... 15
</TABLE>
x
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. Reference is made to the more detailed
information contained or incorporated by reference in this Proxy
Statement/Prospectus and the Annexes hereto. Stockholders of DSC are urged to
read this Proxy Statement/Prospectus and the Annexes hereto in their entirety.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
COMMON STOCK IN CONNECTION WITH THEIR CONSIDERATION OF THE MERGER, SEE "RISK
FACTORS" BEGINNING ON PAGE 14.
THE COMPANIES
ALCATEL
Alcatel Alsthom, a French company headquartered in Paris, together with its
consolidated subsidiaries and associated companies, is a world leader in
providing equipment and systems for the telecommunications, energy and transport
sectors. In 1997, Alcatel had consolidated net sales of FF 185.9 billion
(approximately $31 billion). While Alcatel has operations in over 100 countries,
it has a particularly strong market base in Europe, where it currently generates
two-thirds of its consolidated net sales. Alcatel employs approximately 190,000
people, primarily in Europe. On the basis of market capitalization at December
31, 1997, Alcatel is one of the largest French companies listed on the Paris
BOURSE. The address of Alcatel's principal executive office is 54, rue La
Boetie, 75008 Paris, France, and its telephone number is 33 (1) 40-76-10-10.
DSC
DSC 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. DSC 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.
DSC 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 1997, DSC had revenues of
approximately $1.6 billion and as of December 31, 1997, employed approximately
6,681 persons. DSC's principal executive offices are located at 1000 Coit Road,
Plano, Texas 75075, and its telephone number is (972) 519-3000.
RECENT EVENTS
On June 22, 1998, Alcatel and General Electric Company, plc ("GEC") of the
United Kingdom sold a portion of their interest in GEC Alsthom N.V. ("GEC
Alsthom") in a global initial public offering of shares. Alcatel and GEC retain
the rights to appoint an equal number of non-executive directors to the Board of
Directors of GEC Alsthom, and for the first 12 months following the transaction,
Alcatel and GEC will each retain an equal number of shares in GEC Alsthom. The
transaction reduced Alcatel's former 50% interest in GEC Alsthom to
approximately 24%. GEC Alsthom has been reorganized under a new French holding
company, named "Alstom", and remains headquartered in Paris. Alstom is listed on
the PREMIER MARCHE of the Paris BOURSE, the London Stock Exchange and the NYSE.
<PAGE>
On July 23, 1998, DSC announced its operating results for the second quarter
and six-month period ended June 30, 1998. Revenue for the 1998 second quarter
was $388.4 million compared to $382.9 million recorded in the second quarter of
1997. DSC incurred a net loss for the 1998 second quarter of $4.7 million, or
$0.04 per diluted share, compared to net income of $41.8 million, or $0.35 per
diluted share, for the 1997 second quarter. Second quarter 1998 results included
a pre-tax gain of $10.0 million (after-tax gain of $6.3 million or $0.05 per
diluted share) from the sale of DSC's remaining investment in Airspan
Communications Corporation. Net income for the 1997 second quarter included a
pre-tax gain of approximately $31.5 million (after-tax gain of $19.5 million or
$0.16 per diluted share) from the sale of stock received from a litigation
settlement. Excluding the effects of these special gains, the net loss for the
1998 second quarter was $11.0 million, or $0.09 per diluted share, compared to
net income of $22.3 million, or $0.19 per diluted share, for the 1997 second
quarter.
For the six months ended June 30, 1998 DSC recorded revenue of $703.3
million compared to $729.1 million for the same time period in 1997. The net
loss for the six months ended June 30, 1998 was $34.8 million, or $0.29 per
diluted share, compared to net income of $58.2 million, or $0.49 per diluted
share for the six months ended June 30, 1997. Excluding the effects of special
gains, the net loss for the six months ended June 30, 1998 was $41.1 million, or
$0.35 per diluted share, compared to net income of $36.2 million, or $0.31 per
diluted share, for the six months ended June 30, 1997.
THE SPECIAL MEETING
TIME AND PLACE; PURPOSE
A Special Meeting of the stockholders of DSC will be held at 10:00 a.m.
local time on August 27, 1998, at DSC Communications Corporation Building PB6,
3400 Plano Parkway, Plano, Texas 75075. At the Special Meeting, stockholders of
record of DSC will be asked to (i) consider and vote upon a proposal to adopt
the Merger Agreement and approve the Merger (the "Merger Proposal") and (ii)
transact such other business as may properly come before the Special Meeting.
See "THE SPECIAL MEETING--Time and Place; Purpose."
RECORD DATE; QUORUM
The Record Date established by the DSC Board for the Special Meeting is the
close of business on July 23, 1998. Only holders of record of Common Stock at
the close of business on the Record Date are entitled to notice of, and to vote
at, the Special Meeting. As of the Record Date, there were 119,067,374
outstanding shares of Common Stock, held by 4,188 holders of record. Each holder
of a share of Common Stock outstanding on the Record Date is entitled to cast
one vote per share on the Merger Proposal. The presence at the Special Meeting,
either in person or by proxy, of a majority of the issued and outstanding shares
of Common Stock entitled to vote will constitute a quorum at the Special
Meeting. See "THE SPECIAL MEETING--Record Date" and "THE SPECIAL
MEETING--Required Vote; Quorum."
REQUIRED VOTE
Approval of the Merger Proposal requires the affirmative vote of
stockholders holding a majority of shares of Common Stock outstanding and
entitled to vote thereon. All of the directors and officers of DSC holding
Common Stock are expected to vote their shares of Common Stock in favor of the
Merger Proposal. As of the Record Date, members of the DSC Board, executive
officers of DSC and their respective affiliates owned approximately 1.1% of the
shares of Common Stock entitled to vote on the Merger Proposal. See "THE SPECIAL
MEETING--Required Vote; Quorum."
2
<PAGE>
VOTING AND REVOCATION OF PROXIES
Shares of Common Stock represented by a properly executed Proxy received in
time for the Special Meeting will be voted in the manner specified in the Proxy.
Proxies that do not contain any instruction to vote for or against or to abstain
from voting on the Merger Proposal will be voted in favor of the Merger
Proposal. See "THE SPECIAL MEETING--Required Vote; Quorum." It is not expected
that any matter other than the Merger Proposal will be brought before the
stockholders at the Special Meeting. If, however, other matters are properly
presented, the persons appointed as proxies will vote in accordance with their
best judgment with respect to such matters, unless authority to do so is
withheld in the Proxy. Any person signing and mailing the enclosed proxy may
revoke it at any time before it is voted by giving written notice of revocation
to the Secretary of DSC, mailing to DSC, a later dated proxy which is received
by DSC prior to the Special Meeting or by voting in person at the Special
Meeting. See "THE SPECIAL MEETING--Proxies."
SOLICITATION OF PROXIES
The cost of soliciting Proxies will be borne by DSC. DSC may solicit Proxies
and DSC's directors, officers and employees may also solicit Proxies by
telephone, telegram or in person. These persons will receive no additional
compensation for their services. Arrangements will be made to furnish copies of
Proxy materials to fiduciaries, custodians and brokerage houses for forwarding
to beneficial owners of shares of Common Stock. Such persons will be reimbursed
for their reasonable out-of-pocket expense. Kissel-Blake, Inc. will assist in
the solicitation of Proxies by DSC for a fee of $11,000, plus reasonable out-
of-pocket expenses. See "THE SPECIAL MEETING--Proxies."
THE MERGER
EFFECTS OF THE MERGER
At the Effective Time, Newco will be merged with and into DSC, and DSC will
continue as the Surviving Corporation and become a wholly owned subsidiary of
Alcatel. Each share of Common Stock outstanding immediately prior to the
Effective Time will be converted into 0.815 (the "Exchange Ratio") of an ADS.
Outstanding options to purchase shares of Common Stock issued under DSC stock
option plans will generally be cancelled by DSC for cash in the case of
optionees who have agreed to such cancellation, or in the case of certain
optionees who have not agreed to such cancellation, may become options to
purchase ADSs. In addition, in connection with the Merger, the $400 million
principal amount of outstanding 7% Convertible Subordinated Notes, due August 1,
2004 of DSC (the "Convertible Notes"), currently convertible into Common Stock
will become convertible into ADSs. See "THE MERGER--Form of the Merger;
Consideration."
RECOMMENDATION OF THE DSC BOARD
The DSC Board has unanimously determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are fair to and in the
best interests of DSC stockholders. Accordingly, the DSC Board has unanimously
approved the Merger Proposal and recommends that DSC stockholders vote to
approve and adopt the Merger Proposal. The DSC Board has determined that the
restrictions on business combinations contained in Section 203 of the Delaware
General Corporation Law ("DGCL") are inapplicable to the Merger Agreement. See
"THE MERGER--Recommendation of the DSC Board; Reasons for the Merger." In
considering the DSC Board's recommendation, stockholders should be aware that
certain members of the DSC Board may be deemed to have interests in the Merger
that are in addition to or different from the interests of DSC stockholders
generally. See "THE MERGER--Interests of Certain Persons in the Merger."
3
<PAGE>
OPINION OF DSC'S FINANCIAL ADVISOR
DSC has retained Goldman, Sachs & Co. ("Goldman Sachs") in connection with
DSC's consideration of potential financial and strategic alternatives available
to it. At a meeting of the DSC Board on June 3, 1998, Goldman Sachs delivered
its oral opinion (which it subsequently confirmed in writing as of such date)
that the Exchange Ratio pursuant to the Merger Agreement was fair from a
financial point of view to holders of Common Stock. See "THE MERGER--Opinion of
DSC's Financial Advisor." A copy of the full text of the written opinion of
Goldman Sachs dated as of June 3, 1998, which sets forth the assumptions made,
matters considered and limitations on the review undertaken in connection with
such opinion, is attached hereto as Annex C and is incorporated herein by
reference. Stockholders of DSC are urged to read the opinion in its entirety.
CONDITIONS TO THE MERGER
The obligations of DSC and Alcatel to consummate the Merger are subject to
the satisfaction or waiver (where permissible) of various conditions, including,
among others, (i) approval of the Merger Proposal by the holders of record of
the outstanding shares of Common Stock, (ii) approval of the listing on the NYSE
of the ADSs to be issued in the Merger, (iii) the expiration or termination of
any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), and (iv) receipt by DSC and Alcatel of
opinions of their respective counsel to the effect that, for U.S. federal income
tax purposes, the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Conditions to the Consummation
of the Merger."
REGULATORY APPROVALS
Under the HSR Act and the rules that have been promulgated thereunder by the
Federal Trade Commission ("FTC"), the Merger may not be consummated unless
certain filings have been submitted to the Antitrust Division of the United
States Department of Justice (the "Antitrust Division") and the FTC and certain
waiting period requirements have been satisfied. On June 18, 1998, DSC and
Alcatel each submitted their respective HSR notifications to the FTC and the
Antitrust Division. On July 17, 1998, DSC and Alcatel each received a request
for additional information and other materials from the Antitrust Division.
The Merger also requires filings with, and the approval of, certain
governmental or regulatory bodies in the jurisdictions where each of DSC and
Alcatel operates. In addition, DSC and Alcatel have agreed to seek material
consents, approvals, orders and other governmental authorizations necessary or
advisable to complete or effect the Merger, and to use their reasonable best
efforts to resolve any objections to the Merger from any governmental body with
respect to any antitrust considerations. While DSC and Alcatel believe that they
will receive the requisite regulatory approvals for the Merger, there can be no
assurance as to the timing of such approvals or the ability of the companies to
obtain such approvals on satisfactory terms or otherwise. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--Regulatory Approvals" and "REGULATORY
APPROVALS."
4
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
For United States federal income tax purposes, the parties intend that the
Merger will qualify as a reorganization within the meaning of Section 368(a) of
the Code and that, in general, DSC stockholders will not recognize any gain or
loss pursuant to the Merger. DSC stockholders, however, are urged to consult
their own tax advisors. See "THE MERGER--Certain U.S. Federal Income Tax
Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting.
See "THE MERGER-- Accounting Treatment" and "ALCATEL AND DSC UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS UNDER U.S. GAAP."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated by DSC or Alcatel under certain
circumstances. Under certain of these circumstances, DSC may be required to
reimburse Alcatel for expenses incurred in connection with the Merger not in
excess of $10 million. If termination occurs under certain other circumstances,
DSC may be required to pay Alcatel a termination fee of $120 million and under
certain other circumstances, $60 million. DSC may terminate the Merger Agreement
if the average of the daily closing prices per ADS as reported on the NYSE
Composite Tape for the twenty consecutive full NYSE trading days immediately
preceding the second full NYSE trading day prior to the Special Meeting shall be
less than the Floor Price. "Floor Price" shall mean $37 unless the average of
the Standard & Poor's 500 Index for such 20 consecutive day period is less than
or equal to 92% of the Standard & Poor's 500 Index immediately following the
close of business on June 3, 1998, in which event the Floor Price shall be $35.
See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Termination and Fees."
APPRAISAL RIGHTS
Stockholders of DSC will not be entitled to appraisal rights under Section
262 of the DGCL or any other statute in connection with the Merger. See "THE
SPECIAL MEETING--Appraisal Rights", "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Appraisal Rights" and "COMPARISON OF STOCKHOLDER RIGHTS--Appraisal
Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Stockholders of DSC should be aware that certain directors and officers of
DSC have interests in the Merger that may be deemed to be different from or in
addition to their interests solely as stockholders of DSC. See "THE
MERGER--Interests of Certain Persons in the Merger."
COMPARATIVE RIGHTS OF STOCKHOLDERS OF ALCATEL AND DSC
As a result of the Merger, shares of Common Stock, which are issued by a
Delaware corporation, will be converted into the right to receive ADSs
representing shares of a corporation organized under the laws of the Republic of
France. There are differences between the rights of Alcatel stockholders and
holders of ADSs, and the rights of DSC stockholders. For a discussion of certain
differences between the rights of DSC stockholders and the rights of Alcatel
stockholders and holders of ADSs, see "COMPARISON OF STOCKHOLDER RIGHTS,"
"DESCRIPTION OF ALCATEL SHARES" and "DESCRIPTION OF ALCATEL AMERICAN DEPOSITARY
SHARES."
EXCHANGE PROCEDURES
If the Merger Proposal is approved and the Merger is consummated, promptly
after the Effective Time, a letter of transmittal will be mailed to each holder
of Common Stock. After receipt of such letter of
5
<PAGE>
transmittal, each holder of certificates formerly representing shares of Common
Stock should surrender such certificates to The Bank of New York (the "Exchange
Agent") in accordance with the instructions accompanying the letter of
transmittal, and each holder will receive in exchange thereof certificates of
American Depositary Receipts ("ADRs") representing whole ADSs and any cash which
may be payable in lieu of fractional interests. See "THE MERGER--Conversion of
Shares."
RIGHTS AGREEMENT AMENDMENT
In connection with the execution of the Merger Agreement, DSC and Harris
Trust Savings Bank (the "Rights Agent") have entered into an amendment, dated as
of June 3, 1998, to the Rights Agreement, dated as of April 25, 1996, between
DSC and the Rights Agent (the "Rights Agreement"). The amendment to the Rights
Agreement provides that neither the Merger Agreement nor the transactions
contemplated thereby will result in a distribution of the rights provided for
thereunder. See "THE MERGER-- Rights Agreement."
MERGER AGREEMENT AMENDMENT
On July 21, 1998, the First Amendment to the Merger Agreement was executed
and provides, among other things, that holders of options to purchase shares of
Common Stock under DSC stock option plans may cancel such options and receive a
cash payment in consideration for such cancellation. In addition, the amendment
eliminated certain provisions of the Merger Agreement relating to the parties'
obligations in seeking pooling-of-interest accounting treatment. See "THE
MERGER--Merger Agreement Amendment."
6
<PAGE>
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
ALCATEL
The following Selected Historical Financial Data for the periods indicated
have been derived from the audited consolidated financial statements of Alcatel.
Accounting practices used by Alcatel in preparing its financial statement
conform with generally accepted accounting principles in France ("French GAAP"),
but do not conform with accounting principles generally accepted in the United
States ("U.S. GAAP"). A description of these differences is set forth in Notes
30 and 31 of the Alcatel "Notes to Consolidated Financial Statements," included
elsewhere herein. The balance sheet data as of December 31, 1995, 1996 and 1997,
and the income statement data for each of the years in the three-year period
ended December 31, 1997 have been derived from Alcatel's audited consolidated
financial statements for such years and should be read in conjunction with such
consolidated financial statements and the notes thereto that are contained
herein. See "INDEX TO FINANCIAL STATEMENTS." The balance sheet data as of
December 31, 1993 and 1994, and the income statement data for the years ended
December 31, 1993 and 1994, have been derived from Alcatel's audited
consolidated financial statements, which are not included or incorporated in
this Proxy Statement/Prospectus.
(IN MILLIONS, EXCEPT PER ALCATEL SHARE AND PER ADS DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997(1) 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
AMOUNTS IN ACCORDANCE WITH FRENCH GAAP
Net sales............................................. $ 30,880 FF185,868 FF162,102 FF160,416 FF167,643 FF156,334
Income from operations................................ 1,329 8,000 2,903 634 8,042 11,559
Restructuring costs................................... (202) (1,218) (466) (13,422) (2,898) (2,488)
Amortization of goodwill.............................. (388) (2,338) (2,222) (13,464) (2,557) (2,053)
Other revenue (2)..................................... 329 1,980 3,190 1,757 759 874
Gains on disposal of Alcatel
Shares owned by group subsidiaries (after tax)........ 40 238 -- -- 5 75
Net income (loss)..................................... 775 4,665 2,725 (25,583) 3,620 7,062
Income (loss) per Alcatel Share:
Net income (loss)--Basic (3)........................ 4.94 29.73 17.48 (177.79) 25.74 49.61
Net income (loss)--Diluted (4)...................... 4.84 29.13 17.45 (177.79) 25.74 48.88
Dividends per Alcatel Share (5)....................... 1.91 11.50 10.00 8.00 15.00 15.00
Dividends per ADS (5) (6)............................. 0.38 2.30 2.00 1.60 3.00 3.00
AMOUNTS IN ACCORDANCE WITH U.S. GAAP (7)
Net sales............................................. $ 30,880 FF185,868 FF162,636 FF160,525 FF167,496 FF156,307
Net income (loss)..................................... 486 2,924 (1,198) (21,352) 4,751 7,796
Basic income (loss) per Alcatel Share:
Income (loss) before extraordinary items............ 3.10 18.63 (7.68) (148.39) 35.54 49.15
Net income (loss)................................... 3.10 18.63 (7.68) (148.39) 33.78 54.76
Diluted income (loss) per Alcatel Share : (4)
Income (loss) before extraordinary items............ 3.06 18.42 -- -- 35.04 48.46
Net income (loss)................................... 3.06 18.42 -- -- 33.42 53.75
Basic income (loss) per ADS: (6)
Income (loss) before extraordinary items............ 0.62 3.73 (1.54) (29.68) 7.11 9.83
Net income (loss)................................... 0.62 3.73 (1.54) (29.68) 6.76 10.95
Diluted income (loss) per ADS :
Income (loss) before extraordinary items............ 0.61 3.68 -- -- 7.01 9.69
Net income (loss)................................... 0.61 3.68 -- -- 6.68 10.75
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997(1) 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT PERIOD END):
AMOUNTS IN ACCORDANCE WITH FRENCH GAAP
Total assets.......................................... $ 41,830 FF251,772 FF248,265 FF255,675 FF273,942 FF260,071
Short-term investments and cash equivalents........... 4,622 27,819 29,331 34,940 39,558 41,782
Short-term debt....................................... 2,958 17,805 19,055 26,804 20,294 24,218
Long-term debt........................................ 3,641 21,916 23,422 28,125 31,377 24,813
Minority interests.................................... 295 1,777 1,488 3,213 5,860 5,116
Shareholders' equity.................................. 7,303 43,954 39,170 32,993 59,784 57,884
AMOUNTS IN ACCORDANCE WITH U.S. GAAP (7)
Shareholders' equity.................................. $ 9,206 FF55,413 FF51,788 FF49,525 FF72,712 FF68,653
Total assets (8)...................................... 44,286 266,559 269,482 274,889 293,002 273,421
Long-term debt........................................ 3,669 22,084 24,500 28,264 31,518 24,939
</TABLE>
- ------------------------
(1) French franc amounts have been translated into U.S. dollars solely for the
convenience of the reader at the Noon Buying Rate of FF 6.019 per $1.00 on
December 31, 1997.
(2) Other revenue consists primarily of net capital gains on disposal of fixed
assets.
(3) Based on the weighted average number of Alcatel Shares issued after
deduction of the weighted average number of Alcatel Shares owned by
consolidated subsidiaries, without adjustment for any share equivalents:
156,937,952 in 1997, 155,902,458 in 1996, 143,890,505 in 1995, 140,665,635
in 1994 and 142,357,809 in 1993.
(4) Diluted earnings per share take into account share equivalents having a
dilutive effect after deduction of the weighted average number of share
equivalents owned by group subsidiaries. Net income is adjusted for after
tax interest expense of related convertible bonds. The dilutive effect of
stock option plans is calculated using the treasury stock method. The number
of shares taken into account is as follows:
French GAAP: 171,489,939 in 1997, 157,431,310 in 1996, 143,890,505 in 1995,
140,665,635 in 1994 and 151,046,630 in 1993. U.S. GAAP: 159,244,088 in 1997,
153,152,678 in 1994 and 151,046,630 in 1993. Not applicable in 1996 and 1995
due to loss position.
(5) Year to which dividend relates. Under French Corporation Law, payment of
annual dividends must be made within nine months following the end of the
fiscal year to which they relate.
(6) Adjusted for the one-to-five ratio of Alcatel Shares to ADSs. Alcatel first
issued Alcatel Shares represented by ADSs in 1990.
(7) For information concerning the differences between French GAAP and U.S.
GAAP, see Notes 30 and 31 of the Alcatel "Notes to Consolidated Financial
Statements," included elsewhere herein.
(8) Advance payments received from customers are not deducted from the amount of
total assets. See Note 30(k) of the Alcatel "Notes to Consolidated Financial
Statements" included elsewhere herein.
8
<PAGE>
DSC
The following Selected Historical Financial Data for the periods indicated
have been derived from the consolidated financial statements of DSC. The balance
sheet data as of December 31, 1996 and 1997, and the statement of operations
data for each of the years in the three-year period ended December 31, 1997 have
been derived from DSC's audited consolidated financial statements for such years
and should be read in conjunction with such consolidated financial statements
and the notes thereto that are contained herein. See "INDEX TO FINANCIAL
STATEMENTS." The balance sheet data as of December 31, 1993, 1994 and 1995, and
the statement of operations data for the years ended December 31, 1993 and 1994,
have been derived from DSC's audited consolidated financial statements, which
are not included or incorporated in this Proxy Statement/Prospectus. The
selected historical financial data for the three months ended March 31, 1997 and
1998 have been derived from DSC's unaudited condensed financial statements
incorporated herein by reference and reflect, in the opinion of management of
DSC, all adjustments necessary to present fairly DSC's financial position and
results of operations. Such adjustments are of a recurring nature unless
otherwise disclosed therein. Interim results are not necessarily indicative of
results which may be expected for any other period or the full fiscal year.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997(1) 1996(2) 1995 1994 1993 1998 1997
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $1,575,479 $1,380,891 $1,422,018 $1,003,125 $ 730,774 $ 314,838 $ 346,203
Gross profit................................. 662,272 455,144 685,899 490,392 317,969 91,014 139,275
Operating income (loss)...................... 10,033 (12,043) 279,418 213,999 110,176 (41,272) 23,971
Net income (loss)............................ $ 48,863 $ (7,555) $ 192,680 $ 162,626 $ 81,660 $ (30,104) $ 16,360
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic income (loss) per share(3)............. $ 0.42 $ (0.07) $ 1.68 $ 1.45 $ 0.83 $ (0.25) $ 0.14
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted income (loss) per share(3)........... $ 0.41 $ (0.07) $ 1.63 $ 1.39 $ 0.77 $ (0.25) $ 0.14
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Average shares used in per share computation:
Basic........................................ 117,358 116,108 114,557 111,906 98,884 118,212 117,020
Diluted...................................... 119,496 116,108 118,214 116,891 105,851 118,212 119,075
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............ $ 617,842 $ 334,039 $ 569,264 $ 271,322 $ 313,808 $ 564,687 $ 377,942
Working capital........................... 1,122,713 769,956 738,965 393,034 406,752 1,098,917 784,538
Property and equipment, net............... 443,610 403,596 370,522 282,963 179,783 449,064 407,879
Total assets.............................. 2,439,515 1,925,655 1,865,275 1,268,536 900,417 2,380,465 1,957,374
Long-term debt, including current
maturities(4)........................... 661,808 307,674 243,539 42,578 70,412 658,491 298,917
Shareholders' equity...................... 1,215,820 1,147,636 1,124,079 851,100 617,800 1,189,355 1,172,572
</TABLE>
- ------------------------
(1) Operating results for 1997 included a $135.0 million write-off of in-process
research and development related to the December 1997 acquisition of Celcore
Inc. for which there was no tax benefit, an asset write-down of $22.0
million in connection with the January 1998 disposition of DSC's fixed
wireless local loop business and net gains of $161.5 million from litigation
settlements.
(2) For the year ended December 31, 1996, DSC recorded non-cash special charges
totaling $96.0 million ($82.5 million reduced gross profit and $13.5 million
was charged to operating costs and expenses) related primarily to a
reduction in the carrying value of certain assets for several of DSC's
products.
(3) In April 1994, the DSC Board declared a two-for-one stock split, effected in
the form of a 100% stock dividend, for shareholders of record on May 11,
1994. All per share amounts prior to 1994 have been restated to
retroactively reflect the stock split.
(4) Long-term debt, including current maturities included $400 million of 7%
convertible subordinated notes issued in August 1997. Net proceeds were
invested in cash equivalents and marketable securities.
9
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL DATA UNDER U.S. GAAP
The following Selected Unaudited Pro Forma Combined Condensed Income
Statement Data combines Alcatel's and DSC's historical consolidated income
statement data for the year ended December 31, 1997 giving effect to the Merger
as if it had occurred on January 1, 1997. The following Selected Unaudited Pro
Forma Combined Condensed Balance Sheet Data combines Alcatel's and DSC's
historical consolidated balance sheet data on December 31, 1997, giving effect
to the Merger as if it had occurred on December 31, 1997. The Unaudited Pro
Forma Combined Condensed Financial Information is presented for informational
purposes only and does not purport to be indicative of the financial position or
results of operations as they would have been if Alcatel and DSC had been a
single entity during the period presented, nor is it necessarily indicative of
the results of operations which may occur in the future. The amount of any
anticipated efficiencies from the consolidation of Alcatel and DSC is not fully
determinable and the potential effect of such efficiencies has not been included
in the pro forma amounts presented below. See "ALCATEL AND DSC UNAUDITED PRO
FORMA COMBINED FINANCIAL STATEMENTS UNDER U.S. GAAP" and accompanying notes
thereto.
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------
<S> <C> <C>
FF USD
--------- ---------
UNAUDITED PRO FORMA COMBINED CONDENSED
INCOME STATEMENT DATA:
Revenue............................................................................... 140,770 23,388
Gross profit.......................................................................... 37,169 6,176
Operating income...................................................................... 3,037 506
Net income............................................................................ 2,685 449
Basic income per share................................................................ 15.26 2.55
Diluted income per share.............................................................. 15.13 2.57
Average shares used in per share computation:
Basic............................................................................... 176 176
Diluted............................................................................. 178 178
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
--------------------
<S> <C> <C>
FF USD
--------- ---------
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET DATA:
Cash and marketable securities........................................................ 46,876 7,788
Working capital....................................................................... 30,552 5,076
Property and equipment, net........................................................... 23,922 3,974
Total assets.......................................................................... 229,456 38,122
Short-term and long-term debt......................................................... 49,081 8,154
Shareholders' equity.................................................................. 80,473 13,369
</TABLE>
See "Alcatel and DSC Unaudited Pro Forma Combined Financial Statements under
U.S. GAAP."
10
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth certain historical per share data of Alcatel
and DSC and combined per share data on an unaudited pro forma basis after giving
effect to the Merger based on the purchase method of accounting assuming that
0.815 of an ADS is issued in exchange for each share of Common Stock. This data
should be read in conjunction with the selected historical financial data and
the historical financial statements of Alcatel and DSC and the notes thereto
that are included elsewhere herein. The Selected Unaudited Pro Forma Combined
Financial Information of Alcatel and DSC is derived from the Unaudited Pro Forma
Combined Financial Statements and should be read in conjunction with such pro
forma statements and notes thereto included elsewhere herein. See "ALCATEL AND
DSC UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS UNDER U.S. GAAP." The pro
forma information is presented for informational purposes only and does not
purport to be indicative of the financial position or results of operations as
they would have been if Alcatel and DSC had been a single entity during the
periods presented nor is it necessarily indicative of the results of operations
which may occur in the future. The amount of any anticipated efficiencies from
the consolidation of Alcatel and DSC is not fully determinable and the potential
effect of such efficiencies has not been included in the pro forma amounts
presented below.
<TABLE>
<CAPTION>
ALCATEL ALCATEL COMBINED COMBINED
HISTORICAL PRO-FORMA PRO-FORMA PRO-FORMA
(FF) (FF)(3) (FF) (USD) (1)
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
U.S. GAAP
Basic earnings per share
Net income............................................... 18.63 18.20 15.26 2.55
Diluted earnings per share
Net income............................................... 18.42 17.97 15.13 2.57
Cash dividends........................................... 11.50 11.50 11.50 1.91
Book value (2)........................................... 348.51 445.04 452.10 75.11
</TABLE>
- ------------------------
(1) French franc amounts have been translated into U.S. dollars solely for
convenience of the reader at the Noon Buying Rate of FF 6.019 per $1.00 on
December 31, 1997.
(2) Computed by dividing total stockholders' equity by the number of shares of
common stock outstanding at the end of the periods on an historical and pro
forma combined basis, as applicable.
(3) Alcatel pro forma per share data reflects the sale of a portion of GEC
Alsthom effective June 22, 1998. See "Notes to Unaudited Pro Forma Combined
Financial Statements of Alcatel and DSC."
11
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDENDS
The following table sets forth, for the periods indicated, the high and low
closing prices of Alcatel ADSs and DSC Common Stock per share, each as reported
on the NYSE Composite Tape and NNM, respectively, and dividends declared for the
same periods.
<TABLE>
<CAPTION>
ALCATEL DSC DIVIDENDS PAID
ADSS COMMON STOCK PER ADS/SHARE
------------------ ------------------ ----------------------------
HIGH LOW HIGH LOW ALCATEL(1)(2) DSC(3)
------- ------- ------- ------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995
First Quarter......................................... $18 3/8 $15 3/8 $39 $31 5/8 $ 0 $ 0
Second Quarter........................................ 19 3/4 16 5/8 46 1/2 31 3/4 0 0
Third Quarter......................................... 22 1/8 16 3/4 63 45 5/8 .49 0
Fourth Quarter........................................ 18 5/8 16 3/8 58 3/4 31 0 0
1996
First Quarter......................................... $18 5/8 $16 7/8 $37 1/8 $22 7/8 $ 0 $ 0
Second Quarter........................................ 19 1/8 16 7/8 35 1/4 24 3/8 0 0
Third Quarter......................................... 17 7/8 14 1/2 32 3/4 25 1/8 .51 0
Fourth Quarter........................................ 18 1/2 15 7/8 23 1/8 12 7/8 0 0
1997
First Quarter......................................... $23 3/4 $15 3/4 $24 1/4 $18 $ 0 $ 0
Second Quarter........................................ 25 3/4 21 3/8 26 7/16 18 5/8 0 0
Third Quarter......................................... 28 1/4 24 3/8 32 1/8 21 11/16 .57 0
Fourth Quarter........................................ 27 15/16 22 3/4 30 11/16 20 23/32 0 0
1998
First Quarter......................................... $38 $24 $26 1/8 $16 1/2 $ 0 $ 0
Second Quarter........................................ 43 3/4 35 30 16 7/8 0 0
Third Quarter (through July 27, 1998)................. 47 1/16 41 35 1/2 30 3/8 .38 0
</TABLE>
- ------------------------
(1) Payment equivalent to the French AVOIR FISCAL or tax credit, less applicable
French withholding tax, will be made by the French State only after receipt
of a claim for such payment and, in any event, not before January 15 of the
year following the calendar year in which the dividend is paid. Certain U.S.
tax-exempt holders of ADRs will not be entitled to full payments of AVOIR
FISCAL.
(2) French franc amounts have been translated into dollars solely for
convenience of the reader at the Noon Buying Rates on the respective
dividend payment dates, or on the following business day if such date was
not a business day in the United States. For the 1997 dividend, the rate
used was the Noon Buying Rate of FF 6.0190 per $1.00 on December 31, 1997.
AVOIR FISCAL amounts have been converted into dollars at the Noon Buying
Rates on such dates although such amounts are paid subsequent to such
payment dates. The Noon Buying Rate may differ from the rate that may be
used by the Depositary to convert francs to dollars for purposes of making
payments to holders of ADRs.
(3) Since its inception, DSC has not declared or paid a cash dividend.
Set forth below is a table containing the closing price per ADS and the
closing price per share of Common Stock, each as reported on the NYSE Composite
Tape and NNM, respectively, and the "equivalent per share price" (as defined) of
Common Stock as of: (i) June 3, 1998, the date preceding public announcement of
the Merger; and (ii) July 27, 1998, the last practicable trading day prior to
the effective date of the Registration Statement of which this Proxy
Statement/Prospectus forms a part. The "equivalent per share price" of Common
Stock as of any date equals the closing price per share of ADRs on such date
multiplied by the Exchange Ratio.
<TABLE>
<CAPTION>
DSC
ALCATEL COMMON EQUIVALENT PER
MARKET PRICE PER SHARE AS OF ADSS STOCK SHARE PRICE
- ------------------------------------------------------------------- ------- ------- -------------------
<S> <C> <C> <C>
June 3, 1998....................................................... $42 5/16 $18 13/16 $ 34.48
July 27, 1998...................................................... 43 33 13/32 35.05
</TABLE>
12
<PAGE>
Because the Exchange Ratio is fixed, a change in the market price of ADSs
before the Effective Time will affect the market value of the ADSs to be
received in the Merger in exchange for the Common Stock. THERE CAN BE NO
ASSURANCE AS TO THE MARKET PRICE OF THE ADSS AT ANY TIME BEFORE, AT OR AFTER THE
EFFECTIVE TIME. DSC STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR BOTH ADSS AND COMMON STOCK.
Following the Merger, the Common Stock will no longer be listed on the NNM.
The ADSs to be issued in connection with the Merger are expected to be listed on
the NYSE. See "THE MERGER-- Stock Exchange Listing."
13
<PAGE>
RISK FACTORS
Holders of Common Stock should carefully consider the following factors in
connection with their consideration of the Merger. See also "FORWARD-LOOKING
STATEMENTS" elsewhere in this Proxy Statement/Prospectus.
FIXED EXCHANGE RATIO DESPITE POSSIBLE CHANGE IN STOCK PRICES
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio.
Accordingly, the Exchange Ratio will not be adjusted in the event of an increase
or decrease in the price of either ADSs or Common Stock. The prices of either
ADSs or Common Stock at the Effective Time may vary from their prices at the
date of this Proxy Statement/Prospectus and at the date of the Special Meeting,
possibly by a material amount. Such variations may be the result of changes in
the business, operations or prospects of Alcatel or DSC, market assessments of
the likelihood that the Merger will be consummated and the timing thereof,
regulatory considerations, general market and economic conditions, factors
affecting the telecommunications industry in general and other factors. Because
the Effective Time may occur at a date later than the Special Meeting, there can
be no assurance that the price of ADSs or Common Stock on the date of the
Special Meeting will be indicative of their price at the Effective Time. There
can be no assurance that the market price of ADSs on and after the Effective
Time will not be lower than such prices. Stockholders of DSC are urged to obtain
current market quotations. See "COMPARATIVE STOCK PRICES AND DIVIDENDS." DSC may
terminate the Merger Agreement if the average of the daily closing prices per
ADS as reported on the NYSE Composite Tape for the twenty consecutive full NYSE
trading days immediately preceding the second full NYSE trading day prior to the
Special Meeting shall be less than the Floor Price (as defined herein).
INTEGRATION OF DSC
Alcatel has entered into the Merger Agreement with the expectation that the
Merger would result in certain benefits to Alcatel. Achieving the benefits of
the Merger will depend in part upon the integration of the businesses of DSC
with those of Alcatel, including Alcatel Network Systems, Inc. ("ANS"),
Alcatel's major North American subsidiary, in an efficient manner, and there can
be no assurance that this will occur. This integration will require substantial
attention from, and pose challenges to, management. The integration process
could cause the interruption of, or a disruption in, the companies' businesses,
which could have a material adverse effect on their combined operations. There
can be no assurance that the combined company will realize any of the
anticipated benefits of the Merger.
TELECOMMUNICATIONS INDUSTRY AND TECHNOLOGY; REGULATION
The telecommunications industry is subject to rapid and significant changes
in technology. While Alcatel does not believe that these changes will materially
affect its ability to acquire necessary technologies, the effect of
technological changes, including changes relating to emerging wireline and
wireless transmission and switching technologies, on the businesses of Alcatel
cannot be predicted. The success of Alcatel and ANS in marketing its products to
business and government users requires that it provide superior reliability,
capacity and security via its technological infrastructure. In addition, Alcatel
cannot predict the effect of recent merger and acquisition transactions in the
telecommunications industry.
Alcatel derives substantial revenues by providing international
telecommunications equipment and other services to customers headquartered in
the United States and around the world. Such operations are subject to certain
risks such as changes in government regulations and telecommunications
standards, licensing requirements, tariffs or taxes and other trade barriers and
political and economic instability. In addition, such revenues and cost of sales
are sensitive to changes in international settlement rates. Operations or
investment may be adversely affected by local political and economic
developments, exchange controls, currency fluctuations, royalty and tax
increases and other laws or policies. There can be
14
<PAGE>
no assurance that laws or administration practice relating to taxation, foreign
exchange or other matters of countries within which Alcatel operates or will
operate will not change. Any such change could have a material adverse effect on
the business, financial condition and results of operations of Alcatel.
COMPETITION
Alcatel operates in a market which is highly competitive. Alcatel's
competitors include other manufacturers and distributors as well as a large
number of suppliers that develop their own products for sale directly to
customers. Some of these competitors are larger and may have greater resources
than Alcatel. Most of Alcatel's arrangements with large customers do not provide
Alcatel with guarantees that customer purchase commitments will be maintained at
any level. In addition, technological development efforts by certain of
Alcatel's customers of their own products, manufacture of products similar to
those of Alcatel by competitors or further consolidations in the
telecommunications industry involving Alcatel's customers could lead such
customers to reduce or cease their use of Alcatel's products and services which
could have a material adverse effect on Alcatel and the value of the Alcatel
Shares and its other securities.
YEAR 2000 RISKS
Certain of Alcatel's older computer programs identify years with two digits
instead of four. This is likely to cause problems because the programs may
recognize the year 2000 as the year 1900. These problems (the "Year 2000
Problems") could result in a system failure or miscalculations disrupting
operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. Updating the current
software to be year 2000-compliant is scheduled to be completed prior to any
anticipated impact on operating systems. Although Alcatel does not expect Year
2000 Problems to have a material adverse effect on its internal operations, it
is possible that Year 2000 Problems could have a material adverse effect not
only directly on Alcatel, but also indirectly through an effect on (i) Alcatel's
resellers and distributors and their ability to service Alcatel, to accurately
invoice for services rendered and to accurately process payments received; and
(ii) Alcatel's customers and their ability to continue to utilize Alcatel's
services and products, to collect from their customers and to pay Alcatel for
services received. The cumulative result of such problems, if they occur, could
have a material adverse effect on Alcatel and the value of the Alcatel Shares.
INTERNATIONAL OPERATIONS
Alcatel conducts international operations through a variety of wholly owned
subsidiaries, majority-owned subsidiaries, joint ventures, equity interests,
agents and independent contractors located in North and South America, Europe,
the Far East, the Middle East and Africa. Alcatel is also exploring the
possibility of expansion into other international markets. Any international
operations established by Alcatel will be subject to risks similar to those
affecting its North American operations in addition to other potential risks,
including lack of complete operating control, lack of local business experience,
foreign currency fluctuations, difficulty in enforcing intellectual property
rights, language and other cultural barriers and political and economic
instability.
EXCHANGE RATE FLUCTUATIONS
Alcatel's revenues and expenses are incurred in several international
currencies, since it is headquartered in France and owns properties and conducts
operations in non-U.S. facilities throughout the world. Alcatel's financial
statements are denominated in French francs, and, consequently, fluctuations in
currency exchange rates could have an adverse effect on Alcatel's reported
results.
15
<PAGE>
THE COMPANIES
ALCATEL
Alcatel Alsthom, a French company headquartered in Paris, together with its
consolidated subsidiaries and associated companies, is a world leader in
providing equipment and systems for the telecommunications, energy and transport
sectors. In 1997, Alcatel had consolidated net sales of FF 185.9 billion
(approximately $31 billion). While Alcatel has operations in over 100 countries,
it has a particularly strong market base in Europe, where it currently generates
two-thirds of its consolidated net sales. Alcatel employs approximately 190,000
people, primarily in Europe. On the basis of market capitalization at December
31, 1997, Alcatel is one of the largest French companies listed on the Paris
BOURSE.
Alcatel was established in 1898 as a publicly-owned company, under its
former name Compagnie Generale Electricite--CGE. Alcatel was nationalized by the
French government in 1982 and was then privatized in May 1987. On January 1,
1991, Alcatel changed its official name to Alcatel Alsthom Compagnie Generale
Electricite, or Alcatel Alsthom. In connection with the proposed sale of a
portion of Alcatel's Energy and Transport segment operations conducted through
GEC Alsthom, a 50/50 joint venture between Alcatel and the power systems
division of GEC, the stockholders at an extraordinary general meeting of
stockholders decided on June 18, 1998 to change the name of the corporation to
Alcatel as of September 1, 1998.
Alcatel's operations are organized by product lines into four principal
segments, each acting as a separate worldwide profit center with responsibility
for strategy, research and development, manufacturing and marketing:
- The Telecom segment designs, produces, sells and services
telecommunications equipment and systems for public network, business and
residential use. Telecom segment operations, conducted through Compagnie
Financiere Alcatel ("Alcatel Telecom"), accounted for 44.3% of Alcatel's
1997 consolidated net sales.
- The Cables and Components segment manufactures cables for both
telecommunications and power transmission applications and batteries for
telecommunications, industrial and advanced technology applications.
Cables and Components segment operations, conducted through Alcatel Cable,
accounted for 22.8% of Alcatel's 1997 consolidated net sales.
- The Energy and Transport segment manufactures equipment for power
generation, transmission and distribution and railway transport. Energy
and Transport segment operations, conducted through GEC Alsthom, accounted
for 18.4% of Alcatel's 1997 consolidated net sales.
- The Engineering and Systems segment provides electrical contracting,
industrial control systems and technical assistance for telecommunications
turnkey projects internationally. Engineering and Systems segment
operations, conducted primarily through Cegelec and Alcatel Contracting,
accounted for 14.1% of Alcatel's 1997 consolidated net sales. In May 1998,
Alcatel Alsthom sold substantially all of the Cegelec businesses to GEC
Alsthom.
Alcatel is also engaged in certain other activities, principally
administrative and service-oriented activities supplying support to the parent
company and to other parties, which are grouped under "Others" and accounted for
0.4% of Alcatel's 1997 consolidated net sales. Alcatel also owns approximately
44% of Framatome, a manufacturer of equipment for nuclear power stations and
specialized electronic connectors, in which French state-owned entities hold the
majority interest. Since July 1, 1990, Framatome has been accounted for under
the equity method.
On June 22, 1998, Alcatel and GEC of the United Kingdom sold a portion of
their interest in GEC Alsthom in a global initial public offering of shares.
Alcatel and GEC retain the rights to appoint an equal number of non-executive
directors to the Board of Directors of GEC Alsthom and, for the first twelve
months following the transaction, Alcatel and GEC will each retain an equal
number of shares in GEC Alsthom. The transaction reduced Alcatel's former 50%
interest in GEC Alsthom to approximately 24%.
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GEC Alsthom has been reorganized under a new French holding company, named
"Alstom", and remains headquartered in Paris. Alstom is listed on the PREMIER
MARCHE of the Paris BOURSE, the London Stock Exchange, and the NYSE.
The address of Alcatel's principal executive office is 54, rue La Boetie,
75008 Paris, France, and its telephone number is 33 (1) 40-76-10-10.
DSC
DSC 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. DSC 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.
DSC develops such systems to meet U.S. and international telecommunications
standards and the specific requirements of the operating companies of the RHCs,
independent telephone companies, long-distance carriers, private networks and
companies operating public and private communications networks in other
countries. In 1997, DSC had revenues of approximately $1.6 billion and as of
December 31, 1997 employed 6,681 persons.
DSC 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. DSC is also a major
manufacturer of high-capacity cellular switches for Motorola, Inc., a leading
supplier of wireless communication systems throughout the world.
On July 23, 1998, DSC announced its operating results for the second quarter
and six-month period ended June 30, 1998. Revenue for the 1998 second quarter
was $388.4 million compared to $382.9 million recorded in the second quarter of
1997. DSC incurred a net loss for the 1998 second quarter of $4.7 million, or
$0.04 per diluted share, compared to net income of $41.8 million, or $0.35 per
diluted share, for the 1997 second quarter. Second quarter 1998 results included
a pre-tax gain of $10.0 million (after-tax gain of $6.3 million or $0.05 per
diluted share) from the sale of DSC's remaining investment in Airspan
Communications Corporation. Net income for the 1997 second quarter included a
pre-tax gain of approximately $31.5 million (after-tax gain of $19.5 million or
$0.16 per diluted share) from the sale of stock received from a litigation
settlement. Excluding the effects of these special gains, the net loss for the
1998 second quarter was $11.0 million, or $0.09 per diluted share, compared to
net income of $22.3 million, or $0.19 per diluted share, for the 1997 second
quarter.
For the six months ended June 30, 1998 DSC recorded revenue of $703.3
million compared to $729.1 million for the same time period in 1997. The net
loss for the six months ended June 30, 1998 was $34.8 million, or $0.29 per
diluted share, compared to net income of $58.2 million, or $0.49 per diluted
share for the six months ended June 30, 1997. Excluding the effects of special
gains, the net loss for the six months ended June 30, 1998 was $41.1 million, or
$0.35 per diluted share, compared to net income of $36.2 million, or $0.31 per
diluted share, for the six months ended June 30, 1997.
DSC's executive offices are located at 1000 Coit Road, Plano, Texas 75075.
Its telephone number is (972) 519-3000.
NEWCO
Newco was incorporated in the State of Delaware in May 1998 for the purpose
of consummating the Merger. Newco has limited assets, has no operations and has
not carried on any activities other than those which are related to its
formation and its execution of the Merger Agreement.
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THE SPECIAL MEETING
TIME AND PLACE; PURPOSE
The enclosed Proxy is solicited by and on behalf of the DSC Board for use at
the Special Meeting which will be held at 10:00 a.m., local time, on August 27,
1998 at DSC Communications Corporation Building PB6, 3400 Plano Parkway, Plano,
Texas 75075. At the Special Meeting, stockholders of record of DSC will be asked
to (i) consider and vote upon the Merger Proposal and (ii) transact such other
business as may properly come before the Special Meeting.
RECORD DATE
The DSC Board has fixed the close of business on July 23, 1998 as the Record
Date for the determination of stockholders entitled to notice of, and to vote
at, the Special Meeting. Only holders of record of Common Stock at the close of
business on the Record Date are entitled to notice of and to vote at the Special
Meeting. As of the Record Date, there were 119,067,374 outstanding shares of
Common Stock held by 4,188 holders of record. As of the Record Date, directors
and executive officers of DSC and their affiliates owned 1,324,308 shares of
Common Stock (approximately 1.1% of the Common Stock outstanding). DSC expects
that all of such directors and executive officers will vote their shares in
favor of the Merger Proposal.
PROXIES
Shares of Common Stock represented by properly executed Proxies received in
time for the Special Meeting will be voted at the Special Meeting in the manner
specified on the Proxy. Proxies that are properly executed but do not contain
instructions will be voted "FOR" approval and adoption of the Merger Proposal.
It is not expected that any matter other than approval and adoption of the
Merger Proposal will be brought before the Special Meeting, but, if other
matters are properly presented, the persons named in such Proxy will have
authority, unless authority to do so is withheld in the Proxy, to vote in
accordance with their judgment on any other matter, including without
limitation, any proposal to adjourn or postpone the Special Meeting or otherwise
concerning the conduct of the Special Meeting. A stockholder may revoke a Proxy
at any time prior to its exercise by (i) delivering, prior to the Special
Meeting, to the Secretary, DSC Communications Corporation, 1000 Coit Road,
Plano, Texas 75075, a written notice of revocation bearing a later date or time
than the Proxy; (ii) delivering to the Secretary of DSC a duly executed Proxy
bearing a later date or time than the revoked Proxy; or (iii) attending the
Special Meeting and voting in person. Attendance at the Special Meeting will not
by itself constitute revocation of a Proxy.
DSC will bear the cost of the solicitation of Proxies from its stockholders
and the cost of printing and mailing this Proxy Statement/Prospectus. In
addition to solicitation by mail, the directors, officers and employees of DSC
and its subsidiaries may solicit Proxies from DSC stockholders in person or by
telephone, telegram or electronically. Such directors, officers and employees
will not be additionally compensated for such solicitation but may be reimbursed
for out-of-pocket expenses in connection therewith. Arrangements will also be
made with brokerage houses and other custodians, nominees and fiduciaries for
the forwarding of solicitation materials to the beneficial owners of shares held
of record by such persons. DSC will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in connection therewith.
Kissel-Blake, Inc. will assist in the solicitation of Proxies by DSC for a
fee of $11,000 plus reasonable out-of-pocket expenses.
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REQUIRED VOTE; QUORUM
All voting rights at the Special Meeting are vested exclusively in the
holders of Common Stock. Each holder of a share of Common Stock outstanding on
the Record Date is entitled to cast one vote per share of Common Stock on any
matter which may properly come before the Special Meeting. The affirmative vote
of stockholders holding a majority of the shares of Common Stock outstanding and
entitled to vote at the Special Meeting is required to approve the Merger
Proposal. Brokers and nominees are precluded from exercising their voting
discretion on the Merger Proposal and, for this reason, absent specific
instructions from the beneficial owner of the shares, are not permitted to vote
such shares thereon. Because the affirmative vote of stockholders holding a
majority of the outstanding shares of Common Stock on the Record Date is
required for approval of the Merger Proposal, an abstention or broker non-vote
will have the effect of a vote against the approval and adoption of the Merger
Proposal. THE DSC BOARD RECOMMENDS THAT THE DSC STOCKHOLDERS VOTE FOR APPROVAL
AND ADOPTION OF THE MERGER PROPOSAL.
The DGCL, the Certificate of Incorporation of DSC, the Bylaws of DSC and the
Exchange Act contain requirements governing the actions of DSC at the Special
Meeting. Holders of a majority of the shares of Common Stock outstanding on the
Record Date must be present in person or by proxy at the Special Meeting to
constitute a quorum. Abstentions and broker non-votes are counted as present or
represented for purposes of determining a quorum for the Special Meeting.
APPRAISAL RIGHTS
Under the DGCL, the DSC stockholders are not entitled to appraisal rights in
the event the Merger is consummated.
AVAILABILITY OF INDEPENDENT ACCOUNTANTS
Representatives of Ernst & Young LLP, independent auditors of DSC, will be
present at the Special Meeting, will have the opportunity to make a statement
should they desire to do so and are expected to be available to respond to
appropriate questions.
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THE MERGER
BACKGROUND OF THE MERGER
Alcatel regularly reviews potential candidates for merger, acquisition and
other strategic transactions. During the summer of 1997, representatives of
Alcatel contacted representatives of DSC to discuss the possibility of meeting
to discuss strategic business opportunities. On September 25, 1997, Mr. Serge
Tchuruk, Alcatel's Chairman and Chief Executive Officer, met with Mr. James L.
Donald, DSC's Chairman of the Board, President and Chief Executive Officer, to
discuss strategic business opportunities between DSC and Alcatel. Messrs.
Tchuruk and Donald agreed that the companies should explore strategic business
opportunities and arranged a subsequent meeting of representatives of DSC and
Alcatel. On October 1, 1997, DSC and Alcatel entered into a confidentiality
agreement, which was subsequently amended to include a standstill provision.
On October 10, 1997, representatives of each of DSC and Alcatel met to
discuss their respective businesses and a possible structure for combining DSC
with the businesses of ANS, which is the entity through which Alcatel
principally conducts its North American telecommunications equipment business.
The representatives of DSC and Alcatel agreed that the business synergies that
would result from combining the companies, as well as potential combination
structures, would need to be further analyzed. From November through December
1997, there were various meetings held between representatives of DSC and ANS to
analyze potential business synergies from the possible combination of DSC and
ANS.
On January 9, 1998, Messrs. Donald and Tchuruk met to discuss the results of
the various meetings between the respective representatives of DSC and Alcatel.
Mr. Tchuruk again stated Alcatel's desire to combine DSC with ANS and obtain a
controlling interest in DSC.
On January 15, 1998, Mr. Jean-Pierre Halbron, Senior Executive Vice
President of Alcatel, outlined for Mr. Gerald F. Montry, DSC's Senior Vice
President and Chief Financial Officer, a possible structure for a transaction in
which DSC would be combined with ANS. This structure contemplated a merger of
ANS into DSC (with Alcatel receiving shares of Common Stock in exchange for the
shares of ANS), together with a cash tender offer by Alcatel for additional
shares of the Common Stock, so that after consummation of the merger and the
tender offer Alcatel would own at least fifty-one percent of the outstanding
shares of Common Stock. Under this structure, DSC would remain a publicly traded
corporation following the merger and the tender offer, although Alcatel would
have the right to appoint a majority of the DSC Board. It was contemplated that
in connection with such a transaction, Alcatel and DSC would obtain access to
each other's research and development, and distribution arrangements would be
established whereby DSC would serve as the primary distribution channel for
certain Alcatel products in North America while outside North America, Alcatel
would be the primary distributor for DSC's products. On February 2, 1998, a
representative of Goldman Sachs, DSC's financial advisor, contacted a
representative from Lehman Brothers, Inc. ("Lehman Brothers"), Alcatel's
financial advisor, to advise Alcatel that DSC would only pursue such a
transaction if all of DSC's stockholders received a premium over the market
price for all Common Stock, although DSC would be willing to consider
alternative transaction structures in which Alcatel would receive a minority
interest in DSC as a result of the merger.
A meeting was held on February 27, 1998 among representatives of DSC and
Alcatel, and their respective financial and legal advisors, at which Alcatel
outlined a possible transaction providing for a cash tender offer of $31.25 per
share for a majority of the shares of Common Stock and a merger of DSC and ANS.
In the merger, Alcatel would receive additional shares of Common Stock so that
after the merger and cash tender offer Alcatel would own approximately
seventy-three percent of the outstanding Common Stock. Alcatel also proposed the
issuance of contingent value rights to the remaining public holders of Common
Stock providing for protection in the event that the share price of the Common
Stock three years after the closing of the merger was below $27.00 per share,
with such protection only applying down to a minimum price level. On March 5,
1998, representatives of Goldman Sachs contacted representatives of Lehman
Brothers to advise them that DSC was unwilling to pursue the February 27, 1998
proposal.
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On March 12, 1998, representatives of DSC and Alcatel, and their respective
financial advisors, met to discuss DSC's business. Subsequent meetings were held
in April and May to discuss DSC's business, and during such period Alcatel
conducted legal and financial due diligence of DSC, and DSC conducted legal and
financial due diligence of ANS and Alcatel.
On April 1, 1998, DSC issued a press release indicating that, based upon
preliminary estimates, operating results for the 1998 first quarter were
expected to be lower than analysts' estimates. On April 3, 1998, DSC issued a
press release announcing Mr. Donald's intention to retire from the posts of
President and Chief Executive Officer.
On April 8, 1998, representatives of DSC and Alcatel, and their respective
financial advisors, met to discuss DSC's first quarter financial results.
On April 14, 1998, Alcatel outlined to DSC a revised transaction structure
under which Alcatel would acquire approximately sixty percent of the outstanding
Common Stock in exchange for ADSs at an exchange ratio of 0.842 of an ADS for
each share of Common Stock (or a value of $32.21 per share of Common Stock based
on the closing price of the ADSs on April 14, 1998). DSC and ANS would then
merge and in this merger Alcatel would receive additional shares of Common
Stock, so that after the two transactions, Alcatel would own approximately
eighty percent of the outstanding Common Stock and the public stockholders would
own the remaining Common Stock. DSC would remain a publicly traded corporation.
On April 24, 1998, Alcatel provided DSC with an initial draft of a merger
agreement which incorporated the material terms of the April 14, 1998 proposal.
On April 29, 1998, DSC held a special meeting of its Board of Directors to
discuss Alcatel's proposal. All of the members of the DSC Board were in
attendance and representatives of Goldman Sachs and legal counsel for DSC were
present during the meeting. Presentations were made by DSC management, Goldman
Sachs and legal counsel. After such presentations, the DSC Board authorized
DSC's management to continue discussions with Alcatel and directed management
and the advisors to negotiate several matters, including the exchange ratio,
intercompany arrangements with Alcatel with respect to the use of intellectual
property and distribution channels, and corporate governance protection for
minority stockholders of the combined entity.
On May 7 and 8, 1998, meetings were held among representatives of DSC and
Alcatel and their respective financial and legal advisors to discuss the Alcatel
proposal. DSC's representatives discussed the position of the DSC Board on each
of the matters as to which it had given directions at its April 29 meeting. On
May 8, 1998, Alcatel proposed to restructure the transaction so that Alcatel
would acquire all of the outstanding Common Stock for ADSs. The Alcatel
representatives indicated that Alcatel would be prepared to offer 0.765 of an
ADS in exchange for each share of Common Stock (or a value of approximately
$30.45 per share Common Stock based on the closing price of the ADSs on May 8,
1998). This structure would eliminate the issues between the parties with
respect to intellectual property and distribution arrangements, and corporate
governance of the surviving company since DSC would become a wholly owned
subsidiary of Alcatel. The DSC representatives advised the Alcatel
representatives that they would discuss the proposal with the DSC Board, but
they did not believe the DSC Board would be willing to proceed at that exchange
ratio.
At a regularly scheduled meeting of the Alcatel Board held on May 14, 1998,
management of Alcatel reviewed the status of discussions with DSC.
On May 24, 1998, Mr. Tchuruk telephoned Mr. Donald and indicated that
Alcatel was prepared to increase the exchange ratio to 0.815 of an ADS for each
share of Common Stock (or a value of $35.35 per share of Common Stock based on
the closing price of the ADSs on May 22, 1998). From May 24 through June 2,
1998, DSC and Alcatel negotiated the terms of a definitive merger agreement. On
May 26, 1998, the DSC Board met by conference telephone and were updated with
respect to the discussions with Alcatel and authorized management to continue
negotiations.
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The DSC Board met on June 3, 1998, and presentations with respect to the
Merger Agreement were made by management of DSC, Goldman Sachs and DSC's legal
counsel. The DSC Board determined that the Merger Agreement and the transactions
contemplated thereby are fair to and in the best interests of DSC's stockholders
and unanimously approved the Merger Agreement, and unanimously resolved to
recommend that the stockholders adopt the Merger Agreement and approve the
Merger.
At a meeting of the Alcatel Board of Directors held on June 3, 1998, the
Alcatel Board received presentations from management regarding DSC and its
businesses, the proposed terms of the Merger Agreement and other matters. At
that meeting, the Alcatel Board approved the Merger Agreement. Also on June 3,
1998, the Newco Board of Directors approved the terms of the Merger Agreement.
RECOMMENDATION OF THE DSC BOARD; REASONS FOR THE MERGER
The DSC Board has unanimously determined that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are fair to and in the
best interests of DSC stockholders. ACCORDINGLY, THE DSC BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE MERGER, AND THE DSC BOARD RECOMMENDS THAT
HOLDERS OF COMMON STOCK VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER PROPOSAL.
In the course of reaching its decision to approve the Merger Agreement and
the Merger, the DSC Board consulted with DSC's management, as well as its
outside legal counsel and financial advisor, and considered the following
factors:
(a) The DSC Board considered the results of operations and prospects of DSC
and the nature of its industry.
(b) The DSC Board considered possible alternatives to the Merger, including,
without limitation, continuing to operate DSC as an independent entity, and the
risks associated therewith. The DSC Board also considered that continuing to
operate DSC as an independent entity would involve the risk that DSC's financial
performance may not improve, which could have an adverse effect on stockholder
value.
(c) The DSC Board considered that the industry in which DSC operates is
characterized by rapidly changing technological and market conditions, which
result in shorter product life cycles and require substantial investments in
research and development. The DSC Board noted that DSC may be materially
adversely affected if it is unable to develop and produce on a timely basis new
products to meet existing and future industry demands, if substantial delays in
the availability of new products occur or if any of DSC's existing or new
products are not commercially successful and DSC is therefore required to adjust
the carrying value of or discontinue such products.
(d) The DSC Board considered DSC's existing and future competition, the
relative sizes of other participants in the industry in which it operates and
the available capital and other resources of such other participants as compared
to the available capital and other resources of DSC. The DSC Board noted that
DSC 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 DSC Board anticipates that new
and different competitors will enter DSC's markets. These competitors may
include entrants from the telecommunications, software and data networking
industries. The DSC Board considered that many of DSC's existing foreign and
domestic competitors have substantially greater financial resources than DSC
which allows them a competitive advantage in funding research and development
activities, which are essential to develop products in today's competitive
environment.
(e) The DSC Board considered that a large portion of DSC's revenue is
concentrated among several of DSC's larger customers, and that, although DSC
expects these customer relationships to continue to generate substantial revenue
in the near term, there can be no assurance that any of these customers will
continue to purchase products, or continue to purchase products at historical
levels. The DSC Board noted
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that there has recently been a substantial increase in mergers and acquisitions
among its customers which could adversely affect DSC's customer relationships.
(f) The DSC Board considered the strategic fit between DSC and Alcatel. The
DSC Board noted that the strong position of DSC in access and switching, fixed
and mobile, coupled with Alcatel's leading position in transmission, will create
a major company in the U.S. capable of providing turnkey systems to the
incumbent telecommunications operators as well as new domestic carriers. The DSC
Board also noted that certain of Alcatel's technologies will complement DSC's
products and facilitate the development of new products and services. The DSC
Board also considered that the combined operations of DSC and Alcatel in the
U.S. should benefit from DSC's established relationships with the RHCs, which
provide an enhanced platform for future growth.
(g) The DSC Board considered that Mr. James L. Donald had recently announced
his intention to retire as the President and Chief Executive Officer of DSC. The
DSC Board has initiated a process to find a replacement for Mr. Donald. The DSC
Board considered the prospects of finding a suitable replacement for Mr. Donald
and the risks for DSC and its stockholders that might result from a change in
the senior management team of DSC.
(h) The DSC Board considered that, upon consummation of the Merger, DSC's
stockholders will have an ongoing equity interest in a much larger company with
the prospects for improved long-term growth potential and investment liquidity.
(i) The DSC Board considered that the Merger has an implied value of
approximately $4.4 billion based on the approximately 125 million fully diluted
shares of DSC's Common Stock outstanding and the ADS closing price of $43 7/16
on June 3, 1998. The DSC Board noted that this represented a premium of
approximately eighty percent over the closing price per share of Common Stock on
June 3, 1998.
(j) The DSC Board considered that DSC had some contacts with other companies
that could be interested in a business combination with DSC, and that none of
them, in the judgment of the DSC Board, had indicated a high enough level of
interest to justify suspending discussions with Alcatel, thereby creating a risk
that DSC would lose the opportunity to enter into the Merger Agreement.
(k) The DSC Board considered the financial and other terms and conditions of
the Merger Agreement. In addition to the merger consideration, the primary
factors considered by the DSC Board were the contingencies to successfully
closing a transaction. The DSC Board noted that the Merger Agreement had no
significant condition to closing, such as a financing condition or other similar
significant condition.
(l) The DSC Board considered the analyses and presentation prepared by
Goldman Sachs and its written opinion to the effect that, as of June 3, 1998,
the Exchange Ratio pursuant to the Merger Agreement was fair from a financial
point of view to the holders of Common Stock.
(m) The DSC Board considered that the Merger Agreement provided that Alcatel
would dispose of a certain portion of its businesses to the extent necessary to
satisfy the conditions of the Merger Agreement with respect to approvals under
any Antitrust Law (as defined herein). See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Regulatory Approvals."
(n) The DSC Board considered the fact that the terms of the Merger Agreement
should not unduly discourage other third parties from making bona fide proposals
to acquire DSC subsequent to the execution of the Merger Agreement and, if any
such proposals were made, the DSC Board, in the exercise of its fiduciary
duties, could determine to provide information to and engage in negotiations
with any such third party subject to the terms and conditions of the Merger
Agreement.
In view of the wide variety of factors considered by the DSC Board in
connection with its evaluation of the Merger and the complexity of such matters,
the DSC Board did not consider it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. The DSC Board relied on the experience and
expertise of its financial advisors for quantitative analysis of the financial
terms of the Merger. See "--Opinion of DSC's Financial Advisor." In
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addition, the DSC Board did not assign any particular weight to any factor, but
rather conducted a discussion of the factors described above, including asking
questions of DSC's management and legal and financial advisor, and reached a
general consensus that the Merger was advisable and in the best interests of DSC
and its stockholders and other constituencies. In considering the factors
described above, individual members of the DSC Board may have given different
weight to different factors.
THE DSC BOARD, AT A MEETING DULY CALLED AND HELD, HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND THE MERGER, AND HAS UNANIMOUSLY DETERMINED THAT THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF DSC.
ACCORDINGLY THE DSC BOARD RECOMMENDS THAT THE STOCKHOLDERS OF DSC APPROVE AND
ADOPT THE MERGER PROPOSAL.
OPINION OF DSC'S FINANCIAL ADVISOR
DSC retained Goldman Sachs in connection with its consideration of the
potential financial and strategic alternatives available to DSC. At the June 3,
1998 meeting of the DSC Board, Goldman Sachs delivered its oral opinion (which
it subsequently confirmed in writing as of such date) that, based upon and
subject to various qualifications and assumptions described therein, the
Exchange Ratio was fair from a financial point of view to holders of Common
Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED JUNE 3, 1998,
WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE SCOPE OF
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS.
THE GOLDMAN SACHS OPINION, WHICH IS ADDRESSED TO THE DSC BOARD, IS DIRECTED ONLY
TO THE FAIRNESS OF THE EXCHANGE RATIO AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY DSC STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL
MEETING. THE SUMMARY OF THE GOLDMAN SACHS OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION. STOCKHOLDERS OF DSC ARE URGED TO READ THE OPINION IN ITS
ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
the Merger Agreement; Annual Reports to stockholders and Annual Reports on Form
10-K of DSC for the five years ended December 31, 1997; certain interim reports
to stockholders and Quarterly Reports on Form 10-Q of DSC; Annual Reports to
stockholders and Annual Reports on Form 20-F of Alcatel for the four years ended
December 31, 1996; certain interim reports to stockholders and Quarterly Reports
on Form 6-K of Alcatel; certain internal financial analyses and forecasts for
DSC prepared by its management and certain interim financial analyses and
forecasts for certain United States operations of Alcatel prepared by its
management. Goldman Sachs did not review internal financial analyses or
forecasts for Alcatel on a consolidated basis. Goldman Sachs also held
discussions with members of the senior management of DSC and Alcatel regarding
the strategic rationale for, and potential benefits of, the Merger and the past
and current business operations, financial condition and future prospects of
their respective companies. In addition, Goldman Sachs reviewed the reported
price and trading activity for the Common Stock and the ADSs, compared certain
financial and stock market information for DSC and Alcatel with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations in
the communications equipment industry specifically and in other industries
generally and performed such other studies and analyses as Goldman Sachs
considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by it for
purposes of its opinion. In addition, Goldman Sachs did not make an independent
evaluation or appraisal of the assets and liabilities of DSC or Alcatel or any
of their subsidiaries, and Goldman Sachs was not furnished with any such
evaluation or appraisal.
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The following is a summary of certain of the financial analyses used by
Goldman Sachs in its presentation of its opinion to the DSC Board on June 3,
1998.
HISTORICAL STOCK TRADING ANALYSIS. Goldman Sachs reviewed the historical
trading prices and volumes for the Common Stock. In addition, Goldman Sachs
analyzed the consideration to be received by holders of Common Stock pursuant to
the Merger Agreement based on the closing market price of the ADSs on June 1,
1998 of $42.94 in relation to the closing market price per share of Common Stock
on June 1, 1998 and the average closing market price per share of Common Stock
for the latest one month, six months and twelve months. Such analysis indicated
that the price per share of Common Stock to be paid pursuant to the Merger
Agreement represented a premium of 106%, 98%, 82% and 51%, respectively, based
on the closing market price of Common Stock on June 1, 1998 and the average
closing market prices for the latest one month, six months and twelve months,
respectively.
SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed and compared certain
financial information relating to DSC to corresponding financial information,
ratios and public market multiples for thirty-seven publicly traded corporations
(the "Selected Companies"). The Selected Companies were chosen because they are
publicly-traded companies with operations and products that for purposes of
analysis may be considered similar to DSC in certain respects. Goldman Sachs
focused particularly on a subset of the Selected Companies consisting of ADC
Telecommunications, Inc., Advanced Fibre Communications, Ciena Corporation, ECI
Telecommunications Ltd., Premisys Communications, Inc., Reltec Corporation,
Tellabs, Inc., Alcatel Alsthom, Lucent Technologies, Inc, Northern Telecom Ltd.
and Siemens AG (the "Selected Focus Companies"). The Selected Focus Companies
were identified as particularly comparable to DSC because of the similarity of
products and operations. Goldman Sachs calculated and compared various financial
multiples and ratios. The multiples of DSC were calculated using a price of
$17.00 per share, the closing price of the Common Stock on June 1, 1998. The
multiples and ratios for DSC were based on information provided by DSC's
management and on the most recent publicly available information, including
median analyst estimates provided by IBES. Multiples and ratios for the Selected
Companies were based on the most recent publicly available information,
including median analyst estimates provided by IBES. With respect to the
Selected Companies and Selected Focus Companies, Goldman Sachs considered the
price-to-earnings ("P/E") multiples for 1997, 1998 and 1999. Goldman Sachs
analyses of the Selected Focus Companies indicated P/E multiples of 17.8x to
80.6x for 1997, 15.5x to 47.3x for 1998, and 13.1x to 33.6x for 1999. For 1997,
1998 and 1999, the Selected Companies had median P/E multiples of 35.3x, 29.4x
and 24.5x, respectively, and mean P/E multiples of 36.9x, 31.6x and 24.8x,
respectively. Goldman Sachs analyses of DSC indicated a 1997 P/E multiple of
20.0x and, based on analyst median estimates available from IBES, of 20.0x for
1999. The analyst median estimates for DSC's 1998 EPS, as reported by IBES, was
for a loss, and accordingly, no P/E multiple could be calculated. Goldman Sachs
analyses indicated estimated P/E multiples for DSC of 32.1x and 9.0x for 1998
and 1999, respectively, based on DSC management's base case projections. Goldman
Sachs also considered the levered market capitalization (i.e. market value of
common equity plus long-term debt less cash and cash equivalents) of DSC and the
Selected Companies and Selected Focus Companies. Goldman Sachs analyses of the
Selected Focus Companies indicated levered market capitalization multiples of
latest twelve month ("LTM") revenue of 0.5x to 10.8x compared to 1.3x for DSC,
and of LTM earnings before interest, taxes, depreciation and amortization
("EBITDA") for the Selected Focus Companies of 5.4x to 48.9x, compared to 7.1x
for DSC. The Selected Companies had median and mean levered market
capitalization multiples of LTM revenue of 3.2x and 5.1x, respectively, and
median and mean levered market capitalization multiples of LTM EBITDA of 17.2x
and 19.6x, respectively. Goldman Sachs analyses of the Selected Focus Companies
indicated a five-year estimated EPS growth rate of between 13% and 43%. The
Selected Companies had median and mean five-year estimated EPS growth rates of
26% and 27%, respectively. The median analyst projection for DSC's five-year EPS
growth rate, as reported by IBES, was 20%.
PRESENT VALUE OF IMPLIED FUTURE SHARE PRICES ANALYSIS. Goldman Sachs
performed an analysis to determine the present value of implied future DSC stock
prices based on management's projections of
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earnings per share for 1999 and 2000. Goldman Sachs calculated implied future
prices for shares of Common Stock for 1999 and 2000 using estimated P/E
multiples ranging from 15x to 30x. These implied future DSC share prices were
then discounted to present value using discount rates ranging from 15.0% to
25.0%. Using this analysis, the present value of the implied future DSC share
price based on projected earnings for 1999 ranged from $12.33 to $45.86 and
based on projected earnings for 2000 ranged from $17.18 to $54.81. In
conjunction with this analysis, Goldman Sachs considered that analysts consensus
estimates as reported by IBES were substantially lower than management's
projections for both 1999 and 2000, and that, based on similar P/E multiples and
discount rates, the present value of the implied future DSC share prices based
on such IBES projected earnings for 1999 and 2000 were less than $21.00 and
$22.00, respectively.
SELECTED TRANSACTIONS ANALYSIS. Goldman Sachs analyzed certain information
relating to approximately 189 selected transactions in the communications
equipment industry since 1987 (the "Selected Transactions"), including the
acquisition of Octel Communications Corp. by Lucent Technologies, Inc., the
acquisition of Cascade Communications by Ascend Communications and the
acquisition of US Robotics by 3COM. Such analysis indicated that for the
Selected Transactions for which relevant data was available (i) levered
aggregate consideration as a multiple of LTM revenue ranged from 0.3x to 86.2x,
with a mean of 7.0x and a median of 2.3x, as compared to 2.8x for the
consideration to be received in the Merger as a multiple of DSC's 1997 revenue,
(ii) aggregate equity consideration as a multiple of LTM net income ranged from
4.1x to 120.6x, with a mean of 32.9x and a median of 21.8x, as compared to 43.7x
for the equity consideration to be received in the Merger as a multiple of DSC's
1997 normalized net income, and (iii) aggregate equity consideration as a
multiple of the next year's estimated earnings ranged from 2.5x to 55.6x, with a
mean of 24.0x and a median of 19.9x, as compared to 43.6x for the equity
consideration to be received in the Merger.
PRO FORMA MERGER ANALYSIS. Goldman Sachs prepared pro forma analyses of the
financial impact of the Merger. Using earnings estimates for DSC provided by DSC
management for the calendar years 1999 and 2000 and for Alcatel provided by IBES
for the calendar year 1999, and extrapolated to calendar year 2000 based on
analysts' median long term earnings growth rate as reported by IBES, Goldman
Sachs estimated the EPS of the common stock of the combined company on a pro
forma basis, by making several assumptions. Goldman Sachs performed this
analysis based on a price of $17.00 per share of Common Stock (the per share
price of Common Stock on June 1, 1998) and $42.94 per ADS (the price per ADS on
June 1, 1998). Goldman Sachs did not incorporate projected synergies or
cost-savings associated with the Merger. Based on such analyses and assumptions,
the proposed transaction would be modestly dilutive to Alcatel's stockholders on
an EPS basis in the calendar year 1999 and modestly accretive to Alcatel's
stockholders on an EPS basis in the calendar year 2000.
COMPARISON OF EARNINGS AND DIVIDENDS. Goldman Sachs compared the earnings
attributable to one share of Common Stock for 1997, 1998, and 1999 using
historical financials (for 1997) and DSC management's projections (for 1998 and
1999) with the earnings attributable to 0.815 of an ADS for that same period, as
reported by Alcatel for 1997 and as estimated by analysts and reported by IBES
for 1998 and 1999. Based on such a comparison, one share of Common Stock had
more earnings attributable to it in 1997 than 0.815 of an ADS, but is expected
to have less earnings in 1998. In 1999, one share of Common Stock would have
either more or less earnings attributable to it than 0.815 of an ADS, depending
upon whether DSC's management base case or downside financial projection was
used. Goldman Sachs also compared the dividend policies of DSC and Alcatel and
the dividends that were likely to be paid per share of Common Stock and per
0.815 of an ADS. Goldman Sachs noted that DSC has never paid dividends on its
common equity and that Alcatel has paid dividends to holders of its ADSs.
Goldman Sachs also undertook an analysis of the stock price premiums paid by
acquirors in 40 recent acquisition transactions involving communications
equipment companies. These premiums compare the equity consideration in an
acquisition transaction on a per share basis to the acquired company's stock
price one week before announcement of the acquisition (the "week-ago price").
Based on this sample, the
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lowest premium was 25.8% below the week-ago price and the highest premium was
141.6% over the week-ago price, with a mean of 36.8% and a median of 34.5%. As
of the close of business on June 1, 1998, Goldman Sachs analysis indicated that
the equity consideration to be received in the Merger constituted a 102% premium
over the week-ago price. However, Goldman Sachs did not consider this analysis
to be material to the overall financial analysis performed by Goldman Sachs in
rendering its fairness opinion because the premium paid in any transaction is
dependent on many variables specific to that transaction.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
DSC or Alcatel or the contemplated transaction. The analyses were prepared
solely for purposes of Goldman Sachs' providing its opinion to the DSC Board as
to the fairness of the Exchange Ratio from a financial point of view pursuant to
the Merger Agreement and do not purport to be appraisals or necessarily reflect
the prices at which businesses or securities actually may be sold. Analyses
based upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of DSC, Alcatel, Goldman Sachs or any other
person assumes responsibility if future results are materially different from
those forecast. As described above, Goldman Sachs' opinion to the DSC Board was
one of many factors taken into consideration by the DSC Board in making its
determination to approve the Merger Agreement and the Merger. The foregoing
summary does not purport to be a complete description of the analyses performed
by Goldman Sachs and is qualified by reference to the written opinion of Goldman
Sachs set forth as Annex C hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs has
served as an underwriter for DSC, including as an underwriter for DSC's equity
and for its offering of Convertible Notes. Goldman Sachs has also acted as DSC's
financial advisor in connection with, and participated in certain of the
negotiations leading to, the Merger Agreement. Goldman Sachs is also familiar
with the markets for Alcatel's securities, and has acted, from time to time, as
a financial advisor and underwriter on behalf of Alcatel for both equity and
debt. At the time it delivered its opinion, Goldman Sachs was serving as global
coordinator and co-book runner for the initial public offering of Alstom, an
affiliate of Alcatel. In addition, Goldman Sachs is a full service securities
firm and in the course of its trading activities it may from time to time effect
transactions, for its own account or the account of customers, and hold
positions in securities or options on securities of DSC and Alcatel.
Pursuant to a letter agreement dated April 29, 1998 (the "Engagement
Letter"), DSC engaged Goldman Sachs to act as its financial advisor in
connection with the potential financial and strategic alternatives available to
DSC. Pursuant to the terms of the Engagement Letter, DSC has agreed to pay
Goldman Sachs upon consummation of the Merger, a transaction fee of 0.40% of the
aggregate consideration paid in the Merger (including amounts paid to holders of
options and warrants). DSC also has agreed to reimburse Goldman Sachs for its
reasonable out-of-pocket expenses, including attorneys' fees, and to indemnify
Goldman Sachs against certain liabilities.
ALCATEL'S REASONS FOR THE MERGER
In reaching its decision to approve the Merger Agreement, the Alcatel Board
of Directors (the "Alcatel Board") considered a number of factors, including,
without limitation, the following: (a) a review of the advice of management
regarding the terms of the Merger Agreement; (b) the structure of the
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transaction and the terms of the Merger Agreement; (c) the financial condition,
cash flow and results of operations of Alcatel and DSC on both an historical and
estimated prospective basis; (d) current industry, economic, and market
conditions; (e) the changing regulatory environment in the domestic and
international telecommunications industry; (f) the historical market prices and
recent trading patterns of Alcatel Shares, ADSs and Common Stock; (g) the
opportunity for Alcatel to create a combined enterprise which would increase
Alcatel's marketing resources and enhance Alcatel's competitive position in the
U.S. and financial performance over time; (h) the strength of DSC in an industry
segment, which, together with Alcatel technology, will afford growth
opportunities to Alcatel; (i) the complementary nature and degree of
compatibility of the businesses of Alcatel and DSC; (j) the potential for
operational and financial synergies as a result of the integration of the
resources of Alcatel and DSC; and (k) that the addition of DSC's retail customer
relationships in new geographic regions and markets should improve Alcatel's
ability to pursue the retail market and strategic acquisitions and to form
partnerships and communications alliances with enhanced operating and purchasing
efficiencies. The foregoing discussion of factors is not intended to be
exhaustive. In light of the wide variety of factors considered by the Alcatel
Board, the Alcatel Board did not find it practical to and did not quantify or
otherwise assign any relative weight to the specific factors under its
consideration. The Merger is not subject to the approval of the stockholders of
Alcatel.
FORM OF THE MERGER; CONSIDERATION
In the Merger, Newco, a newly organized and wholly owned subsidiary of
Alcatel, will be merged with and into DSC, with DSC continuing as the Surviving
Corporation. Each share of Common Stock outstanding immediately prior to the
Effective Time shall be converted into 0.815 of an ADS; provided, however, that
each DSC stockholder entitled to receive a fractional share of an ADS shall
receive cash in lieu of such fractional interest. See "--Fractional Shares."
Outstanding options to purchase shares of Common Stock issued under DSC stock
option plans will generally be cancelled by DSC for cash in the case of
optionees who have agreed to such cancellation, or in the case of certain
optionees who have not agreed to such cancellation, may become options to
purchase ADSs. In addition, in connection with the Merger, outstanding
Convertible Notes currently convertible into Common Stock will become
convertible into ADSs.
EFFECTIVE TIME
The Merger will become effective upon the filing of a certificate of merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware or such other date as is specified in such Certificate of Merger in
accordance with the DGCL. Subject to certain limitations, the Merger Agreement
may be terminated by either party if, among other reasons, the Merger has not
been consummated on or before March 31, 1999. See "CERTAIN PROVISIONS OF THE
MERGER AGREEMENT--Conditions to the Consummation of the Merger" and
"--Termination and Fees."
CONVERSION OF SHARES
At the Effective Time, each outstanding share of Common Stock will be
converted into the right to receive 0.815 of an ADS. As soon as practicable
following the Effective Time, The Bank of New York (the "Exchange Agent") will
send a letter of transmittal to each holder of Common Stock which will contain
instructions with respect to the surrender of a certificate or certificates
representing shares of Common Stock to be exchanged for a certificate or
certificates of ADRs representing whole ADSs, or the amount of cash in lieu of
any fractional interest in a share of Common Stock for which the shares
represented by the certificates so surrendered are exchangeable pursuant to the
Merger Agreement.
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The Exchange Agent will accept such certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices. After the
Effective Time, there will be no further transfer on the records of DSC or its
transfer agent of certificates representing shares of Common Stock which have
been converted, in whole or in part, pursuant to the Merger Agreement into ADSs,
and if such certificates are presented to DSC for transfer, they will be
canceled against delivery of ADSs. Until surrendered as contemplated by the
Merger Agreement, each certificate representing shares of Common Stock will be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender ADSs. No interest will be paid or will accrue on any
cash payable in lieu of any fractional ADSs.
No dividends or other distributions with respect to the Alcatel Shares with
a record date after the Effective Time will be paid to the holder of any
unsurrendered certificate representing shares of Common Stock with respect to
the ADSs represented thereby, and no cash payment in lieu of a fractional share
shall be paid to any such holder pursuant to the Merger Agreement until the
surrender of such certificate in accordance with the Merger Agreement. Subject
to the effect of applicable laws, following surrender of any such certificate,
there shall be paid to the holder of the certificate representing ADSs issued in
connection therewith, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional ADS to which such holder is
entitled pursuant to the Merger Agreement and the proportionate amount of
dividends or other distributions, if any, with a record date after the Effective
Time theretofore paid with respect to ADSs, and (ii) at the appropriate payment
date, the proportionate amount of dividends or other distributions, if any, with
a record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such ADSs.
EMPLOYEE STOCK OPTIONS AND EMPLOYEE BENEFIT MATTERS
The Merger Agreement provides that DSC will use its reasonable best efforts
to cause each option (other than options granted under DSC's 1990 Employee Stock
Purchase Plan and DSC's International Employee Stock Purchase Plan, described
below) granted to an employee, consultant or director of DSC or any of its
subsidiaries to acquire shares of Common Stock, which is outstanding immediately
prior to the Effective Time (each, an "Option"), to be cancelled immediately
prior to the Effective Time. As of July 23, 1998, holders of approximately 37%
of the outstanding Options (including the Chief Executive Officer and the four
other most highly compensated executive officers (the "Named Executive
Officers")), have consented to such cancellation. Immediately upon such
cancellation, each holder of an Option so cancelled, in exchange for the
cancellation thereof, will receive from DSC an amount in cash equal to the
product of (1) the number of shares of Common Stock subject to such Option and
(2) the excess, if any, of the fair market value of an ADS multiplied by the
Exchange Ratio over the per share exercise price of such Option. "Fair market
value" shall mean the closing price of the ADSs on the NYSE on the business day
immediately preceding the Effective Time.
Each Option which is not cancelled as described above (other than any
Options granted under the 1990 Stock Option and Cash Payment Plan or the Special
Celcore Incentive Plan, which Options shall terminate at the Effective Time)
shall become and represent an option to purchase a number of ADSs (a "Substitute
Option"), determined by multiplying (i) the number of shares of Common Stock
subject to such Option immediately prior to the Effective Time by (ii) the
Exchange Ratio, at an exercise price per ADS (increased to the nearest whole
cent) equal to the exercise price per share of Common Stock immediately prior to
the Effective Time divided by the Exchange Ratio; provided, however, that in the
case of an Option to which Section 421 of the Code applies by reason of its
qualification as an incentive stock option under Section 422 of the Code, the
conversion formula will be adjusted if necessary to comply with Section 424(a)
of the Code. After the Effective Time, each Substitute Option shall be
exercisable upon the same terms and conditions as were applicable to the related
Option prior to the Effective Time subject to accelerated vesting if and to the
extent provided in the applicable plans.
Pursuant to the Merger Agreement, DSC's 1990 Employee Stock Purchase Plan
and DSC's International Employee Stock Purchase Plan (the "ESPPs") shall be
terminated as of July 31, 1998.
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The Merger Agreement provides that for a period of one year following the
Effective Time, Alcatel will cause the Surviving Corporation and its
subsidiaries to provide DSC's employees who are actively employed as of the
Effective Time with employee benefit plans and arrangements that are, in the
aggregate, substantially similar to those provided by DSC immediately prior to
the Effective Time other than stock option or other equity-based plans and other
than employment, severance or similar plans and agreements.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of DSC's management and the DSC Board may be deemed to have
certain interests in the Merger that are different from, or in addition to, the
interests of DSC stockholders generally. The DSC Board was aware of these
interests of management and the DSC Board considered them, among other matters,
in approving the Merger Agreement and the transactions contemplated thereby.
These interests are summarized below.
DIRECTORS' AND OFFICERS' INSURANCE; LIMITATION OF LIABILITY OF DSC DIRECTORS
AND OFFICERS. The Merger Agreement provides that Alcatel will or will cause the
Surviving Corporation (the "Indemnifying Parties") after the Effective Date, to
indemnify, defend and hold harmless, as and to the fullest extent permitted by
law, each present and former director or officer of DSC and its subsidiaries
(each an "Indemnified Party") against any losses, claims, damages, liabilities,
costs, expenses (including reasonable attorneys' fees and expenses in advance of
the final disposition of any claim, suit, proceeding or investigation to each
Indemnified Party to the fullest extent permitted by law upon receipt of an
undertaking from such Indemnified Party to repay such advanced expenses if it is
finally and unappealably determined that such Indemnified Party was not entitled
to such indemnification), judgments, fines and amounts paid in settlement in
connection with any such claim, action, suit, proceeding or investigation
arising in whole or in part out of (i) his or her actions as such a director or
officer or (ii) the Merger Agreement or the transactions contemplated thereby.
In the event of any such threatened or actual claim, action, suit, proceeding or
investigation (whether asserted or arising before or after the Effective Date),
the Indemnified Parties may retain counsel reasonably satisfactory to the
Indemnifying Parties. The charter of DSC also provides for the indemnification
of DSC directors and officers to the fullest extent permitted by law. The Merger
Agreement requires Alcatel to keep in effect and guarantee performance of all
indemnification provisions contained in the charter, bylaws and the Director and
Officer Indemnification Agreements and related Trust Agreement of DSC and its
subsidiaries.
The Merger Agreement provides that Alcatel will, or will cause the Surviving
Corporation to, to the extent such insurance is available, cause the persons
serving as officers and directors of DSC immediately prior to the Effective Time
to be covered for a period of six years from the Effective Time by the
directors' and officers' liability insurance policy maintained by DSC (provided
that Alcatel or the Surviving Corporation may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions which are
not less advantageous to such directors and officers of DSC than the terms and
conditions of such existing policy) with respect to acts or omissions occurring
prior to the Effective Time which were committed by such officers and directors
in their capacity as such; provided, however, that the Surviving Corporation
will not be obligated to make annual premium payments for such insurance paid in
excess of 200% of the current annual premiums paid by DSC for such insurance.
EMPLOYEE BENEFIT PLANS. The approval of the Merger Agreement by DSC
stockholders or the consummation of the Merger will constitute a change in
control of DSC for purposes of certain DSC benefit and Stock Option plans.
Accordingly, provisions of certain DSC benefit and stock option plans will cause
the acceleration of vesting and/or payment or potential payment of certain
equity-based and cash-based incentives and supplemental retirement benefits.
SEVERANCE AGREEMENTS. DSC has in effect Severance Compensation Agreements
("Severance Agreements") with 12 executive officers, including the Named
Executive Officers. An executive becomes entitled to severance benefits as
described below if, within two years following a change in control (for the
purpose
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of the Severance Agreements, stockholder approval of the Merger will constitute
a change in control), the executive's employment is terminated by DSC (other
than by reason of death, disability, retirement or termination by DSC for cause,
as defined in the Severance Agreements) or by the executive for Good Reason.
Under the Severance Agreements, "Good Reason" means circumstances which
generally include (a) significant diminution of duties; (b) reduction in
compensation or benefits; (c) forced relocation; (d) DSC or its successor no
longer is required to have its Common Stock registered pursuant to Section 12(b)
or 12(g) of the Exchange Act; and (e) the failure by DSC or its successor to
enter into an agreement with the executive that is substantially similar to the
Severance Agreement with respect to a change in control of DSC or its successor
occurring thereafter. Under each Severance Agreement, upon a termination as
described above, the terminated executive would receive a cash severance payment
of (a) an amount equal to the higher of (x) three times the executive's average
annual compensation for the most recent five taxable years or (y) 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; (b) a pro rata annual incentive award
(calculated by reference to the greater of the executive's most recent bonus or
the average of the executive's most recent three bonuses); (c) payment of a
"deferred vested benefit" under DSC's Supplemental Executive Retirement Plan
(described below), calculated as if the executive had accumulated three
additional years of service and earnings under such plan; (d) a "gross-up"
payment to reimburse the executive for income and employment taxes payable on
the amounts payable to the executive under (c) above; and (e) a "gross-up"
payment to reimburse the executive for excise taxes on "excess parachute
payments." The Severance Agreements also provide for the continuation for up to
two years of health care and life insurance and certain other benefits (or, if
such continuation is precluded by the terms of the applicable plans, an
after-tax economic equivalent of such benefits). Upon a change of control, DSC
will also immediately fully vest all unvested awards, units and benefits which
have been awarded or allocated to the executive under DSC's incentive
compensation plans.
The Merger will result in an executive being entitled to terminate for Good
Reason because DSC will no longer be required to have its Common Stock
registered pursuant to Section 12(b) or 12(g) of the Exchange Act. If the
employment of any executive is terminated under circumstances entitling him to
severance benefits under a Severance Agreement, such officer will be entitled to
the following approximate amounts (which amounts are estimated based on a date
of termination on or after the date of the Special Meeting, and certain
actuarial, compensation and other assumptions, and which amounts do not include
the after-tax economic equivalent, if any, of health care and life insurance and
certain other benefits discussed in the preceding paragraph and estimates for
possible tax gross-up payments which may be payable to the executive and are
otherwise subject to change, which could materially increase the amounts
payable): Mr. Montry, $13,635,000; Mr. Basham, $4,488,000; Mr. Adams,
$4,330,000; Mr. Pisterzi $1,533,000; and all executive officers as a group (7
persons in total) $31,420,000.
SEVERANCE PLAN. In addition, DSC has in effect the Executive Severance
Compensation Plan (the "Severance Plan") which covers 51 DSC executives. An
executive becomes entitled to the severance benefits described below if within
two years following a change in control (for purposes of the Severance Plan,
stockholder approval of the Merger will constitute a change in control), the
executive's employment is terminated either by DSC (other than as result of
death, disability, retirement or termination by DSC for cause (as defined in the
Severance Plan)) or by the executive for Good Reason (which includes demotion,
reduction in base salary or benefits or forced relocation). Under the Severance
Plan, upon a termination described above, the terminated participant is entitled
to receive: (a) a lump sum payment equal to the sum of (i) annual base salary
and (ii) the most recent annual incentive award; (b) payment of a "deferred
vested benefit" under DSC's Supplemental Executive Retirement Plan; (c) full
vesting under DSC's Savings and Retirement Plan, plus one year of employer
retirement and matching contributions; (d) one year of employer-paid health
coverage; (e) pro rata bonus for the year of termination; (f) outplacement
benefits of up to $15,000; and (g) a lump sum payment equal to the after-tax
economic equivalent of the cost of the life insurance benefit provided under the
group plan in which the participant participated immediately prior to the
participant's termination of employment. Upon a change in control, DSC will also
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immediately and fully vest all unvested awards of securities of DSC, accelerate,
vest and make immediately exercisable all installments of options to acquire DSC
securities, and waive all resale or other restrictions applicable to securities
underlying options or awards, in each case, which are held by the participant.
DONALD AGREEMENT. DSC has in effect an employment agreement with James L.
Donald (the "Donald Agreement"), pursuant to which, if within two years
following a change in control (stockholder approval of the Merger will
constitute a change in control for purposes of the Donald Agreement), Mr.
Donald's employment is terminated by DSC without cause or there is a
"Constructive Termination Without Cause," Mr. Donald will receive a severance
benefit. A "Constructive Termination Without Cause" generally includes (a)
reduction in salary or benefits; (b) diminution in duties; (c) certain
relocations; and (d) unreasonable interference, in the good-faith judgment of
Mr. Donald, by the DSC Board or a substantial stockholder of DSC, in Mr.
Donald's carrying out his duties and responsibilities under the Donald
Agreement. The severance benefit under the Donald Agreement includes (a) a lump
sum cash payment equal to the sum of (i) his base salary ($1,000,000) for the
remainder of his term of employment (6 1/2 years) and (ii) annual bonus for the
remainder of the term of employment (based on the average of the three highest
annual incentive awards awarded during the last ten years); (b) lifetime medical
coverage for Mr. Donald and his spouse, and coverage until age 23 for his
children; and (c) benefit plan continuation until the earlier of (1) the
expiration of his term of employment or (2) the date upon which Mr. Donald
obtains equivalent coverage from a subsequent employer (or, if such continuation
is precluded by the terms of the applicable plans, an after-tax economic
equivalent of such benefits). Mr. Donald will receive a "gross-up payment" in
order to reimburse him for excise taxes on excess parachute payments imposed on
any amounts or benefits received from DSC (whether under the Donald Agreement or
otherwise). If Mr. Donald's employment terminates under circumstances entitling
him to severance benefits under the Donald Agreement, he would be entitled to
approximately $15,697,000 (which amount is estimated based on a date of
termination which is on or near the date of the Special Meeting, and certain
actuarial, compensation and other assumptions, and which amount does not include
the after-tax economic equivalent, if any, of health care and life insurance and
certain other benefits discussed in the preceding paragraph and estimates for
possible tax gross-up payments which may be payable to Mr. Donald and is
otherwise subject to change, which could materially increase the amount
payable).
EQUITY INCENTIVE AWARDS. With respect to all of the DSC equity incentive
plans, in accordance with the terms of such plans, all restrictions and
conditions applicable to awards of restricted stock, stock options or other
awards granted under such plans will be deemed to have been satisfied as of the
date of the Merger and all such awards shall become fully vested and, if
applicable, exercisable, as of such date. Based upon awards outstanding as of
July 23, 1998, the vesting of 157,753 restricted shares of Common Stock, valued
at $35.25, based upon the per share closing price on July 23, 1998 of an ADS
multiplied by the Exchange Ratio, and held by directors and executive officers
of DSC, would be accelerated upon the Merger. Each of the directors and
executive officers of DSC listed below holds restricted stock awards
32
<PAGE>
which will become vested as a result of the Merger with respect to the following
number of shares of Common Stock and corresponding aggregate values:
<TABLE>
<CAPTION>
RESTRICTED AGGREGATE
DIRECTORS AND NAMED EXECUTIVE OFFICERS STOCK VALUE
- -------------------------------------------------------------------------------- --------------- --------------
<S> <C> <C>
James L. Donald
Chairman of the Board,
President and
Chief Executive Officer....................................................... 84,390 $ 2,974,748
Gerald F. Montry
Senior Vice President and
Chief Financial Officer....................................................... 9,345 329,411
Wylie D. Basham
Senior Vice President......................................................... 26,825 945,581
Allen R. Adams
Senior Vice President......................................................... 6,125 215,906
Michael J. Pisterzi
Vice President................................................................ 15,556 548,349
All executive officers as a group (8 persons)................................... 150,253 5,296,418
All directors and executive officers as a group (13 persons).................... 157,753 $ 5,560,793
</TABLE>
Based upon awards outstanding as of July 23, 1998, the vesting of options
relating to 2,580,360 shares of Common Stock, valued at $35.25, based upon the
per share closing price on July 23, 1998 of an ADS multiplied by the Exchange
Ratio, less the exercise price of the options, and held by directors and
executive officers of DSC, would be accelerated upon the Merger. Each of the
directors and executive officers of DSC listed below holds stock options which
will become vested as a result of the Merger with respect to the following
number of shares of Common Stock and corresponding values:
<TABLE>
<CAPTION>
DIRECTORS AND NAMED EXECUTIVE OFFICERS OPTIONS VALUE
- ----------------------------------------------------------------------------------- ------------ ---------------
<S> <C> <C>
James L. Donald
Chairman of the Board,
President and
Chief Executive Officer.......................................................... 2,000,000 $ 3,000,000
Gerald F. Montry
Senior Vice President and
Chief Financial Officer.......................................................... 91,668 1,439,179
Wylie D. Basham
Senior Vice President............................................................ 136,000 1,911,500
Allen R. Adams
Senior Vice President............................................................ 58,334 895,836
Michael J. Pisterzi
Vice President................................................................... 136,534 2,106,265
All executive officers as a group (8 persons)...................................... 2,562,860 11,489,628
All directors and executive officers as a group (13 persons)....................... 2,580,360 $ 11,791,503
</TABLE>
CERTAIN CASH-BASED INCENTIVE PLANS. DSC has in effect the 1994 Long-Term
Incentive Compensation Plan (the "LTIP") for senior executives and others
providing for cash and stock incentive payments upon the achievement of business
performance objectives expressed in terms of DSC's earnings per share. The LTIP
provides that upon a change in control awards under the LTIP become fully
vested. Stockholder approval of the Merger constitutes a change of control for
purposes of the LTIP. The amount of the awards which will become vested as a
result of the Merger under the LTIP are as follows: Mr. Donald, $378,600; Mr.
Montry, $54,000 and Mr. Adams, $40,800. Under the terms of Section 11.1 of the
LTIP and assuming the employment of a participant in the LTIP is terminated
under certain circumstances (including termination by DSC without cause and
retirement on or after age 65), the awards shall continue for a period of 14
months from the date of the employee's termination.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. DSC has in effect a Supplemental
Executive Retirement Plan ("SERP") which provides for supplemental retirement
income benefits for certain eligible employees
33
<PAGE>
in consideration for such employees' agreement to be bound by certain
non-competition and non-solicitation provisions. In addition, the SERP provides
that, if a participant's employment is terminated by DSC for any reason other
than "just cause" (as defined in the SERP), death, disability or retirement, or
if a participant terminates his employment for "good reason" (as defined in the
SERP), within 24 months after a change in control (the Merger would constitute a
change in control under the SERP), the participant will be entitled to receive
the lump sum actuarial equivalent of his accrued benefit under the SERP.
Potential amounts payable to executive officers under the SERP upon a change of
control are included in the severance benefits under "--Severance Agreements"
above. The participant will receive a "gross-up" payment to reimburse him for
excise taxes on excess parachute payments imposed on any amounts received under
the SERP. DSC also has in effect a rabbi trust providing for the funding of a
portion of the potential amounts payable under the SERP within 30 days of a
change in control.
EXECUTIVE INCOME CONTINUATION PLAN. DSC has in effect the Executive Income
Continuation Plan which provides payments (the "Accrued Benefit") to Mr. Donald
in the event of the termination of his employment, and to his surviving spouse
in the event of his death. The Accrued Benefit is paid in the form of monthly
installments for the life of Mr. Donald or, at Mr. Donald's election, as a
ten-year certain and life annuity. The Accrued Benefit is an annual benefit
equal to (a) 3% of the average compensation received by Mr. Donald for his three
most highly compensated years (up to a maximum of $3,000,000) multiplied by Mr.
Donald's years of service, minus any amount payable under a qualified defined
benefit plan. Mr. Donald's Accrued Benefit under the Executive Income
Continuation Plan as of August 31 , 1998 will be approximately $1,170,000. The
trust underlying the Executive Income Continuation Plan (the "Executive Income
Continuation Trust") provides that upon any change in control (as defined in the
Donald Agreement), DSC will contribute to the Executive Income Continuation
Trust an amount necessary to fund fully the present value of the Accrued
Benefit.
CERTAIN LITIGATION. On July 2, 1998, C.L. Grimes, a stockholder of DSC,
filed a suit in Delaware Chancery Court, purportedly on behalf of a class of all
holders of Common Stock (except directors of DSC), seeking to enjoin payments
due to Mr. Donald upon the consummation of the Merger under his employment
agreement, the LTIP, and the executive income continuation plan, and the cash
value of certain previously granted stock option awards. Grimes contends that
the aggregate amount of the prospective payments is excessive, and resulted in
Alcatel offering holders of Common Stock less than they would have otherwise
received in the Merger. Grimes does not seek to enjoin the Merger itself.
Defendants in the suit are DSC, Mr. Donald and all current non-employee
directors of DSC. DSC believes Grimes' complaint to be without merit and all
defendants intend to file a motion to dismiss Grimes' complaint, and to
otherwise vigorously resist Grimes' complaint.
FRACTIONAL SHARES
No certificates or scrip representing a fraction of an ADS will be issued in
connection with the Merger, and such fractional interests will not entitle the
owner thereof to vote or to any rights of a stockholder of Alcatel after the
Merger. Each holder of shares of Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of an ADS will
receive, in lieu thereof, a cash payment (without interest) equal to such
holder's proportionate interest in the net proceeds from a sale (on the NYSE) by
the Exchange Agent on behalf of the holders of the aggregate of the fraction of
ADSs which would otherwise be issued ("Excess ADSs"). Until the net proceeds
from the sale of Excess ADSs have been distributed to the holders of Common
Stock, the Exchange Agent will hold such proceeds in trust for the benefit of
such holders. In connection with the sale of Excess ADSs on the NYSE, Alcatel
will pay commissions, transfer taxes and other out-of-pocket transaction costs
of the Exchange Agent incurred in connection with the sale of the Excess ADSs.
34
<PAGE>
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligation of DSC and Alcatel to consummate the Merger is subject to
various conditions, including, without limitation, obtaining requisite
stockholder approval, the termination or expiration of the relevant waiting
period under the HSR Act and the absence of any injunction or other legal
restraint or prohibition preventing the consummation of the Merger. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--Conditions to the Consummation of the
Merger" and "REGULATORY APPROVALS."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a description of certain U.S.
federal income tax consequences of the Merger and does not purport to be a
complete analysis or description of all potential tax effects of the Merger. The
discussion only applies to U.S. Holders (as defined below) that hold Common
Stock as capital assets within the meaning of Section 1221 of the Code and does
not address all potential tax consequences that may be relevant to particular
DSC stockholders or to DSC stockholders subject to special treatment under the
Code, including, without limitation, foreign persons or entities, insurance
companies, financial institutions, dealers in securities, tax-exempt
organizations, persons who hold shares of Common Stock as part of a "straddle"
or a "conversion transaction" for U.S. federal income tax purposes, and
individuals who received shares of Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation.
A "U.S. Holder" means a holder of Common Stock who is (i) an individual
citizen or resident of the U.S., (ii) a corporation created or organized in or
under the laws of the U.S., any political subdivision thereof, or the District
of Columbia or (iii) a partnership, trust or estate treated, for U.S. federal
income tax purposes, as a domestic partnership, trust or estate.
No information is provided herein with respect to the tax consequences, if
any, of the Merger under applicable foreign, state, local and other tax laws.
The following discussion is based on the provisions of the Code, applicable
Treasury Regulations thereunder, Internal Revenue Service rulings, judicial
decisions and other administrative pronouncements, all in effect as of the date
hereof. There can be no assurance that future legislative, administrative or
judicial changes or interpretations will not affect the accuracy of the
statements or conclusions set forth herein. Any such future change or
interpretation could apply retroactively and could affect the accuracy of the
following discussion.
EACH U.S. HOLDER IS STRONGLY ADVISED TO CONSULT HIS OR HER TAX ADVISORS AS
TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH U.S. HOLDER, AND
AS TO ANY ESTATE, GIFT, STATE, LOCAL OR NON-U.S. TAX CONSEQUENCES, INCLUDING
FRENCH TAX CONSEQUENCES, ARISING OUT OF THE MERGER AND THE OWNERSHIP OF THE
ADSs.
CERTAIN CONSEQUENCES OF THE MERGER. U.S. Holders of ADSs received pursuant
to the Merger evidenced by ADRs will be treated as owners of the Alcatel Shares
underlying such ADSs for purposes of the Code and for purposes of the Convention
Between the Government of the United States of America and the Government of the
French Republic for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and Capital of August 31, 1994
entered into force on December 30, 1995.
The obligation of DSC to consummate the Merger is conditioned upon the
receipt by DSC from Baker & McKenzie of an opinion, in form and substance
reasonably satisfactory to DSC, that on the basis of certain facts,
representations and assumptions the Merger will constitute a reorganization for
U.S. federal income tax purposes within the meaning of Section 368(a) of the
Code. The obligation of Alcatel to consummate the Merger is conditioned upon the
receipt by Alcatel from Skadden, Arps, Slate, Meagher &
35
<PAGE>
Flom LLP of an opinion, in form and substance reasonably satisfactory to
Alcatel, that on the basis of certain facts, representations and assumptions the
Merger will constitute a reorganization for U.S. federal income tax purposes
within the meaning of Section 368(a) of the Code.
A U.S. Holder who receives ADSs in exchange for Common Stock will not
recognize gain or loss upon such exchange (except with respect to cash received
in lieu of a fractional interest in an ADS and with respect to certain "5%
shareholders" of Alcatel). Accordingly, (i) the aggregate tax basis of the ADSs
received by a U.S. Holder will be the same as the aggregate tax basis of the
Common Stock surrendered in exchange therefor pursuant to the Merger (adjusted
to take account of fractional interests) and (ii) the holding period of the ADSs
will include the holding period of the Common Stock surrendered in exchange
therefor pursuant to the Merger. A U.S. Holder which is or following the Merger
will become a "5% shareholder" of Alcatel within the meaning of applicable
Treasury Regulations under Section 367 of the Code (in general, a person that
owns, actually or constructively under attribution rules, at least five percent
of either total voting power or total value of the stock of Alcatel immediately
after the Merger) will, however, only qualify for the treatment described in
this paragraph if such U.S. Holder files a "gain recognition agreement" with the
Internal Revenue Service.
A U.S. Holder who receives cash in lieu of a fractional interest in an ADS
will be treated as having received such fractional interest pursuant to the
Merger and as having sold it for cash. The amount of any capital gain or loss
attributable to such sale will be equal to the difference between the cash
received with respect to the fractional interest and the ratable portion of the
tax basis of the Common Stock surrendered that is allocated to such fractional
interest. Under the Internal Revenue Service Restructuring and Reform Act of
1998, in the case of an individual U.S. Holder, any such gain will be subject to
U.S. federal income tax at a maximum rate of 20% if such U.S. Holder's holding
period in the Common Stock is more than 12 months at the Effective Time.
The tax opinions are not binding on the Internal Revenue Service or any
court and do not preclude the Internal Revenue Service or a court from reaching
a contrary conclusion. Moreover, no rulings have been or will be sought from the
Internal Revenue Service concerning the tax consequences of the Merger. If the
Merger is not treated as a reorganization under Section 368 of the Code, a U.S.
Holder would recognize capital gain or loss equal to the difference between the
aggregate fair market value of the ADSs received and the aggregate tax basis of
the Common Stock surrendered in exchange therefor.
CERTAIN U.S. INFORMATION REPORTING REQUIREMENTS. Treasury Regulations
promulgated pursuant to Section 6038B of the Code require each U.S. Holder of
Common Stock who is or will become a "5% shareholder" of Alcatel (in general, a
person that owns, actually or constructively under the attribution rules, at
least five percent of either the total voting power or total value of the stock
of Alcatel immediately after the Merger) to file an IRS Form 926 and attach a
statement setting forth certain information concerning the exchange of Common
Stock for ADSs pursuant to the Merger, unless such 5% shareholder (i) has
properly entered into a gain recognition agreement with the Internal Revenue
Service, (ii) is a tax-exempt entity and the income from the Merger is not
unrelated business income, or (iii) will report the income from the Merger on
its timely-filed U.S. federal income tax return for the taxable year that
includes the date of the Merger. The penalty for failing to comply with this
requirement is equal to 10% of the fair market value at the time of the Merger
of the Common Stock owned by such 5% shareholder (subject to a $100,000 limit,
unless the failure is due to intentional disregard).
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF HOLDING ADSS. A description
of certain U.S. federal income tax consequences of holding ADSs, including the
treatment of the payment of dividends by Alcatel with respect to such ADSs, is
set forth in the Alcatel Annual Report on Form 20-F for the year ended December
31, 1997. However, the description contained therein should be considered only
as a summary and does not purport to be a complete analysis of all potential tax
effects of the ownership of the ADSs. Because this summary does not discuss all
possible tax implications (such as tax consequences for holders of ADSs who are
dealers, or whose functional currency is not the U.S. dollar, or who are
otherwise subject
36
<PAGE>
to special treatment under U.S. Federal tax law), prospective owners of ADSs are
advised to consult their own tax advisors concerning the complete U.S. Federal,
state and local tax consequences, as well as the French tax consequences, of
their ownership of the ADSs.
U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING. A holder of ADSs may,
under certain circumstances, be subject to certain information reporting
requirements and a backup withholding tax at the rate of 31% with respect to
dividends paid on the ADSs or the proceeds of sale of the ADSs, unless such
holder (i) is a corporation or comes within certain other exempt categories, and
when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number ("T.I.N."), certifies that such holder is not subject to
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. A holder of ADSs who does not provide a correct T.I.N.
may be subject to penalties imposed by the Internal Revenue Service.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting. In
general, the purchase method accounts for a business combination as the
acquisition of one company by another. Purchase accounting requires that the
purchase price and costs of the acquisition be allocated to all of the assets
acquired, including in-process research and development, and liabilities
assumed, based on their fair value. If the purchase price exceeds the fair value
of the purchased company's net assets and the amount allocated to in-process
research and development and developed technology, the excess is recorded as
goodwill, and the developed technology and goodwill will be amortized over their
respective estimated lives. Earnings or losses of the purchased company are
included in the buyer's financial statements prospectively from the consummation
date of the acquisition. See "ALCATEL AND DSC UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS UNDER U.S. GAAP."
CERTAIN SECURITIES LAWS CONSIDERATIONS
The ADSs issued in connection with the Merger will have been registered
under the Securities Act. Such ADSs will be freely transferable, except that
ADSs issued to all former holders of Common Stock (or Options or Convertible
Notes, as the case may be) who are deemed to be "affiliates" of DSC at the time
of the Special Meeting (as "affiliates" is defined for purposes of Rule 145
under the Securities Act) may not be resold except in transactions permitted by
Rule 145 or as otherwise permitted under the Securities Act.
Pursuant to the Merger Agreement, DSC will deliver to Alcatel a list of
names and addresses of those persons who were, in DSC's reasonable judgment,
affiliates of DSC. DSC has agreed to provide Alcatel with such information and
documents as Alcatel shall reasonably request for purposes of reviewing such
list. DSC is obligated under the Merger Agreement to use its reasonable best
efforts to cause to be executed at least 30 days prior to the Special Meeting, a
letter substantially in the form attached as an exhibit to the Merger Agreement,
by each of the affiliates of DSC identified in such list.
STOCK EXCHANGE LISTING
The ADSs are listed on the NYSE, and the principal trading market for the
Alcatel Shares is the Paris Bourse. The Alcatel Shares are also listed on the
Amsterdam, Antwerp, Brussels, Frankfurt, Stockholm, Tokyo and Swiss stock
exchanges and are quoted on SEAQ International. Alcatel expects that the ADSs to
be issued in the Merger or upon exercise of Substitute Options will be approved
for listing on the NYSE prior to the Effective Time.
RIGHTS AGREEMENT
Pursuant to the Merger Agreement, DSC has agreed that, prior to the earlier
of (i) the vote of the DSC stockholders at the Special Meeting or (ii) October
31, 1998, DSC will not (a) redeem its rights issued under the Rights Agreement
(the "Rights") or amend or terminate the Rights Agreement, or (b) permit
37
<PAGE>
the Rights to become non-redeemable at the redemption price currently in effect.
Notwithstanding the foregoing, immediately prior to the Effective Time, DSC has
agreed to redeem the Rights. DSC has entered into an Amendment to the Rights
Agreement which provides that neither the Merger Agreement nor the transactions
contemplated thereby will result in a distribution of the Rights provided for
thereunder or the occurrence of a Distribution Date (as defined in the Rights
Agreement) or a "flip-in" or "flip-over" event (as such events are described in
the Rights Agreement).
MERGER AGREEMENT AMENDMENT
On July 21, 1998, the First Amendment to the Merger Agreement was executed
and provides, among other things, that holders of options to purchase shares of
Common Stock under DSC stock option plans may cancel such options and receive a
cash payment rather than ADSs in consideration for such cancellation. In
addition, First Amendment eliminated certain provisions of the Merger Agreement
relating to the parties' obligations in seeking pooling-of-interest accounting
treatment. The First Amendment to the Merger Agreement is attached hereto as
Annex B and incorporated herein by reference.
CONVERTIBLE NOTES
DSC has outstanding approximately $400,000,000 principal amount of 7%
Convertible Notes due August 1, 2004 pursuant to an Indenture between DSC and
the Bank of New York, dated as of August 12, 1997 (the "Indenture"). The
Convertible Notes are not currently redeemable, and it is anticipated that such
notes will remain outstanding following the Effective Time. The Convertible
Notes (each of which has a face amount of $1,000) are convertible into shares of
Common Stock at a conversion price of $49.725 per share of Common Stock, subject
to adjustment under certain circumstances. As of December 31, 1997, DSC had
reserved approximately 8,044,000 shares of Common Stock for issuance upon
conversion of the Convertible Notes. The Indenture governing the Convertible
Notes provides that upon the occurrence of a transaction such as the Merger, the
resultant entity will execute a supplemental indenture providing that holders of
Convertible Notes can thereafter (as long as the Notes remain convertible)
convert their Notes only into the type and amount of consideration receivable
upon the Merger by a holder of the number of shares of Common Stock into which
such Notes were convertible immediately prior to the Merger.
Pursuant to the Merger Agreement, DSC, The Bank of New York (as trustee) and
Alcatel have agreed to execute a supplemental indenture to the Indenture to
provide that, following the Effective Time, holders of Convertible Notes may
convert such notes into ADSs on the terms and ratios set forth in the Indenture.
It is currently contemplated that some or all of the ADSs to be issued upon
conversion of the Convertible Notes would be purchased on the market or in
negotiated transactions by the Surviving Corporation.
38
<PAGE>
ALCATEL AND DSC
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS UNDER U.S. GAAP
The following Unaudited Pro Forma Combined Income Statement combines
Alcatel's and DSC's historical consolidated income statements for the year ended
December 31, 1997, giving effect to the Merger as if it had occurred on January
1, 1997. The Unaudited Pro Forma Combined Balance Sheet combines Alcatel's and
DSC's historical consolidated balance sheets as of December 31, 1997, giving
effect to the Merger as if it had occurred on December 31, 1997. Of the total
purchase price, 14.4 billion francs (US$2.4 billion) represented the value of
in-process research and development. The excess of the purchase price of DSC
(exclusive of the amount allocated to in-process research and development) over
the net identifiable assets and liabilities of DSC is reported as developed
technology and goodwill (included in Intangibles in the Unaudited Pro Forma
Combined Balance Sheet). The carrying values of DSC's net assets are assumed to
equal their fair values for purposes of these Unaudited Pro Forma Combined
Financial Statements, unless indicated otherwise in the Notes to Unaudited Pro
Forma Combined Financial Statements. These values are subject to revision.
However, management believes that any resulting adjustments from purchase price
allocation (other than the potential adjustments described in Note 6 to the
Unaudited Pro Forma Combined Financial Statements) will not have a material
effect on Alcatel's financial position or its results of operations.
The historical financial information of Alcatel has been derived from the
audited consolidated financial statements for the year ended December 31, 1997
which are included elsewhere herein and should be read in conjunction with such
financial information and the notes thereto. The Unaudited Pro Forma Combined
Financial Statements reflect the disposition of GEC Alsthom (See Note 2 to the
Unaudited Pro Forma Combined Financial Statements) by Alcatel and the
acquisition of DSC and have been prepared applying U.S. GAAP. Alcatel's
consolidated financial statements for the year ended December 31, 1997 have been
converted from French GAAP to U.S. GAAP and translated into U.S. dollars for
purposes of this presentation. French GAAP differs in certain significant
respects from U.S. GAAP. A French GAAP to U.S. GAAP reconciliation has been
provided for Alcatel on pages 43 to 45 as of and for the year ended December 31,
1997. For further information concerning the differences between French GAAP and
U.S. GAAP, see Notes 30 and 31 of the Alcatel "Notes to Consolidated Financial
Statements," included elsewhere herein.
The historical financial information of DSC has been derived from the
audited financial statements for the year ended December 31, 1997 which are
included elsewhere herein and should be read in conjunction with such financial
information and the notes thereto.
The Unaudited Pro Forma Combined Balance Sheet and Unaudited Pro Forma
Combined Income Statement were prepared assuming the consummation of the Merger,
which is accounted for under the purchase method of accounting. The unaudited
pro forma adjustments are described in the accompanying notes. The unaudited pro
forma adjustments represent Alcatel's preliminary determination of the necessary
adjustments and are based upon certain assumptions Alcatel considers reasonable
under the circumstances. Final amounts may differ from those set forth below.
The unaudited pro forma financial information presented herein may not be
indicative of the results of operations as they would have been if Alcatel and
DSC had been a single entity during 1997, nor is it necessarily indicative of
the results of operations which may occur in the future. Anticipated
efficiencies from the consolidation of Alcatel and DSC are not fully
determinable and have been excluded from the amounts included in the pro forma
amounts presented herein.
39
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT UNDER U.S. GAAP
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ALCATEL
---------------------------------------------- PRO FORMA
PRO FORMA ADJUSTMENTS ADJUSTMENTS
---------------------- ---------------
DISPOSITION OF DSC ACQUISITION OF
GEC ALSTHOM PRO FORMA ---------------------- DSC
(FF) (FF) (FF) (USD) (FF) (FF)
--------- ---------------------- ----------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. 185,868 (54,312) 131,556 1,575 9,214
Cost of revenue...................... 140,804 (42,544) 98,260 913 5,341
--------- ------- ----------- ----- --------- -----
Gross profit....................... 45,064 (11,768) 33,296 662 3,873 --
--------- ------- ----------- ----- --------- -----
Operating costs and expenses:
Research and product development... 11,642 (1,761) 9,881 252 1,474
Selling, general and
administrative................... 26,023 (8,460) 17,563 232 1,357
In-process research and
development...................... -- -- -- 135 790
Restructuring costs................ 1,694 (803) 891 -- --
Asset write-down................... -- -- -- 22 129
Other operating costs.............. 1,404 -- 1,404 11 64 579(e)
--------- ------- ----------- ----- --------- -----
Total operating costs and
expenses....................... 40,763 (11,024) 29,739 652 3,814 579
--------- ------- ----------- ----- --------- -----
Operating income................... 4,301 (744) 3,557 10 59 (579)
Interest income...................... 5,585 (918) 4,667 27 158
Interest expense..................... (6,839) 285 (6,554) (34) (199)
Gain on sale of stock in
subsidiaries....................... 2,176 -- 2,176 -- --
Other income (expense), net.......... (191) (11) (202) 159 930
--------- ------- ----------- ----- --------- -----
Income before income taxes......... 5,032 (1,388) 3,644 162 948 (579)
Share in net income of equity
affiliates......................... 569 290 859 -- --
Provision for income taxes........... (2,529) 1,025 (1,504) (113) (661) 89(e)
Minority interests................... (148) 37 (111) -- --
--------- ------- ----------- ----- --------- -----
Net income......................... 2,924 (36) 2,888 49 287 (490)
--------- ------- ----------- ----- --------- -----
--------- ------- ----------- ----- --------- -----
Basic income per share............... 18.63 18.20
--------- -----------
--------- -----------
Diluted income per share............. 18.42 17.97
--------- -----------
--------- -----------
Average shares used in per share
computation:
Basic.............................. 157 157
Diluted............................ 159 159
<CAPTION>
COMBINED
------------------------
PRO FORMA PRO FORMA
(FF) (USD)
----------- -----------
<S> <C> <C>
Revenue.............................. 140,770 23,388
Cost of revenue...................... 103,601 17,212
----------- -----------
Gross profit....................... 37,169 6,176
----------- -----------
Operating costs and expenses:
Research and product development... 11,355 1,887
Selling, general and
administrative................... 18,920 3,143
In-process research and
development...................... 790 131
Restructuring costs................ 891 148
Asset write-down................... 129 21
Other operating costs.............. 2,047 340
----------- -----------
Total operating costs and
expenses....................... 34,132 5,670
----------- -----------
Operating income................... 3,037 506
Interest income...................... 4,825 802
Interest expense..................... (6,753) (1,122)
Gain on sale of stock in
subsidiaries....................... 2,176 362
Other income (expense), net.......... 728 121
----------- -----------
Income before income taxes......... 4,013 669
Share in net income of equity
affiliates......................... 859 143
Provision for income taxes........... (2,076) (345)
Minority interests................... (111) (18)
----------- -----------
Net income......................... 2,685 449
----------- -----------
----------- -----------
Basic income per share............... 15.26 2.55
----------- -----------
----------- -----------
Diluted income per share............. 15.13 2.57
----------- -----------
----------- -----------
Average shares used in per share
computation:
Basic.............................. 176 176
Diluted............................ 178 178
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
40
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET UNDER U.S. GAAP
AS OF DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
ALCATEL PRO FORMA
---------------------------------------------- ADJUSTMENTS
PRO FORMA ADJUSTMENTS -------------
---------------------- ACQUISITION
DISPOSITION OF DSC OF
GEC ALSTHOM PRO FORMA -------------------- DSC
(FF) (FF) (FF) (USD) (FF) (FF)
--------- ---------------------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents........ 18,593 20,911 39,504 277 1,667 (1,047)(a)
(1,631)(d)
Marketable securities............ 9,481 (3,150) 6,331 341 2,052 --
Receivables...................... 76,465 (32,719) 43,746 436 2,624 --
Inventories...................... 43,627 (20,805) 22,822 374 2,251 --
Other current assets............. 23,531 (8,442) 15,089 167 1,005 (12)(f)
--------- ------- ----------- --------- --------- -------------
Total current assets........... 171,697 (44,205) 127,492 1,595 9,599 (2,690)
--------- ------- ----------- --------- --------- -------------
Property and Equipment, Net........ 27,898 (6,648) 21,250 444 2,672 --
Intangibles, Including Goodwill.... 36,807 (3,368) 33,439 178 1,071 6,055(b)
Other Noncurrent Assets............ 30,157 (841) 29,316 223 1,342 (90)(f)
--------- ------- ----------- --------- --------- -------------
Total assets................... 266,559 (55,062) 211,497 2,440 14,684 3,275
--------- ------- ----------- --------- --------- -------------
--------- ------- ----------- --------- --------- -------------
Liabilities and Shareholders'
Equity
Current Liabilities
Short-term debt.................. 11,952 7,040 18,992 -- -- --
Accounts payable................. 29,327 (11,064) 18,263 110 662 --
Accrued liabilities.............. 117,857 (60,763) 57,094 330 1,986 265(c)
728(f)
Current portion of long-term
debt........................... 5,853 -- 5,853 33 199 (193)(d)
--------- ------- ----------- --------- --------- -------------
Total current liabilities...... 164,989 (64,787) 100,202 473 2,847 800
--------- ------- ----------- --------- --------- -------------
Long-term Debt, net of current
portion.......................... 22,084 (262) 21,822 629 3,786 (1,378)(d)
Other Noncurrent Liabilities....... 24,073 (4,360) 19,713 122 734 457(f)
Commitments and Contingencies
Shareholders' Equity
Capital stock.................... 6,527 -- 6,527 1 6 776(a)
Additional capital............... 44,582 -- 44,582 756 4,550 19,827(a)
Accumulated translation
adjustment..................... (6,179) 162 (6,017) 3 18 (18)(a)
Retained earnings................ 13,472 14,185 27,657 499 3,002 (17,448)(a)
--------- ------- ----------- --------- --------- -------------
58,402 14,347 72,749 1,259 7,576 3,137
Treasury stock, at cost.......... (2,989) -- (2,989) (43) (259) 259
--------- ------- ----------- --------- --------- -------------
Total shareholders' equity..... 55,413 14,347 69,760 1,216 7,317 3,396
--------- ------- ----------- --------- --------- -------------
Total liabilities and
shareholders' equity......... 266,559 (55,062) 211,497 2,440 14,684 3,275
--------- ------- ----------- --------- --------- -------------
--------- ------- ----------- --------- --------- -------------
<CAPTION>
COMBINED
------------------------
PRO FORMA PRO FORMA
(FF) (USD)
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents........ 38,493 6,395
Marketable securities............ 8,383 1,393
Receivables...................... 46,370 7,704
Inventories...................... 25,073 4,166
Other current assets............. 16,082 2,672
----------- -----------
Total current assets........... 134,401 22,330
----------- -----------
Property and Equipment, Net........ 23,922 3,974
Intangibles, Including Goodwill.... 40,565 6,739
Other Noncurrent Assets............ 30,568 5,079
----------- -----------
Total assets................... 229,456 38,122
----------- -----------
----------- -----------
Liabilities and Shareholders'
Equity
Current Liabilities
Short-term debt.................. 18,992 3,155
Accounts payable................. 18,925 3,144
Accrued liabilities.............. 60,073 9,982
Current portion of long-term
debt........................... 5,859 973
----------- -----------
Total current liabilities...... 103,849 17,254
----------- -----------
Long-term Debt, net of current
portion.......................... 24,230 4,026
Other Noncurrent Liabilities....... 20,904 3,473
Commitments and Contingencies
Shareholders' Equity
Capital stock.................... 7,309 1,214
Additional capital............... 68,959 11,457
Accumulated translation
adjustment..................... (6,017) (1,000)
Retained earnings................ 13,211 2,195
----------- -----------
83,462 13,866
Treasury stock, at cost.......... (2,989) (497)
----------- -----------
Total shareholders' equity..... 80,473 13,369
----------- -----------
Total liabilities and
shareholders' equity......... 229,456 38,122
----------- -----------
----------- -----------
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS OF ALCATEL AND DSC UNDER U.S. GAAP
NOTE 1. BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Income Statement for the year ended
December 31, 1997 and the Unaudited Pro Forma Combined Balance Sheet at December
31, 1997 of Alcatel and DSC have been prepared under U.S. GAAP based upon the
purchase method of accounting. The DSC Balance Sheet was translated from U.S.
dollars to French francs at the year end exchange rate of 6.019. The DSC Income
Statement was translated from U.S. dollars to French francs at the average
exchange rate for 1997 of 5.85. The exchange rate used to translate the combined
unaudited pro forma amounts from French francs to U.S. dollars was 6.019 and has
been made solely for the convenience of the reader. Certain DSC historical
financial statement amounts have been reclassified for pro forma presentation.
NOTE 2. PRO FORMA ADJUSTMENTS--DISPOSITION OF GEC ALSTHOM
On June 22, 1998, Alcatel and GEC of the United Kingdom sold a portion of
their interest in GEC Alsthom in a global initial public offering of shares. The
transaction reduced Alcatel's former 50% interest to approximately 24%.
Adjustments to reflect the elimination of all assets and liabilities of GEC
Alsthom, which are replaced with a 24% equity investment in GEC Alsthom, have
been made to the Unaudited Pro Forma Combined Balance Sheet. A 14.2 billion
francs (US$2.4 billion) gain on the disposition of the interest in GEC Alsthom,
has been reflected in equity but not in the Unaudited Pro Forma Combined Income
Statement. Adjustments to reflect the elimination of all revenues and expenses
of GEC Alsthom, which are replaced with a 24% equity interest in the net income
of GEC Alsthom, have been made to the Unaudited Pro Forma Combined Income
Statement.
NOTE 3. PURCHASE PRICE OF DSC
The estimated purchase price of the Merger is approximately 26.5 billion
francs (US$4.4 billion), including estimated transaction costs of approximately
0.3 billion francs (US$44 million). The estimated purchase price includes the
conversion of all the outstanding Common Stock into approximately 97.3 million
ADSs (19.5 million Alcatel Shares) using the Exchange Ratio of 0.815 with an
estimated value of 25.2 billion francs (US$4.2 billion) and estimated cash
payments related to all unexercised DSC stock options of 1.0 billion francs
(US$174 million). Both the value of the shares and the cash payments assume a
value of $35 per share of Common Stock.
NOTE 4. PRO FORMA ADJUSTMENTS--ACQUISITION OF DSC
Adjustments included in the Unaudited Pro Forma Combined Financial
Statements are as follows:
a) Reflects the elimination of Common Stock, additional paid-in-capital,
accumulated translation adjustment and retained earnings, the expected
issuance of 97.3 million ADSs (19.5 million Alcatel Shares) using the
Exchange Ratio of 0.815 and cash payments for all unexercised DSC stock
options. Also reflects the write-off of in-process research and
development, as discussed in Note 5, which has been excluded from the
Unaudited Pro Forma Income Statement as it was considered a non-recurring
charge.
b) Reflects the remaining excess of the purchase price of DSC over its net
book value and the elimination of DSC's pre-existing goodwill. See Notes
5 and 6.
c) Reflects Alcatel's estimate of transaction costs.
d) Reflects Alcatel's intention to pay off approximately 1.6 billion francs
(US$261 million) of DSC's outstanding debt, including a make-whole
provision of approximately 60 million francs (US$10.0 million) as a
result of the early retirement of debt, using existing cash balances.
e) Reflects an increase in net intangible amortization related to the
Merger, including the deferred income tax effect related to the
amortization of developed technology. See Note 5.
f) Reflects preliminary fair value adjustments to DSC's assets and
liabilities, as well as the liability for deferred taxes and special
severance arrangements for certain DSC management personnel.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS OF ALCATEL AND DSC UNDER U.S. GAAP (CONTINUED)
NOTE 4. PRO FORMA ADJUSTMENTS--ACQUISITION OF DSC (CONTINUED)
The net pro forma impact on interest expense/income of the above cash
transactions is immaterial.
NOTE 5. IN-PROCESS RESEARCH AND DEVELOPMENT
A preliminary estimate of the intangible assets acquired aggregated
approximately 21.1 billion francs (US$3.6 billion). Alcatel received a
preliminary independent appraisal of the intangible assets which indicated that
approximately 14.4 billion francs (US$2.4 billion) of the acquired intangible
assets consisted of in-process research and development. Through the acquisition
of DSC, Alcatel will add new in-process and existing technology capabilities.
The development of the next generation of products will involve certain risks
due to the complexity and uncertainty inherent in research and development
efforts. As a result, the amount identified as in-process research and
development will be expensed as a non-recurring, non-tax deductible charge by
Alcatel when the Merger is consummated. Of the remaining intangible assets of
7.1 billion francs (US$1.2 billion), 1.2 billion francs (US$200.0 million) will
be assigned to developed technology and 5.9 billion francs (US$1.0 billion) will
be assigned to goodwill. The developed technology and goodwill will be amortized
on a straight-line basis over five and fifteen years, respectively, in
accordance with their respective estimated useful lives. Management believes
that the unamortized balance is recoverable through future operating results.
These estimates could change as the estimates of the fair value of assets
acquired and liabilities assumed are finalized and the appraisal of in-process
research and development is completed.
NOTE 6. RESTRUCTURING AND INTEGRATION
No adjustments have been reflected in the Unaudited Pro Forma Combined
Income Statement for the costs or benefits that Alcatel management anticipates
will result from the restructuring and integration of DSC's operations with
those of Alcatel and its affiliates. In addition, no adjustments have been
reflected in the Unaudited Pro Forma Combined Balance Sheet for the costs to
restructure and integrate the operations of DSC with those of Alcatel and its
affiliates. At this time, Alcatel management has not had sufficient time to
complete its plans relative to this restructuring and integration. Alcatel
management expects that the complete formulation of its restructuring and
integration plan will be completed in September 1998. Alcatel management
believes the restructuring and integration plan, when completed, will include
the costs and benefits associated with rationalizing duplicate and overlapping
personnel, facilities and product lines. The completion of the restructuring and
integration plan will impact the final allocation of the purchase price and, to
the extent the plan relates to Alcatel's operations, will result in a one time
restructuring charge to operations. Alcatel management currently estimates that
the restructuring and integration plan could increase the amount of goodwill
reflected on the Unaudited Pro Forma Combined Balance Sheet by approximately 2.4
billion francs (US$400 million) to 3.0 billion francs (US$500 million),
resulting in additional annual goodwill amortization of approximately 160.7
million francs (US$27 million) to 200.0 million francs (US$33 million).
Additionally, the restructuring and integration plan could result in a one time
restructuring charge to operations of approximately 0.6 billion francs (US$100
million) to 1.2 billion francs (US$200 million).
NOTE 7. PRO FORMA NET INCOME PER SHARE
The pro forma combined basic and diluted net income per share is based on
the weighted average number of common and dilutive equivalent shares outstanding
of Alcatel and for pro forma basic and diluted earnings per share, the average
shares include the 97.3 million ADSs (19.5 million Alcatel Shares) expected to
be issued to holders of Common Stock in the Merger using the Exchange Ratio of
0.815.
43
<PAGE>
FRENCH GAAP/US GAAP RECONCILIATION
ALCATEL ALSTHOM AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNDER
FRENCH GAAP A B C D E
(FF) (FF) (FF) (FF) (FF) (FF)
------------- --------- --- --------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Revenue.......................................... 185,868 -- -- -- -- --
Cost of revenue.................................. 140,303 563 -- -- -- --
--
------------- --------- --- --------- ---
Gross profit................................... 45,565 (563) -- -- -- --
--
------------- --------- --- --------- ---
Operating costs and expenses:
Research and product development............... 11,642 -- -- -- -- --
Selling, general and administrative............ 25,923 -- -- -- -- --
Restructuring costs............................ 1,218 -- -- -- -- --
Other operating costs.......................... -- -- -- 1,209 112 83
--
------------- --------- --- --------- ---
Total operating costs and expenses........... 38,783 -- -- 1,209 112 83
--
------------- --------- --- --------- ---
Operating income (loss)........................ 6,782 (563) -- (1,209) (112) (83)
Interest income.................................. 5,757 -- (113) -- -- --
Interest expense................................. (6,825) -- -- -- -- --
Gain on sale of stock in subsidiaries............ 2,193 -- (18) -- --
Other income (expense), net...................... (2,313) -- (238) 2,338 -- --
--
------------- --------- --- --------- ---
Income (loss) before income taxes.............. 5,594 (563) (351) 1,111 (112) (83)
Share in net income of equity affiliates......... 577 -- -- -- -- --
Provision for Income taxes....................... (1,353) -- -- -- -- --
Minority interests............................... (153) -- -- -- -- --
--
------------- --------- --- --------- ---
Net income (loss).............................. 4,665 (563) (351) 1,111 (112) (83)
--
--
------------- --------- --- --------- ---
------------- --------- --- --------- ---
Basic income (loss) per share.................... 29.73
-------------
-------------
Diluted income (loss) per share.................. 29.13
-------------
-------------
Average shares used in per share computation:
Basic.......................................... 157
Diluted........................................ 171
<CAPTION>
OTHER UNDER
F G H I ADJUSTMENT US GAAP
(FF) (FF) (FF) (FF) (FF) (FF)
--- --- --- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.......................................... -- -- -- -- -- 185,868
Cost of revenue.................................. -- -- -- -- (62) 140,804
-- --
--- --------- --- -----------
Gross profit................................... -- -- -- -- 62 45,064
-- --
--- --------- --- -----------
Operating costs and expenses:
Research and product development............... -- -- -- -- -- 11,642
Selling, general and administrative............ -- -- -- -- 100 26,023
Restructuring costs............................ -- 476 -- -- -- 1,694
Other operating costs.......................... -- -- -- -- -- 1,404
-- --
--- --------- --- -----------
Total operating costs and expenses........... -- 476 -- -- 100 40,763
-- --
--- --------- --- -----------
Operating income (loss)........................ -- (476) -- -- (38) 4,301
Interest income.................................. 1 -- -- -- (60) 5,585
Interest expense................................. -- -- -- -- (14) (6,839)
Gain on sale of stock in subsidiaries............ -- -- -- -- 1 2,176
Other income (expense), net...................... 1 4 9 4 4 (191)
-- --
--- --------- --- -----------
Income (loss) before income taxes.............. 2 (472) 9 4 (107) 5,032
Share in net income of equity affiliates......... -- -- -- -- (8) 569
Provision for Income taxes....................... (13) -- -- (1,158) (5) (2,529)
Minority interests............................... -- -- -- 3 2 (148)
-- --
--- --------- --- -----------
Net income (loss).............................. (11) (472) 9 (1,151) (118) 2,924
-- --
-- --
--- --------- --- -----------
--- --------- --- -----------
Basic income (loss) per share.................... 18.63
-----------
-----------
Diluted income (loss) per share.................. 18.42
-----------
-----------
Average shares used in per share computation:
Basic.......................................... 157
Diluted........................................ 159
</TABLE>
44
<PAGE>
FRENCH GAAP/U.S. GAAP RECONCILIATION
ALCATEL ALSTHOM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
UNDER
FRENCH
GAAP B C D E F
(FF) (FF) (FF) (FF) (FF) (FF)
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents......................... 18,593 -- -- --
Marketable securities............................. 9,226 -- -- 255
Receivables....................................... 76,465 -- -- --
Inventories....................................... 43,627 -- -- --
Other current assets.............................. 22,959 -- -- --
------------- --------- --------- --------- --------- ---------
Total current assets............................ 170,870 -- -- -- -- 255
------------- --------- --------- --------- --------- ---------
Property and Equipment, at cost..................... 77,901 -- -- -- --
Less accumulated depreciation and amortization.... (49,360) -- -- -- --
28,541 -- -- -- -- --
Goodwill............................................ 29,896 -- 1,893 3,570 2,869 (30)
Other Noncurrent Assets............................. 22,465 -- 68 -- 2,695
------------- --------- --------- --------- --------- ---------
Total assets.................................... 251,772 -- 1,961 3,570 2,869 2,920
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt................................... 11,952 -- -- -- --
Accounts payable.................................. 29,327 -- -- -- --
Accrued liabilities............................... 88,141 -- -- -- --
Current portion of long-term debt................. 5,853 -- -- -- --
------------- --------- --------- --------- --------- ---------
Total current liabilities....................... 135,273 -- -- -- -- --
------------- --------- --------- --------- --------- ---------
Long-term Debt, net of current portion.............. 21,916 -- -- -- --
Other Noncurrent Liabilities........................ 50,629 -- -- -- --
Commitments and Contingencies
Shareholders' Equity
Capital stock..................................... 6,527 -- -- -- --
Additional capital................................ 35,772 2,882 -- 4,915 -- --
Accumulated translation adjustment................ (5,607) -- (530) -- --
Retained earnings................................. 9,846 (2,477) 2,491 (1,345) 2,869 2,920
------------- --------- --------- --------- --------- ---------
46,538 405 1,961 3,570 2,869 2,920
Treasury stock, at cost........................... (2,584) (405) -- -- --
------------- --------- --------- --------- --------- ---------
Total shareholders' equity...................... 43,954 -- 1,961 3,570 2,869 2,920
------------- --------- --------- --------- --------- ---------
Total liabilities and shareholders' equity.... 251,772 -- 1,961 3,570 2,869 2,920
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
<CAPTION>
UNDER
US
G H I J GAAP
(FF) (FF) (FF) (FF) (FF)
--------- --- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents......................... -- -- -- -- 18,593
Marketable securities............................. -- -- -- -- 9,481
Receivables....................................... -- -- -- -- 76,465
Inventories....................................... -- -- -- -- 43,627
Other current assets.............................. -- -- -- 572 23,531
--------- --- --------- ----------- -----------
Total current assets............................ -- -- -- 572 171,697
--------- --- --------- ----------- -----------
Property and Equipment, at cost..................... -- -- -- 257 78,158
--
Less accumulated depreciation and amortization.... -- -- (900) (50,260)
-- -- -- (643) 27,898
Goodwill............................................ (144) (311) (467) (469) 36,807
Other Noncurrent Assets............................. -- -- 4,252 677 30,157
--------- --- --------- ----------- -----------
Total assets.................................... (144) (311) 3,785 137 266,559
--------- --- --------- ----------- -----------
--------- --- --------- ----------- -----------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt................................... -- -- -- -- 11,952
Accounts payable.................................. -- -- -- -- 29,327
Accrued liabilities............................... (1,053) -- 210 30,559 117,857
Current portion of long-term debt................. -- -- -- -- 5,853
--------- --- --------- ----------- -----------
Total current liabilities....................... (1,053) -- 210 30,559 164,989
--------- --- --------- ----------- -----------
Long-term Debt, net of current portion.............. -- -- -- 168 22,084
Other Noncurrent Liabilities........................ (805) -- 2,513 (28,264) 24,073
Commitments and Contingencies
Shareholders' Equity
Capital stock..................................... -- -- -- -- 6,527
Additional capital................................ -- -- -- 1,013 44,582
Accumulated translation adjustment................ (122) -- 34 46 (6,179)
Retained earnings................................. 1,836 (311) 1,028 (3,385) 13,472
--------- --- --------- ----------- -----------
1,714 (311) 1,062 (2,326) 58,402
Treasury stock, at cost........................... -- -- -- -- (2,989)
--------- --- --------- ----------- -----------
Total shareholders' equity...................... 1,714 (311) 1,062 (2,326) 55,413
--------- --- --------- ----------- -----------
Total liabilities and shareholders' equity.... (144) (311) 3,785 137 266,559
--------- --- --------- ----------- -----------
--------- --- --------- ----------- -----------
</TABLE>
45
<PAGE>
NOTES TO THE FRENCH GAAP/U.S. GAAP RECONCILIATION
A ACCOUNTING FOR LONG-TERM CONTRACTS
In the Engineering and Systems segment, revenue and margins of long-term
contracts were previously recorded upon completion. From January 1, 1997, the
Engineering and Systems segment recognized revenue and margins of long-term
contracts using the percentage of completion method. The adjustment shown in the
income statement results from a change in accounting estimates relating to the
use of the percentage of completion method.
B ACCOUNTING FOR GAINS ON SALES OF TREASURY STOCK
Alcatel includes gains on its own shares sold by its subsidiaries in the
determination of its income. Under U.S. GAAP, such gains are credited directly
to equity.
C AMORTIZATION OF ACQUISITION GOODWILL
In France, goodwill is generally amortized over 20 years and the
amortization expense is not considered a component of operating income. Under
U.S. GAAP, goodwill must be amortized against income over its estimated life not
to exceed 40 years and the amortization expense must be included in operating
income. Alcatel has concluded that the goodwill has an indeterminate life and,
as a result, has used a 40-year life in preparing the U.S. GAAP reconciliation.
In addition, goodwill amortization expense has been reclassified to other
operating costs, a component of operating income.
D FAIR VALUE ACCOUNTING FOR THE MERGERS WITH COMPAGNIE FINANCIERE ALCATEL,
ALSTHOM AND GENERALE OCCIDENTALE
Alcatel accounted for the mergers with Compagnie Financiere Alcatel, Alsthom
and Generale Occidentale, paid for with its own newly-issued shares, on the
basis of the historical value of the net assets transferred to the group. Under
U.S. GAAP, the net assets acquired by issuing shares are recorded at the fair
value of the shares issued using the purchase accounting method. Accordingly,
additional goodwill amortization has been reflected in the U.S. GAAP
reconciliation.
E ACQUISITION GOODWILL CHARGED AGAINST SHAREHOLDERS' EQUITY
A portion of the goodwill related to the acquisition of a majority interest
in Telettra (1991), Alcatel SEL (1992) and of the 30% stake in Alcatel N.V.
(1992) was directly charged against shareholders' equity. Under U.S. GAAP,
acquisition goodwill is classified as an intangible asset. For reconciliation
purposes, Alcatel has amortized acquisition goodwill over a 40-year life.
F ACCOUNTING FOR MARKETABLE SECURITIES AND MARKETABLE EQUITY SECURITIES
Alcatel accounts for its investments at the lower of historical cost or fair
value, assessed investment by investment. Under U.S. GAAP, certain investments
in equity securities are stated at fair value. Changes in fair value related to
trading securities are included in net income while those relating to
available-for-sale securities are included directly in shareholders' equity.
G LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFIT AND OTHER COSTS
Alcatel accounts for such liabilities when restructuring programs have been
finalized and approved by group management. The group has applied EITF 94-3,
SFAS 88 and SFAS 112 in preparing the U.S. GAAP reconciliation. Under such
requirements, the conditions to be met in order to record a restructuring
reserve in the balance sheet are more stringent than under Alcatel policy.
H ACCOUNTING FOR THE ACQUISITION OF THE 30% STAKE IN ALCATEL N.V.
In connection with this transaction, Alcatel used forward exchange contracts
to reduce its foreign currency exposure relative to the cash payments in 1993
and 1994. The premium on these contracts was charged to expenses in 1992 net
income. Under U.S. GAAP, the premium should be included in net income over the
life of the contracts.
I INCOME TAXES
Income taxes have been accounted for in accordance with the Financial
Accounting Standard Board's Statement No. 109 "Accounting for Income Taxes" The
main reconciling differences arise from the recognition of more deferred tax
assets (and subsequent adjustment to the valuation allowance) under U.S. GAAP
than under French GAAP.
J OTHER ADJUSTMENT
The short term portion of accrued pensions, retirement obligations, accrued
contract costs and other reserves is reclassified from non current liabilities
to current liabilities under U.S. GAAP (35,240 million francs at December 31,
1997).
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DESCRIPTION OF ALCATEL SHARES
Set forth below is certain information concerning Alcatel Shares and related
summary information concerning certain provisions of Alcatel's Articles of
Association and By-laws (the "Alcatel Articles of Association") and applicable
provisions of the LOI SUR LES SOCIETES COMMERCIALES (the "French Corporation
Law"). Such summary information and the description of Alcatel Shares do not
purport to be complete and are qualified in their entirety by reference in the
full charter of Alcatel. The English translation of the Alcatel Articles of
Association is incorporated by reference in this Proxy Statement/Prospectus.
GENERAL
Alcatel presently has only one class of capital stock outstanding,
consisting of the Alcatel Shares, nominal value FF40 per share. Pursuant to the
Alcatel Articles of Association, such shares may be held in registered or bearer
form, at the option of the shareholder, provided that a holder of 3% or more of
the Alcatel Shares must apply to register all of such holder's shares. This
registration requirement will apply to all the Alcatel Shares as may be acquired
subsequently, in excess of the 3% threshhold. At June 12, 1998, there were
167,529,898 Alcatel Shares outstanding. All of the Alcatel Shares are fully-paid
and nonassessable.
The principal characteristics of the Alcatel Shares, as provided in the
Alcatel Articles of Association and French Corporation Law, are described below.
CHANGES IN SHARE CAPITAL
The share capital of Alcatel may be increased only with the approval of the
stockholders at an extraordinary general meeting. See "--Stockholders' Meeting
and Voting Rights." The stockholders may delegate to the Alcatel Board the power
required to effect, in one or more stages, any increases in share capital
previously approved by the stockholders. Increases in share capital may be made
either by the issuance of additional shares or by increases in the nominal value
of existing shares. Additional Alcatel Shares may be issued for cash or in
satisfaction of indebtedness by Alcatel, for assets contributed in kind or upon
the conversion of debt securities previously issued by Alcatel. The share
capital may also be increased through the capitalization of existing reserves,
in which case the voting and quorum procedures of an ordinary general meeting of
stockholders will apply. Stock dividends may be distributed by approval of the
stockholders at an ordinary general meeting in lieu of payment of cash
dividends, as described under
"--Dividend and Liquidation Rights."
The share capital of Alcatel may be decreased only with the approval of the
Alcatel stockholders at an extraordinary general meeting. Reductions in share
capital can be made either by decreasing the nominal value of Alcatel Shares or
by reducing the number of such shares. A reduction in the number of Alcatel
Shares can be made either by an exchange of Alcatel Shares or by the repurchase
and cancellation by Alcatel of its shares. The procedures for reduction of share
capital are different depending on whether the reduction is motivated by losses
or by other reasons.
STOCKHOLDERS' MEETING AND VOTING RIGHTS
In accordance with French Corporation Law, there are two types of general
meetings of stockholders: ordinary and extraordinary.
Ordinary general meetings of stockholders are required for matters such as
the election of directors, appointment of the statutory auditors, approval of
the annual accounts and determination of dividends.
Extraordinary general meetings of stockholders are required for all matters
requiring amendment of the Alcatel Articles of Association, approval of mergers,
the creation of a new class of shares, an increase or decrease in share capital,
a waiver of preemptive subscription rights and authorization of the issuance of
investment certificates and notes convertible or exchangeable into Alcatel
Shares.
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A meeting of the stockholders of Alcatel may be called by the Alcatel Board
or, in the event the Alcatel Board does not call the meeting, by the statutory
auditors of Alcatel or by an agent appointed by the President of the Commercial
Court (PRESIDENT DU TRIBUNAL DE COMMERCE) at the request of (i) any interested
party, in case of an emergency, (ii) stockholders representing 10% or more of
the capital, or (iii) certain qualifying orgainized groups of stockholders
meeting certain specific conditions pursuant to French Corporation Law. The
right to attend and vote at a stockholders' meeting is only accorded to those
stockholders whose shares have been registered in their name five days prior to
the meeting, or with respect to bearer shares, to those who deposit with Alcatel
at least five days prior to the date of the meeting a certificate from an
accredited intermediary (a French broker, bank or authorized financial
institution registered as such in France) evidencing the holding of the shares
until the time fixed for the meeting. A quorum for an ordinary general
stockholders' meeting consists of the holders of shares constituting one-fourth
of the voting power of the outstanding shares of Alcatel entitled to vote. A
quorum for an extraordinary stockholders' meeting consists of the holders of
shares constituting one-third of the voting power of the outstanding shares of
Alcatel entitled to vote. A majority of the vote cast is required for actions
taken at an ordinary stockholders' meeting and a qualified majority of 66.66% of
the vote cast is required for actions taken at an extraordinary stockholders'
meeting, provided that unanimity is required to increase liabilities of
stockholders.
Each Alcatel Share entitles the holder thereof to one vote at ordinary
general meetings of the stockholders of Alcatel. However, double voting rights
(or two votes per share) are assigned to all fully paid, registered Alcatel
Shares which the holder has held for three years. These double voting rights
expire when registered Alcatel Shares are converted to bearer Alcatel Shares or
when ownership of such shares is transferred. Under French Corporation Law,
shares held directly or indirectly by Alcatel are not entitled to voting rights.
In addition, a stockholder may not cast, as single votes, in his own name or as
a proxy, more than 8% of the votes to which such stockholder is entitled for any
motion at a stockholders' meeting, provided that, if the stockholder also has
the right to exercise double voting rights in its own name or by proxy, the 8%
limitation may be exceeded solely to take into account such double voting
rights. In no case, however, may a stockholder exercise voting rights exceeding
16% of the total number of the votes to which Alcatel Shares present or
represented at general stockholders' meeting are entitled.
Amendments of the Alcatel Articles of Association require the approval of
the holders of a qualified majority of at least 66.66% of the shares entitled to
vote, provided that unanimity is required to increase liabilities of
stockholders.
DIVIDEND AND LIQUIDATION RIGHTS
Dividends are declared at ordinary general meetings of stockholders, and are
paid once a year unless the Alcatel Board approves an interim dividend and
distributes such dividend in accordance with French Corporation Law. Qualifying
stockholders receive an initial dividend of 5% per annum on the amount in which
their shares are fully paid.
For each financial year, the Alcatel Board examines the financial statements
and recommends the disposition of all unappropriated profits, including the
amount of net profits of Alcatel which will be distributed by way of dividends
among the holders of Alcatel Shares to the extent that stockholders do not
specify any other use by action at the ordinary general meeting. At its own
discretion, the Alcatel Board may propose to make a dividend available in
Alcatel Shares in addition to cash. If the Alcatel Board has proposed, and the
stockholders have approved, a dividend also payable in Alcatel Shares, a
stockholder may elect to receive such dividend entirely in cash or entirely in
such shares, plus or minus cash for fractional amounts. The value of the Alcatel
Shares is determined by reference to the price of the shares on the Paris BOURSE
and cannot be less than their nominal value. In both 1996 and 1997, the Alcatel
Board proposed and the stockholders approved that dividends be payable in
Alcatel Shares in addition to cash. Accordingly in 1996, 1,337,022 Alcatel
Shares were issued as dividends. In 1997 and 1998, no dividends were paid in
Alcatel Shares.
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Under French Corporation Law, the ordinary general meeting at which annual
dividends may be declared must be held within six months after the end of the
company's financial year (unless otherwise authorized by court order). Annual
dividends must be paid within nine months of the end of the company's financial
year, unless otherwise authorized by court order, and are payable to persons
holding shares on the date of payment. Dividends not claimed within five years
of the date of payment become the property of the French government-owned CAISSE
DES DEPOTS ET CONSIGNATIONS.
If earnings are sufficient, the Alcatel Board has the authority, without the
approval of stockholders, to declare and pay interim dividends on the basis of
audited accounts. French Corporation Law requires that interim dividends amount
to at least five francs per share. Interim dividends may also be paid in the
form of stock in lieu of cash. Alcatel has historically not paid interim
dividends.
Upon a liquidation of Alcatel, any liquidation proceeds remaining after
paying off all of Alcatel's liabilities would be distributed PARI PASSU among
the holders of Alcatel Shares in proportion to the total nominal value of the
shares held by each holder.
HOLDING AND TRANSFER OF ALCATEL SHARES
Pursuant to the Alcatel Articles of Association, Alcatel Shares may be held
in registered or in bearer form. The two forms are interchangeable upon request
of the holder. Any stockholder owning 3% of the total number of Alcatel Shares,
or other securities convertible into Alcatel Shares, must request, within five
trading days of reaching such ownership level, that all such shares, as well as
any shares subsequently acquired in excess of such amount, be in registered
form.
Pursuant to French Corporation Law concerning "dematerialization" of
securities, ownership rights in securities, including the Alcatel Shares
(whether in registered or bearer form), are not represented by share
certificates. In the case of registered securities, Alcatel maintains an account
in the name of the holder of such securities, or appoints an agent to maintain
such account on its behalf.
The holder of registered securities may manage its own securities (in which
case such securities are called TITRES NOMINATIFS PURS) or appoint an
"accredited intermediary" to do so (in which case such securities are called
TITRES NOMINATIFS ADMINISTRES). In the case of securities in bearer form, the
securities are held on the stockholder's behalf by an accredited intermediary
and recorded in its books in an account opened in the name of the stockholder by
such accredited intermediary.
Transferring ownership of Alcatel Shares is generally effected by an entry
recorded in the transfer account maintained by or on behalf of Alcatel for this
purpose. However, in certain circumstances, including those in which the Alcatel
Shares are held in bearer form by a beneficial owner who is not a resident of
France, the custodian may, in its discretion, issue physical certificates
(CERTIFICATS REPRESENTATIFS) representing Alcatel Shares held in bearer form,
PROVIDED THAT such shares are held and, if traded, traded outside of France.
Such securities are transferable by delivery of such certificates. In
determining whether or not to issue CERTIFICATS REPRESENTATIFS in these
circumstances, the custodian considers certification practices in foreign
markets and may consult with Alcatel.
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DESCRIPTION OF ALCATEL AMERICAN DEPOSITARY SHARES
Upon issuance in connection with the consummation of the Merger, the ADSs
representing Alcatel Shares will be evidenced by ADRs and will be issuable
pursuant to the Amended and Restated Deposit Agreement (the "Deposit
Agreement"), dated as of March 10, 1997, between Alcatel and The Bank of New
York (the "Depositary") and all holders of ADRs issued from time to time
thereunder. The following is a summary of material provisions of the Deposit
Agreement. It does not purport to be a complete statement of all of the terms
and conditions of the Deposit Agreement and is therefore qualified in its
entirety by reference to the Deposit Agreement, a copy of which has been filed
as an exhibit to the Registration Statement. Additional copies of the Deposit
Agreement are available for inspection at the principal office of the Depositary
(the "Principal Office") which is located at 101 Barclay Street, New York, New
York 10286 and at the principal office of Electro Banque, the custodian under
the Deposit Agreement (the "Custodian"), which is located at 44 rue Washington,
75008 Paris, France.
AMERICAN DEPOSITARY RECEIPTS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the Deposit
Agreement. Each ADS represents one-fifth of an Alcatel Share (or evidence of a
right to receive one-fifth of such share) deposited under the Deposit Agreement
with the Custodian or any successor custodian. An ADR may evidence any whole
number of ADSs.
DEPOSIT AND WITHDRAWAL OF ALCATEL SHARES
As used herein, "Deposited Securities" means Alcatel Shares deposited under
the Deposit Agreement and any and all other securities, property and cash
received by the Depositary or the Custodian in respect or in lieu of such
Alcatel Shares.
Subject to the terms of the Deposit Agreement, the Depositary has agreed
that upon deposit with the Custodian or with the Depositary at its Principal
Office for forwarding to the Custodian of Alcatel Shares accompanied by all
certifications required (including agreements or assignment of dividends to be
paid in the future on such Alcatel Shares or appropriate evidence thereof or
evidence of rights to receive such Alcatel Shares by subscription), it will,
upon payment of all taxes, charges and fees provided in the Deposit Agreement,
execute and deliver at its Principal Office to or upon the order of the person
or persons specified by the depositor an ADR or ADRs registered in the name or
names of such person or persons for the whole number of ADSs issuable in respect
of such deposit. Pursuant to the Deposit Agreement, no Alcatel Shares will be
accepted for deposit unless accompanied by evidence satisfactory to the
Depositary (which may be an opinion of counsel) that any necessary approval has
been granted by (i) the governmental agency in the Republic of France, if any,
that is regulating the currency exchange and (ii) the governmental authority in
the Republic of France, if any, that is regulating foreign ownership of French
companies, and Alcatel agrees that it will not, and will not permit any of its
subsidiaries to, deposit Alcatel Shares of which any necessary approval has not
been granted.
Pursuant to the Deposit Agreement, the Depositary may, unless it receives
written instructions to the contrary, (i) issue ADRs prior to the receipt of
Alcatel Shares ("Pre-Release") and (ii) deliver Alcatel Shares prior to the
receipt and cancellation of ADRs, including ADRs which were issued under (i)
above but for which Alcatel Shares may not have been received. The Depositary
may receive ADRs in lieu of Alcatel Shares in satisfaction of a Pre-Release.
Each such transaction shall be (a) preceded or accompanied by a written
representation by the person or entity (the "Pre-Releasee") to whom ADRs or
Alcatel Shares are delivered that the Pre-Releasee or its customer beneficially
owns the Alcatel Shares or ADRs to be delivered to the Depositary, or a written
representation from the Pre-Releasee that it will hold such Alcatel Shares or
ADRs in trust for the Depositary until their delivery to the Depositary or
Custodian, reflect on its records the Depositary as the owner of such Alcatel
Shares or ADRs and deliver such Alcatel Shares or ADRs upon the Depositary's
request, (b) at all times fully collateralized (marked to market
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daily) with cash, United States government securities or other collateral of
comparable safety and liquidity, (c) terminable by the Depositary on not more
than five business days' notice and (d) subject to such further indemnities and
credit regulations as the Depositary deems appropriate. The Depositary will
generally limit the number of Alcatel Shares represented by ADRs issued and
outstanding at any time under clause (i) above to 30% of the Alcatel Shares on
deposit with the Custodian under the Deposit Agreement.
Upon surrender of ADRs at the Principal Office of the Depositary, and upon
payment of the charges provided in the Deposit Agreement, ADR holders are
entitled to delivery of the whole number of Alcatel Shares deposited under the
Deposit Agreement ("Deposited Securities") represented by the ADSs evidenced by
such ADRs. Delivery of certificates and other documents of title for the
Deposited Securities and such other property represented by the ADSs evidenced
by the surrendered ADRs may be made at the Principal Office of the Depositary at
the risk and expense of the ADR holder.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
Pursuant to the Deposit Agreement, the Depositary is obligated to convert as
promptly as practicable any dividends and other distributions by Alcatel and to
take all actions which are necessary or appropriate to ensure that the Custodian
or the Depositary, as the case may be, receives all such dividends and
distributions on all Deposited Securities.
The Depositary is required, to the extent that in its reasonable judgment it
can convert francs (or any other foreign currency) on a reasonable basis into
dollars and transfer the resulting dollars to the United States within one day
of receipt, to convert all cash dividends and other cash distributions which it
or the Custodian receives on the underlying Alcatel Shares into dollars, and to
distribute, after deduction of any customary charges incurred in connection with
such conversion, the amount thus received to the holders of ADRs. Such
distribution may be made upon an averaged or other practicable basis without
regard to any distinctions among the holders entitled to such distribution
because of the application of exchange restrictions or otherwise. The amount
distributed will be reduced by any amounts required to be withheld by Alcatel,
the Custodian or the Depositary on account of taxes or other governmental
charges. If the Depositary determines in its judgment any foreign currency
received by it cannot be so converted and transferred on a reasonable basis, the
Depositary may distribute the foreign currency (or an appropriate document
evidencing the right to receive such currency) received by it or in its
discretion hold such foreign currency uninvested and without liability (with
interest thereon) for the respective accounts of the ADR holders entitled to
receive the same.
If a distribution by Alcatel consists of a dividend in, or distribution
other than, cash or Alcatel Shares, the Depositary shall distribute to the
holders of outstanding ADRs, in proportion to their holdings, the property or
securities received by the Custodian. If, in the judgment of the Depositary, it
cannot make an effective distribution of such property or securities
proportionately among the holders of ADRs, then after consultation with Alcatel,
the Depositary shall sell the securities or property it received, and distribute
the net proceeds of such sale to the holders entitled to such distribution.
In the event that the Depositary determines that any distribution in cash or
property is subject to any tax or governmental charges which the Depositary or
the Custodian is obligated to withhold, the Depositary may use such cash or
dispose, including by public or private sale, of all or a portion of such
property in such amounts and in such manner as the Depositary deems necessary
and practicable to pay such taxes or governmental charges, and the Depositary
shall distribute the net proceeds of any such sale or the balance of any such
cash or property after deduction of such taxes or governmental charges to the
ADR holders entitled thereto in proportion to their holdings.
If Alcatel offers or causes to be offered to the holders of Deposited
Securities any rights to subscribe for additional Alcatel Shares or any rights
of any other nature, the Depositary will, if requested by Alcatel:
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(a) make such rights available to all or certain holders of ADRs by
means of warrants or otherwise, if lawful and feasible, or
(b) if making such rights available is not lawful or not feasible, or if
the rights represented by such warrants or other instruments are not exercised
and appear to be about to lapse, use its best efforts to sell such rights or
warrants or other instruments at public or private sale, at such place or places
and upon such terms as the Depositary may deem reasonable and proper, and
allocate the net proceeds of such sales (net of all taxes and governmental
charges payable in connection with such rights) for the account of the holders
of ADRs otherwise entitled thereto upon an averaged or other practicable basis
without regard to any distinctions among such holders because of the application
of exchange restrictions with regard to a particular holder or otherwise.
If registration under the Securities Act is required with respect to the
securities to which any such rights relate in order for ADR holders to be
offered or sold the securities represented by such rights, the Depositary will
not make available to holders of ADRs any right to subscribe for or to purchase
any securities unless a registration statement is in effect. Alcatel does not,
however, have any obligation to file such a registration statement or to have
such a registration statement declared effective. If the Depositary can neither
make such rights available to such holders nor dispose of such rights and make
the net proceeds available to such holders, then the Depositary will allow the
rights to lapse.
RECORD DATES
Whenever any cash dividend or other cash distribution is to be declared and
paid or any distribution other than cash is to be declared and made, or whenever
rights are issued with respect to the Deposited Securities, or whenever the
Depositary receives notice of any meeting of holders of Deposited Securities,
the Depositary will fix a record date (which will be the same date that holders
of Alcatel Shares will be entitled to such rights) for the determination of the
holders of ADRs who shall be entitled to receive such dividend, distribution or
rights, or the net proceeds of the sale thereof or to give instructions for the
exercise of voting rights, if any, at any such meeting.
VOTING OF THE UNDERLYING ALCATEL SHARES
Upon receipt of notice of any meeting of holders of Alcatel Shares or other
Deposited Securities, the Depositary will, as soon as practicable thereafter,
mail to the holders of ADRs a summary in English of the notice containing the
information set forth in such notice of meeting. The holders of ADRs are
entitled under the Deposit Agreement, subject to any applicable provisions of
French law and of the Alcatel Articles of Association and the ADRs, to exercise
the voting rights, if any, pertaining to the whole number of Deposited
Securities represented by their respective ADSs and will receive from the
Depositary summaries in English of any materials or documents provided by
Alcatel for the purpose of exercising such voting rights. Voting rights may be
exercised only in respect of five ADSs or integral multiples thereof (subject to
appropriate proportional adjustment in the event of a stock split,
reclassification or other similar event).
According to French Corporation Law and the Alcatel Articles of Association,
only holders of Alcatel Shares who hold their Alcatel Shares in registered form
for at least three years will be entitled to double voting rights. Thus, holders
of ADRs representing Alcatel Shares in bearer form will not be entitled to
double voting rights. A stockholder may not exercise, in respect of single votes
that it may cast in its own name or by proxy, more than 8% of the votes to which
the shares present or represented at a general stockholders' meeting are
entitled; PROVIDED THAT, if the stockholder also has the right to exercise
double voting rights in its own name or by proxy, the 8% limitation may be
exceeded solely to take into account such double voting rights. In no case,
however, may a stockholder exercise voting rights exceeding 16% of the total
number of votes to which shares present or represented at a general
stockholders' meeting are
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entitled. These double voting rights expire when registered Alcatel Shares are
converted to bearer shares or when ownership of Alcatel Shares is transferred.
Upon receipt by the Depositary of properly completed voting instructions,
the Depositary will either, in its discretion, vote such Deposited Securities in
accordance with such instructions or forward such instructions to the Custodian,
and the Custodian shall endeavor, insofar as practicable and permitted under any
applicable provisions of French law, the Alcatel Articles of Association and the
Deposited Securities, to vote or cause to be voted the Deposited Securities in
accordance with any nondiscretionary instructions set forth in such request. The
Depositary shall not vote or attempt to exercise the right to vote that attaches
to the Alcatel Shares or other Deposited Securities other than in accordance
with such instructions or in accordance with the statement above as to the
manner in which Alcatel Shares with respect to which the Depositary does not
receive properly completed voting instructions or receives a blank proxy will be
voted.
The Depositary will not charge holders for taking any of the foregoing
actions in connection with meetings of stockholders.
NOTICES AND REPORTS
On or before the first date on which Alcatel gives notice, by publication or
otherwise, of any meeting of holders of Alcatel Shares or other Deposited
Securities or any adjourned meeting of such holders, or of the taking of any
action in respect of any cash or other distributions or the offering of any
rights, Alcatel will transmit to the Custodian a copy of the notice thereof in
the form given or to be given to holders of Deposited Securities. The Depositary
will arrange for the prompt mailing of copies of such notices and other reports
and communications which are received by the Custodian as the holder of
Deposited Securities to all ADR holders to the extent not previously mailed.
INSPECTION OF TRANSFER BOOKS
The Depositary will keep books at its Principal Office in New York City for
the registration and transfer of ADRs that at all reasonable times will be open
for inspection by the holders of ADRs, PROVIDED that such inspection shall not
be for the purpose of communicating with holders of ADRs in the interest of a
business or object other than the business of Alcatel or a matter related to the
Deposit Agreement or the ADRs.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of the ADRs and the Deposit Agreement may at any time be amended by
agreement between Alcatel and the Depositary. Any amendment which imposes or
increases any fees or charges (other than taxes or other governmental charges),
or which otherwise prejudices any substantial existing right of ADR holders,
will not take effect as to outstanding ADRs until the expiration of three months
after written notice of such amendment has been given by the Depositary to the
record holders of outstanding ADRs. Every holder of an ADR at the expiration of
such three months period will be deemed, by continuing to hold such ADR, to
consent and agree to such amendment and to be bound by the Deposit Agreement as
so amended. In no event may any amendment impair the right of any ADR holder to
surrender his ADR and receive the Alcatel Shares and any other property
represented thereby, except in order to comply with mandatory provisions of
applicable law.
Whenever so directed by Alcatel, the Depositary will terminate the Deposit
Agreement by mailing notice of such termination to the record holders of all
ADRs then outstanding at least 30 days prior to the date fixed in such notice
for such termination. The Depositary may likewise terminate the Deposit
Agreement if 90 days shall have expired after the Depositary shall have
delivered to Alcatel a written notice of its election to resign and a successor
Depositary shall not have been appointed and accepted its appointment. If any
ADRs remain outstanding after the date of termination, the Depositary thereafter
will
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discontinue the registration of transfers of ADRs, will suspend the distribution
of dividends to the holders thereof, will not accept deposits of Alcatel Shares
and will not give any further notices or perform any further acts under the
Deposit Agreement, except that the Depositary will continue to collect dividends
and other distributions pertaining to Deposited Securities, will sell property
and rights and convert Deposited Securities into cash as provided in the Deposit
Agreement and will continue to deliver Deposited Securities together with any
dividends or other distributions received with respect thereto and the net
proceeds of the sale of any rights or other property in exchange for surrendered
ADRs. At any time after the expiration of one year from the date of termination,
the Depositary may sell the underlying Alcatel Shares and any other property and
hold the net proceeds, together with any other cash then held, without liability
for interest, for the pro rata benefit of the holders of ADRs which have not
theretofore been surrendered.
CHARGES OF DEPOSITARY
The Depositary will charge the party to whom ADRs are delivered against
deposits of Alcatel Shares, and the party surrendering ADRs for delivery of
Alcatel Shares or other underlying securities, up to $5.00 for each 100 ADSs (or
portion thereof) represented by the ADRs issued or surrendered. Taxes and other
governmental charges, any applicable transfer or registration fees on the
deposit or withdrawal of Alcatel Shares and certain cable, telex and facsimile
transmission expenses are payable by persons depositing or withdrawing Alcatel
Shares, as well as reasonable expenses which are incurred by the Depositary in
the conversion of foreign currency into dollars.
All other charges and expenses of the Depositary will be borne by the
Depositary or paid by Alcatel in accordance with agreements in writing to be
entered into between Alcatel and the Depositary. All charges and expenses of any
custodian are for the sole account of the Depositary.
TRANSFER OF ADRS
The ADRs are transferable on the books of the Depositary upon surrender of
such ADRs by the holder, provided that the ADRs are properly endorsed and
accompanied by the proper instruments of transfer. The Depositary will execute
and deliver a new ADR to the person entitled thereto. As a condition precedent
to the execution and delivery, registration of transfer or surrender of any ADR,
or the delivery of any distribution in respect thereof or withdrawal of any
Deposited Securities, the Custodian may require payment of a sum sufficient to
reimburse it for any tax or other governmental charge and any stock transfer or
registration fee with respect thereto and payment of any applicable charges
payable by the holders of ADRs. Notwithstanding any other provision of the
Deposit Agreement or the ADRs, the surrender of outstanding ADRs and withdrawal
of Deposited Securities may not be suspended, except as required in connection
with (i) temporary delays caused by closing the transfer books of the
Depositary, the deposit of Alcatel Shares in connection with voting at a
stockholders' meeting or the payment of dividends, (ii) the payment of fees,
taxes and similar charges, and (iii) compliance with any United States or
foreign laws or governmental regulations relating to the ADRs or the withdrawal
of Deposited Securities.
The execution and delivery, registration of transfer and surrender of ADRs
may be suspended or withheld, during any period when the transfer books of the
Depositary are closed, or if any such action is deemed necessary or advisable by
the Depositary or Alcatel at any time or from time to time because of any
requirement of law or of any government or governmental authority, body or
commission, or under any provision of the Deposit Agreement or the Alcatel
Articles of Association or for any other reason.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The Merger Agreement contemplates the merger of Newco into DSC, with DSC
surviving the Merger as a wholly owned subsidiary of Alcatel. This section of
the Proxy Statement/Prospectus describes certain aspects of the proposed Merger,
including certain provisions of the Merger Agreement. The description of the
Merger Agreement contained in this Proxy Statement/Prospectus does not purport
to be complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached hereto as Annex A, and a copy of the
First Amendment dated as of July 21, 1998 to the Merger Agreement is included as
Annex B to this Proxy Statement/Prospectus, each of which is incorporated herein
by reference. All holders of Common Stock are urged to read carefully the Merger
Agreement in its entirety.
EFFECTIVE TIME; CLOSING
The Merger Agreement provides that the Merger shall become effective on the
date and time at which the Certificate of Merger has been duly filed with the
Secretary of State of the State of Delaware or at such other date and time as is
agreed between the parties and specified in the Certificate of Merger. It is
anticipated that such filing will occur concurrently with the closing of the
Merger (the "Closing"), which Closing, in turn, will, subject to the
satisfaction or waiver of the conditions set forth in the Merger Agreement, take
place at 10:00 a.m., New York City time, on a date to be specified by the
parties, no later than the second business day after the satisfaction or waiver
of the conditions set forth in the Merger Agreement, unless another time or date
is agreed to in writing by the parties.
APPRAISAL RIGHTS
There are no appraisal rights available in connection with the Merger. See
"COMPARISON OF STOCKHOLDER RIGHTS--Appraisal Rights."
MERGER CONSIDERATION
Pursuant to the Merger Agreement, as of the Effective Time (i) each share of
Common Stock held by DSC as treasury stock and each share of Common Stock owned
by Newco immediately prior to the Effective Time will automatically be cancelled
and retired and will cease to exist, and no consideration or payment shall be
delivered therefor or in respect thereto and (ii) each share of Common Stock
issued and outstanding immediately prior to the Effective Time (other than
shares to be cancelled in accordance with clause (i)) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into 0.815 of an ADS. All shares of Common Stock to be converted into ADSs
shall, by virtue of the Merger and without any action on the part of the holders
thereof, cease to be outstanding, be cancelled and retired and cease to exist,
and each holder of a certificate representing prior to the Effective Time any
such shares of Common Stock shall thereafter cease to have any rights with
respect thereto, except the right to receive (i) the ADSs representing Alcatel
Shares into which such shares of Common Stock have been converted, (ii) at the
appropriate payment date or as promptly as practicable thereafter, the
proportionate amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender of the holder's certificate
formerly representing shares of Common Stock and a payment date subsequent to
such surrender payable with respect to the ADSs and (iii) any cash, without
interest, to be paid in lieu of any fraction of an ADS.
EXCHANGE OF SHARE CERTIFICATES
At or promptly following the Effective Time, Alcatel shall deposit, or cause
to be deposited, with the Exchange Agent the ADRs, representing ADSs, for the
benefit of the holders of shares of Common Stock which are converted into ADSs.
As of or promptly following the Effective Time, DSC shall cause the Exchange
Agent to mail (and make available for collection by hand) to each holder of
record of a certificate or certificates, which immediately prior to the
Effective Time represented outstanding shares of
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Common Stock (the "Certificates"), a letter of transmittal and instructions for
surrendering the Certificates in exchange for ADSs. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with a letter of
transmittal duly completed and validly executed in accordance with the
instructions thereto, and such other documents as may be required pursuant to
such instructions, the holder of such Certificate shall be entitled to receive
in exchange therefor the fraction of an ADS for each share of Common Stock
formerly represented by such Certificate, and the Certificate so surrendered
shall be forthwith cancelled.
No fraction of an ADS will be issued in the Merger and no dividend or other
distribution, stock split or interest with respect to Alcatel Shares shall
relate to any fractional ADS, and such fractional interest shall not entitle the
owner thereof to vote or to any rights as a security holder of the ADSs. In lieu
of any such fractional security, each holder of shares of Common Stock otherwise
entitled to a fraction of an ADS will be entitled to receive from the Exchange
Agent a cash payment representing such holder's proportionate interest in the
net proceeds from the sale by the Exchange Agent on behalf of all such holders
of the Excess ADSs. The sale of the Excess ADSs by the Exchange Agent shall be
executed on the NYSE through one or more member firms of the NYSE and shall be
executed in round lots to the extent practicable.
COMPANY STOCK OPTIONS AND COMPANY EMPLOYEE STOCK PURCHASE PLANS
The Merger Agreement provides that DSC shall use its reasonable best efforts
to cause each Option (other than any option granted under the ESPPs) which is
outstanding immediately prior to the Effective Time to be cancelled immediately
prior to the Effective Time. Immediately upon cancellation, each holder of an
Option so cancelled, in exchange for such cancellation, shall receive an amount
in cash equal to the product of (1) the number of shares of Common Stock subject
to such Option and (2) the excess, if any, of the fair market value of an ADS
multiplied by the Exchange Ratio over the per share exercise price of such
Option. For purposes of the foregoing, "fair market value" shall mean the
closing price of the ADSs on the NYSE on the business day immediately preceding
the Effective Time.
Each Option which is not cancelled as provided in the preceding paragraph as
of the Effective Time (other than any Options granted under the 1990 Stock
Option and Cash Payment Plan or the Special Celcore Incentive Plan, which
Options shall terminate at the Effective Time) shall become and represent a
Substitute Option to purchase a number of ADSs determined by multiplying (i) the
number of shares of Common Stock subject to such Option immediately prior to the
Effective Time by (ii) the Exchange Ratio, at an exercise price per ADS
(increased to the nearest whole cent) equal to the exercise price per share of
Common Stock immediately prior to the Effective Time divided by the Exchange
Ratio. After the Effective Time, each Substitute Option shall be exercisable
upon the same terms and conditions as were applicable to the related Option
prior to the Effective Time subject to accelerated vesting if and to the extent
provided in the applicable plans as of the date hereof.
As of July 31, 1998, DSC's ESPPs shall be terminated.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
each of DSC and Alcatel relating to, among other things, (i) corporate existence
and power; (ii) corporate authorization; (iii) required consents, approvals,
orders and authorizations of governmental authorities relating to the Merger
Agreement and noncontravention of certain agreements as a result of the Merger
Agreement; (iv) capitalization; (v) documents filed by each of DSC and Alcatel
with the Commission and the accuracy of information contained therein; (vi)
financial statements; (vii) the accuracy of information supplied by each of DSC
and Alcatel in connection with the Registration Statement of which this Proxy
Statement/ Prospectus is a part; (viii) absence of material adverse changes;
(ix) tax treatment and (x) finder's fees. DSC also made representations and
warranties to Alcatel relating to (i) absence of undisclosed liabilities; (ii)
taxes; (iii) employee benefit plans; (iv) litigation and compliance with
applicable laws; (v) labor
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matters; (vi) certain material contracts; (vii) environmental matters; (viii)
intellectual property; (ix) opinion of financial advisors; (x) recommendation of
the DSC Board; and (xi) amendment of the Rights Agreement of DSC.
NO SOLICITATION; RECOMMENDATION
The Merger Agreement provides that DSC shall not (whether directly or
indirectly through advisors, agents or other intermediaries), and shall cause
its officers, directors, advisors, representatives or other agents not to,
directly or indirectly, (i) solicit, initiate or encourage any Acquisition
Proposal (as defined below) or (ii) engage in discussions or negotiations with,
or disclose any non-public information relating to DSC or its subsidiaries or
afford access to the properties, books or records of DSC or its subsidiaries to,
any person that has made an Acquisition Proposal or has advised DSC that it is
interested in making an Acquisition Proposal; PROVIDED THAT, if and only if (i)
the DSC Board believes in good faith, based on such matters as it deems
relevant, including the advice of DSC's financial advisor, that such Acquisition
Proposal is a Financially Superior Proposal (as defined below) or that there is
a reasonable likelihood that such person will make a Financially Superior
Proposal and (ii) the DSC Board determines in good faith, based on such matters
as it deems relevant, including the advice of DSC's outside legal counsel, that
the failure to engage in such negotiations or discussions or provide such
information is reasonably likely to result in a breach of the fiduciary duties
of the DSC Board under applicable law, then DSC may furnish information with
respect to itself and its subsidiaries and participate in negotiations regarding
such Acquisition Proposal; PROVIDED THAT DSC will not disclose any information
to such person without entering into a confidentiality agreement (an "Acceptable
Confidentiality Agreement") that is substantially similar to the confidentiality
agreement between Alcatel and DSC (the "Confidentiality Agreement"). For
purposes of the Merger Agreement, "Acquisition Proposal" means any offer or
proposal for a merger, consolidation, recapitalization, liquidation or other
business combination involving DSC or any of its material subsidiaries (as
defined in the Merger Agreement) or the acquisition or purchase of over 30% or
more of any class of equity securities of DSC or any of its material
subsidiaries, or any tender offer (including self-tenders) or exchange offer
that if consummated would result in any person beneficially owning 30% or more
of any class of equity securities of DSC or any of its material subsidiaries, or
a substantial portion of the assets of DSC or any of its subsidiaries, taken as
a whole, other than transactions contemplated by the Merger Agreement. For
purposes of the Merger Agreement, a "Financially Superior Proposal" means an
Acquisition Proposal which in the reasonable judgment of the DSC Board, based on
such matters as it deems relevant, including the advice of DSC's financial
advisor, (i) is likely to result in a transaction providing aggregate value
greater than that provided pursuant to the Merger Agreement and (ii) is
reasonably capable of being financed by the person making such Proposal. In the
event that an executed Acceptable Confidentiality Agreement does not contain any
standstill restrictions or contains standstill restrictions less restrictive
than those in the Confidentiality Agreement or contains standstill restrictions
which are then waived or not enforced by DSC then Alcatel shall similarly be
released from the standstill restrictions in the Confidentiality Agreement or
the standstill restrictions in the Confidentiality Agreement shall automatically
be modified to be no more restrictive than those contained in the executed
Acceptable Confidentiality Agreement or DSC shall waive and not enforce the
standstill restrictions in the Confidentiality Agreement.
The Merger Agreement provides that the DSC Board shall recommend approval
and adoption of the Merger Agreement and the Merger by DSC's stockholders;
except that it may withdraw, modify or change such recommendation if but only if
(i) it believes in good faith, based on such matters as it deems relevant,
including the advice of DSC's financial advisors, that a Financially Superior
Proposal has been made and (ii) it has determined in good faith, based on the
advice of outside counsel, that the failure to withdraw, modify or change such
recommendation is reasonably likely to result in a breach of the fiduciary
duties of the DSC Board under applicable law.
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RIGHTS AGREEMENT
The Merger Agreement provides that prior to the earlier of (i) the vote of
the stockholders of DSC at the Special Meeting or (ii) October 31, 1998, without
the consent of Alcatel, DSC shall not (a) redeem the Rights or amend or modify
or terminate the Rights Agreement other than to delay the Distribution Date (as
defined therein) or to render the Rights inapplicable to the execution, delivery
and performance of the Merger Agreement and the Merger or (b) permit the Rights
to become non-redeemable at the redemption price currently in effect. The Merger
Agreement also provides that, notwithstanding the foregoing, immediately prior
to the Closing, DSC shall redeem the Rights.
REGULATORY APPROVALS
The Merger Agreement provides that DSC and Alcatel shall cooperate with one
another in seeking any such actions, consents, approvals or waivers or making
any such filings and furnishing information required in connection with this
Proxy Statement/Prospectus. Without limitation, each of DSC and Alcatel will use
its reasonable best efforts to take or cause to be taken all actions necessary
to obtain any clearance, waiver, approval or authorization relating to the HSR
Act from regulatory Governmental Entities (as defined in the Merger Agreement).
The Merger Agreement also provides that DSC and Alcatel will use their
reasonable best efforts to resolve such objections, if any, as may be asserted
with respect to the Merger or any other transaction contemplated thereby under
any Antitrust Law (as defined below). To the extent necessary to satisfy certain
conditions to the parties' obligations under the Merger Agreement insofar as
Antitrust Laws are concerned, Alcatel has agreed to, and if so directed by
Alcatel, DSC has agreed to and shall hold separate and/or divest certain assets
or operations of DSC with net revenues not greater than $175 million for the
year ended December 31, 1997. For purposes of the Merger Agreement, "Antitrust
Law" means the Sherman Act, as amended, the Clayton Act, as amended, EC Merger
Regulations and all other Federal, state and foreign statutes, rules,
regulations, orders, decrees, administrative and judicial doctrines, and other
laws that are designed or intended to prohibit, restrict or regulate competition
or actions having the purpose or effect of monopolization or restraint of trade.
See "REGULATORY APPROVALS."
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Each party's obligation to consummate the Merger is subject to the
satisfaction (or, to the extent permitted by applicable law, the waiver on or
prior to the Effective Time) of the following conditions: (i) the Merger
Agreement shall have been adopted, and the Merger approved, by the stockholders
of DSC in accordance with applicable law; (ii) any applicable waiting periods
under the HSR Act and the EC Merger Regulation (as defined below) relating to
the Merger shall have expired or been terminated; (iii) no provision of any
applicable law or regulation and no judgment, injunction, order or decree shall
prohibit the consummation of the Merger or the other transactions contemplated
by the Merger Agreement; (iv) the Form F-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order, and any material "Blue Sky" and other state securities
laws applicable to the registration and qualification of the ADSs following the
Closing shall have been complied with; (v) the ADSs issuable in accordance with
the Merger shall have been approved for listing on the NYSE, subject to official
notice of issuance; (vi) the other party to the Merger Agreement having
performed in all material respects its respective agreements and covenants
contained in or contemplated by the Merger Agreement that are required to be
performed by it at or prior to the Effective Time; (vii) the representations and
warranties of the other party to the Merger Agreement set forth in the Merger
Agreement, without giving effect to any materiality qualifications or
limitations therein or any references therein to a Material Adverse Effect (as
defined below), being true and correct in all respects as of the Effective Time
(or to the extent such representations and warranties speak as of an earlier
date, being true in all respect as of such earlier date, except (A) as otherwise
contemplated by the Merger Agreement and (B) for such failures to be true and
correct which in the aggregate would not have a
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Material Adverse Effect (as defined below); (viii) the receipt of an officer's
certificate from an officer of the other party, dated as of the date of the
Closing (the "Closing Date"), to the effect that to such officer's knowledge,
the conditions set forth in (vi) and (vii), as they relate to each party
respectively, have been satisfied or waived; and (ix) DSC and Alcatel each
having received a tax opinion from their tax counsel, Baker & McKenzie and
Skadden, Arps, Slate, Meagher & Flom LLP, respectively, in form and substance
reasonably satisfactory to such party, dated the Closing Date, to the effect
that the Merger will constitute a reorganization for United States federal
income tax purposes within the meaning of Section 368(a) of the Code.
For purposes of the Merger Agreement, "EC Merger Regulations" mean Council
Regulation (EEC) No. 4064/89 of December 21, 1989 on the Control of
Concentrations Between Undertakings, OJ (1989) L 395/1 (as amended) and the
regulations and decisions of the Commission of the European Community or other
organs of the European Union or European Community implementing such
regulations.
A "Material Adverse Effect" means, when used in connection with DSC or
Alcatel, a material adverse effect on the condition (financial or otherwise),
business, assets or results of operations of such party and their respective
subsidiaries, taken as a whole, that is not a result of general changes in the
economy in which such entities operate.
Additionally, Alcatel's obligations to consummate the Merger are further
subject to the satisfaction (or to the extent permitted by applicable law, the
waiver on or prior to the Effective Time) of the following conditions: (i) all
foreign laws regulating competition, antitrust, investment or exchange control
shall have been complied with, and all approvals required under such foreign
laws shall have been received; (ii) certain third party consents, approvals and
waivers shall have been obtained and DSC's representation regarding
non-contravention of agreements shall be true and correct in all respects as of
the closing without giving effect to the disclosure schedule provided by DSC in
connection with the Merger Agreement; (iii) no suit, action, proceeding or
investigation by any governmental entity, including the European Commission or
any organ of the European Union, shall have been commenced (and be pending)
against Alcatel, DSC or Newco or any of their respective affiliates, partners,
associates, officers or directors, or any officers or directors of such
partners, seeking (A) to prevent or delay the transactions contemplated by the
Merger Agreement, (B) material damages in connection therewith, (C) any other
remedy which would materially impair the intended benefits to Alcatel of the
Merger or otherwise have a Material Adverse Effect on either DSC or Alcatel or
(D) to impose criminal liability on any of the foregoing entities or persons
(each of (A)-(D), a "Material Adverse Consequence") and in each case, other than
(D), which Alcatel reasonably believes is reasonably likely to result in a
Material Adverse Consequence; and (iv) Alcatel shall have received certain
affiliate agreements from certain officers and directors of DSC.
TERMINATION AND FEES
The Merger Agreement may be terminated and the transactions contemplated by
the Merger Agreement may be abandoned at any time prior to the Closing Date,
whether before or after DSC has obtained stockholder approval: (a) by the mutual
written consent of DSC and Alcatel; (b) by either DSC or Alcatel, if the Merger
has not been consummated by March 31, 1999, or such other date, if any, as DSC
and Alcatel shall agree upon; PROVIDED THAT the party seeking to terminate
pursuant to this provision shall not have breached in any material respect its
obligations under the Merger Agreement; (c) by either DSC or Alcatel, if there
shall be any law or regulation that makes consummation of the transactions
contemplated by the Merger Agreement illegal or if any judgment, injunction,
order or decree enjoining Alcatel, Newco or DSC from consummating the
transactions contemplated by the Merger Agreement is entered and such judgment,
injunction, order or decree shall have become final and nonappealable; (d) by
Alcatel, if (i) the DSC Board shall have withdrawn or modified or amended in any
respect adverse to Alcatel or Newco its approval or recommendation of the Merger
or (ii) the DSC Board shall have recommended to the stockholders of DSC any
Acquisition Proposal or shall have resolved or announced an intention to do so,
or (iii) a tender offer or exchange offer for 30% or more of the outstanding
shares of Common Stock is
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announced or commenced and either (A) the DSC Board recommends acceptance of
such tender offer or exchange offer by its stockholders or (B) within 10
business days thereof, the DSC Board shall have failed to recommend against
acceptance of such tender offer or exchange offer by its stockholders or (iv)
DSC shall have otherwise breached (A) its obligations relating to the holding of
the Special Meeting, (B) its agreement to not solicit any Acquisition Proposal
or (C) its obligations relating to the Rights Agreement; (e) by either DSC or
Alcatel, if the approval of the stockholders of DSC of the Merger and the
adoption of the Merger Agreement shall not have been obtained at a duly held
meeting of stockholders of DSC or any adjournment thereof; (f) by DSC, if the
average of the daily closing prices per ADS as reported on the NYSE Composite
Tape for the twenty consecutive full NYSE trading days immediately preceding the
second full NYSE trading day prior to the Special Meeting shall be less than the
Floor Price (as herein defined). As used in the Merger Agreement, the term
"Floor Price" shall mean $37 unless the average of the Standard & Poor's 500
Index for such 20 consecutive day period is less than or equal to 92% of the
Standard & Poor's 500 Index immediately following the close of business on June
3, 1998, in which event the Floor Price shall be $35; (g) by DSC, after October
31, 1998, for the purpose of accepting a Financially Superior Proposal, so long
as the adoption of the Merger Agreement and the approval of the Merger by DSC's
stockholders at the Special Meeting shall not have been obtained prior to such
termination; or (h) by DSC, if the Closing does not occur as a result of the
nonfulfillment of the condition set forth in clause (iii) of Alcatel' s
conditions under "--Conditions to the Consummation of the Merger" and all other
conditions necessary for the Closing have been satisfied or waived sixty days
after the Closing would otherwise have been required to occur had clause (iii)
of Alcatel's conditions under "-- Conditions to the Consummation of the Merger"
been satisfied or waived.
TERMINATION FEE. DSC will pay Alcatel in immediately available funds by
wire transfer an amount equal to $120 million (the "Termination Fee") (less in
the case of (ii) below any amount previously paid pursuant to the Alternative
Termination Fee (as defined below)) if:
(i) the Merger Agreement is terminated by Alcatel pursuant to clause (d)
under "-- Termination and Fees;"
(ii) the Merger Agreement is terminated by either DSC or Alcatel
pursuant to clause (e) under "--Termination and Fees" and an Acquisition
Proposal had been commenced, proposed or disclosed, and had not been
irrevocably withdrawn, prior to the vote of stockholders of DSC and, within
one year of such termination, DSC accepts a written offer or enters into an
agreement to consummate (or there is actually consummated) (A) an
Acquisition Proposal with such party or any affiliate thereof, or (B) an
Acquisition Proposal providing for consideration in excess of either that
contained in the initial Acquisition Proposal or the consideration provided
for pursuant to the Merger Agreement; PROVIDED THAT for purposes of
determination of the termination fee, an Acquisition Proposal shall not be
deemed to be irrevocably withdrawn if the offeror or any related party
thereto or affiliate thereof shall have indicated any intent or evidenced
any reasonable likelihood of resubmitting (or, within one year after
termination of the Merger Agreement, actually makes or proposes) such
proposal or any amended or substitute proposal (or enters into substantive
negotiations with DSC with respect thereto);
(iii) the Merger Agreement is (A) terminated by either DSC or Alcatel
pursuant to clause (b) under "--Termination and Fees," (B) the Special
Meeting had not been held prior to such termination and (C) an Acquisition
Proposal had been commenced, proposed or disclosed, and, at least 60 days
prior to such termination had not been irrevocably withdrawn; or
(iv) the Merger Agreement is terminated by DSC pursuant to clause (g)
under "-- Termination and Fees."
ALTERNATIVE TERMINATION FEE. DSC will pay Alcatel in immediately available
funds by wire transfer an amount equal to $60 million (the "Alternative
Termination Fee") if the Merger Agreement is terminated by either DSC or Alcatel
pursuant to clause (e) under "-- Termination and Fees" and an Acquisition
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Proposal had been commenced, proposed or disclosed and had not been irrevocably
withdrawn, prior to the vote of the stockholders of DSC.
The Merger Agreement provides that DSC shall pay the Termination Fee or
Alternative Termination Fee required to be paid (if all conditions thereto have
been satisfied) (x) prior to the termination of the Merger Agreement by DSC, (y)
not later than one business day after the termination of the Merger Agreement by
Alcatel or (z) in the case of clause (ii), one business day after such fee
becomes due; PROVIDED THAT in the case of an Alternative Termination Fee, if the
Acquisition Proposal is determined not to have been irrevocably withdrawn by
reason of an Acquisition Proposal having been made or proposed after termination
of the Merger Agreement, then such fee will be payable not later than one
business day after such event. Notwithstanding the foregoing, Alcatel shall have
the right to treat any termination by DSC of the Merger Agreement as invalid,
and the right to so terminate as waived, if DSC fails to pay to Alcatel, at the
appropriate time specified above, any Termination Fee required to be paid.
For purposes of the "Termination and Fees" section only, "Acquisition
Proposal" means any bona fide offer or proposal for a merger, consolidation,
recapitalization, liquidation or other business combination involving DSC or the
acquisition or purchase of over 30% or more of any class of equity securities of
DSC, or any tender offer (including self-tenders) or exchange offer that if
consummated would result in any person beneficially owning 30% or more of any
class of equity securities of DSC or 30% of the assets of DSC and its
subsidiaries, taken as a whole, other than the Merger, in each case providing
for a specific amount, range of amounts or formula for determination of amount,
of consideration to be paid to DSC or its stockholders; PROVIDED, HOWEVER, that
an offer or proposal made prior to the termination of the Merger Agreement shall
not for purposes of the Alternative Termination Fee be deemed an "Acquisition
Proposal" if there is no reasonable basis to conclude that it is capable of
being financed by the person making such proposal; PROVIDED FURTHER that the
preceding proviso shall not apply in the event that DSC entered into
negotiations with such person or furnished information to such person pursuant
to "--No Solicitation; Recommendation."
EXPENSES
The Merger Agreement provides that if the Merger Agreement is (i) terminated
and the representations and warranties of DSC are not true in all material
respects at the time of termination, (ii) terminated and there had been a
Material Adverse Effect on DSC prior to the time of termination or (iii)
terminated (A) pursuant to clause (b) under "--Termination and Fees" and the
Special Meeting had not been held prior to such termination or (B) pursuant to
clause (e) under "--Termination and Fees," DSC will pay Alcatel in immediately
available funds an amount equal to Alcatel's reasonable out-of-pocket expenses,
but in any event not to exceed $10 million, including expenses of financial
advisors, outside legal counsel and accountants, incurred in connection with the
transactions contemplated by the Merger Agreement. In no event shall DSC be
liable for the payment of any Alcatel expenses if it has paid the Termination
Fee or the Alternative Termination Fee.
CONDUCT OF BUSINESS PENDING THE MERGER
The Merger Agreement provides that, until the Closing Date, DSC and its
subsidiaries will conduct their businesses in the ordinary course consistent
with past practice and will use their reasonable best efforts to preserve intact
their business organizations and relationships with third parties and to keep
available the services of their present officers and employees. The Merger
Agreement also provides that until the Closing Date, each party to the Merger
Agreement will not (and will not permit any of its subsidiaries to) take any
action or knowingly omit to take any action that would make any of its
representations and warranties contained in the Merger Agreement false in any
material respect as of the Closing Date.
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AMENDMENTS; MODIFICATIONS AND WAIVER
Except as otherwise provided in the Merger Agreement, any provision of the
Merger Agreement may be amended, modified or waived by the parties thereto, by
action taken by or authorized by their respective Boards of Directors, prior to
the Closing Date if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by DSC and Alcatel or, in the case of a
waiver, by the party against whom the waiver is to be effective; PROVIDED THAT,
after the adoption of the Merger Agreement by the DSC stockholders, no such
amendment shall be made except as allowed under applicable law. The Merger
Agreement also provides that no failure or delay by any party in exercising any
right, power or privilege thereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies contained in the Merger Agreement are cumulative and not exclusive of
any rights or remedies provided by law.
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COMPARISON OF STOCKHOLDER RIGHTS
DUTIES OF DIRECTORS
ALCATEL
As required by the Articles of Association (STATUTS) of Alcatel, Alcatel is
managed by a Board of Directors (CONSEIL D'ADMINISTRATION) which must consist of
no less than six and no more than 18 members (ADMINISTRATEURS), except in the
event of a merger of Alcatel with another corporation (SOCIETE ANONYME), in
which case such number can be increased to 30 for a maximum period of three
years following the merger and subject to other specific conditions provided by
French Corporation Law. The Board of Directors of Alcatel currently consists of
15 members. French Corporation Law requires that each member of the Board of
Directors of a SOCIETE ANONYME be a stockholder thereof and hold a minimum
number of shares specified in the Articles of Association. In that respect, the
Alcatel Articles of Association require that each member of the Alcatel Board
own at least 10 Alcatel Shares.
The Alcatel Articles of Association provide that the Alcatel Board has the
broadest powers to act in all circumstances on behalf of Alcatel within the
scope of Alcatel's corporate purpose and without prejudice to the powers
expressly granted to the stockholders of Alcatel as a matter of law. However,
the limitation for the Alcatel Board to act within the scope of the corporate
purpose is not enforceable against third parties who rely on any ULTRA VIRES act
of the Alcatel Board, unless Alcatel is able to show that such third parties
knew, or should have known given the circumstances, that such act was beyond the
corporate purpose of Alcatel.
The members of the Alcatel Board owe a duty of loyalty and care to Alcatel.
Members of the Alcatel Board may be subject to civil and/or criminal liability
in case of a breach of such duty of loyalty and care which can result from
either a violation of the provisions of French Corporation Law or the Alcatel
Articles of Association, or acts of mismanagement. Actions against one or
several members of the Alcatel Board may be brought by any individual acting on
his/her own behalf as a third party or as a stockholder of Alcatel suffering
actual damage, or by stockholders of Alcatel acting, individually or
collectively, for and on behalf of Alcatel (ACTION SOCIALE "UT SINGULI"). Except
where liability arises out of acts taken by, and entrusted with, a specific
member of the Alcatel Board (in which case liability is limited to such member
of the Alcatel Board), all members of the Alcatel Board may be jointly and
severally liable to Alcatel, its stockholders or third parties suffering
damages.
DSC
Delaware law provides that the Board of Directors has the ultimate
responsibility for managing the business and affairs of a corporation. In
discharging this function, directors of Delaware corporations owe fiduciary
duties of care and loyalty to the corporations for which they serve as
directors. Directors of Delaware corporations also owe fiduciary duties of care
and loyalty to stockholders. Delaware courts have held that the directors of a
Delaware corporation are required to exercise an informed business judgment in
the performance of their duties. An informed business judgment means that the
directors have informed themselves of all material information reasonably
available to them.
A director of a Delaware corporation, in the performance of such director's
duties, is fully protected in relying, in good faith, upon the records of the
corporation and upon such information, opinions, reports or statements presented
to the corporation by any of the corporation's officers or employees, or
committees of the board of directors, or by any other person as to matters the
director reasonably believes are within such other person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the corporation.
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The DGCL does not contain any statutory provision permitting the board of
directors, committees of the board and individual directors, when discharging
the duties of their respective positions, to consider the interests of any
constituencies other than the corporation or its stockholders. It is unclear
under the current state of development of the Delaware law the extent to which
the board of directors, committees of the board and individual directors of a
Delaware corporation may, in considering what is in the corporation's best
interests or the effects of any action on the corporation, take into account the
interests of any constituency other than the stockholders of the corporation. In
addition, the duty of the board of directors, committees of the board and
individual directors of a Delaware corporation may be enforced directly by the
corporation or may be enforced by a stockholder, as such, by an action in the
right of the corporation, or may, in certain circumstances, be enforced directly
by a stockholder or by any other person or group.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
ALCATEL
The Alcatel Board currently consists of 15 members. The Chairman of the
Board of Directors (PRESIDENT DU CONSEIL D'ADMINISTRATION) is selected from the
members of the Board of Directors appointed by the stockholders at an ordinary
general meeting of stockholders (ASSEMBLEE GENERALE ORDINAIRE DES ACTIONNAIRES)
and has a casting (tie-breaking) vote. The Alcatel Articles of Association
provide that two members of the Alcatel Board must, at the time of their
appointment, be both employees of Alcatel or an affiliate thereof (i.e. pursuant
to the Alcatel Articles of Association, any company in which Alcatel holds,
directly or indirectly, at least 50% of the voting rights or any company in
which a company in the Alcatel Group holds, directly or indirectly, at least 50%
of the voting rights), and members of a mutual fund formed as a result of a
company shareholding scheme in which Alcatel or an affiliate thereof is a
participant and which holds at least 75% of its portfolio in Alcatel Shares. In
the event that any of these two members of the Alcatel Board fail to comply with
the double condition stated above, such member is automatically deemed to have
retired one calendar month after such non-compliance.
The maximum term of office for members of the Alcatel Board cannot exceed
six years. Pursuant to French Corporation Law, such members may be re-elected
for additional terms, and there is no limit on the number of such additional
terms, PROVIDED, HOWEVER, that, the maximum ages for holding a position as the
Chairman of the Board, Chief Executive Officer and a member of the Alcatel Board
are 68, 65 and 70, respectively, according to the Alcatel Articles of
Association.
DSC
The DSC Amended and Restated Bylaws (the "DSC Bylaws") provide that the DSC
Board shall consist of not less than seven, nor more than 15 members. Such
number may be increased by the DSC Board. The DSC Restated Certificate of
Incorporation (the "DSC Certificate") and the DSC Bylaws provide that the DSC
Board be divided into three classes and for directors to be elected to serve
staggered three-year terms with each class to consist as nearly as possible of
one-third of the directors. The DSC Board currently consists of seven members.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
ALCATEL
The members of the Alcatel Board may be removed, with or without cause
(REVOCATION "AD NUTUM") prior to the expiration of their terms by a majority
vote of the stockholders. Under French Corporation Law, removal of a member of
the Alcatel Board will not subject Alcatel to liability unless the removed
director shows that such director's removal was made in an injurious and
vexatious manner (CIRCONSTANCES INJURIEUSES OU VEXATOIRES).
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As required by French Corporation Law and the Alcatel Articles of
Association, in the case of vacancies resulting from the resignation or death of
a member of the Alcatel Board, if the number of remaining members of the Alcatel
Board exceeds three, such remaining members may fill the vacancy by appointing a
new member of the Alcatel Board, such appointment being subject, however, to the
ratification thereof by the stockholders at their next general meeting. In the
event that the employment contract of an employee member of the Alcatel Board is
terminated, or such member of the Alcatel Board resigns, dies or is removed from
office, or such director's office becomes vacant for any other reason, such
vacancy is filled for the remaining term of office by the new employee of
Alcatel determined at the time of appointment and complying with the conditions
stated above.
Under French Corporation Law, any change in the structure of the Board of
Directors of a SOCIETE ANONYME as a result of the removal, resignation or death
of one or several of its members must be disclosed to the public within one
month of such change.
DSC
The stockholders of DSC may remove any director for cause upon the
affirmative vote of the holders of a majority of the voting power of all voting
stock then outstanding. In the case of vacancies created by such removals or
otherwise, the DSC Bylaws provide that the vacancy be filled by the vote of a
majority of the directors remaining in office, although less than a quorum, and
not by the stockholders.
STOCKHOLDER NOMINATIONS
ALCATEL
Under French Corporation Law, stockholders can nominate individuals for the
Alcatel Board at a stockholders' meeting, provided that such nomination is part
of the agenda of the stockholders' meeting. The nomination must contain the
name, age, professional references, professional activity for the past five
years of the candidate and the number of Alcatel shares owned by such candidate,
if any. Such information must be made available to the stockholders by the
Alcatel Board no less than five days before the meeting. In addition, if the
agenda for the stockholders' meeting includes the election of members of the
Alcatel Board, any stockholder may propose his/her election to the Alcatel Board
at the stockholders' meeting, even if he/she has not availed himself/herself of
the procedures to make such nomination in advance of the stockholders' meeting
and to have the Alcatel Board notify the Stockholders of such nomination in
advance of the stockholders' meeting.
DSC
The DSC Bylaws establish procedures that must be followed for stockholders
to nominate individuals for election to the DSC Board. Nominations by
stockholders of individuals for election to the DSC Board must be made by
delivering written notice of such nomination to the Secretary of DSC not less
than 70 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting at which directors will be elected, provided,
however, that if the annual meeting is advanced by more than 20 days or delayed
by more than 70 days from such anniversary date, notice by the stockholder must
be delivered not earlier than the ninetieth day prior to such annual meeting and
not later than the close of business on the later of the seventieth day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of the meeting is first made. The nomination notice
must set forth certain information about the stockholder making the nomination,
including name and address and class and number of shares of capital stock of
DSC beneficially owned by such stockholder. The nomination notice must set forth
certain information about the persons to be nominated, including information
concerning the nominees' principal occupations or employment and the class and
number of shares of DSC that are beneficially owned by each such person and must
include the written consent of the nominee.
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ACTION BY WRITTEN CONSENT
ALCATEL
French Corporation Law does not permit stockholders to act by written
consent outside a general stockholders' meeting.
DSC
The DGCL provides that unless otherwise specified in the certificate of
incorporation, stockholders may take action by written consent in lieu of a
meeting; provided that consents in writing are signed by the HOLDERS of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize such action at a meeting and the other requirements of
Section 228 of the DGCL are complied with. The DSC Certificate does not restrict
stockholder action by written consent.
STOCKHOLDER MEETINGS
ALCATEL
As required by the Alcatel Articles of Association, an annual ordinary
general meeting of the stockholders (ASSEMBLEE GENERALE ORDINAIRE ANNUELLE) must
be held annually during the first six months of the year in order, among other
things, to elect the members of the Alcatel Board, to ratify agreements between
Alcatel and the management, to receive the written report of the Chairman and
the statutory auditor on the operations of the corporation for the past fiscal
year and to approve the financial statements therefor.
All stockholders' meetings, whether ordinary or extraordinary, are held
pursuant to a notice sent by the Alcatel Board. In the event the Alcatel Board
fails to send such notice, stockholders representing 10% of the registered
capital of Alcatel may petition the President of the Commercial Court (PRESIDENT
DU TRIBUNAL DE COMMERCE) to order the calling of a stockholders' meeting. A
notice calling (CONVOCATION) for the stockholders' meeting must be published in
a legal newspaper (BULLETIN D'ANNONCES LEGALES OFFICIEL) at least 15 days before
the stockholders' meeting is held.
A quorum for an ordinary general stockholders' meeting consists of the
holders of shares constituting one-fourth of the voting power of the outstanding
shares of Alcatel entitled to vote. A quorum for an extraordinary stockholders'
meeting consists of the holders of shares constituting one-third of the voting
power of the outstanding shares of Alcatel entitled to vote. A majority of the
vote cast is required for actions taken at an ordinary stockholders' meeting and
a qualified majority equal to 66.66% of the vote cast is required for actions
taken at an extraordinary stockholders' meeting, provided that unanimity is
required to increase liabilities of stockholders.
DSC
Under the DGCL, if the annual meeting for the election of directors is not
held on a designated date, the directors are required to cause such meeting to
be held as soon thereafter as may be convenient. If they fail to do so for a
period of 30 days after the designated date, or if no date has been designated
for a period of 13 months after the organization of the corporation or after its
last annual meeting, the Court of Chancery may summarily order a meeting to be
held upon application of any stockholder or director.
A special meeting of stockholders of DSC may be called only by a majority of
the DSC Board or the Chairman of the Board. A quorum for a meeting of the
stockholders of DSC generally consists of the holders of shares constituting a
majority of the voting power of the outstanding shares of DSC entitled to vote.
A majority of the votes cast is generally required for an action by the
stockholders of DSC.
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STOCKHOLDER PROPOSALS
ALCATEL
Under French Corporation Law, stockholders representing, individually or
collectively, a portion of the capital of Alcatel equal to at least FF
33,964,816 (based on the current share capital of Alcatel) may request that a
resolution that they proposed for adoption at such meeting be included in the
agenda. Such request must be made within 10 days of the publication of the
notice (AVIS DE REUNION) of the stockholders' meeting in a legal newspaper
(BULLETIN D'ANNONCES LEGALES OFFICIEL) and must specify the reasons for such
resolution. In addition, French Corporation Law requires that the Alcatel Board
respond during such meeting to any questions submitted in writing by any
stockholder.
DSC
The DSC Bylaws establish procedures that must be followed for a stockholder
to submit a proposal at an annual meeting of stockholders (other than a proposal
submitted under the Commission's stockholder proposal rules). No proposal for a
vote may be submitted to the stockholders by a stockholder unless such
submitting stockholder has timely filed with the Secretary of DSC a written
statement setting forth specified information, including a brief description of
the proposal and the reasons for bringing such business before the annual
meeting, the name and address of the person making the proposal, the class and
number of shares of capital stock of DSC beneficially owned by such person, and
any material interest of the stockholder in such business.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
ALCATEL
Under French Corporation Law, the following fundamental transactions require
the approval of the holders of a qualified majority of at least 66.66% of the
shares entitled to vote: amendments to the Articles of Association, transfer of
the registered office to a non-neighboring DEPARTEMENT, increase or decrease of
the registered capital, exclusion of the stockholders' preemptive rights,
issuance of debentures convertible into new or already issued stock,
authorization of employee stock purchase plans and authorizations of mergers,
spinoffs, partial contribution of assets, dissolution of the corporation and
disposition of all or substantially all of the assets of Alcatel. In addition,
the transformation of the corporation into another type of legal entity
requires, depending on the new type of entity, either a unanimous vote of the
stockholders or the approval of the holders of a qualified majority of at least
75% or 66% of the shares entitled to vote.
DSC
Under the DGCL, fundamental corporate transactions (such as mergers, sales
of all or substantially all of the corporation's assets and dissolutions)
require the approval of the holders of a majority of the shares entitled to
vote. The DSC Certificate, however, imposes a super-majority provision requiring
that at least three-fourths of the holders of shares entitled to vote, approve
any merger, consolidation or disposition of substantially all of the assets to
or with another person or entity, if on the date of such vote, the other person
or entity owns 5% or more of the shares of DSC capital stock. The DGCL permits a
corporation to increase the minimum percentage vote required. Under the DGCL,
amendment of the certificate of incorporation requires the approval of the Board
of Directors and the holders of a majority of each class of shares entitled to
vote. Under the DGCL, a corporation's bylaws may also be amended by the
stockholders.
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APPRAISAL RIGHTS
ALCATEL
A valuation award proceeding is available to Alcatel's stockholders under
French Corporation Law and the rules and regulations of the French securities
regulatory authority that evaluates a tender offer (REGLEMENT DU CONSEIL DES
MARCHES FINANCIERS) in the event of a voluntary or forced withdrawal of minority
stockholders from a corporation as a consequence of a squeeze-out triggered by
stockholders owning at least 95% of the voting rights of the stock of the
corporation. Rights of appraisal are not available to Alcatel Stockholders in
connection with the Merger.
DSC
The rights of stockholders to demand payment in cash by a corporation of the
fair value of their shares under certain circumstances are called appraisal
rights under the DGCL. The DGCL does not afford appraisal rights to holders of
shares which are either listed on a national securities exchange, quoted on the
NNM or held of record by more than 2,000 stockholders when the plan of merger or
consolidation converts such shares solely into stock of the surviving
corporation or stock of another corporation (or cash in lieu of fractional
shares) which is either listed on a national securities exchange, quoted on the
NNM or held of record by more than 2,000 stockholders. In addition, Delaware law
denies appraisal rights to the stockholders of the surviving corporation in a
merger if such merger did not require for its approval the vote of the
stockholders of such surviving corporation. Thus, rights of appraisal are not
available to DSC stockholders in connection with the Merger.
PREEMPTIVE RIGHTS
ALCATEL
Under French Corporation Law, an existing stockholder of a SOCIETE ANONYME
has a preemptive right (DROIT PREFERENTIEL DE SOUSCRIPTION) to subscribe for any
shares, debt instruments convertible into shares and participating debt
instruments issued by such SOCIETE ANONYME in proportion to the shares already
held by such stockholder (SOUSCRIPTION A TITRE IRREDUCTIBLE), unless such right
is excluded at an extraordinary general stockholders' meeting. Under certain
conditions, unexercised preemptive rights may be transferred to third parties.
If expressly authorized at the extraordinary general Stockholders' meeting
approving the capital increase, the stockholders or the third parties to whom
preemptive rights were transferred may subscribe for the shares subject to the
capital increase above and beyond their pro rata interest in the share capital
of the corporation (SOUSCRIPTION A TITRE IRREDUCTIBLE) by purchasing the stock
reserved for stockholders who neither exercised nor transferred their preemptive
rights.
DSC
Under the DGCL, stockholders have no preemptive rights to subscribe for
additional issues of stock or for any security convertible into such stock
unless, and except to the extent that, such rights are expressly provided for in
the certificate of incorporation. The DSC Certificate does not provide for
preemptive rights.
STOCK REPURCHASES
ALCATEL
Under French Corporation Law, a SOCIETE ANONYME may acquire, subject to
certain limitations set forth at the stockholder's ordinary general meeting, up
to 10% its own shares only in connection with: (i) a capital decrease not
resulting from corporate losses (REDUCTION DU CAPITAL NON MOTIVEE PAR DES
PERTES), (ii) stock option plans (ATTRIBUTION D'OPTIONS D'ACHAT D'ACTIONS AUX
SALARIES), (iii) the improvement of its
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financial situation, (iv) the orderly trading of the corporation's shares on the
stock markets and (iv) a merger or similar transactions.
DSC
Under the DGCL, a corporation may purchase or redeem its own shares unless
the capital of the corporation is impaired or when such purchase or redemption
would cause an impairment of the capital of the corporation. A Delaware
corporation may, however, purchase or redeem out of capital any of its preferred
shares if such shares will be retired upon acquisition, thereby reducing the
capital of the corporation.
ANTI-TAKEOVER STATUTES
ALCATEL
French law does not contain any anti-takeover statutes. However, a number of
provisions are available to a SOCIETE ANONYME under the French Corporation Law
that may have certain anti-takeover effects. These provisions include, among
other things, the repurchase by the corporation of its own shares in connection
with a decrease of its share capital, the issuance of shares with double voting
rights (ACTIONS A DROIT DE VOTE DOUBLE), limitations of the voting power of each
stockholder and stockholders agreements providing for preemptive rights in case
of a sale of shares by a stockholder.
DSC
Section 203 of the DGCL contains certain "anti-takeover" provisions that
apply to a Delaware corporation, unless the corporation elects not to be
governed by such provision in its certificate of incorporation or bylaws.
Neither the DSC Certificate nor the DSC Bylaws contain such an election. Thus,
DSC is governed by Section 203 of the DGCL, which precludes a corporation from
engaging in any "business combination" (I.E., mergers, consolidations, sales of
substantially all assets, etc.) with any person (other than the corporation and
any direct or indirect majority-owned subsidiary of the corporation) that owns
15% or more of the outstanding voting stock of the corporation (except for any
such person whose ownership of shares in excess of the 15% limitation is the
result of action taken solely by the corporation) for a period of three years
following the time that such stockholder obtained ownership of more than 15% of
the outstanding voting stock of the corporation. The three-year waiting period
does not apply, however, if (i) prior to the time such person obtained ownership
of more than 15% of the outstanding voting stock of the corporation, the board
of directors of the corporation approved either the business combination or the
transaction which resulted in such stockholder owning in excess of 15% of such
stock, (ii) upon consummation of the transaction which resulted in the
stockholder owning in excess of 15% of the outstanding voting stock of the
corporation, such stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time that the transaction commenced, or (iii) at
or subsequent to such time as the stockholder obtained more than 15% of the
outstanding voting stock of the corporation, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
acquiring stockholder.
LIMITATION ON DIRECTORS' LIABILITY
ALCATEL
French Corporation Law prohibits any limitation, exclusion or waiver of the
personal liability of the members of the Board of Directors for damages due to
breach of duty in their official capacity.
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DSC
The DGCL permits a corporation to limit a director's personal liability,
with certain specified exemptions. Such a limitation must be set forth in the
corporation's certificate of incorporation. The DSC Certificate currently
eliminates a director's personal liability for monetary damages to the fullest
extent permitted by Delaware law. As a result, a DSC director presently has no
monetary liability except for liability for (i) breach of the duty of loyalty,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (iii) declaration of an improper dividend or
an improper redemption of stock or (iv) any transaction from which the director
derived an improper personal benefit.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
ALCATEL
Under French Corporation Law, members of the Board of Directors of a SOCIETE
ANONYME are liable for their management as a matter of public policy and as a
consequence, the Articles of Association cannot restrict such liability.
However, if a director sued by a third party finally prevails in a litigation on
all counts (i.e., is not found at fault) but is nevertheless required to bear
attorneys' fees and costs, the company could validly reimburse such fees and
costs pursuant to a contract. If the indemnification arrangement is concluded
after the adoption of the Articles of Association, it would require stockholder
approval.
DSC
The DSC Bylaws require indemnification of its directors and officers to the
fullest extent permitted under Delaware law. The DGCL permits a corporation to
indemnify any person involved in a third party action by reason of his agreeing
to serve, serving or formerly serving as an officer or director of the
corporation, against expenses, judgments, fines and settlement amounts paid in
such third party action (and against expenses incurred in any derivative
action), if such person acted in good faith and reasonably believed that his
actions were in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe that
his conduct was unlawful. Furthermore, the DGCL provides that a corporation may
advance expenses incurred by officers and directors in defending any action upon
receipt of an undertaking by the person to repay the amount advanced if it is
ultimately determined that such person is not entitled to indemnification.
In general, no indemnification for expenses in derivative actions is
permitted under the DGCL where the person has been adjudged liable to the
corporation, unless a court finds him entitled to such indemnification. If,
however, the person has been successful in defending a third party or derivative
action, indemnification for expenses incurred is mandatory under the DGCL.
Under the DGCL, the statutory provisions for indemnification are
nonexclusive with respect to any other rights, such as contractual rights, to
which a person seeking indemnification may be entitled. Delaware law does not
expressly permit such contractual or other rights to provide for indemnification
against judgments and settlements paid in a derivative action.
CUMULATIVE VOTING
ALCATEL
The French Corporation Law does not allow cumulative voting in the election
of members of the Board of Directors. Under French Corporation Law, as a general
rule, each stockholder is entitled to one vote per share of stock. In addition,
the Alcatel Articles of Association provide for double voting rights which are
attached to all fully paid-up registered shares registered in the name of the
same stockholder for a period of at least three years. The Alcatel Articles of
Association further provide that, regardless of the number of Alcatel Shares
that a stockholder possesses directly or indirectly, no stockholder may cast
more
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than 8% of the votes attached to the shares present or represented when any
resolution at any Stockholders' meeting is put to the vote. However, this limit
may be increased up to 16% if such stockholder is further entitled to double
vote.
DSC
Under the DGCL, each stockholder is entitled to one vote per share of stock,
unless the certificate of incorporation provides otherwise. In addition, under
the DGCL, cumulative voting in the election of directors is only permitted if
expressly authorized in a corporation's certificate of incorporation. The DSC
Certificate does not expressly authorize cumulative voting.
CONFLICT-OF-INTEREST TRANSACTIONS
ALCATEL
Under French Corporation Law, transactions involving a SOCIETE ANONYME and a
member of the Board of Directors which are not at arm's length are subject to
the Board of Directors' prior consent (CONVENTIONS REGLEMENTEES). The statutory
auditor must be informed of the transaction within one month following its
consummation and must prepare a report to be submitted to the stockholders for
approval at their next meeting. In the event the transaction is not approved by
the stockholders, it will remain enforceable by third parties as against the
corporation, but the latter may in turn hold the interested member of the Board
of Directors liable for any damages it may suffer as a result thereof.
DSC
The DGCL generally permits transactions involving a Delaware corporation and
an interested director of that corporation if (a) the material facts as to the
director's relationship or interest are disclosed and a majority of
disinterested directors consent, (b) the material facts are disclosed as to the
director's relationship or interest and holders of a majority of shares entitled
to vote thereon consent or (c) the transaction is fair to the corporation at the
time it is authorized by the Board of Directors, a committee of the Board of
Directors or the stockholders.
DIVIDENDS
ALCATEL
Under French Corporation Law, dividends may only be declared out of
distributable profits (BENEFICE DISTRIBUABLE) which are equal to net profits
minus any losses carried forward (REPORTS A NOUVEAU DEFICITAIRES) or reserves
allocations plus any profits carried forward (REPORTS A NOUVEAU BENEFICIARIES)
and special reserves created by the stockholders, as the case may be. Dividends
may be declared only after the stockholders have approved the financial
statements of Alcatel for the past fiscal year and have determined the amount of
distributable profits. However, interim dividends (ACOMPTES SUR DIVIDENDES) may
be declared from time to time during the fiscal year by the Alcatel Board if
Alcatel shows net profits, as reflected in an interim balance sheet duly
certified by its statutory auditor, in an amount sufficient to pay the proposed
interim dividends.
DSC
The DGCL permits dividends to be paid out of (i) surplus (the excess of net
assets of the corporation over capital), or (ii) if the corporation does not
have adequate surplus, net profits for the current or immediately preceding
fiscal year, unless the net assets are less than the capital of any outstanding
preferred stock. In determining the amount of surplus of a Delaware corporation,
the assets of the corporation, including stock of subsidiaries owned by the
corporation, must be valued at their fair market value as determined by the
Board of Directors, without regard to their historical book value.
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LOANS TO DIRECTORS
ALCATEL
French Corporation Law strictly prohibits the granting of loans by a SOCIETE
ANONYME to any member of the Board of Directors who is an individual and their
dependents. The granting of loans by a SOCIETE ANONYME to a member of the Board
of Directors that is a company is permissible; provided that the conditions
under the conflict-of-interest transaction procedures are satisfied.
DSC
Under the DGCL, loans can generally be made to officers and directors upon
approval by the Board of Directors.
STOCKHOLDER SUITS
ALCATEL
Under French Corporation Law, stockholders representing, individually or
collectively, a portion of the capital of Alcatel equal to at least FF
33,964,816 (based on the current share capital of Alcatel) may bring an action
for and on behalf Alcatel (ACTION SOCIALE "UT SINGULI") to allow Alcatel to
recover any damages suffered by it.
DSC
Under the DGCL, a stockholder may bring a derivative action on behalf of the
corporation to enforce the rights of the corporation. An individual also may
commence a class action suit on his or her own behalf and other similarly
situated stockholders where the requirements for maintaining a class action
under Delaware law have been met. A person may institute and maintain such a
suit only if such person was a stockholder at the time of the transaction which
is the subject of the suit or his or her stock thereafter devolved upon him or
her by operation of law. Additionally, under Delaware case law, the plaintiff
generally must be a stockholder not only at the time of the transaction which is
the subject of the suit, but also through the duration of the derivative suit.
Delaware law also requires that the derivative plaintiff make a demand on the
directors of the corporation to assert the corporate claim before the suit may
be prosecuted by the derivative plaintiff, unless such demand would be futile.
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REGULATORY APPROVALS
The Merger is subject to the expiration or termination of the applicable
waiting period under the HSR Act. Certain aspects of the Merger will require
notification to, and filings with, certain authorities in certain states and
non-U.S. jurisdictions, including foreign jurisdictions where DSC and Alcatel
currently operate. Under the HSR Act and the rules promulgated thereunder by the
FTC, the Merger may not be consummated until notifications have been given and
certain information has been furnished to the FTC and the Antitrust Division and
the applicable waiting period has expired or been terminated. On June 18, 1998,
DSC and Alcatel filed Notification and Report Forms under the HSR Act with the
FTC and the Antitrust Division. On July 17, 1998, DSC and Alcatel each received
a request for additional information and other materials from the Antitrust
Division. At any time before or after the Effective Time, and notwithstanding
expiration of the waiting period under the HSR Act, any state could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of substantial assets of DSC. Private parties may
also seek to take legal action under the antitrust laws under certain
circumstances.
The antitrust and competition laws of certain other foreign jurisdictions
require (or, in some instances, provide for on a voluntary basis) notification
of certain transactions and the observance of pre-consummation waiting periods.
Alcatel and DSC will make any such required filings (and, if deemed in Alcatel's
and DSC's interests, any such voluntary filings) with the appropriate antitrust
and competition authorities as promptly as practicable. There can be no
assurance that a challenge to the Merger will not be made on antitrust or
competition grounds or, if such a challenge were to be made, what the outcome
would be.
73
<PAGE>
SECURITY OWNERSHIP OF CERTAIN DSC BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the shares of
Common Stock owned of record and beneficially as of July 15, 1998 (unless
otherwise noted), by (i) each current director of DSC, (ii) each named executive
officer of DSC, (iii) all directors and executive officers of DSC as a group,
and (iv) each person known to DSC who is a beneficial holder of more than five
percent of the shares of Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS
NAME AND BENEFICIAL OWNER (1) (2)
- ------------------------------------------------------------------------ ---------------------- -----------------
<S> <C> <C>
AXA Assurances I.A.R.D. Mutuelle (3).................................... 11,672,225 9.47%
21, rue de Chareaudon,
75009 Paris, France
FMR Corp. (4)........................................................... 7,908,656 6.42%
82 Devonshire Street
Boston, Massachusetts 92109
George Soros(5)......................................................... 6,203,500 5.03%
Allen R. Adams.......................................................... 193,591 *
Wylie D. Basham......................................................... 224,825 *
Raymond J. Dempsey...................................................... 49,000 *
James L. Donald......................................................... 3,868,412 3.17%
Sir John Fairclough..................................................... 69,000 *
James L. Fischer........................................................ 63,000 *
Robert S. Folsom (6).................................................... 125,000 *
William O. Hunt......................................................... 9,000 *
Gerald F. Montry (7).................................................... 510,956 *
Michael J. Pisterzi..................................................... 165,056 *
All directors and current executive officers as a group (13 persons).... 5,517,975 4.48%
</TABLE>
- ------------------------
* Ownership of less than 1% of the outstanding Common Stock.
(1) Each individual, unless otherwise noted, has sole voting and investment
power with respect to all shares owned by such individual. Includes shares
that a person has a right to acquire if such right is exercisable within 60
days as follows: Allen R. Adams, 178,846 shares; Wylie D. Basham, 198,000
shares; Raymond J. Dempsey, 37,000 shares; James L. Donald 2,820,000 shares;
Sir John Fairclough, 47,000 shares; James L. Fischer, 47,000 shares; Robert
S. Folsom, 37,000 shares; William O.Hunt, 7,000 shares; Gerald F. Montry,
385,000 shares (directly) and 70,000 shares (indirectly); Michael J.
Pisterzi, 149,500 shares; and all directors and current executive officers
as a group (13 persons), 4,193,667 shares.
(2) Based upon 119,067,374 shares of Common Stock outstanding as of July 23,
1998, plus any shares of Common Stock under options of the particular
director, executive officer or stockholder, or, in the case of all directors
and current executive officers as a group, under options of all directors
and current executive officers as a group.
(3) According to the Schedule 13G filed February 13, 1998, at December 31, 1997,
AXA Assurances I.A.R.D. Mutuelle; AXA Assurances Vie Mutuelle; Alpha
Assurances Vie Mutuelle; AXA Courtage Assurance Mutuelle; AXA-UAP; and The
Equitable Companies Incorporated, as a group, had sole
74
<PAGE>
voting power with respect to 2,643,975 shares, shared voting power with
respect to 8,780,900 shares, sole dispositive power with respect to
11,671,025 shares and shared dispositive power with respect to 1,200 shares.
Other members of the group are The Equitable Life Assurance Society of the
United States; Alliance Capital Management L.P.; Donaldson Lufkin Jenrette
Securities Corporation; and Wood, Struthers &Winthrop Management Corp., each
of which is a subsidiary of The Equitable Companies Incorporated.
(4) According to the Schedule 13G filed February 10, 1998, at December 31, 1997,
FMR Corp., Edward C. Johnson 3d, and Abigail P. Johnson, as a group, were
the beneficial owners of 7,908,656 shares of Common Stock. FMR Corp., a
member of the above group, had sole voting power with respect to 226,681
shares and sole dispositive power with respect to 7,908,656 shares, and each
of Edward C. Johnson 3d, and Abigail P. Johnson, also members of the above
group, had sole dispositive power with respect to 7,908,656 shares.
(5) According to the Schedule 13G filed June 22, 1998, at June 19, 1998 Quantum
Industrial Partners LDC ("QIP"), QIH Management Investor, L.P. ("QIHMI"),
QIH Management, Inc. ("QIHM"), Soros Fund Management LLC ("SFM"), George
Soros ("Soros"), Stanley F. Druckenmiller ("Druckenmiller"), Winston
Partners, L.P. ("Winston L.P."), Chatterjee Fund Management, L.P. ("CFM"),
Winston Partners II LDC ("Winston LDC"), Winston Partners II LLC ("Winston
LLC"), Chatterjee Advisors LLC ("Chatterjee LLC"), Chatterjee Management
Company ("CMC") and Dr. Purnendu Chatterjee ("Chatterjee"), as a group were
the owners of 6,203,500 shares of Common Stock. QIP, QIHMI and QIHM, as a
group, had shared voting power and shared dispositive power with respect to
1,578,500 shares. SFM had sole voting power and sole dispositive power with
respect to 2,708,300 shares, and shared voting power and shared dispositive
power with respect to 1,578,500 shares. Soros had sole voting power and sole
dispositive power with respect to 676,500 shares, and shared voting power
and shared dispositive power with respect to 4,286,800 shares. Druckenmiller
had shared voting power and shared dispositive power with respect to
4,286,800 shares. Each of Winston L.P. and CFM had sole voting power and
sole dispositive power with respect to 201,000 shares. Winston LDC had sole
voting power and sole dispositive power with respect to 686,000 shares.
Winston LLC had sole voting power and sole dispositive power with respect to
353,200 shares. Each of Chatterjee LLC and CMC had sole voting power and
sole dispositive power with respect to 1,039,200 shares. Chatterjee had sole
voting power and sole dispositive power with respect to 1,240,200 shares,
and shared voting power and shared dispositive power with respect to
1,578,500 shares.
(6) Includes 14,000 shares held indirectly by Mr. Folsom.
(7) Include 6,000 shares held indirectly by Mr. Montry.
75
<PAGE>
LEGAL MATTERS AND EXPERTS
The validity of the Alcatel Shares, including those underlying the ADSs
offered hereby will be passed upon by Pascal Durand-Barthez, general counsel of
Alcatel.
The consolidated financial statements of DSC incorporated by reference in
its Annual Report (Form 10-K) for the year ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon incorporated by reference therein and included herein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Alcatel incorporated in this Proxy
Statement/Prospectus have been audited by Arthur Andersen, LLP, independent
auditors, as stated in their report which has been given upon their authority as
experts in accounting and auditing.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
Management of DSC knows of no other matters that may properly be, or which
are likely to be, brought before the Special Meeting. However, if any other
matters are properly brought before the Special Meeting, the persons named in
the enclosed Proxy or their substitutes will vote the Proxies in accordance with
their judgment with respect to such matters, unless authority to do so is
withheld in the Proxy.
Proposals which stockholders intend to present at DSC's 1999 Annual Meeting
of Stockholders and wish to have included in DSC's proxy materials must be
received by DSC no later than December 1, 1998. No such meeting will be held if
the Merger is consummated prior to the date thereof.
By Order of the Board of Directors
[LOGO]
George B. Brunt
Vice President, Secretary and General
Counsel
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DSC COMMUNICATIONS CORPORATION
Report of Independent Auditors.................................................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995........ F-3
Consolidated Balance Sheets at December 31, 1997 and 1996......................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........ F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997,
1996 and 1995................................................................................... F-6
Notes to Consolidated Financial Statements........................................................ F-7
ALCATEL ALSTHOM
Report of Independent Auditors.................................................................... F-28
Consolidated Income Statements for the years ended December 31, 1997, 1996 and 1995............... F-29
Consolidated Balance Sheets at December 31, 1997, 1996 and 1995................................... F-30
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........ F-31
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1997,
1996 and 1995................................................................................... F-32
Information by:
- Business segment................................................................................ F-33
- Geographical segment............................................................................ F-35
Notes to Consolidated Financial Statements:
- Summary of accounting policies.................................................................. F-36
- Summary of differences between accounting principles followed by the Company and United States
generally accepted accounting principles ("U.S. GAAP").......................................... F-71
All schedules have been omitted since they are not required under the applicable instructions or
the substance of the required information is shown in the financial statements.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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 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.
ERNST & YOUNG LLP
Dallas, Texas
January 26, 1998
F-2
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
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.
F-3
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
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.................................................. 629,206 274,602
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.
F-4
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
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
--------- --------- ---------
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.
F-5
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ UNREALIZED
PAR GAINS ACCUMULATED
SHARES VALUE ADDITIONAL (LOSSES) ON TRANSLATION
OUTSTANDING $0.01 CAPITAL SECURITIES ADJUSTMENT
------------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994................................ 113,525 $ 1,185 $ 631,729 $ (3,764) $ --
Shares issued upon exercise of options................... 1,500 15 10,283 -- --
Shares issued under stock purchase plans................. 467 5 10,178 -- --
Income tax benefit related to stock options.............. -- -- 49,987 -- --
Restricted shares issued to employees, net of unearned
compensation........................................... 110 1 1,271 -- --
Net change in unrealized gains (losses) on securities,
net of income taxes.................................... -- -- -- 4,155 --
Translation adjustment................................... -- -- -- -- 4,404
Net income............................................... -- -- -- -- --
------------- --------- ----------- ----------- -------------
Balances, December 31, 1995................................ 115,602 1,206 703,448 391 4,404
Shares issued upon exercise of options................... 1,068 10 7,484 -- --
Shares issued under stock purchase plans................. 262 3 6,691 -- --
Income tax benefit related to stock options.............. -- -- 6,872 -- --
Restricted shares issued to employees, net of unearned
compensation and forfeitures........................... 320 3 6,248 -- --
Net change in unrealized gains (losses) on securities,
net of income taxes.................................... -- -- -- (538) --
Translation adjustment................................... -- -- -- -- 4,339
Net loss................................................. -- -- -- -- --
------------- --------- ----------- ----------- -------------
Balances, December 31, 1996................................ 117,252 1,222 730,743 (147) 8,743
Shares issued upon exercise of options................... 390 4 3,729 -- --
Shares issued under stock purchase plans................. 441 5 11,079 -- --
Valuation of stock options assumed in acquisition........ -- -- 4,800 -- --
Restricted shares issued to employees, net of unearned
compensation and forfeitures........................... (22) -- 5,612 -- --
Net change in unrealized gains (losses) on securities,
net of income taxes.................................... -- -- -- 341 --
Translation adjustment................................... -- -- -- -- (6,249)
Net income............................................... -- -- -- -- --
------------- --------- ----------- ----------- -------------
Balances, December 31, 1997................................ 118,061 $ 1,231 $ 755,963 $ 194 $ 2,494
------------- --------- ----------- ----------- -------------
------------- --------- ----------- ----------- -------------
<CAPTION>
COST OF
RETAINED TREASURY
EARNINGS SHARES TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balances, December 31, 1994................................ $ 265,061 $ (43,111) $ 851,100
Shares issued upon exercise of options................... -- -- 10,298
Shares issued under stock purchase plans................. -- -- 10,183
Income tax benefit related to stock options.............. -- -- 49,987
Restricted shares issued to employees, net of unearned
compensation........................................... -- -- 1,272
Net change in unrealized gains (losses) on securities,
net of income taxes.................................... -- -- 4,155
Translation adjustment................................... -- -- 4,404
Net income............................................... 192,680 -- 192,680
----------- ----------- ---------
Balances, December 31, 1995................................ 457,741 (43,111) 1,124,079
Shares issued upon exercise of options................... -- -- 7,494
Shares issued under stock purchase plans................. -- -- 6,694
Income tax benefit related to stock options.............. -- -- 6,872
Restricted shares issued to employees, net of unearned
compensation and forfeitures........................... -- -- 6,251
Net change in unrealized gains (losses) on securities,
net of income taxes.................................... -- -- (538)
Translation adjustment................................... -- -- 4,339
Net loss................................................. (7,555) -- (7,555)
----------- ----------- ---------
Balances, December 31, 1996................................ 450,186 (43,111) 1,147,636
Shares issued upon exercise of options................... -- -- 3,733
Shares issued under stock purchase plans................. -- -- 11,084
Valuation of stock options assumed in acquisition........ -- -- 4,800
Restricted shares issued to employees, net of unearned
compensation and forfeitures........................... -- -- 5,612
Net change in unrealized gains (losses) on securities,
net of income taxes.................................... -- -- 341
Translation adjustment................................... -- -- (6,249)
Net income............................................... 48,863 -- 48,863
----------- ----------- ---------
Balances, December 31, 1997................................ $ 499,049 $ (43,111) $1,215,820
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
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 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
F-7
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
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> <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
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
F-8
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-9
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-10
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
<CAPTION>
(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>
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,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
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
F-11
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
RECEIVABLES
Receivables consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
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,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
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>
F-12
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
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,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
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.
F-13
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
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.
F-14
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- --------- ----------
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,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
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>
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
F-15
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
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.
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.
F-16
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-17
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-18
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Outstanding options are summarized as follows:
<TABLE>
<CAPTION>
OPTIONS
----------------------
<S> <C> <C> <C>
PLANS OTHER
----------- ---------
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 --
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>
F-19
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
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 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.
F-20
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS, OTHER THAN PER
SHARE DATA)
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.
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
F-21
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-22
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-23
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-24
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTERNATIONAL OPERATIONS AND MAJOR CUSTOMERS
INTERNATIONAL OPERATIONS
The Company operates in a single industry segment, the telecommunications
equipment marketplace.
A summary of the Company's operations by geographic area is presented below
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
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.
F-25
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-26
<PAGE>
DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
QUARTERLY RESULTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOURTH(A) THIRD SECOND(B) FIRST(B) FOURTH THIRD(C)(D) SECOND(D) FIRST
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
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.
F-27
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Alcatel Alsthom:
We have audited the consolidated balance sheets of Alcatel Alsthom and its
subsidiaries as of December 31, 1997, 1996 and 1995, and the related
consolidated statements of income, consolidated statements of cash flows and
changes in shareholders' equity for each of the three years in the period ended
December 31, 1997, all expressed in French francs. 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 in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alcatel
Alsthom and its subsidiaries as of December 31, 1997, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles in France.
Accounting practices used by the company in preparing the accompanying
financial statements conform with generally accepted accounting principles in
France, but do not conform with accounting principles generally accepted in the
United States. A description of these differences and a complete reconciliation
of consolidated net income and shareholders' equity to U.S. generally accepted
accounting principles is set forth in Notes 30 and 31 of the Notes to the
consolidated financial statements.
Arthur Andersen LLP
PARIS, FRANCE
MARCH 19, 1998
F-28
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
NOTE 1997(A) 1997 1996 1995
--------- ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS EXCEPT PER SHARE INFORMATION)
NET SALES...................................... $ 30,880 FF 185,868 FF 162,102 FF 160,416
---------- -------------- -------------- --------------
Cost of sales.................................. (25,244) (151,945) (135,473) (134,645)
Administrative and selling expenses............ (4,307) (25,923) (23,726) (25,137)
---------- -------------- -------------- --------------
INCOME FROM OPERATIONS......................... (3) 1,329 8,000 2,903 634
Financial income (loss)........................ (4) (177) (1,068) (691) (1,553)
Restructuring costs............................ (20) (202) (1,218) (466) (13,422)
Amortization of goodwill....................... (8) (388) (2,338) (2,222) (13,464)
Other revenue (expense)........................ (5) 368 2,218 3,190 1,757
---------- -------------- -------------- --------------
INCOME BEFORE TAXES AND SHARE IN NET INCOME OF 929 5,594 2,714 (26,048)
EQUITY AFFILIATES............................
---------- -------------- -------------- --------------
Income tax..................................... (6) (225) (1,353) (678) (1,121)
Share in net income of equity affiliates....... 96 577 1,025 173
Minority interests............................. (25) (153) (336) 1,413
---------- -------------- -------------- --------------
NET INCOME..................................... 775 4,665 2,725 (25,583)
---------- -------------- -------------- --------------
---------- -------------- -------------- --------------
EARNINGS PER SHARE (IN FRANCS)
Basic earnings per Share....................... (7) 4.94 29.73 17.48 (177.79)
Diluted earnings per Share..................... (7) 4.84 29.13 17.45 (177.79)
</TABLE>
- ------------------------
(a) Translation of amounts from French francs ("FF") into U.S. Dollars ("$") has
been made merely for the convenience of the reader at the noon buying rate
in New York City for cable transfers in French francs as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"), which was FF 6.019 per $1.00 on December 31, 1997.
F-29
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C> <C>
NOTE 1997(A) 1997
----- ----------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C> <C>
Goodwill, net............................................................................. (8) $ 4,967 FF 29,896
Other intangible assets, net.............................................................. (9) 136 820
----------- ---------
INTANGIBLE ASSETS, NET.................................................................... 5,103 30,716
----------- ---------
Property, plant and equipment............................................................. (10) 12,943 77,901
Depreciation.............................................................................. (10) (8,201) (49,360)
----------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET........................................................ 4,742 28,541
----------- ---------
Share in net assets of equity affiliates.................................................. (11) 784 4,718
Other investments and miscellaneous, net.................................................. (12) 2,812 16,927
----------- ---------
INVESTMENTS AND OTHER NON-CURRENT ASSETS.................................................. 3,596 21,645
----------- ---------
TOTAL NON-CURRENT ASSETS.................................................................. 13,441 80,902
----------- ---------
INVENTORIES AND WORK IN PROGRESS.......................................................... (13) 7,248 43,627
----------- ---------
Trade receivables and related accounts.................................................... (14) 12,704 76,465
----------- ---------
Other accounts receivable................................................................. (15) 3,814 22,959
----------- ---------
ACCOUNTS RECEIVABLE....................................................................... 16,518 99,424
----------- ---------
Short-term investments.................................................................... (16) 994 5,984
Receivables from disposals of assets...................................................... -- --
Marketable securities..................................................................... (16) 539 3,242
Cash on hand.............................................................................. 3,089 18,593
----------- ---------
Cash and cash equivalents................................................................. 3,628 21,835
----------- ---------
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENT....................................... 4,622 27,819
TOTAL CURRENT ASSETS...................................................................... 28,388 170,870
----------- ---------
Total assets.............................................................................. 41,830 251,772
----------- ---------
----------- ---------
<CAPTION>
ASSETS
<S> <C> <C>
1996 1995
--------- ---------
<S> <C> <C>
Goodwill, net............................................................................. FF 31,996 FF 32,178
Other intangible assets, net.............................................................. 1,326 1,204
--------- ---------
INTANGIBLE ASSETS, NET.................................................................... 33,322 33,382
--------- ---------
Property, plant and equipment............................................................. 74,643 74,586
Depreciation.............................................................................. (46,995) (45,080)
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET........................................................ 27,648 29,506
--------- ---------
Share in net assets of equity affiliates.................................................. 7,668 8,375
Other investments and miscellaneous, net.................................................. 11,062 13,470
--------- ---------
INVESTMENTS AND OTHER NON-CURRENT ASSETS.................................................. 18,730 21,845
--------- ---------
TOTAL NON-CURRENT ASSETS.................................................................. 79,700 84,733
--------- ---------
INVENTORIES AND WORK IN PROGRESS.......................................................... 49,658 45,695
--------- ---------
Trade receivables and related accounts.................................................... 65,665 66,948
--------- ---------
Other accounts receivable................................................................. 23,911 23,359
--------- ---------
ACCOUNTS RECEIVABLE....................................................................... 89,576 90,307
--------- ---------
Short-term investments.................................................................... 5,600 7,463
Receivables from disposals of assets...................................................... 6,043 --
Marketable securities..................................................................... 5,041 8,802
Cash on hand.............................................................................. 12,647 18,675
--------- ---------
Cash and cash equivalents................................................................. 23,731 27,477
--------- ---------
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENT....................................... 29,331 34,940
TOTAL CURRENT ASSETS...................................................................... 168,565 170,942
--------- ---------
Total assets.............................................................................. 248,265 255,675
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C>
NOTE 1997(A) 1997
----- --------------- -----------------------------
<CAPTION>
AFTER
-------------
AFTER BEFORE
APPROPRIATION --------------
APPROPRIATION*
--------------- -----------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Capital stock (FF 40 nominal value; 163,199,080 Shares issued
at December 31, 1997, 161,788,947 Shares at December 31, 1996
and 150,548,066 Shares at December 31, 1995)................. $ 1,084 FF 6,527 FF 6,527
Additional paid-in-capital..................................... 5,943 35,772 35,772
Retained earnings.............................................. 1,636 7,085 9,846
Cumulative translation adjustments............................. (932) (5,607) (5,607)
Net income..................................................... -- 4,665 --
Less treasury stock at cost (5,245,510 in 1997; 5,362,186 in
1996 and 4,376,309 in 1995).................................. (429) (2,584) (2,584)
------- -------------- -------------
SHAREHOLDERS' EQUITY........................................... (18) 7,303 45,858 43,954
------- -------------- -------------
MINORITY INTERESTS............................................. (19) 295 1,777 1,777
------- -------------- -------------
Accrued pension and retirement obligations..................... 1,458 8,777 8,777
Accrued contract costs and other reserves...................... (20) 6,658 40,075 40,075
------- -------------- -------------
TOTAL RESERVES FOR LIABILITIES AND CHARGES..................... 8,116 48,852 48,852
------- -------------- -------------
Bonds and notes issued......................................... 3,516 21,164 21,164
Other borrowings............................................... 3,083 18,557 18,557
------- -------------- -------------
TOTAL FINANCIAL DEBT........................................... (21) 6,599 39,721 39,721
(OF WHICH MEDIUM AND LONG-TERM PORTION)........................ 3,641 21,916 21,916
------- -------------- -------------
Customers' deposits and advances............................... (22) 8,358 50,304 50,304
Trade payables and related accounts............................ 4,872 29,327 29,327
Other payables................................................. (23) 6,286 32,933 37,837
TOTAL OTHER LIABILITIES........................................ 19,516 115,564 117,468
------- -------------- -------------
Total liabilities and shareholders' equity..................... 41,830 251,772 251,772
------- -------------- -------------
------- -------------- -------------
COMMITMENTS AND CONTINGENCIES.................................. (24)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
1996 1995
-------------- --------------
AFTER AFTER
APPROPRIATION* APPROPRIATION*
-------------- --------------
<S> <C> <C>
Capital stock (FF 40 nominal value; 163,199,080 Shares issued
at December 31, 1997, 161,788,947 Shares at December 31, 1996
and 150,548,066 Shares at December 31, 1995)................. FF 6,471 FF 6,022
Additional paid-in-capital..................................... 35,089 32,580
Retained earnings.............................................. 6,544 3,755
Cumulative translation adjustments............................. (6,506) (7,107)
Net income..................................................... -- --
Less treasury stock at cost (5,245,510 in 1997; 5,362,186 in
1996 and 4,376,309 in 1995).................................. (2,428) (2,257)
-------------- --------------
SHAREHOLDERS' EQUITY........................................... 39,170 32,993
-------------- --------------
MINORITY INTERESTS............................................. 1,488 3,213
-------------- --------------
Accrued pension and retirement obligations..................... 8,455 8,330
Accrued contract costs and other reserves...................... 42,516 42,302
-------------- --------------
TOTAL RESERVES FOR LIABILITIES AND CHARGES..................... 50,971 50,632
-------------- --------------
Bonds and notes issued......................................... 20,117 21,990
Other borrowings............................................... 22,360 32,939
-------------- --------------
TOTAL FINANCIAL DEBT........................................... 42,477 54,929
(OF WHICH MEDIUM AND LONG-TERM PORTION)........................ 23,422 28,125
-------------- --------------
Customers' deposits and advances............................... 52,076 47,382
Trade payables and related accounts............................ 25,223 24,016
Other payables................................................. 36,860 42,510
TOTAL OTHER LIABILITIES........................................ 114,159 113,908
-------------- --------------
Total liabilities and shareholders' equity..................... 248,265 255,675
-------------- --------------
-------------- --------------
COMMITMENTS AND CONTINGENCIES..................................
</TABLE>
- ------------------------
* See note 17.
(a) Translation of amounts from French francs ("FF") into U.S. Dollars ("$") has
been made merely for the convenience of the reader at the noon buying rate
in New York City for cable transfers in French francs as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"), which was FF 6.019 per $1.00 on December 31, 1997.
F-30
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997(A) 1997 1996 1995
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 775 FF 4,665 FF 2,725 FF(25,583)
Minority interests............................................... 26 154 336 (1,413)
Adjustments to reconcile income before minority interests to net
cash provided by operating activities:
Depreciation and amortization, net............................. 1,514 9,110 8,569 20,533
Changes in reserves for pension obligations, net............... 41 248 (140) 490
Changes in other long-term reserves, net....................... (472) (2,838) (3,147) 10,555
Net (gain) loss on disposal of non-current assets.............. (402) (2,419) (5,016) (1,870)
Share in net income of equity affiliates (net of dividends
received).................................................... (54) (325) (659) 135
Other.......................................................... (9) (56) -- --
--------- --------- ---------- ----------
WORKING CAPITAL PROVIDED BY OPERATIONS............................. 1,419 8,539 2,668 2,847
Net change in current assets and current liabilities:
Decrease (increase) in accounts receivable..................... (23) (141) (329) (3,659)
Decrease (increase) in inventories............................. (32) (190) (1,669) (1,943)
Increase (decrease) in accounts payable and accrued expenses... (585) (3,521) 1,817 (3,479)
Changes in short-term reserves, net*........................... 27 163 1,493 3,197
--------- --------- ---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES................... 806 4,850 3,980 (3,037)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of fixed assets........................... 149 899 974 577
Capital expenditures............................................. (1,169) (7,038) (5,672) (6,307)
Decrease (increase) in loans..................................... (416) (2,503) 104 12
Cash expenditures for acquisition of consolidated companies, net
of cash acquired, and for acquisition of unconsolidated
companies**.................................................... (344) (2,068) (1,007) (912)
Cash proceeds from sale of previously consolidated companies, net
of cash sold, and from sale of unconsolidated companies........ 1,059 6,376 11,375 2,789
Decrease (increase) in short-term investments.................... (34) (206) 2,044 7,205
--------- --------- ---------- ----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES................... (754) (4,540) 7,818 3,364
--------- --------- ---------- ----------
NET CASH FLOW AFTER INVESTMENT..................................... 52 310 11,798 327
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt........................... (789) (4,748) (15,116) 2,810
Proceeds from issuance of long-term debt......................... 573 3,450 270 726
Proceeds from issuance of shares................................. 84 508 24 15
Dividends paid................................................... (287) (1,725) (902) (857)
--------- --------- ---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES................... (418) (2,515) (15,724) 2,694
Net effect of exchange rate changes................................ 51 309 180 (370)
--------- --------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (315) (1,896) (3,746) 2,651
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 3,943 23,731 27,477 24,826
--------- --------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR**......................... 3,628 21,835 23,731 27,477
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
- ------------------------
Income taxes paid amounted to FF 1,632 million in 1997, FF 792 million in 1996
and FF 2,507 million in 1995. Interest paid amounted to FF 4,226 million in
1997, FF 3,971 million in 1996 and FF 6,164 million in 1995.
* Changes in short-term reserves for restructuring have been reclassified in
1995 and 1996 from "Net change in current assets and liabilities" to
"Changes in other reserves, net."
** Line items "Cash proceeds from sale of previously consolidated companies,
net of cash sold, and from sale of unconsolidated companies" and "Cash and
cash equivalents at end of year" including receivables from disposal of
assets (see note 1j).
(a) Translation of amounts from French francs ("FF") into U.S. Dollars ("$") has
been made merely for the convenience of the reader at the noon buying rate
in New York City for cable transfers in French francs as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"), which was FF 6.019 per $1.00 on December 31, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-31
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TREASURY
STOCK
NUMBER ADDITIONAL CUMULATIVE OWNED BY
OF SHARES CAPITAL PAID-IN RETAINED TRANSLATION NET CONSOLIDATED
NOTE OUTSTANDING STOCK CAPITAL EARNINGS ADJUSTMENTS INCOME SUBSIDIARIES
----- ----------- ----------- ----------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS EXCEPT FOR NUMBER OF SHARES OUTSTANDING)
BALANCE AT DECEMBER 31,
1994 AFTER
APPROPRIATION......... 142,169,042 5,862 31,158 30,483 (5,464) 0 (2,255)
----------- ----------- ----------- ----------- ------ --------- ------
Capital increase........ (17a) 4,003,198 160 1,422
Net change in treasury
stock owned by
consolidated
subsidiaries.......... (17f) (483) (2)
Translation
adjustment............ (1,643)
Other changes........... 59
Net income.............. (25,583)
Appropriation of net
income................ (26,787) 25,583
----------- ----------- ----------- ----------- ------ --------- ------
BALANCE AT DECEMBER 31,
1995 AFTER
APPROPRIATION......... 146,171,757 6,022 32,580 3,755 (7,107) 0 (2,257)
Capital increase........ (17a) 10,255,004 449 2,246 1,800
Transfer to additional
paid-in capital....... 263 (263)
Net change in treasury
stock owned by
consolidated
subsidiaries.......... (17f) 159 (171)
Translation
adjustment............ 601
Other changes........... (14)
Net income.............. 2,725
Appropriation of net
income................ 1,107 (2,725)
----------- ----------- ----------- ----------- ------ --------- ------
BALANCE AT DECEMBER 31,
1996 AFTER
APPROPRIATION......... 156,426,761 6,471 35,089 6,544 (6,506) 0 (2,428)
New accounting method as
of 01/01/1997......... (2) 474
Capital increase........ 1,410,133 56 683
Transfer to additional
paid-in capital.......
Net change in treasury
stock owned by
consolidated
subsidiaries.......... 116,676 54 (156)
Translation
adjustment............ 899
Other changes........... 13
Net income.............. 4,665
----------- ----------- ----------- ----------- ------ --------- ------
BALANCE AT DECEMBER 31,
1997 BEFORE
APPROPRIATION......... 157,953,570 6,527 35,772 7,085 (5,607) 4,665 (2,584)
Proposed appropriation
of net income......... 2,761 (4,665)
----------- ----------- ----------- ----------- ------ --------- ------
BALANCE AT DECEMBER 31,
1997 AFTER
APPROPRIATION......... 157,953,570 6,527 35,772 9,846 (5,607) 0 (2,584)
----------- ----------- ----------- ----------- ------ --------- ------
----------- ----------- ----------- ----------- ------ --------- ------
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT DECEMBER 31,
1994 AFTER
APPROPRIATION......... 59,784
-------------
Capital increase........ 1,582
Net change in treasury
stock owned by
consolidated
subsidiaries.......... (2)
Translation
adjustment............ (1,643)
Other changes........... 59
Net income.............. (25,583)
Appropriation of net
income................ (1,204)
-------------
BALANCE AT DECEMBER 31,
1995 AFTER
APPROPRIATION......... 32,993
Capital increase........ 4,495
Transfer to additional
paid-in capital....... 0
Net change in treasury
stock owned by
consolidated
subsidiaries.......... (12)
Translation
adjustment............ 601
Other changes........... (14)
Net income.............. 2,725
Appropriation of net
income................ (1,618)
-------------
BALANCE AT DECEMBER 31,
1996 AFTER
APPROPRIATION......... 39,170
New accounting method as
of 01/01/1997......... 474
Capital increase........ 739
Transfer to additional
paid-in capital....... 0
Net change in treasury
stock owned by
consolidated
subsidiaries.......... (102)
Translation
adjustment............ 899
Other changes........... 13
Net income.............. 4,665
-------------
BALANCE AT DECEMBER 31,
1997 BEFORE
APPROPRIATION......... 45,858
Proposed appropriation
of net income......... (1,904)
-------------
BALANCE AT DECEMBER 31,
1997 AFTER
APPROPRIATION......... 43,954
-------------
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-32
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
INFORMATION BY BUSINESS SEGMENT*
<TABLE>
<CAPTION>
OTHERS AND
ELIMINATIONS
CABLES AND ENGINEERING ENERGY AND BETWEEN
BUSINESS SEGMENT TELECOM COMPONENTS AND SYSTEMS TRANSPORT SEGMENTS CONSOLIDATED
- --------------------------------------------- ----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
1997
Net sales -- segments........................ 82,902 48,389 27,920 34,449 (7,792) 185,868
-- between segments**..................... (557) (5,989) (1,661) (258) 8,465 0
----------- ----------- ----------- ----------- ------ ------------
NET SALES.................................... 82,345 42,400 26,259 34,191 673 185,868
----------- ----------- ----------- ----------- ------ ------------
INCOME FROM OPERATIONS....................... 3,098 2,872 423*** 1,701 (94) 8,000
----------- ----------- ----------- ----------- ------ ------------
DEPRECIATION OF PROPERTY, PLANT AND
EQUIPMENT, NET............................. 2,833 1,623 298 909 168 5,831
----------- ----------- ----------- ----------- ------ ------------
WORKING CAPITAL PROVIDED BY OPERATIONS....... 2,980 2,080 601 2,023 855 8,539
----------- ----------- ----------- ----------- ------ ------------
CAPITAL EXPENDITURES......................... 3,017 1,649 342 1,211 358 6,577
----------- ----------- ----------- ----------- ------ ------------
1996
Net sales -- segments........................ 71,109 46,280 22,375 29,917 (7,579) 162,102
-- between segments**..................... (648) (6,136) (1,808) (218) 8,810 0
----------- ----------- ----------- ----------- ------ ------------
NET SALES.................................... 70,461 40,144 20,567 29,699 1,231 162,102
----------- ----------- ----------- ----------- ------ ------------
INCOME FROM OPERATIONS....................... (953) 2,697 (234)*** 1,393 0 2,903
----------- ----------- ----------- ----------- ------ ------------
DEPRECIATION OF PROPERTY, PLANT AND
EQUIPMENT, NET............................. 2,936 1,671 250 775 175 5,807
----------- ----------- ----------- ----------- ------ ------------
WORKING CAPITAL PROVIDED BY OPERATIONS....... (1,818) 1,803 (151) 1,610 1,224 2,668
----------- ----------- ----------- ----------- ------ ------------
CAPITAL EXPENDITURES......................... 2,489 1,231 303 765 200 4,988
----------- ----------- ----------- ----------- ------ ------------
1995
Net sales -- segments........................ 68,920 47,524 22,089 29,384 (7,501) 160,416
-- between segments**..................... (383) (7,206) (1,613) (303) 9,505 0
----------- ----------- ----------- ----------- ------ ------------
NET SALES.................................... 68,537 40,318 20,476 29,081 2,004 160,416
----------- ----------- ----------- ----------- ------ ------------
INCOME FROM OPERATIONS....................... (3,018) 2,290 (429)*** 1,334 457 634
----------- ----------- ----------- ----------- ------ ------------
DEPRECIATION OF PROPERTY, PLANT AND
EQUIPMENT, NET............................. 2,967 1,732 306 787 288 6,080
----------- ----------- ----------- ----------- ------ ------------
WORKING CAPITAL PROVIDED BY OPERATIONS....... (1,949) 2,137 79 1,992 588 2,847
----------- ----------- ----------- ----------- ------ ------------
CAPITAL EXPENDITURES......................... 2,667 1,457 354 810 374 5,662
----------- ----------- ----------- ----------- ------ ------------
</TABLE>
- ------------------------
* The Cables and Components segment was modified to include the Batteries
segment (previously disclosed separately) and the Components Division
(previously in Telecom). The Telecom segment includes now the Sub-marines
Network Division (previously in Cables). 1996 and 1995 have been restated.
See also note 29.
** Inter segment sales are made on an arm's length basis.
*** Of which Alcatel Siette: FF (41) million in 1997, FF (326) million in 1996
and FF (600) million in 1995.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-33
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
INFORMATION BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
OTHERS AND
ENERGY ELIMINATIONS
CABLES AND ENGINEERING AND BETWEEN
BUSINESS SEGMENT TELECOM COMPONENTS AND SYSTEMS TRANSPORT SEGMENTS CONSOLIDATED
- ---------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS EXCEPT FOR STAFF COUNT)
1997
Intangible assets, net........................ 11,419 1,617 710 1,868 15,102 30,716
Property, plant and equipment, net............ 11,855 9,304 972 5,827 583 28,541
Other non-current assets, net................. 8,506 482 238 810 11,609 21,645
----------- ----------- ----------- ----------- ----------- ------------
Non-current assets............................ 31,780 11,403 1,920 8,505 27,294 80,902
Inventories and work in progress.............. 14,182 6,967 5,835 16,649 (6) 43,627
Other current assets.......................... 40,445 15,627 21,513 31,626 18,032 127,243
----------- ----------- ----------- ----------- ----------- ------------
TOTAL ASSETS.................................. 86,407 33,997 29,268 56,780 45,320 251,772
----------- ----------- ----------- ----------- ----------- ------------
STAFF......................................... 73,852 36,110 34,497 43,285 1,805 189,549
----------- ----------- ----------- ----------- ----------- ------------
1996
Intangible assets, net........................ 11,952 2,051 1,039 1,738 16,542 33,322
Property, plant and equipment, net............ 11,631 9,604 945 5,188 280 27,648
Other non-current assets, net................. 12,220 512 276 833 4,889 18,730
----------- ----------- ----------- ----------- ----------- ------------
Non-current assets............................ 35,803 12,167 2,260 7,759 21,711 79,700
Inventories and work in progress.............. 13,924 6,966 13,413 15,295 60 49,658
Other current assets.......................... 28,940 9,629 29,703 34,461 16,174 118,907
----------- ----------- ----------- ----------- ----------- ------------
TOTAL ASSETS.................................. 78,667 28,762 45,376 57,515 37,945 248,265
----------- ----------- ----------- ----------- ----------- ------------
STAFF......................................... 75,818 38,839 32,613 41,490 1,840 190,600
----------- ----------- ----------- ----------- ----------- ------------
1995
Intangible assets, net........................ 11,916 2,759 959 822 16,926 33,382
Property, plant and equipment, net............ 12,463 10,352 824 4,557 1,310 29,506
Other non-current assets, net................. 20,194 1,434 454 726 (963) 21,845
----------- ----------- ----------- ----------- ----------- ------------
Non-current assets............................ 44,573 14,545 2,237 6,105 17,273 84,733
Inventories and work in progress.............. 13,921 7,298 10,933 13,242 301 45,695
Other current assets.......................... 38,189 12,185 20,526 34,874 19,473 125,247
----------- ----------- ----------- ----------- ----------- ------------
TOTAL ASSETS.................................. 96,683 34,028 33,696 54,221 37,047 255,675
----------- ----------- ----------- ----------- ----------- ------------
STAFF......................................... 82,036 40,334 29,980 36,860 2,620 191,830
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-34
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
INFORMATION BY GEOGRAPHICAL MARKET
<TABLE>
<CAPTION>
REST OF REST OF
FRANCE GERMANY EUROPE WORLD CONSOLIDATED
--------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS EXCEPT FOR STAFF COUNT)
1997
NET SALES
-- by subsidiary location............................... 69,706 30,110 49,798 36,254 185,868
-- by geographical market............................... 34,437 24,854 56,243 70,334 185,868
Income from operations.................................... 2,292 1,127 2,086 2,495 8,000
Property, plant and equipment, net........................ 8,422 4,592 8,647 6,880 28,541
Total Assets.............................................. 130,355 27,929 58,376 35,112 251,772
Staff..................................................... 71,364 28,961 54,348 34,876 189,549
1996
NET SALES
-- by subsidiary location............................... 64,331 27,254 43,508 27,009 162,102
-- by geographical market............................... 36,246 21,609 48,642 55,605 162,102
Income from operations.................................... 1,874 (363) (42) 1,434 2,903
Property, plant and equipment, net........................ 8,300 5,260 9,405 4,683 27,648
Total Assets.............................................. 127,555 37,944 57,825 24,941 248,265
Staff..................................................... 71,780 30,650 57,330 30,840 190,600
1995
NET SALES
-- by subsidiary location............................... 65,647 25,667 45,455 23,647 160,416
-- by geographical market............................... 39,736 20,729 47,831 52,120 160,416
Income from operations.................................... 2,374 (2,259) 862 (343) 634
Property, plant and equipment, net........................ 8,536 5,630 10,706 4,634 29,506
Total Assets.............................................. 142,267 29,253 62,507 21,648 255,675
Staff..................................................... 74,460 27,150 60,110 30,110 191,830
</TABLE>
- ------------------------
The above information is analyzed by subsidiary location, except for net sales
which are also analyzed by geographical market.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-35
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
The Consolidated Financial Statements of Alcatel Alsthom and its
consolidated subsidiaries (the "group") are presented in accordance with French
generally accepted accounting principles ("GAAP") which incorporate the
requirements of the 7th EEC Directive and comply with the significant accounting
principles described hereafter.
(A) CONSOLIDATION METHODS
Companies over which the group has legal or effective control are fully
consolidated.
The accounts for the Energy and transport segment, represented by GEC
Alsthom n.v. and its subsidiaries ("GEC Alsthom"), are consolidated on a
proportional basis because GEC Alsthom n.v. is jointly-controlled (50/50) by
Alcatel Alsthom and GEC Plc (United Kingdom) ("GEC").
Companies over which the group has a significant influence ("equity
affiliates") are accounted for by the equity method. Significant influence is
generally assumed when the group interest is between 20% and 50%.
The Consolidated Financial Statements are prepared on the basis of year-end
(or interim) financial statements at December 31.
Alcatel Alsthom Shares held on a long-term basis by subsidiaries are stated
at cost and shown as a deduction from shareholders' equity. Gains from disposals
to third parties, and unrealized losses measured to the market value, are
included in the Consolidated Income Statements.
All significant intra-group transactions are eliminated.
(B) TRANSLATION OF FINANCIAL STATEMENTS DENOMINATED IN FOREIGN CURRENCIES
The balance sheets of non-French consolidated subsidiaries are translated
into French francs at the year-end rate of exchange, and their income statements
and cash flow statements are translated at the average annual rate of exchange.
The resulting translation adjustments are included in shareholders' equity under
the line item "Cumulative translation adjustments."
(C) TRANSLATION OF FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions are translated into French francs at the rate
of exchange applicable on the transaction date. At year end, foreign currency
receivables and payables are translated into French francs at the rate of
exchange prevailing on that date. The resulting exchange gains and losses are
recorded in the income statement.
Exchange gains or losses on foreign currency borrowings that represent an
economic hedge of a net investment in a foreign subsidiary are reported as
translation adjustments in shareholders' equity under the line item "Cumulative
translation adjustments."
(D) RESEARCH AND DEVELOPMENT EXPENSES
These are recorded as expenses for the year in which they are incurred,
except for:
F-36
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
- -- certain software development costs which are included in intangible assets,
when strict specific capitalization criteria are fulfilled, and amortized
over their useful lives which do not exceed five years;
- -- recoverable amounts disbursed under the terms of contracts with customers,
which are included in work in progress on long-term contracts.
(E) INTANGIBLE ASSETS
Goodwill is amortized, using the straight-line method, over a period,
determined for each transaction, which does not exceed twenty years. In some
exceptional cases, and when acquisitions are completed using the issuance of
capital stock or securities with equity characteristics as settlement of the
purchase price, the portion of goodwill attributable to such settlement may be
charged to shareholders' equity.
Whenever events or changes in market indicate a potential impairment of
intangible assets and property, plant and equipment, a detailed review is
carried out in order to reduce the carrying amount of such assets to their
market value.
Market value is calculated on the basis of forecast operating margins.
Whenever such review indicates that market values are lower than carrying
amounts, the group further considers the effect of possible business strategies,
such as restructuring plans of involved companies, on its future profitability.
If necessary, an exceptional amortization of these intangible assets as well as
plant, property and equipment is accounted for to reduce their carrying amount
to their market value.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at historical cost for the group
(excluding any revaluation). Depreciation is generally calculated over the
following useful lives:
<TABLE>
<S> <C>
Industrial buildings, plant and equipment
- buildings for industrial use............................. 20 years
- infrastructure and fixtures.............................. 10-20 years
- equipment and tools...................................... 5-10 years
- except for small equipment and tools..................... 3 years
Buildings for administrative use............................... 20-40 years
</TABLE>
Depreciation expense is determined using primarily the straight-line method.
The declining balance method is used for equipment and tools in the Systems
segment.
Fixed assets acquired through capital lease arrangements or long-term rental
arrangements that transfer substantially all of the benefits and risks of
ownership to the group are capitalized.
(G) INVESTMENTS
Investments are stated at the lower of historical cost (excluding
revaluations) or fair value (market value for investments in listed companies),
assessed investment by investment, taking into consideration the diversity of
the activities they represent.
F-37
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
(H) LONG-TERM CONTRACTS
Work in progress on long-term contracts is stated at production cost
excluding administrative and selling expenses and interest expense. Provisions
are established to cover all foreseeable losses on completion.
From January 1st, 1997, revenue and margins of long-term contracts are
recognized on a percentage-of-completion basis in all sectors.
In 1995 and 1996, in the Engineering and Systems segment, revenue and
margins of long-term contracts were recorded upon completion, i.e. as at the
date of transfer of ownership as defined in the contract (see note 2).
(I) INVENTORIES
Inventories are valued at the lower of cost (including indirect production
costs where applicable) or net realizable value. Cost is primarily calculated on
a weighted-average price basis.
(J) CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise receivables from disposal of assets
having a maturity less than three months and which are liquid and transferable
as well as cash on hand and marketable securities. The latter item is valued at
the lower of cost or market value.
(K) PENSION AND RETIREMENT OBLIGATIONS
In accordance with the laws and practices of each country, the group
participates in employee benefit plans by offering various retirement benefits.
In certain countries, the group also provides for special termination benefits.
For defined contribution plans and multi-employer plans, expenses are
recorded as incurred. For defined benefit pension plans, liabilities and prepaid
expenses are determined using actuarial cost methods and are recorded in
accordance with the prevailing accounting practice in each country. Initial
liability, prior service cost and actuarial gains and losses are generally
recorded immediately in the income statement without deferral. The effect of
changes in assumptions in France regarding discount rate and seniority on
retirement date, will be amortized from 1998 over the average expected remaining
working life of the employees concerned.
General assumptions have been determined by actuaries on a country by
country basis and, for certain assumptions (turnover, salary increases), company
by company. The assumptions for 1997, 1996 and 1995 are as follow:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Discount rate.................................... 5-7% 6-7% 6-8%
Future salary increases.......................... 2-7% 3-7% 3-8%
Expected long-term on assets..................... 6-8% 6-8% 7-8%
Average residual active life..................... 15-27 years 15-27 years 15-27 years
Amortization period of transition
obligation..................................... 15-27 years 15-27 years 15-27 years
</TABLE>
F-38
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
(L) RESERVES FOR RESTRUCTURING
Reserves for restructuring costs are provided for when the restructuring
programs have been finalized and approved by group management. Such costs
primarily relate to severance payments, early retirement of employees, shut down
of facilities and write-off of fixed assets, inventories and other assets.
(M) DEFERRED TAXATION
Deferred income taxes are computed under the liability method for all timing
differences arising between taxable income and accounting income, including
entries recorded in individual accounts solely for tax purposes.
Taxes on proposed dividends to be distributed by subsidiaries are provided
for. No provision is made for taxes payable on undistributed retained earnings.
Deferred income tax assets are only recorded in the Consolidated Balance
Sheet insofar as the company in question is reasonably certain that the assets
will be realized in the future.
Tax consolidation is available for the group in a number of countries. In
order to comply with generally accepted accounting principles, group tax relief
in France has been accounted for since 1996 in the year it arises rather than in
the year the consolidated tax return is filed. The effect of this change in
accounting method is outlined in note 6.
(N) NET SALES
Net sales represent sales and revenues net of value added taxes (VAT).
(O) INCOME FROM OPERATIONS
Income from operations includes research and development expenses, pension
costs and employee profit sharing. From 1997, income from operations is
calculated before financial income (loss) and complies with the practices of
many of the Company's competitors.
(P) STRUCTURE OF CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOW
Most of the group's activities in the various business segments involve
long-term operating cycles. As a result the Consolidated Balance Sheet combines
trading assets (inventories and work in progress, accounts receivable) and
trading liabilities (reserves for liabilities and charges, customers' deposits
and advances, trade payables and other payables) without distinction between the
amounts due less than one year and due more than one year. Medium and long-term
portion of financial debt, however, represents financial debt maturing after one
year.
(Q) FINANCIAL INSTRUMENTS
The group uses financial instruments to manage and reduce its exposure to
fluctuations in interest rates, foreign currency exchange rates and metal
prices. When these contracts qualify as hedges, gains and losses on such
contracts are accounted for in the same period as the item being hedged;
otherwise, changes in the market value of these instruments are recognized in
the period of change.
F-39
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- CHANGE IN ACCOUNTING POLICY
In order to comply with the benchmark treatment of the Conseil National de
la Comptabilite, revenue and margins of long-term contracts of the Engineering
and Systems segment are accounted for, from January 1st 1997, under the
percentage of completion method. The effect of the change in accounting policy
is reported as an adjustment of the opening balance of retained earnings as of
January 1st 1997 (MFF 474).
For 1996 and 1995, the adjustments relating to the income statements would
have been respectively MFF 456 and MFF (279) on sales and MFF 20 and MFF (24) on
income from operations. For 1997, the effect of the change is MFF (728) on sales
and MFF (33) on income from operations. this change in accounting policy has no
tax effect on the consolidated accounts but reduces tax losses carried forward
(reported off balance sheet).
NOTE 3 -- INCOME FROM OPERATIONS
Income from operations includes amortization and depreciation, research and
development expenses, pension costs and employee profit sharing, as well as in
1997 an additional provision of MFF 506 due to the deterioration crisis in South
East Asia, relating to doubtful receivables and work in progress on businesses
located in these countries and after consideration of reserves already accounted
for.
(A) AMORTIZATION AND DEPRECIATION
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Amortization of:
- -- Specific software........................................... 837 416 830
- -- Other....................................................... 103 124 159
--------- --------- ---------
TOTAL AMORTIZATION OF OTHER INTANGIBLE ASSETS.................. 940 540 989
--------- --------- ---------
--------- --------- ---------
Depreciation of:
- -- Land and buildings.......................................... 930 921 1,060
- -- Plant, equipment and tools.................................. 3,358 3,417 3,461
- -- Other....................................................... 1,543 1,469 1,559
--------- --------- ---------
TOTAL DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT*........... 5,831 5,807 6,080
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* See note 10.
(B) RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses amounted to FF 11,642 million in 1997 (FF
11,016 million in 1996 and FF 11,070 million in 1995) and are reported in the
income statement under the line item "Cost of Sales".
Total R & D expenditures, including specific studies realized at customers'
request, amounted to FF 16,679 million in 1997 (FF 16,568 million in 1996 and FF
16,201 million in 1995).
F-40
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INCOME FROM OPERATIONS (CONTINUED)
(C) OTHER EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Pension costs..................................................... (1,101) (1,024) (1,115)
Employee profit sharing........................................... (250) (260) (240)
--------- --------- ---------
(1,351) (1,284) (1,355)
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 4 -- FINANCIAL INCOME (LOSS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Net interest (expense) income..................................... (1,219) (1,233) (1,037)
Dividends*........................................................ 251 340 444
Provision for depreciation of investments**....................... 36 (5) (691)
Net exchange gain (loss).......................................... (145) 18 (238)
Other financial items (net)....................................... 9 189 (31)
--------- --------- ---------
FINANCIAL INCOME (LOSS)........................................... (1,068) (691) (1,553)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* received from unconsolidated companies (excluding equity affiliates).
** which includes FF 113 million in 1997, FF 331 million in 1996 and FF (444)
million in 1995 related to Alcatel Alsthom Shares held on a long-term basis
by subsidiaries.
NOTE 5 -- OTHER REVENUE (EXPENSE)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Net capital gains on disposal of fixed assets........................ 2,197 3,740 1,870
Gains from disposals of Alcatel Alsthom shares held by
subsidiaries....................................................... 238 -- --
Other (net).......................................................... (217) (550) (113)
--------- --------- ---------
TOTAL................................................................ 2,218 3,190 1,757
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-41
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAX
(A) ANALYSIS OF INCOME TAX CHARGE
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Current income tax charge............................................. 1,307 554 1,909
Deferred income tax charge (credit), net.............................. 46 124 (788)
--------- --- ---------
INCOME TAX*........................................................... 1,353 678 1,121
--------- --- ---------
--------- --- ---------
</TABLE>
- ------------------------
* The 1996 income tax charge includes FF 653 million related to the 1995 tax
consolidation gain in France. This gain results from the change in
accounting introduced in order to comply with generally accepted accounting
principles.
The increase in the corporate income tax rate in France has had no material
effect on the 1997 consolidated financial statements, primarily because of
unrecorded tax loss carry forwards utilized in the French tax consolidation.
Geographical origin:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
France..................................................... 416 (411) 845
Foreign.................................................... 891 965 1,064
--------- --------- ---------
Current income tax......................................... 1,307 554 1,909
--------- --------- ---------
France..................................................... (137) 165 (277)
Foreign.................................................... 183 (41) (511)
--------- --------- ---------
Deferred income tax........................................ 46 124 (788)
--------- --------- ---------
INCOME TAX................................................. 1,353 678 1,121
France..................................................... 3,485 4,543 (1,834)
Foreign.................................................... 2,109 (1,829) (24,214)
--------- --------- ---------
INCOME BEFORE TAX.......................................... 5,594 2,714 (26,048)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-42
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAX (CONTINUED)
(B) EFFECTIVE INCOME TAX RATE
The effective income tax rate can be analyzed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS
AND IN PERCENTAGE)
Income before taxes and share in net income of equity
affiliates..................................................... 5,594 2,714 (26,048)
Average income tax rate.......................................... 38.2% 50.6% 41.5%
--------- --------- ---------
Expected tax..................................................... 2,135 1,373 (10,810)
Impact of:
- -- reduced taxation of certain revenues*......................... (182) (1,961) (287)
- -- (utilization) creation of tax loss carryforwards.............. (1,026) 101 9,032
- -- tax credits................................................... (347) (468) (223)
- -- other permanent differences................................... 773 1,633 3,409
--------- --------- ---------
Actual income tax charge......................................... 1,353 678 1,121
--------- --------- ---------
EFFECTIVE TAX RATE............................................... 24.0% 25.0% 4.3%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* Primarily capital gains.
Average income tax rate is the sum of income before taxes multiplied by the
local statutory rate for each subsidiary, divided by consolidated income before
taxes.
The level of the average income tax rate in 1996 and 1995 results from the
lack of compensation for losses incurred by certain companies against profits
realized by other companies.
In 1995, the creation of tax loss carryforwards relates primarily to
reserves for restructuring (see note 20) whilst the high level in other
permanent differences relates to exceptional amortization of goodwill (see note
8).
F-43
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAX (CONTINUED)
(C) DEFERRED TAX BALANCES
Deferred tax liabilities (assets) are included in the following captions of
the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Other accounts receivable
- -- current assets................................................. (1,954) (1,991) (1,438)
- -- non-current assets............................................. (785) (570) (455)
--------- --------- ---------
Total*............................................................ (2,739) (2,561) (1,893)
--------- --------- ---------
Other payables
- -- current liabilities............................................ 652 1,149 772
- -- non-current liabilities........................................ 1,297 810 1,007
--------- --------- ---------
Total**........................................................... 1,949 1,959 1,779
--------- --------- ---------
NET DEFERRED TAX LIABILITIES (ASSETS)............................. (790) (602) (114)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* See note 15.
** See note 23.
Current deferred tax assets are recognized in companies which plan to incur
a tax charge in the future.
Non-current deferred tax assets primarily relate to accrued pension and
retirement obligations and other reserves not yet tax deductible.
(D) TAX LOSSES CARRIED FORWARD
Tax losses carried forward and not yet utilized represent a potential tax
saving of FF 11,846 million at December 31, 1997, FF 14,229 million at December
31, 1996 and FF 8,994 million in 1995.
Because of their uncertain nature, these potential assets will only be
recognized in income as and when they are realized.
Tax savings arising out of losses carried forward expire as follows:
<TABLE>
<CAPTION>
YEARS AMOUNT
- ----------------------------------------------------------------- ---------------------------
<S> <C>
(IN MILLIONS OF FRENCH
FRANCS)
1998............................................................. 535
1999............................................................. 841
2000............................................................. 794
2001............................................................. 939
2002 and thereafter.............................................. 8,737
------
Total............................................................ 11,846
------
------
</TABLE>
Other potential tax savings relate to unrecorded deferred tax assets, which
amount to FF 2,735 million at December 31, 1997 (FF 3,542 million at December
31, 1996 and FF 6,409 million in 1995).
F-44
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- EARNINGS PER SHARE
The number of shares and share equivalents used to calculate basic net
income per share and diluted earnings per share is defined in accordance with
U.S. accounting standards. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128, "Earnings per share" ("SFAS 128"). The
company adopted SFAS 128 for the year ended December 31, 1997. SFAS 128 replaced
the primary earnings per share calculation with a basic earnings per share
calculation and modified the calculation of diluted earnings per share. Amounts
presented in 1996 and 1995 were restated to conform with the provisions of SFAS
128.
Net income per share is computed on the basis of the weighted average number
of shares issued after deduction of the weighted average number of shares owned
by group subsidiaries.
Diluted earnings per share take into account share equivalents having a
dilutive effect after deduction of the weighted average number of share
equivalents owned by group subsidiaries. Net income is adjusted for after tax
interest expense of related convertible bonds. The dilutive effect of stock
option plans is calculated using the treasury stock method.
The following tables present a reconciliation of the net income per share
and the fully-diluted earnings per share for each year disclosed:
<TABLE>
<CAPTION>
NUMBER OF PER-SHARE
1997 NET INCOME SHARES AMOUNT
- ------------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
NET INCOME PER SHARE................................... 4,665 156,937,952 29.73
Stock option plans..................................... 1,145,497
Convertibles bonds..................................... 330 13,406,490
----- ------------- -----
Diluted earnings per share............................. 4,995 171,489,939 29.13
----- ------------- -----
----- ------------- -----
</TABLE>
At December 31, 1997, no share equivalent having a potential dilutive effect
in the future existed. Group subsidiaries owned 5,245,510 shares and 2,200,790
share equivalents.
<TABLE>
<CAPTION>
NUMBER OF PER-SHARE
1996 NET INCOME SHARES AMOUNT
- ------------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
NET INCOME PER SHARE................................... 2,725 155,902,458 17.48
Stock option plans..................................... 60,763
Convertibles bonds..................................... 22 1,468,089
----- ------------- -----
Diluted earnings per share............................. 2,747 157,431,310 17.45
----- ------------- -----
----- ------------- -----
</TABLE>
At December 31, 1996, certain securities having a potential dilutive effect
in the future were not taken into account in the computation of diluted earnings
per share because the effect would have been antidilutive:
-- convertible bonds 6.5% 1990 and 2.5% 1994 (see note 21a1);
-- stock option plans granted in 1994 (see note 18b).
F-45
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- EARNINGS PER SHARE (CONTINUED)
Group subsidiaries owned 5,320,995 shares and 2,200,790 share equivalents.
<TABLE>
<CAPTION>
NUMBER OF PER-SHARE
1995 NET INCOME SHARES AMOUNT
- ------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
NET INCOME PER SHARE................................... (25,583) 143,890,505 (177.79)
Stock option plans
Convertibles bonds
----------- ------------- -----------
Diluted earnings per share............................. (25,583) 143,890,505 (177.79)
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
At December 31, 1995, certain securities having a potential dilutive effect
in the future were not taken into account in the computation of diluted earnings
per share because the effect would have been antidilutive:
-- convertible bonds 6.5% 1990 and 2.5% 1994 (see note 21a1);
-- stock option plans granted in 1994 (see note 18b).
Group subsidiaries owned 4,376,309 shares and 435,790 share equivalents.
NOTE 8 -- GOODWILL, NET
<TABLE>
<CAPTION>
1997
---------------------------------- 1996 1995
GROSS CUMULATIVE --------- ---------
ACQUISITIONS VALUE AMORTIZATION NET NET NET
- ------------------------------------------------------------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
CFA.......................................................... 19,087 (7,294) 11,793 12,748 13,703
Telettra..................................................... 11,089 (6,236) 4,853 4,389 4,327
Alcatel Cable................................................ 2,609 (262) 2,347 2,478 --
STC.......................................................... 5,988 (4,327) 1,661 1,676 1,670
NTS Rockwell................................................. 4,181 (2,425) 1,756 1,649 1,648
Havas*....................................................... -- -- -- 1,452 1,514
AEG Kabel.................................................... 2,379 (1,561) 818 883 955
Canada Wire and Cable........................................ 1,326 (1,326) -- -- --
Cortaillod................................................... -- -- -- -- 1,611
Others....................................................... 10,809 (4,141) 6,668 6,721 6,750
--------- ------------ --------- --------- ---------
57,468 (27,572) 29,896 31,996 32,178
--------- ------------ --------- --------- ---------
--------- ------------ --------- --------- ---------
</TABLE>
- ------------------------
* In 1997, part of the shares held in Havas were sold and the shares retained
have been reclassified as "Other investments" (see Note 11a -- Note 12).
In 1991, the capital gain resulting from the difference between the book
value and the fair value of the equity of Alcatel Face disposed of to Fiat in
connection with the acquisition of a 75% interest in Telettra, and the
amortization of a portion of the related goodwill, were deferred. In 1995, in
connection with the acquisition of the remaining 25% interest in Telettra, this
capital gain was charged against the unamortized portion of goodwill.
F-46
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- GOODWILL, NET (CONTINUED)
In 1995, an exceptional amortization of goodwill related to certain acquired
companies was accounted for. This exceptional amortization, included in
"Cumulative amortization" amounted to FF 10,888 million and was broken down as
follows:
<TABLE>
<CAPTION>
EXCEPTIONAL AMORTIZATION
1995
---------------------------
<S> <C>
(IN MILLIONS OF FRENCH
FRANCS)
Telettra......................................................... 4,183
STC.............................................................. 2,801
AEG Kabel........................................................ 1,112
NTS Rockwell..................................................... 1,067
Canada Wire and Cable............................................ 957
Generale Occidentale............................................. 597
Others........................................................... 171
------
Total............................................................ 10,888
------
------
</TABLE>
Amortization of goodwill charged to shareholders' equity, if amortized,
would have generated a charge of FF 83 million in 1997.
NOTE 9 -- OTHER INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
- -- Specific software*............................................. 3,532 3,387 2,838
- -- Trademarks..................................................... 12 12 16
- -- Other.......................................................... 1,001 960 908
--------- --------- ---------
Total value at cost............................................... 4,545 4,359 3,762
--------- --------- ---------
Cumulative amortization........................................... (3,725) (3,033) (2,558)
--------- --------- ---------
Net............................................................... 820 1,326 1,204
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* This primarily includes expenditures on public switching software developed
by Alcatel subsidiaries.
F-47
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT
(A) CHANGE IN PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
GROSS VALUE
---------------------------------------------------------
PLANT,
EQUIPMENT
LAND BUILDINGS AND TOOLS OTHER TOTAL
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
DECEMBER 31, 1994.............................................. 2,763 20,002 37,317 14,469 74,551
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Additions...................................................... 77 678 2,713 2,194 5,662
Disposals...................................................... (71) (713) (2,227) (1,183) (4,194)
Other movements................................................ (80) (15) 411 (1,749) (1,433)
--------- ----------- ----------- --------- ---------
DECEMBER 31, 1995.............................................. 2,689 19,952 38,214 13,731 74,586
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Additions...................................................... 21 432 2,252 2,283 4,988
Disposals...................................................... (162) (679) (2,111) (1,264) (4,216)
Other movements................................................ 158 (1,971) 1,240 (142) (715)
--------- ----------- ----------- --------- ---------
DECEMBER 31, 1996.............................................. 2,706 17,734 39,595 14,608 74,643
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Additions...................................................... 35 741 2,855 2,946 6,577
Disposals...................................................... (122) (754) (2,986) (1,440) (5,302)
Other movements................................................ 84 951 1,614 (666) 1,983
--------- ----------- ----------- --------- ---------
DECEMBER 31, 1997.............................................. 2,703 18,672 41,078 15,448 77,901
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
</TABLE>
Property, plant and equipment acquired under capital leases and long-term
rental arrangements account for less than 5% of the total property, plant and
equipment.
(B) CHANGES IN ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
-----------------------------------------------------------
PLANT
EQUIPMENT
LAND BUILDINGS AND TOOLS OTHER TOTAL
----- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
DECEMBER 31, 1994............................................... 145 8,624 25,676 9,020 43,465
--- ----------- ----------- --------- ---------
--- ----------- ----------- --------- ---------
Depreciation charge............................................. 18 1,042 3,461 1,559 6,080
Write-backs..................................................... (11) (524) (2,083) (1,089) (3,707)
Other movements................................................. 10 (1) (21) (746) (758)
--- ----------- ----------- --------- ---------
DECEMBER 31, 1995............................................... 162 9,141 27,033 8,744 45,080
--- ----------- ----------- --------- ---------
--- ----------- ----------- --------- ---------
Depreciation charge............................................. 15 906 3,417 1,469 5,807
Write-backs..................................................... (6) (419) (1,899) (1,162) (3,486)
Other movements................................................. 1 (1,036) 264 365 (406)
--- ----------- ----------- --------- ---------
DECEMBER 31, 1996............................................... 172 8,592 28,815 9,416 46,995
--- ----------- ----------- --------- ---------
--- ----------- ----------- --------- ---------
Depreciation charge............................................. 11 919 3,358 1,543 5,831
Write-backs..................................................... (7) (481) (2,880) (1,288) (4,656)
Other movements................................................. (85) 77 580 618 1,190
--- ----------- ----------- --------- ---------
DECEMBER 31, 1997............................................... 91 9,107 29,873 10,289 49,360
--- ----------- ----------- --------- ---------
--- ----------- ----------- --------- ---------
</TABLE>
F-48
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
(C) LEASES AND RENTALS
Future rentals under capital leases at December 31, 1997:
<TABLE>
<CAPTION>
MATURITY DATE AMOUNT
- ----------------------------------------------------------------- -------------------------------
<S> <C>
(IN MILLIONS OF FRENCH FRANCS)
1998............................................................. 29
1999............................................................. 29
2000............................................................. 26
2001............................................................. 25
2002............................................................. 27
2003 and thereafter.............................................. 89
---
Capital lease obligations........................................ 225
---
Interest......................................................... 72
---
TOTAL FUTURE RENTAL OBLIGATIONS.................................. 297
---
---
</TABLE>
Rental expenses for operating leases over the last three years:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Minimum rentals..................................................... (1,845) 1,903 2,032
Contingent rentals.................................................. (55) 55 58
Sublease rentals.................................................... 84 (60) (107)
--------- --------- ---------
TOTAL............................................................... (1,816) 1,898 1,983
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-49
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SHARE IN NET ASSETS OF EQUITY AFFILIATES
(A) EQUITY
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
-------------------------------
Havas*...................................................... -- 21.2 21.2 -- 3,345 3,254
Framatome................................................... 44.1 44.1 44.1 3,085** 2,749 2,569
Cofira***................................................... -- -- 25.0 -- -- 863
Shanghai Bell............................................... 31.7 31.7 31.7 976 907 682
Other
(less than FF 250 million each)........................... 657 667 1,007
--------- --------- ---------
TOTAL....................................................... 4,718 7,668 8,375
--------- --------- ---------
</TABLE>
- ------------------------
* In 1997, part of the shares held in Havas were sold and the shares retained
have been reclassified as "Other investments".
** Provisional figures
*** Cofira was sold in 1996.
(B) INFORMATION ON EQUITY AFFILIATES
Summarized financial information for Framatome at December 31:
<TABLE>
<CAPTION>
1997* 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
BALANCE SHEET DATA
Non-current assets....................................................... 6,825 6,622 7,667
Current assets........................................................... 26,798 27,376 25,163
--------- --------- ---------
Total assets............................................................. 33,623 33,998 32,830
--------- --------- ---------
--------- --------- ---------
Shareholders' equity..................................................... 7,037 6,277 5,729
Minority interests....................................................... 304 311 268
Non-current liabilities.................................................. 9,967 9,874 8,585
Current liabilities...................................................... 16,315 17,536 18,248
--------- --------- ---------
Total liabilities and shareholders' equity............................... 33,623 33,998 32,830
--------- --------- ---------
--------- --------- ---------
INCOME STATEMENT DATA
Net sales................................................................ 18,381 15,202 17,901
Income from operations after financing................................... 3,119 2,145 1,567
Net income............................................................... 989 1,036 721
</TABLE>
- ------------------------
* Provisional figures
F-50
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SHARE IN NET ASSETS OF EQUITY AFFILIATES (CONTINUED)
Summarized financial information for Havas at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN MILLIONS OF
FRENCH FRANCS)
BALANCE SHEET DATA
Non-current assets................................................................. 19,151 18,547
Current assets..................................................................... 23,022 18,623
--------- ---------
Total assets....................................................................... 42,173 37,170
--------- ---------
--------- ---------
Shareholders' equity............................................................... 15,757 15,338
Minority interests................................................................. 1,866 1,890
Non-current liabilities............................................................ 9,699 5,451
Current liabilities................................................................ 14,851 14,491
--------- ---------
Total liabilities and shareholders' equity......................................... 42,173 37,170
--------- ---------
--------- ---------
INCOME STATEMENT DATA
Net sales.......................................................................... 48,607 44,626
Income from operations after financing............................................. 1,562 1,475
Net income......................................................................... 794 405
</TABLE>
Summarized financial information for other equity affiliates:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Total assets............................................................... 10,415 14,221 22,421
Shareholders' equity....................................................... 4,500 3,906 7,488
Net sales.................................................................. 8,090 15,290 18,029
Net income................................................................. 522 688 (360)
</TABLE>
- ------------------------
In 1995, CEAC was sold and CEP Communication was disposed of to Havas.
In 1996, Cofira was sold.
F-51
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- OTHER INVESTMENTS AND MISCELLANEOUS, NET
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- --------- ---------
<S> <C> <C> <C> <C> <C>
AT NET NET NET
COST PROVISION VALUE VALUE VALUE
--------- ----------- --------- --------- ---------
<CAPTION>
(IN MILLIONS OF FRENCH FRANCS)
<S> <C> <C> <C> <C> <C>
Investments in:
-- listed securities*..................... 4,401 (1) 4,400 2,611 4,450
-- unlisted securities.................... 4,389 (694) 3,695 2,675 2,960
--------- --- --------- --------- ---------
8,790 (695) 8,095 5,286 7,410
--------- --- --------- --------- ---------
--------- --- --------- --------- ---------
Long-term loans to customers (banking and
finance subsidiaries)..................... 2,791 (72) 2,719 1,382 1,780
Other**..................................... 6,336 (223) 6,113 4,394 4,280
--------- --- --------- --------- ---------
TOTAL................................... 17,917 (990) 16,927 11,062 13,470
--------- --- --------- --------- ---------
--------- --- --------- --------- ---------
</TABLE>
- ------------------------
* Market value 1997: FF 7,095 million
1996: FF 3,767 million
1995: FF 5,552 million
** This line includes primarily long-term interest bearing receivables of the
Telecom sector, guarantee deposits and loans to unconsolidated companies.
Investments in listed companies at December 31, 1997:
<TABLE>
<CAPTION>
SHARE-
% NET MARKET HOLDERS' NET
INTEREST VALUE VALUE EQUITY* INCOME*
----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN PERCENTAGE AND MILLIONS OF FRENCH FRANCS)
Societe Generale............................ 2.7% 1,218 2,179 54,084 4,544
Compagnie Generale des Eaux................. 2.4% 1,189 2,534 32,201 1,953
Havas*...................................... 6.9% 1,989 2,352 1,763 105
Other (less than FF 200 million)............ 4 30
--------- -----
TOTAL................................... 4,400 7,095
--------- -----
--------- -----
</TABLE>
- ------------------------
* At December 31, 1996. Financial data is generally not available until May of
the following fiscal year.
F-52
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- INVENTORIES AND WORK IN PROGRESS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Raw materials and goods.......................................... 10,501 10,453 10,728
Industrial work in progress...................................... 12,542 10,137 9,381
Work in progress on long-term contracts.......................... 15,256 23,754 19,430
Finished products................................................ 9,934 9,914 10,301
--------- --------- ---------
GROSS VALUE...................................................... 48,233 54,258 49,840
--------- --------- ---------
VALUATION ALLOWANCE.............................................. (4,606) (4,600) (4,145)
--------- --------- ---------
NET VALUE........................................................ 43,627 49,658 45,695
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 14 -- TRADE RECEIVABLES AND RELATED ACCOUNTS
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Receivables on long-term contracts............................... 44,060 36,168 41,068
Other trade receivables.......................................... 36,139 32,872 28,697
--------- --------- ---------
GROSS VALUE...................................................... 80,199 69,040 69,765
--------- --------- ---------
VALUATION ALLOWANCE.............................................. (3,734) (3,375) (2,817)
--------- --------- ---------
NET VALUE........................................................ 76,465 65,665 66,948
</TABLE>
NOTE 15 -- OTHER ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Customer accounts (banking and finance companies)................ 3,670 5,887 9,061
Advances and progress payments on long-term contracts............ 5,588 5,669 4,852
Prepaid taxes.................................................... 3,538 2,386 2,052
Deferred taxes*.................................................. 2,739 2,561 1,893
Prepaid expenses................................................. 1,202 926 699
Advances made to employees....................................... 531 300 247
Other accounts................................................... 5,815 6,410 4,772
--------- --------- ---------
GROSS VALUE...................................................... 23,083 24,139 23,576
--------- --------- ---------
VALUATION ALLOWANCE.............................................. (124) (228) (217)
--------- --------- ---------
NET VALUE........................................................ 22,959 23,911 23,359
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* See note 6c.
F-53
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 -- MARKETABLE SECURITIES
Marketable securities primarily consist of investments in money market
instruments, bonds and other transferable securities.
The market value of these securities was FF 7,898 million at December 31,
1997 (FF 9,219 million at December 31, 1996 and FF 14,490 million at December
31, 1995).
NOTE 17 -- APPROPRIATION OF 1997 EARNINGS
The Board of Directors has decided to propose to the Shareholders' ordinary
annual general meeting to be held on June 18, 1998 a dividend of FF 11.50 per
share on the 163,199,080 Shares outstanding at December 31, 1997, giving rise to
an aggregate distribution of FF 1,877 million (FF 10.00 at December 31, 1996 on
the 161,788,947 shares, the aggregate distribution was FF 1,618 million and FF
8.00 December 31, 1995 on the 150,548,066 shares, the aggregate distribution was
FF 1,204 million).
NOTE 18 -- SHAREHOLDERS' EQUITY
(A) CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL:
Capital stock at December 31, 1997 is composed of 163,199,080 Shares of
nominal value FF 40 each (161,788,947 shares and 150,548,066 shares of nominal
value FF 40 each at December 31, 1996 and December 31, 1995 respectively).
Increases in the capital stock and additional paid-in capital during 1997
amounted to FF 739 million (FF 4,495 million in 1996 and FF 1,582 million in
1995). These increases related to the issue of:
- -- 743,051 shares for a total par value of FF 30 million in exchange for
convertible bonds (additional paid-in capital: FF 272 million) ;
- -- 424,267 shares for a total par value of FF 17 million during the share offer
reserved for the group's employees (additional paid-in capital: FF 250
million) ;
- -- 242,815 shares for a total par value of FF 9 million corresponding to the
exercising of 242,815 options (additional paid-in capital: FF 160 million).
(B) STOCK OPTIONS:
In 1994, 1996 and 1997, Alcatel Alsthom adopted stock option incentive plans
under which key employees were granted 1,967,850, 1,892,700 and 1,713,300
options respectively.
Options can be exercised:
- -- for the first plan : from July 1, 1997, through December 29, 2000, each
option giving the right to one share at an exercise price of FF 700 ;
- -- for the second plan: from July 1, 1998 through December 31, 2003, each
option giving the right to one share at an exercise price of FF 425. As of
December 11, 1996 a complementary stock option plan was adopted, for 78,800
options which can be exercised from July 1, 1998 through December 31, 2003,
each option giving the right to one share at an exercise price of FF 440 ;
- -- for the third plan: from May 1, 2002 through December 31, 2004, each option
giving the right to one share at an exercice price of FF 632. As of December
10, 1997 a complementary stock option plan was adopted, for 73,400 options
which can be exercised from December 10, 2002 through December 31, 2004,
each option giving the right to one share at an exercise price of FF 687.
Shares issued can be in either registered or bearer form, depending on the
buyer's preference and give rights to a full dividend for the year in which the
option is exercised.
F-54
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 -- SHAREHOLDERS' EQUITY (CONTINUED)
(C) CONVERTIBLE BONDS
Note 21(a) below describes the various convertible bonds issued and
outstanding at December 31, 1997.
Full conversion of these bonds would represent the issuance of 15,171,209
Shares of nominal value FF 40 each, 2,200,790 of which would become treasury
stock as the corresponding bonds are held by certain of the Company's
consolidated subsidiaries (see note 18f).
(D) CONSOLIDATED RETAINED EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Parent company's retained earnings............................ 37,389 30,026 12,882
Consolidated subsidiaries' retained earnings.................. (34,368) (25,294) (10,421)
Share in retained earnings of equity affiliates............... 2,160 1,812 1,294
--------- --------- ---------
Total....................................................... 5,181 6,544 3,755
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* Before appropriation.
(E) DISTRIBUTABLE RETAINED EARNINGS
Not all consolidated retained earnings may be appropriated for distribution
of dividends, due primarily to the impact of consolidation adjustments. The
distributable retained earnings of Alcatel Alsthom, the parent company, totalled
FF 17,023 million at December 31, 1997 (FF 14,323 million at December 1996 and
FF 14,156 million at December 31, 1995). As of December 31, 1997, no retained
earnings are distributable free of withholding tax and the withholding tax due
on 1997 dividends amounts to FF 27 million. As of December 31, 1996 and 1995,
retained earnings distributable free of withholding tax amounted to respectively
FF 380 and FF 546 million.
(F) TREASURY STOCK
Alcatel Alsthom Shares owned by group consolidated subsidiaries amounting to
FF 2,584 million at December 1997 (FF 2,428 million at December 31, 1996 and FF
2,257 million at December 31, 1995) are deducted at cost from consolidated
retained earnings.
F-55
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 -- MINORITY INTERESTS
<TABLE>
<CAPTION>
(IN MILLIONS OF FRENCH
FRANCS)
---------------------------
<S> <C>
BALANCE AT DECEMBER 31, 1994..................................... 5,860
------
------
Other changes*................................................... (1,188)
Minority interests in 1995 income................................ (1,413)
Minority interests in dividends.................................. (46)
------
BALANCE AT DECEMBER 31, 1995..................................... 3,213
------
------
Other changes*................................................... (2,061)
Minority interests in 1996 income................................ 336
------
BALANCE AT DECEMBER 31, 1996..................................... 1,488
------
------
Other changes*................................................... 136
Minority interests in 1997 income................................ 153
------
BALANCE AT DECEMBER 31, 1997..................................... 1,777
------
------
</TABLE>
- ------------------------
* Corresponds to the net effect of acquisitions and disposals of minority
interests. In 1995, the Groupe de la Cite was disposed of to Havas and
consequently minority interests decreased by FF 947 million. In 1996, the
Company's merger with Alcatel Cable resulted in a decrease in minority
interests of FF 1,414 million.
NOTE 20 -- ACCRUED CONTRACT COSTS AND OTHER RESERVES
(A) ANALYSIS BY TYPE
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Accrued contract costs........................................... 23,568 21,808 20,097
Reserves for restructuring....................................... 8,545 13,086 16,914
Other reserves................................................... 7,962 7,622 5,291
--------- --------- ---------
Total.......................................................... 40,075 42,516 42,302
--------- --------- ---------
--------- --------- ---------
</TABLE>
Accrued contract costs relate primarily to warranties, cost of completed
billed contracts, contract losses and penalties relating to commercial
contracts.
(B) ANALYSIS OF RESERVES FOR RESTRUCTURING
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
OPENING BALANCE..................................................... 13,086 16,914 7,277
Expensed during year................................................ (5,128) (5,684) (3,338)
New plans and adjustments to previous estimates..................... 1,231 466 13,422
Effect of acquisition (disposal) of consolidated subsidiaries....... (22) 939 396
Currency translation adjustments and others......................... (622) 451 (843)
--------- --------- ---------
CLOSING BALANCE..................................................... 8,545 13,086 16,914
--------- --------- ---------
--------- --------- ---------
</TABLE>
A plan over a three year period 1996/1998 aimed at adapting the level of
workforce and rationalizing manufacturing facilities and distribution activities
of the Telecom and Cables sectors was set up in 1995 and it concerns mainly the
subsidiaries in France, Italy, Germany, Spain and Belgium. This plan has been
largely implemented during 1996 and 1997 and will be completed by the end of
1998.
F-56
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 -- FINANCIAL DEBT
(A) BONDS AND NOTES ISSUED
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Convertible bonds issued by :
-- Parent company............................................... 9,320 9,630 10,271
-- Subsidiaries................................................. -- -- 772
--------- --------- ---------
9,320 9,630 11,043
Other bonds and notes............................................ 11,844 10,487 10,947
--------- --------- ---------
Total............................................................ 21,164 20,117 21,990
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) CONVERTIBLE BONDS
Alcatel Alsthom transactions:
- -- In April 1990, Alcatel Alsthom issued 8,205,000 convertible bonds having a
nominal value of FF 680, which are listed on the Paris Bourse, bear interest
at 6.50% per annum and mature on January 1, 2000. At December 31, 1997,
8,195,779 of these bonds remained outstanding and were convertible into
Shares at the conversion rate of one share per one bond.
- -- In April 1994, Alcatel Alsthom issued 6,250,000 convertible bonds having a
nominal value of FF 800, which are listed on the Paris Bourse, bear interest
at 2.50% per annum, and mature on January 1, 2004. On maturity date, the
remaining bonds will be reimbursed at FF 1,098 each resulting in an
actuarial interest of 5.50% per annum. At December 31, 1997, 6,249,980 of
these bonds remained outstanding and were convertible at the conversion rate
of one share per one bond.
- -- In January 1996, Alcatel Alsthom assumed the liability for 726,231
convertible bonds issued by Alcatel Cable and outstanding as of the date of
the Company's merger with that company. These bonds, issued in 1994 and
having a nominal value of FF 645 each, are listed on the Paris Bourse and
bear interest at 3.00% per annum. On maturity date, January 1, 2001, the
remaining bonds will be reimbursed at FF 822 each resulting in an actuarial
interest of 6.54% per annum. At December 31, 1997, 725,450 of these bonds
remained outstanding and were convertible at the conversion rate of one
share per one bond.
- -- In January 1996, Alcatel Alsthom assumed the liability for 73,453
convertible bonds issued by Alcatel Cable and outstanding as of the date of
the Company's merger with that company. These bonds, issued in 1991 and
having a nominal value of FF 4,100 each, are listed on the Paris Bourse and
bear interest at 6.75% per annum. These bonds have been totally converted in
1997.
F-57
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 -- FINANCIAL DEBT (CONTINUED)
(2) OTHER BONDS AND NOTES
These bonds and notes were issued by the following companies:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Alcatel Alsthom*................................................. 11,344 9,987 10,447
Electro Banque................................................... 500 500 500
Others........................................................... -- -- --
--------- --------- ---------
TOTAL............................................................ 11,844 10,487 10,947
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* The main changes between 1996 and 1997 are analysed as follows:
- -- Issuance by Alcatel Alsthom, on January 27, 1997 of samurai bonds amounting
to Yen 20,000 million, with a three year maturity and bearing interest at 5%
per annum (amount at December 31, 1997:
FF 839 million).
- -- Issuance by Alcatel Alsthom, on March 12, 1997, of bonds amounting to FF
1,500 million, which mature on March 12, 2007 and bear interest at 5,625%
per annum. These bonds are listed on the Paris Bourse and the Luxembourg
Bourse.
- -- Reimbursement of XEU borrowing 1992/1997 for FF 976 million.
- -- Conversion of bonds amounted to FF 302 million.
(B) OTHER BORROWINGS
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Short-term borrowings and bank overdrafts........................ 17,257 21,297 31,728
Capital lease obligations........................................ 225 111 144
Accrued interest................................................. 1,075 952 1,067
--------- --------- ---------
18,557 22,360 32,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-58
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 -- FINANCIAL DEBT (CONTINUED)
(C) ANALYSIS BY MATURITY DATE:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
SHORT-TERM FINANCIAL DEBT........................................ 17,805 19,055 26,804
--------- --------- ---------
1997............................................................. -- -- 3,112
1998............................................................. -- 3,701 4,848
1999............................................................. 3,176 3,352 9,131
2000............................................................. 7,146 6,237 225
2001............................................................. 979 718 --
2001 and thereafter.............................................. -- -- 10,809
2002............................................................. 471 -- --
2002 and thereafter.............................................. -- 9,414 --
2003 and thereafter.............................................. 10,144 -- --
--------- --------- ---------
LONG-TERM FINANCIAL DEBT*........................................ 21,916 23,422 28,125
--------- --------- ---------
TOTAL............................................................ 39,721 42,477 54,929
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* See note 1p.
(D) LONG-TERM FINANCIAL DEBT
Analysis by currency and interest rate:
<TABLE>
<CAPTION>
WEIGHTED INTEREST RATE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/1997 12/31/1996 12/31/1995 1997 1996 1995
------------- ------------- ------------- --------- --------- ---------
<CAPTION>
(IN % AND MILLIONS OF FRENCH FRANCS)
<S> <C> <C> <C> <C> <C> <C>
French franc*......................... 5.9% 6% 7.1% 18,583 19,670 21,979
Deutsche mark......................... 6.8% 6.2% 5.3% 725 1,046 1,262
Italian lira.......................... 3.3% 6.7% 9.0% 520 694 757
US Dollar............................. 4.7% 5.5% 5.9% 1,271 602 598
Swiss franc........................... 3.9% 4.2% 5.9% 176 279 334
Spanish peseta........................ 5.4% 7.1% 10.3% 9 16 20
Pound sterling........................ 7.4% 8.1% 8.1% 7 7 9
Other................................. 7.2% 5.1% 6.1% 625 1,108 3,166
--
--- --- --------- --------- ---------
TOTAL................................. 5.8% 6.00% 6.9% 21,916 23,422 28,125
--
--
--- --- --------- --------- ---------
--- --- --------- --------- ---------
</TABLE>
- ------------------------
* The rates shown take into account the current portion of the original
long-term borrowings (FF 3,500 million in 1997).
F-59
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 -- FINANCIAL DEBT (CONTINUED)
(E) SHORT-TERM FINANCIAL DEBT
Analysis by type:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Current portion of:
-- bonds and notes issued...................................... 3,508 987 506
-- capital lease obligations................................... 29 19 31
-- long-term bank borrowings................................... 2,316 1,773 2,419
Short-term borrowing and bank overdrafts:
-- lines of credit............................................. 3,654 4,779 11,714
-- commercial paper............................................ 4,216 8,547 2,439
-- bank loans.................................................. 3,007 1,998 8,628
Accrued interest................................................. 1,075 952 1,067
--------- --------- ---------
TOTAL............................................................ 17,805 19,055 26,804
--------- --------- ---------
--------- --------- ---------
</TABLE>
Analysis by currency and interest rate:
<TABLE>
<CAPTION>
WEIGHTED INTEREST RATE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/1996 12/31/1995 12/31/1994 1996 1995 1994
------------- ------------- ------------- --------- --------- ---------
<CAPTION>
(IN % AND MILLIONS OF FRENCH FRANCS)
<S> <C> <C> <C> <C> <C> <C>
French franc*......................... 3.3% 3.5% 5.9% 9,136 9,886 11,358
Deutsche mark......................... 3.7% 4.0% 4.5% 1,047 1,184 4,051
Italian lira.......................... 6.3% 6.9% 10.3% 537 856 1,460
US dollar............................. 6.5% 8.3% 6.4% 2,631 1,992 2,994
Swiss franc........................... 4.8% 3.0% 5.0% 131 64 1,448
Spanish peseta........................ 5.4% 7.2% 9.5% 276 761 1,038
Pound sterling........................ 7.2% 6.7% 6.9% 1,326 363 713
Other................................. 5.1% 7.1% 7.3% 2,721 3,949 3,742
-- --
--- --------- --------- ---------
TOTAL................................. 4.5% 5.1% 6.3% 17,805 19,055 26,804
-- --
-- --
--- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
- ------------------------
* The rates shown do not take into account the current portion of the original
long-term borrowings (FF 3,500 million in 1997).
(F) OTHER INFORMATION
- -- At December 31, 1997, the group had unused confirmed credit lines of
approximately FF 12,300 million at a weighted average interest rate of 3.82%
resulting in a 12.5 basis points spread over the floating reference rate (FF
12,300 million at December 31, 1996 and FF 7,550 million at December 31,
1995).
- -- Commitment fees on these credit lines amounted to FF 10.2 million, FF 10
million and FF 6 million for 1997, 1996 and 1995, respectively.
Assets pledged to secure indebtedness (including mortgage loans) amounted to
FF 545 million at December 31, 1997.
F-60
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22 -- CUSTOMERS' DEPOSITS AND ADVANCES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Advance payments received on long-term contracts................. 46,865 48,014 44,033
Other deposits and advances received from customers.............. 3,439 4,062 3,349
--------- --------- ---------
Total customers' deposits and advances........................... 50,304 52,076 47,382
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 23 -- OTHER PAYABLES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Analysis is as follows, after approbation:
Accrued payables and other....................................... 16,544 16,064 16,565
Customer deposits (banking and finance companies)................ 6,389 5,843 10,863
Social security payables......................................... 7,987 8,045 7,202
Accrued taxes.................................................... 2,869 3,107 4,557
Deferred taxes*.................................................. 1,949 1,959 1,779
Dividends to be paid............................................. 1,877 1,618 1,250
Government grants................................................ 222 224 294
--------- --------- ---------
TOTAL............................................................ 37,837 36,860 42,510
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* See note 6(c).
NOTE 24 -- COMMITMENTS AND CONTINGENCIES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Guarantees given on contracts and others......................... 41,247 38,364 36,272
Discounted notes receivable...................................... 338 182 2,285
Secured borrowings............................................... 5,251 3,653 4,700
Commitments to buy or sell forward raw materials or goods........ 1,744 1,462 1,602
Commitments to purchase fixed assets............................. 763 837 719
--------- --------- ---------
TOTAL............................................................ 49,343 44,498 45,578
--------- --------- ---------
--------- --------- ---------
</TABLE>
Guarantees given on long-term contracts consist of performance bonds issued
to customers and bank guarantees given to secure advance payments received from
customers. In the event, such as delay in delivery or failure in performance on
the underlying contracts, it becomes likely that Alcatel Alsthom will become
liable for such guarantees, the estimated risk is reserved for on the
Consolidated Balance Sheet under the line item "accrued contract costs and other
reserves", see note 20.
F-61
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25 -- FINANCIAL INSTRUMENTS AND MARKET-RELATED EXPOSURES
(1) FINANCIAL INSTRUMENTS:
In 1996, it was decided to centralize treasury management in order to
minimize the group's exposure to market risks: foreign exchange risk, interest
rate risk and credit risk.
The following information is presented in compliance with the requirements
of Statement of Financial Accounting Standards No. 105 "Disclosures of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," No. 107 "Disclosure
about Fair Value of Financial Instruments" and No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
(A) PURPOSES FOR WHICH DERIVATIVE FINANCIAL INSTRUMENTS ARE HELD OR ISSUED.
The group enters into derivative financial instruments with
off-balance-sheet risks primarily to manage its exposure to fluctuations in
interest rates and foreign currency exchange rates. All financial instruments
held or issued by the group at year end are hedges of existing or anticipated
financial or commercial transactions. Anticipated transactions mainly relate to
firm commercial contracts and commercial bids. Firm commercial contracts and
other firm commitments are hedged using forward exchange contracts or options
while commercial bids are hedged using purchased options. The duration of
anticipated transactions which are not firmly committed does not usually exceed
18 months. There are no short option positions, except for currency options sold
but matched with long positions, within the group at year end.
The group controls credit risks associated with these financial instruments
through credit approvals, investment limits and centralized monitoring
procedures, but does not normally require collateral or other security to
support financial instruments with off-balance sheet risks. Temporary cash
investments are made in a well-diversified portfolio consisting of very high
quality, liquid obligations of government, corporate and financial institutions.
Because of the diversified nature and geographical location of its customer
base, management believes that any credit risk for trade receivables is limited
and no significant concentrations of credit risk exist.
(B) ACCOUNTING POLICY
Interest rate hedging instruments: gains and losses are recognized in income
in the same period as the item being hedged and are not deferred.
Foreign exchange hedging instruments: on a contract by contract basis,
premiums and discounts, as well as net gains, are recognized in income in the
same period as the item being hedged (i.e., in the case of a long term contract
on the basis of the percentage-of-completion method).
Hedging gains (losses) deferred at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF FRENCH
FRANCS)
---------------------------
<S> <C>
Deferred losses........................................ (3,845)
Deferred gains......................................... 3,499
------
Net.................................................... (346)
------
------
</TABLE>
F-62
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25 -- FINANCIAL INSTRUMENTS AND MARKET-RELATED EXPOSURES (CONTINUED)
(C) FAIR VALUE
At December 31, 1997, balance sheet and off-balance sheet financial
instruments are as follows:
<TABLE>
<CAPTION>
PRINCIPAL FAIR CARRYING
AMOUNT VALUE AMOUNT
----------- --------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
BALANCE SHEET FINANCIAL INSTRUMENTS
Assets:
Investments in shares*...................................................... 10,790 8,095
Loans / debentures.......................................................... 8,832 8,832
Receivables from disposal of assets......................................... -- --
Investments in notes, bonds and other....................................... 5,446 5,382
Investments in managed funds................................................ 2,452 2,261
----------- --------- -----------
Marketable securities**..................................................... 7,898 7,643
Cash and bank deposits...................................................... 20,176 20,176
Liabilities:
Financial debt.............................................................. 42,713 39,721
OFF-BALANCE SHEET FINANCIAL INSTRUMENT
Foreign exchange risk:
Buy / lend
Forward exchange contract................................................. 25,073 (376)
Long-term exchange swaps.................................................. 277 (7)
Short-term exchange swaps................................................. 3,747 (36)
Long-term currency swaps.................................................. 1,605 (54)
Short-term currency swaps................................................. 1,283 (18)
Currency option contracts
Call 24,274 318
Put 25,068 423
Sell / borrow
Forward exchange contract................................................. 25,638 (350)
Long-term exchange swaps.................................................. 95 3
Short-term exchange swaps................................................. 10,690 (2)
Long-term currency swaps.................................................. 0 0
Short-term currency swaps................................................. 0 0
Currency option contracts
Call 14,728 (165)
Put 19,878 (249)
Insurance contracts........................................................... 7,711
Interest rate risk:
Buy / lend
Long-term interest rate swaps............................................. 3,444 44
Short-term interest rate swaps............................................ 1,536 26
Future option contracts
Call 0 0
Put 0 0
Interest rate cap contracts............................................... 1,418 6
Interest rate floor contracts............................................. 30 1
FRA....................................................................... 16 0
Sell / borrow
Long-term interest rate swaps............................................. 3,459 9
Short-term interest rate swaps............................................ 666 (4)
Future option contracts
Call 0 0
Put 0 0
Interest rate cap contracts............................................... 26 (1)
Interest rate floor contracts............................................. 0 0
</TABLE>
- ------------------------------
* There is no significant unrealized losses related to available-for-sale
securities.
** There is no significant unrealized losses related to trading securities.
F-63
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, balance sheet and off-balance sheet financial
instruments are as follows:
<TABLE>
<CAPTION>
PRINCIPAL FAIR CARRYING
AMOUNT VALUE AMOUNT
----------- --------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
BALANCE SHEET FINANCIAL INSTRUMENTS
Assets:
Investments in shares*...................................................... 6,442 5,286
Loans / debentures.......................................................... 5,776 5,776
Receivables from disposal of assets......................................... 6,043 6,043
Investments in notes, bonds and other....................................... 6,689 6,585
Investments in managed funds................................................ 2,530 2,380
--------- -----------
Marketable securities**..................................................... 9,219 8,965
Cash and bank deposits...................................................... 14,323 14,323
Liabilities:
Financial debt.............................................................. 43,447 42,477
OFF-BALANCE SHEET FINANCIAL INSTRUMENT
Foreign exchange risk:
Buy / lend
Forward exchange contract................................................. 8,410 42
Long-term exchange swaps.................................................. 58 0
Short-term exchange swaps................................................. 4,984 107
Long-term currency swaps.................................................. 2,429 (97)
Short-term currency swaps................................................. 2,289 (10)
Currency option contracts
Call 11,297 272
Put 21,506 216
Sell / borrow
Forward exchange contract................................................. 15,547 (65)
Long-term exchange swaps.................................................. 15 0
Short-term exchange swaps................................................. 13,267 (8)
Long-term currency swaps.................................................. 785 18
Short-term currency swaps................................................. 0 0
Currency option contracts
Call 10,814 (172)
Put 15,965 (163)
Interest rate risk:
Buy / lend
Long-term interest rate swaps............................................. 5,924 197
Short-term interest rate swaps............................................ 3,095 15
Future option contracts
Call 0 0
Put 1,000 0
Interest rate cap contracts................................................. 2,572 4
Interest rate floor contracts............................................... 195 5
Sell / borrow
Long-term interest rate swaps............................................. 4,159 (59)
Short-term interest rate swaps............................................ 3,319 (8)
Future option contracts
Call 2,000 0
Put
Interest rate cap contracts................................................. 522 (1)
Interest rate floor contracts............................................... 400 (2)
</TABLE>
- ------------------------------
* There is no significant unrealized losses related to available-for-sale
securities.
** There is no significant unrealized losses related to trading securities.
F-64
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of all quoted financial instruments is based on the quoted
market price on the last trading day of the year.
Alcatel Alsthom does not actively trade financial instruments, and therefore
fair values for non-quoted financial instruments have been estimated using one
or more models which indicate a value based on estimates of quantifiable
"market" characteristics. The highly judgemental nature of such an undertaking,
and the limitations of estimation techniques, make it necessary to caution the
users of these financial statements that the values presented for non-quoted
financial instruments may differ from those that could have been realized at
December 31, 1997. Fair values given are indicative of the interest rates
prevailing as at December 31, 1997 and it should be noted that minor changes in
assumptions concerning both these rates and future cash flows and/or
methodologies can have a material effect on the estimated values.
For non-quoted instruments, the following methods and assumptions were used
to estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value:
INSTRUMENTS USED TO MANAGE INTEREST RATES:
The fair values of these instruments have been obtained by discounting the
future estimated interest differential cash flows, at the current market
interest rate. For option type instruments, the fair values have been estimated
by obtaining a market price from a third party bank.
CURRENCY SWAPS:
The fair values have been estimated as the differential between the current
year end rate and the future rate specified in the swap agreement.
CURRENCY AND INTEREST RATE SWAPS:
The estimation of fair value involves splitting the swap into its borrowing
and lending elements and discounting the future expected currency cash flows
relating to each element. The present values calculated have been converted at
the year end rate and netted to give an estimated fair value.
CURRENCY OPTIONS:
The fair values have been estimated by requesting the price of an option to
exactly close out the position held from a third party bank or by using a
well-known quotation software.
INVESTMENTS:
For non-quoted investments, the estimated fair value is given as the
company's share of the net asset value.
FIXED RATE BONDS AND NOTES:
The fair value is based on expected future cash flows discounted at the
current market rate on similar bond issues.
FLOATING RATE BONDS AND NOTES:
The fair value is estimated assuming that the value is par at the next rate
fixing date and discounting the par value, and the interest element until the
next rate fixing date, at the current market rate.
F-65
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND SHORT-TERM INVESTMENTS:
For the assets, the carrying amount is a reasonable estimate of fair value.
BORROWINGS:
The fair values of Alcatel Alsthom's borrowings is estimated on the basis of
the range of interest rates and maturity profile compared with market rates
available for debt of similar remaining maturities.
D) OTHER INFORMATION:
Earliest/latest maturity dates for each type of off-balance sheet instrument
used to hedge foreign exchange risk at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MATURITY DATE
-----------------------------------
<S> <C> <C>
EARLIEST LATEST
--------------- ------------------
Forward exchange contracts............................... January 1998 October 2003
Long-term exchange rate swaps............................ January 1998 December 2000
Short-term exchange rate swaps........................... January 1998 December 1998
Long-term currency swaps................................. April 1999 December 2003
Short-term currency swaps................................ May 1998 December 1998
Currency option contracts
call................................................... January 1998 December 1999
put.................................................... January 1998 December 1999
Insurance contracts...................................... January 1998 September 2001
</TABLE>
Earliest/latest maturity dates and lowest/highest interest rate for each
type of off-balance sheet instruments used to hedge interest rate risk at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MATURITY DATE INTEREST RATE
------------------------------------ ------------------------
<S> <C> <C> <C> <C>
EARLIEST LATEST LOWEST HIGHEST
---------------- ------------------ ----------- -----------
Long-term interest rate swaps............................ February 1999 September 2008 3.61% 7.65%
Short-term interest rate swaps........................... February 1998 December 1998 3.49% 7.33%
Interest rate cap contracts.............................. January 1998 May 2006 5.0% 7.5%
Interest rate floor contracts............................ January 2000 January 2000 7.0% 7.0%
</TABLE>
F-66
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Analysis by major currency is as follows:
<TABLE>
<CAPTION>
EUROPEAN U.S. DEUTSCHE SPANISH POUND ITALIAN SWISS BELGIAN
CUR.UNIT DOLLAR MARK PESETA STERLING LIRA FRANC FRANC
------------- --------- ----------- ----------- ----------- --------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
SELL OR BORROW
Long-term exchange rate
swaps...................... 0 0 0 0 0 0 0 0
Short-term exchange rate
swaps...................... 6 4,967 294 1,336 1,731 44 445 205
Forward exchange contracts... 243 10,175 9,753 275 2,182 132 473 415
Currency option contracts:
call....................... 0 4,592 4,898 778 3,749 0 0 0
put........................ 0 5,808 5,271 2,040 5,093 359 0 0
Short-term currency swaps.... 0 0 0 0 0 0 0 0
Long-term currency swaps..... 0 0 0 0 0 0 0 0
BUY OR LEND
Long-term exchange rate
swaps...................... 0 0 131 0 0 0 0 0
Short-term exchange rate
swaps...................... 0 268 1,306 145 849 317 363 7
Forward exchange contracts... 21 3,370 11,891 1,272 4,852 86 286 341
Currency option contracts:
call....................... 0 1,957 8,581 3,722 8,723 1,061 0 9
put........................ 0 14,964 4,281 1,828 2,455 120 0 0
Short-term currency swaps.... 0 531 0 0 0 0 113 0
Long-term currency swap...... 0 223 105 0 0 0 169 0
<CAPTION>
JAPANESE
YEN OTHERS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
SELL OR BORROW
Long-term exchange rate
swaps...................... 0 95 95
Short-term exchange rate
swaps...................... 1,047 615 10,690
Forward exchange contracts... 269 1,721 25,638
Currency option contracts:
call....................... 649 62 14,728
put........................ 1,040 266 19,877
Short-term currency swaps.... 0 0 0
Long-term currency swaps..... 0 0 0
BUY OR LEND
Long-term exchange rate
swaps...................... 0 146 277
Short-term exchange rate
swaps...................... 491 3,747
Forward exchange contracts... 1,300 1,654 25,073
Currency option contracts:
call....................... 161 60 24,274
put........................ 847 573 25,068
Short-term currency swaps.... 572 67 1,283
Long-term currency swap...... 1,108 0 1,605
</TABLE>
(2) OTHER MARKET RELATED EXPOSURES:
(A) METAL PRICE RISK
The group enters into futures contracts on the London Metal Exchange in
order to reduce its exposure to market fluctuations on its copper and aluminum
firm positions.
(B) STOCK MARKET RISK
Alcatel Alsthom and its subsidiaries are not engaged in speculative trading
on the stock markets. Subject to approval by Alcatel Alsthom, subsidiaries may
make equity investments in selected companies (See Note 11).
F-67
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 26 -- RELATED PARTY TRANSACTIONS
Related party transactions relate to equity affiliates, unconsolidated
subsidiaries and shareholders of Alcatel Alsthom, the parent company.
Transactions are recorded primarily in the following accounts:
INCOME STATEMENT
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Net sales........................................................ 1,119 1,732 1,414
Cost of sales.................................................... (446) (703) (678)
--------- --------- ---------
Interest expense................................................. (12) (15) (17)
Interest income.................................................. 11 4 19
</TABLE>
BALANCE SHEET
<TABLE>
<CAPTION>
1997 1996 1995
----- --------- -----
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Trade receivables and related accounts.................................. 541 1,107 804
Other accounts receivable............................................... 157 33 51
--- --------- ---
Trade payables and related accounts..................................... 82 84 58
Other payables.......................................................... 169 1 169
--- --------- ---
</TABLE>
NOTE 27 -- PAYROLL AND STAFF
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS
AND NUMBER OF STAFF)
Wages and salaries (including social security/pension costs)..................... 54,242 51,764 51,656
OF WHICH REMUNERATION OF EXECUTIVE OFFICERS IN ALCATEL ALSTHOM OR IN
CONSOLIDATED SUBSIDIARIES...................................................... 36 36 35
Employee profit sharing.......................................................... 250 260 240
Staff of consolidated companies at year-end*..................................... 189,549 190,600 191,830
OF WHICH: EXECUTIVES AND SENIOR TECHNICAL STAFF**.............................. 33% 30% 31%
</TABLE>
- ------------------------
* Takes into account 50% of the staff for GEC Alsthom n.v. and its
subsidiaries for 1997, 1996 and 1995.
** Executives, senior technical staff and positions normally requiring three
years of higher education.
NOTE 28 -- CONTINGENCIES
Independent of a certain number of legal proceedings incidental to the
normal conduct of its business, which Management does not believe to represent
significant costs for the group, it should be mentioned that a legal
investigation is occurring concerning "overbillings" which are alleged to have
been committed at Alcatel CIT to the detriment of its principal client, France
Telecom, based on an audit of production
F-68
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 28 -- CONTINGENCIES (CONTINUED)
costs conducted for the first time in 1989 in the Transmission division, and the
second time in 1992 in the Switching division.
While the file relating to the Transmission division resulted in the
signature of an agreement with France Telecom, the latter, however, filed a
civil complaint with the investigating Magistrate regarding the switching
activity, after which the CEO of Alcatel Alsthom and the CEO of Alcatel CIT, who
have both since resigned, were placed under investigation.
The group, without totally excluding that these legal investigations could
have an impact on the accounts, an impact which, in any case is not quantifiable
today, has not judged it necessary to create a provision.
NOTE 29 -- MAIN CONSOLIDATED COMPANIES
<TABLE>
<CAPTION>
% DE CONSOLIDATION
COMPANY COUNTRY CONTROL % INTEREST METHOD
- -------------------------------------------------- ------------------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
ALCATEL ALSTHOM(1)(2)............................. France 100.0 100.0 Parent company
TELECOM SEGMENT
ALCATEL S.A....................................... France 100.0 100.0 Full consolidation
Alcatel Altech.................................... South Africa
Alcatel Austria A.G............................... Austria
Alcatel Australia Limited......................... Australia
Alcatel Bell Telephone............................ Belgium
Alcatel Business Systems.......................... France
Alcatel CIT....................................... France
Alcatel Data Networks............................. France
Alcatel Espace.................................... France
Alcatel Espana.................................... Spain
Alcatel Indetel S.A. de C.V.(1)................... Mexico
Alcatel Italia.................................... Italy
Alcatel Networks Systems Inc...................... USA
Alcatel NV........................................ The Netherlands
Alcatel Reseaux d'Entreprise...................... France
Alcatel Schweiz AG................................ Switzerland
Alcatel SEL A.G.(1)............................... Germany
Alcatel STK A.S.(1)............................... Norway
Alcatel Submarine Networks Limited................ U.K.
Alcatel Taisel.................................... Taiwan
Alcatel Telecom Limited........................... U.K.
Alcatel Telecommunicacoes......................... Brazil
Alcatel Telspace.................................. France
</TABLE>
- ------------------------
(1) Publicly traded.
(2) The activities of Alcatel Alsthom, as the parent company, are included under
Others.
F-69
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 29 -- MAIN CONSOLIDATED COMPANIES (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATION
COMPANY COUNTRY % CONTROL % INTEREST METHOD
- ----------------------------------------------- ------------------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
CABLES SEGMENT
ALCATEL CABLE................................ France 100.0 100.0 Full consolidation
Alcatel Alsthom Maroc(1)..................... Morocco
Alcatel Canada Inc........................... Canada
Alcatel Cavi S.p.A........................... Italy
Alcatel Kabel Beteiligungs AG................ Germany
Alcatel NA Cable Systems Inc................. USA
Group Saft................................... France
ENERGY AND TRANSPORT SEGMENT
GEC ALSTHOM NV................................. The Netherlands 50.0 50.0 Proportional
AEG T & D group.............................. Germany
Chantiers de l'Atlantique.................... France
European Gas Turbine SA...................... France
European Gas Turbine Ltd..................... U.K.
EVT-Energie und Verfahrenstechnik GmbH....... Germany
GEC Alsthom Centrales Energetiques SA........ France
GEC Alsthom Electromecanique SA.............. France
GEC Alsthom T & D SA......................... France
GEC Alsthom Transport SA..................... France
GEC Alsthom Ltd.............................. U.K.
Linke Hofmann Busch.......................... Germany
ENGINEERING AND SYSTEMS SEGMENT
CEGELEC........................................ France 100.0 100.0 Full consolidation
AAS.......................................... Germany
AAT.......................................... Germany
Alcatel Contracting.......................... France
Alcatel Siette............................... Italy
Cegelec Controls Ltd......................... U.K.
Sogelerg -- Sogreah.......................... France
</TABLE>
- ------------------------
(1) Publicly traded.
F-70
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 29 -- MAIN CONSOLIDATED COMPANIES (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATION
COMPANY COUNTRY % CONTROL % INTEREST METHOD
- ----------------------------------------------- ------------------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
OTHER SEGMENT(1)
Nuclear
FRAMATOME...................................... France 44.1 44.1 Equity
FRAMATOME CONNECTORS INTERNATIONAL............. France
Others
ALCATEL ALSTHOM RECHERCHE...................... France 100.0 100.0 Full consolidation
LOCATEL........................................ France 100.0 100.0 Full consolidation
Financial services
COMPAGNIE FINANCIERE ALCATEL................... France 100.0 100.0 Full consolidation
CIE IMMOBILIERE MERIDIONALE.................... France 100.0 100.0 Full consolidation
CIVELEC........................................ France 100.0 100.0 Full consolidation
Electro Banque................................. France 100.0 100.0 Full consolidation
GENERALE OCCIDENTALE........................... France 100.0 100.0 Full consolidation
SOFICIM........................................ France 100.0 100.0 Full consolidation
SIKL........................................... France 100.0 100.0 Full consolidation
</TABLE>
- ------------------------
(1) The activities of Alcatel Alsthom, as the parent company, are included under
Others.
NOTE 30 -- SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE
COMPANY AND U.S. GAAP
Alcatel Alsthom's accounting policies comply with generally accepted
accounting principles in France (French GAAP). Elements of Alcatel Alsthom's
accounting policies which differ significantly from generally accepted
accounting principles in the United States (U.S. GAAP) are described below:
(A) ACCOUNTING FOR LONG-TERM CONTRACTS
In 1995 and 1996 in the Engineering and Systems segment, revenue and margins
of long-term contracts were recorded upon completion.
From January 1st 1997, the Engineering and Systems segment recognized
revenue and margins of long-term contracts using the percentage of completion
method. Consequently, there will be no more adjustment for the purpose of
reconciliation to US GAAP. For 1996 and 1995, income on long-term contracts has
been adjusted, using the percentage-of-completion method for material
differences. For 1997, the adjustment shown in the income statement results from
a change in accounting estimates relating to the use of the percentage of
completion method.
(B) ACCOUNTING FOR GAINS ON SALES OF TREASURY STOCK
Alcatel Alsthom includes gains on its own Shares sold by its subsidiaries in
the determination of its income. Under U.S. GAAP, such gains are credited
directly to equity.
F-71
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30 -- SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE
COMPANY AND U.S. GAAP (CONTINUED)
(C) AMORTIZATION OF ACQUISITION GOODWILL
In France, goodwill is generally amortized over 20 years. Under U.S. GAAP,
goodwill must be amortized against income over its estimated life not to exceed
40 years. The company has concluded that the goodwill has an indeterminate life
and, as a result, has used a 40-year life in preparing the U.S. GAAP
reconciliation.
(D) FAIR VALUE ACCOUNTING FOR THE MERGERS WITH COMPAGNIE FINANCIERE ALCATEL,
ALSTHOM AND GENERALE OCCIDENTALE
Alcatel Alsthom accounted for the mergers with Compagnie Financiere Alcatel,
Alsthom and Generale Occidentale, paid for with its own newly-issued Shares, on
the basis of the historical value of the net assets transferred to the group.
Under U.S. GAAP, the net assets acquired by issuing shares are recorded at the
fair value of the shares issued using the purchase accounting method.
Accordingly, additional goodwill amortization has been reflected in the U.S.
GAAP reconciliation.
(E) ACQUISITION GOODWILL CHARGED AGAINST SHAREHOLDERS' EQUITY
A portion of the goodwill related to the acquisition of a majority interest
in Telettra (1991), Alcatel SEL (1992) and of the 30% stake in Alcatel n.v.
(1992) was directly charged against shareholders' equity. Under U.S. GAAP,
acquisition goodwill is classified as an intangible asset. For reconciliation
purposes, the Company has amortized acquisition goodwill over a 40-year life.
(F) ACCOUNTING FOR MARKETABLE SECURITIES AND MARKETABLE EQUITY SECURITIES
Alcatel Alsthom accounts for its investments at the lower of historical cost
or fair value, assessed investment by investment. Under U.S. GAAP, certain
investments in equity securities are stated at fair value. Changes in fair value
related to trading securities are included in net income while those relating to
available-for-sale securities are included directly in shareholders' equity.
(G) LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFIT AND OTHER
COSTS
Alcatel Alsthom accounts for such liabilities when restructuring programs
have been finalized and approved by group management. The group has applied EITF
94-3, SFAS 88 and SFAS 112 in preparing the U.S GAAP reconciliation. Under such
requirements, the conditions to be met in order to record a restructuring
reserve in the balance sheet are more stringent than under Alcatel Alsthom's
policy.
(H) ACCOUNTING FOR CLOSING OF DUPLICATE FACILITIES OF ACQUIRING COMPANIES
Under certain conditions, Alcatel Alsthom accounted for costs incurred to
close duplicate facilities of acquiring companies as part of the cost of
acquisition. Under U.S. GAAP, such costs are charged to income.
(I) ACCOUNTING FOR THE ACQUISITION OF THE 30% STAKE IN ALCATEL N.V.
In connection with this transaction, Alcatel Alsthom used forward exchange
contracts to reduce its foreign currency exposure relative to the cash payments
in 1993 and 1994. The premium on these contracts
F-72
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30 -- SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE
COMPANY AND U.S. GAAP (CONTINUED)
was charged to expenses in 1992 net income. Under U.S. GAAP, the premium should
be included in net income over the life of the contracts.
In addition, this investment was accounted for at the price contractually
agreed which did not include any interest factor. Under U.S. GAAP, this
investment would be recorded using the present value of the future payments.
(J) INCOME TAXES
Income taxes have been accounted for in accordance with the Financial
Accounting Standard Board's Statement No. 109 "Accounting for Income Taxes" (see
Note 31 c5). The main reconciling differences arise from the recognition of more
deferred tax assets (and subsequent adjustment to the valuation allowance) under
U.S. GAAP than under French GAAP.
(K) PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The classification of certain items in, and the format of, Alcatel Alsthom's
Consolidated Financial Statements vary to some extent from U.S. GAAP.
The most significant reporting and presentation practices followed by
Alcatel Alsthom which differ from U.S. GAAP are described in the following
paragraphs:
In its balance sheet, Alcatel Alsthom reports advance payments on long-term
contracts received from customers as a liability. Under U.S. GAAP, advance
payments, determined contract by contract, are generally shown as a reduction of
unbilled contract costs or, to the extent advance payments exceed unbilled
contract costs, as a liability.
Accrued interest, short term borrowings, bank overdrafts and short term
portion of other debt are included in debt. The long-term portion of debt is
specified on the balance sheet. Under U.S. GAAP, the portion of debt maturing
within one year would be classified as a current liability (FF 17,805 million at
December 31, 1997, FF 19,055 million at December 31, 1996 and FF 26,804 million
at December 31, 1995).
The short-term portion of accrued pensions, retirement obligations, accrued
contract costs and other reserves would be shown as current liabilities under
U.S. GAAP (FF 35,240 million at December 31, 1997, FF 32,023 million at December
31, 1996, and 31,133 million at December 31, 1995). Additionally, U.S. GAAP
would require the long-term portion of other payables to be shown as non-current
liabilities (FF 3,106 million at December 31, 1997, FF 3,452 million at December
31, 1996 and FF 3,707 million at December 31, 1995).
Under U.S. GAAP income statement presentation (see Note 31), other revenues
(expenses) detailed in Note 5 have been presented as a deduction from or an
addition to operating income, except for gains on sale of shares in subsidiaries
which have been presented in a separate line item after operating income.
Profit on the disposal of treasury stock which has been presented in a
separate line item has been adjusted for U.S. GAAP reconciliation (see (b)
above).
In its statement of cash flows, Alcatel Alsthom presents the measures
"working capital provided by operations" and "net cash flow after investment".
These measures would not be shown under U.S. GAAP statement of cash flows
presentation. Although, a short-term note receivable was included as cash and
cash
F-73
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30 -- SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE
COMPANY AND U.S. GAAP (CONTINUED)
equivalents in the statement of cash flows for 1996. Under U.S. GAAP, this item
would not meet the definition of cash equivalents.
In its Consolidated Financial Statements, Alcatel Alsthom applies the
pro-rata consolidation method to account for investment in certain joint
ventures, which does not comply with U.S. GAAP. Pursuant to the SEC's rules for
foreign registrants, the effect has not been eliminated.
Six special purpose leasing activities are accounted for using the equity
method under French GAAP. Under U.S. GAAP, these activities would be combined
because the Group has substantially all the risks and rewards of ownership. This
presentation would increase other financial fixed assets by FF 0 million and FF
292 million, increase long-term receivables by FF 2,282 million and FF 1,309
million, increase long-term borrowings by FF 948 million and FF 2,397 million
and increase accrued payables by FF 1,334 million and FF (740) million at the
years ended December 31, 1996 and 1997, each respectively.
(L) RELATED PARTIES
Under U.S. GAAP, information provided for in Note 26 would be presented on
the face of the Consolidated Balance Sheets and the Consolidated Income
Statements.
F-74
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP
The following is a summary of the estimated adjustments to the Consolidated
Income Statements for the years 1997, 1996 and 1995 and Alcatel Alsthom
shareholders' equity at December 31, 1997, 1996 and 1995, which would be
required if U.S. GAAP had been applied instead of French GAAP.
Translation of amounts from FF into $ has been made merely for the
convenience of the reader at the Noon Buying Rate which was FF 6.019 per $1.00
on December 31, 1997.
(A) CONSOLIDATED INCOME STATEMENTS
(1) NET INCOME
<TABLE>
<CAPTION>
1997 1997 1996 1995
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN MILLIONS)
NET INCOME AS REPORTED IN THE CONSOLIDATED INCOME STATEMENTS.... $ 775 FF 4,665 FF 2,725 FF (25,583)
Accounting for long-term contracts.............................. (94) (563) 79 (26)
Accounting for gains on sales of treasury stock................. (58) (351) (331) 444
Amortization of acquisition goodwill............................ 185 1,111 414 (3,301)
Fair value accounting for the mergers of Alcatel Alsthom with
subsidiaries (amortization of acquisition goodwill)........... (19) (112) (112) (112)
Acquisition goodwill charged against shareholders' equity....... (14) (83) (83) (871)
Accounting for investments in securities........................ (2) (11) 63 (14)
Restructuring costs............................................. (78) (472) (3,026) 3,985
Accounting for closing of duplicate facilities of acquiring
companies..................................................... -- -- -- 1,482
Accounting for the acquisition of the 30% stake in Alcatel
n.v........................................................... 1 9 9 9
Income taxes.................................................... (191) (1,151) (856) 1,497
Other adjustments............................................... (17) (100) (44) 510
Tax effect of the above adjustments............................. (3) (18) (36) 628
--------- ----------- ----------- ------------
NET INCOME ACCORDING TO U.S. GAAP............................... $ 486 FF 2,924 FF (1,198) FF (21,352)
--------- ----------- ----------- ------------
--------- ----------- ----------- ------------
</TABLE>
- ------------------------
* U.S. GAAP adjustments are presented after taking into consideration the
impact on minority interests.
F-75
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
In 1995, exceptional amortization of acquisition goodwill and reserves for
restructuring accounted for resulted in significant changes in the following
adjustments to net income:
<TABLE>
<CAPTION>
EFFECT OF
EXCEPTIONAL NORMAL TOTAL
ITEMS ADJUSTMENT ADJUSTMENT
----------- ------------- -----------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Amortization of acquisition goodwill.............................. (5,312)* 2,011 (3,301)
Acquisition goodwill charged against shareholders' equity......... (762)** (109) (871)
Accounting for closing of duplicate facilities of acquiring
companies....................................................... 1,530** (48) 1,482
Income taxes...................................................... 590** 907 1,497
Other adjustments................................................. 1,312*** (802) 510
Tax effect of the above adjustments............................... -- 389 389
</TABLE>
- ------------------------
* Effect of U.S. GAAP adjustments on the calculation of exceptional
amortization acquisition goodwill of accounted for under U.S. GAAP.
** Effect of exceptional amortization of acquisition goodwill accounted for
under U.S. GAAP.
*** Effect of exceptional amortization of acquisition goodwill
Effect of exceptional reserves for restructuring 848
-----
1,312
(2) SUMMARIZED U.S. GAAP CONSOLIDATED INCOME STATEMENTS
The Consolidated Income Statements for the years ended December 31, 1997,
1996 and 1995 have been adjusted to reflect the main differences between U.S.
GAAP and French GAAP discussed above.
<TABLE>
<CAPTION>
1997(A) 1997 1996 1995
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN MILLIONS)
NET SALES................................................ $ 30,880 FF 185,868 FF 162,636 FF 160,525
Cost of sales.......................................... (23,393) (140,804) (124,826) (122,947)
Administrative and selling expenses.................... (4,323) (26,023) (23,687) (25,105)
Research and development expenses...................... (1,934) (11,642) (11,016) (11,070)
Restructuring costs.................................... (281) (1,694) (3,461) (9,312)
---------- ------------- ------------- -------------
INCOME FROM OPERATIONS................................... 948 5,705 (354) (7,909)
Interest expense....................................... (1,136) (6,839) (8,196) (5,434)
Interest income and other financial income, net........ 928 5,585 7,096 4,298
Other operating income (expense), net.................. (265) (1,595) (3,174) (16,050)
Gain on sale of stock in subsidiaries.................. 362 2,176 4,168 1,791
---------- ------------- ------------- -------------
INCOME BEFORE TAXES AND MINORITY INTERESTS............... 836 5,032 (460) (23,304)
Share in net income of equity affiliates............... 95 569 993 173
Provision for income tax............................... (420) (2,529) (1,577) 529
Minority Interests..................................... (25) (148) (154) 1,250
---------- ------------- ------------- -------------
NET INCOME............................................... $ 486 FF 2,924 FF (1,198) FF (21,352)
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
</TABLE>
- ------------------------
(1) See Note 30 (f).
F-76
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
(a) Translation of amounts from French francs ("FF") into U.S. Dollars ("$") has
been made merely for the convenience of the reader at the noon buying rate
in New York City for cable transfers in French francs as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"), which was FF 6.019 per $1.00 on December 31, 1997.
The Consolidated Income Statements include GEC Alsthom and Groupe de la
Cite on a proportional consolidation basis.
(3) EARNINGS PER SHARE UNDER U.S. GAAP:
Estimated earnings per Share are calculated in accordance with U.S. GAAP
(see Note 7).
<TABLE>
<CAPTION>
1997(A) 1997 1996 1995
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss)........................................ $ 3.10 18.63 (7.68) (148.39)
DILUTED EARNINGS PER SHARE:
Net income (loss)*....................................... 3.06 18.42 -- --
</TABLE>
- ------------------------
* Not applicable due to loss position in 1996 and 1995.
(a) Translation of amounts from French francs ("FF") into U.S. Dollars ("$") has
been made merely for the convenience of the reader at the noon buying rate
in New York City for cable transfers in French francs as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"), which was FF 6.019 per $1.00 on December 31, 1997.
The following tables present a reconciliation of the net income per share
and the diluted earnings per share for each year disclose.
<TABLE>
<CAPTION>
NUMBER OF PER-SHARE
1997 NET INCOME SHARES AMOUNT
- ------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
NET INCOME PER SHARE................................... 2,924 156,937,952 18.63
Stock option plans..................................... 1,145,497
Convertibles bonds..................................... 8 1,160,639
----------- ------------- -----------
Diluted earnings per share............................. 2,932 159,244,088 18.42
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
At December 31, 1997, certain securities having a potential dilutive effect
in the future were not taken into account in the computation of diluted earnings
per share because the effect would have been antidilutive:
-- convertible bonds 6.5% 1990 and 2.5% 1994 (see note 21a1).
Group subsidiaries owned 5,245,510 shares and 2,200,790 shares equivalents.
<TABLE>
<CAPTION>
NUMBER OF PER-SHARE
1996 NET INCOME SHARES AMOUNT
- ------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
NET INCOME PER SHARE................................... (1,198) 155,902,458 (7.68)
</TABLE>
The completion of diluted earning per share is not applicable due to loss
position. Group subsidiaries owned 5,320,995 shares and 2,200,790 shares
equivalents.
F-77
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF PER-SHARE
1995 NET INCOME SHARES AMOUNT
- ------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
NET INCOME PER SHARE................................... (21,352) 143,890,505 (148.39)
</TABLE>
The completion of diluted earning per share is not applicable due to loss
position. Group subsidiaries owned 4,376,309 shares and 435,790 shares
equivalents.
(B) SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997(A) 1997 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN MILLIONS)
SHAREHOLDERS' EQUITY AS REPORTED IN THE CONSOLIDATED BALANCE
SHEETS..................................................... $ 7,303 FF 43,954 FF 39,170 FF 32,993
Accounting for long-term contracts........................... -- -- 1,504 1,466
Amortization of acquisition goodwill......................... 326 1,961 792 808
Fair value accounting for the mergers of Alcatel Alsthom with
subsidiaries (acquisition goodwill)........................ 593 3,570 3,682 3,794
Acquisition goodwill charged against shareholders' equity.... 477 2,869 2,952 3,035
Accounting for investments in securities..................... 485 2,920 1,379 1,262
Restructuring costs.......................................... 285 1,714 2,193 5,251
Accounting for the acquisition of the 30% stake in Alcatel
n.v........................................................ (52) (311) (320) (329)
Income taxes................................................. 176 1,062 2,434 2,255
Other adjustments............................................ (195) (1,174) (328) 744
Tax effect of the above adjustments.......................... (186) (1,117) (1,636) (1,555)
Minority interests........................................... (5) (33) (34) (199)
----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY ACCORDING TO U.S. GAAP.................. $ 9,207 FF 55,415 FF 51,788 FF 49,525
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(a) Translation of amounts from French francs ("FF") into U.S. Dollars ("$") has
been made merely for the convenience of the reader at the noon buying rate
in New York City for cable transfers in French francs as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"), which was FF 6.019 per $1.00 on December 31, 1997.
F-78
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
(C) Additional U.S. GAAP information
(1) Statement of changes in shareholders' equity
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED CUMULATIVE TREASURY
CAPITAL PAID-IN RETAINED HOLDING TRANSLATION STOCK
STOCK CAPITAL EARNINGS GAINS/(LOSSES) ADJUSTMENT AT COST
----------- ----------- ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Balance at December 31, 1996 after
appropriation....................... 6,471 43,402 10,857 915 (7,024) (2,833)
Capital increase...................... 56 683 -- -- -- --
Net change in treasury stock owned by
consolidated subsidiaries........... -- 351 54 -- -- (156)
Net changes in unrealized holding
gains/(losses)...................... -- -- -- 1,141 -- --
Minimum liability adjustment.......... -- -- (592) -- -- --
Shares issued to employees............ -- 146 -- -- -- --
Other changes......................... -- -- 80 -- -- --
Translation adjustment................ -- -- -- -- 844 --
Net income............................ -- -- 2,924 -- -- --
----- ----------- ----------- ----- ------ -----------
Balance at December 31, 1997 before
appropriation....................... 6,527 44,582 13,323 2,056 (6,180) (2,989)
Proposed appropriation of net
income.............................. -- -- (1,904) -- -- --
----- ----------- ----------- ----- ------ -----------
Balance at December 31, 1997 after
appropriation....................... 6,527 44,582 11,419 2,056 (6,180) (2,989)
----- ----------- ----------- ----- ------ -----------
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1996 after
appropriation....................... 51,788
Capital increase...................... 739
Net change in treasury stock owned by
consolidated subsidiaries........... 249
Net changes in unrealized holding
gains/(losses)...................... 1,141
Minimum liability adjustment.......... (592)
Shares issued to employees............ 146
Other changes......................... 80
Translation adjustment................ 844
Net income............................ 2,924
------
Balance at December 31, 1997 before
appropriation....................... 57,319
Proposed appropriation of net
income.............................. (1,904)
------
Balance at December 31, 1997 after
appropriation....................... 55,415
------
</TABLE>
- ------------------------
* The increase in the Minimum Liability Adjustment between 1996 and 1997
mainly results from changes in assumptions in France regarding seniority on
retirement date. This change has involved a high increase in the funded
status, which has been offset by actuarial losses.
(2) RETIREMENT BENEFITS, PENSION PLANS AND SPECIAL TERMINATION PLANS
The group sponsors various defined benefit pension plans. In France, all
group's employees elect to benefit from the retirement indemnity scheme. In
other countries, the employee groups covered and the type of retirement plan
depends on local regulations and practices. Plan assets consist principally of
governmental and corporate bonds (approximately 50%) and equity securities
(approximately 30%) and short-term investments (approximately 10%).
In order to comply with U.S. GAAP, the Company applied the Statement of
Financial Accounting Standards No. 87 "Employers' Accounting for Pensions"
("SFAS 87") and Statement of Financial Accounting Standards No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," starting January 1, 1989 as follows:
F-79
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
-- the actuarial method used is the projected unit credit method. However,
when the benefit formulas attribute more benefits to senior employees or
when the plans are integrated with social security systems or
multi-employer plans, the Company has elected to apply the projected unit
credit service pro-rata method to avoid delayed recognition of pension
costs;
-- the transition obligation or fund excess has been determined at January
1, 1989 as being the difference between the liabilities accounted for
under prior years accounting policies and the funded status of the plans
resulting from SFAS 87 calculations. That transition obligation or fund
excess is amortized using the greater of 15 years and the average
residual active life of the population covered by each plan;
-- the related market-value is determined using a five-year moving average
method; and
-- prior service experience and gains and losses in excess of 10% of the
liability or asset are amortized over the average residual active life of
participants.
Funded status of the defined benefits pension plans of the group:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Vested benefits......................................... (19,201) (14,302) (13,750)
Non vested benefits..................................... (2,838) (1,289) (986)
----------- ----------- -----------
Accumulated benefit obligation.......................... (22,039) (15,591) (14,736)
Effect of future salary increases....................... (4,568) (3,420) (2,670)
----------- ----------- -----------
Projected benefit obligation............................ (26,607) (19,011) (17,406)
Market value of investments............................. 17,211 10,894 10,154
----------- ----------- -----------
Funded status........................................... (9,396) (8,117) (7,252)
Unrecognized transition obligation (excess)............. 22 58 57
Unrecognized prior service cost......................... 61 10 (7)
Unrecognized net gains or losses........................ 924 75 (330)
----------- ----------- -----------
NET ACCRUED FOR PENSION PLANS........................... (8,389) (7,974) (7,532)
(Accrued)............................................... (9,506) (8,799) (8,095)
Prepaid................................................. 1,117 825 563
</TABLE>
Annual cost:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Service cost............................................ 695 600 501
Interest cost........................................... 1,494 1,299 1,238
Return on investment.................................... (1,098) (789) (722)
Net amortization and deferral........................... 34 3 (3)
Effect of settlements, curtailments and special
termination benefits.................................. (470) (312) (848)
----------- ----------- -----------
TOTAL COST.............................................. 655 801 166
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-80
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
The benefit obligation and the service cost include the effect of employee
contributions in order to show the liability and cost attributable to the
services rendered according to the pension benefit formula. The group records
curtailment profits that mainly correspond to the effect on the existing pension
plans of restructuring plans accrued separately (see Note 19).
SUMMARY OF MAIN ASSUMPTIONS:
General assumptions have been determined by actuaries on a country by
country basis and, for specific assumptions (turnover, salary increases),
company by company.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
- -- discount rate................................. 5-7% 6-7% 6-8%
- -- future salary increases....................... 2-7% 3-7% 3-8%
- -- expected long-term return on assets........... 6-8% 6-8% 7-8%
- -- average residual active life.................. 15-27 years 15-27 years 15-27 years
- -- amortization period of transition
obligation..................................... 15-27 years 15-27 years 15-27 years
</TABLE>
(3) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
In order to comply with U.S. GAAP, the group applied the Statement of
Financial Accounting Standard No. 106 "Employers' Accounting for Post-Retirement
Benefits other than Pensions" with effect from January 1, 1993 for U.S. group
subsidiaries and with effect from January 1, 1995 for other group subsidiaries.
These post-retirement benefits, primarily life insurance and health care, cover
most of U.S. group employees.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS
AND NUMBER OF STAFF)
Retirees........................................................................... (340) (300) (279)
Active employees fully eligible for benefits....................................... (53) (39) (37)
Other active employees............................................................. (162) (131) (124)
--------- --------- ---------
Accumulated post-retirement benefit obligation..................................... (555) (470) (440)
--------- --------- ---------
--------- --------- ---------
Unrecognized transition obligation................................................. 262 253 254
Unrecognized net gain or loss...................................................... 47 43 53
--------- --------- ---------
Net accrued liability.............................................................. (246) (174) (133)
--------- --------- ---------
--------- --------- ---------
Number of employees:
Active employees................................................................... 5,049 4,841 5,368
Retirees........................................................................... 1,595 1,621 1,638
Annual Cost:
Service cost....................................................................... 12 10 8
Interest cost...................................................................... 40 34 35
Amortization of unrecognized transition obligation................................. 17 15 15
Amortization of unrecognized net gain or loss...................................... -- -- 1
Curtailment gain................................................................... 8 -- --
--------- --------- ---------
Net periodic post-retirement benefit cost.......................................... 77 59 59
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-81
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
General assumptions have been determined by actuaries on a country by
country basis, and for specific assumptions company by company.
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
(IN PERCENTAGE)
Discount rate.......................................................... 7.75--8% 8% 8--9%
Health care cost rate for the next year................................ 9--9.5% 8.5--10% 9.5--10.5%
Health care cost rate trend:
10 next years........................................................ 8.4--10% 8.5--10% 9.5--10.5%
thereafter........................................................... 5--6% 5--6% 5--6.5%
</TABLE>
The effect of a one-percentage-point increase in the assumed health care
cost trend rate for each future year is as follows:
<TABLE>
<CAPTION>
(IN PERCENTAGE)
-------------------
<S> <C>
Effect on the aggregate of the service and interest costs......................................... 9.6%
Effect on the accumulated post-retirement benefit obligation for health care benefits............. 7.4%
</TABLE>
The unrecognized transition obligation is amortized over 20 years. The 10%
corridor method is employed in determining the amortization of the unrecognized
net gain or loss.
(4) INCOME TAXES
(A) DEFERRED TAX BALANCES:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Deferred tax assets................................................... 25,282 26,365 23,151
Less valuation allowance(1)........................................... (18,214) (15,683) (14,480)
------------ ------------ ------------
Net deferred tax assets............................................... 7,068 10,682 8,671
Deferred tax liabilities.............................................. (5,690) (8,875) (7,850)
------------ ------------ ------------
Net deferred taxes.................................................... 1,378 1,807 821
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
(1) Of which FF 1,611 million at December 31, 1997 (FF 1,921 million at December
31, 1996 and FF 1,851 million at December 31, 1995) will be allocated to
reduce goodwill.
Major temporary differences giving rise to deferred taxes at December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Accounting for long-term contracts.................................... (429) (1,527) (1,669)
Depreciation of property, plant and equipment......................... (1,410) (1,545) (1,836)
Intangible assets..................................................... (2) (408) (489)
Other................................................................. (3,849) (5,395) (3,856)
</TABLE>
F-82
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------- -------------
(IN MILLIONS OF FRENCH FRANCS)
<S> <C> <C> <C>
------ ------ ------
DEFERRED TAX LIABILITIES.............................................. (5,690) (8,875) (7,850)
------ ------ ------
------ ------ ------
Tax losses carried forward............................................ 2,526 4,424 3,378
Accrued pension and retirement obligation............................. 612 848 784
Other reserves........................................................ 2,165 2,633 2,564
Other................................................................. 1,765 2,777 1,945
------ ------ ------
NET DEFERRED TAX ASSETS............................................... 7,068 10,682 8,671
------ ------ ------
------ ------ ------
</TABLE>
Deferred tax balances are analyzed as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 CURRENT NON-CURRENT TOTAL
- --------------------------------------------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Deferred tax assets (net of valuation allowance)................................. 3,626 3,442 7,068
Deferred tax liabilities......................................................... (2,403) (3,287) (5,690)
----------- ------ ---------
1,223 155 1,378
----------- ------ ---------
----------- ------ ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 CURRENT NON-CURRENT TOTAL
- --------------------------------------------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Deferred tax assets (net of valuation allowance)................................. 5,072 5,610 10,682
Deferred tax liabilities......................................................... (4,053) (4,822) (8,875)
----------- ------ ---------
1,019 788 1,807
----------- ------ ---------
----------- ------ ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 CURRENT NON-CURRENT TOTAL
- --------------------------------------------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Deferred tax assets (net of valuation allowance)................................. 3,089 5,582 8,671
Deferred tax liabilities......................................................... (2,988) (4,862) (7,850)
----------- ------ ---------
101 720 821
----------- ------ ---------
----------- ------ ---------
</TABLE>
(B) ANALYSIS OF PROVISION FOR INCOME TAX:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Current tax expense.............................................................. 1,307 554 1,909
Tax benefit of operating losses carried forward.................................. (1,834) (359) (4,763)
Net change in valuation allowance................................................ 1,383 887 9,206
Other deferred tax expenses (benefits)........................................... 1,673 495 (6,881)
--------- --------- ---------
Provision for income tax......................................................... 2,529 1,577 (529)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-83
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
(C) EFFECTIVE INCOME TAX RATE
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
Income (loss) before taxes, minority interests and extraordinary items......... 5,032 (460) (23,304)
Average income tax rate........................................................ 37.9% (46.9)% (49.7)%
--------- --------- ---------
Expected tax................................................................... 1,907 216 11,587
Impact of:
-- reduced taxation of certain revenues...................................... (36) (1,840) (281)
-- net change in valuation allowance......................................... 1,383 887 9,206
-- tax credits............................................................... (347) (468) (223)
-- other..................................................................... (378) 2,782 2,356
--------- --------- ---------
Actual provision for income tax................................................ 2,529 1,577 (529)
Effective tax rate............................................................. 50.3% N.A. N.A.
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
N.A.: not applicable due to loss before taxes in 1996 and 1995.
(5) STOCK-BASED COMPENSATION
In 1996 and 1997, Alcatel Alsthom adopted stock option incentive plans (see
note 18).
The following information is disclosed according to the Statement of
Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation
("SFAS 123") and relates to second and the third plans adopted respectively in
1996 and 1997:
<TABLE>
<CAPTION>
1996 PLANS 1997 PLANS
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
PRINCIPAL COMPLEMENTARY PRINCIPAL COMPLEMENTARY
---------- --------------- ---------- ---------------
<CAPTION>
(IN NUMBER OF OPTIONS)
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996......................... -- -- -- --
Granted................................................ 1,813,900 78,800 -- --
Exercised.............................................. -- -- -- --
Forfeited.............................................. (37,000) -- -- --
Expired................................................ -- -- -- --
---------- ------ ---------- ------
Outstanding at December 31, 1996....................... 1,776,900 78,800 -- --
Granted................................................ -- -- 1,639,000 73,400
Exercised.............................................. -- -- -- --
Forfeited.............................................. (79,200) (1,500) (23,000) --
Expired................................................ -- -- -- --
1,697,700 77,300 1,616,900 73,400
Exercisable at December 31, 1996 in number of
options.............................................. -- -- -- --
Exercisable at December 31, 1997 in number of
options.............................................. -- -- -- --
Fair value at grant-date (in millions of French
francs).............................................. 279 13 404 19
</TABLE>
F-84
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
These options can be exercised from:
- -- July 1st, 1998 through December 31, 2003, each option giving the right to
one share at an exercise price of FF 425, for the 1996 plans.
- -- from May 1st, 2002 through December 31, 2004, each option giving the right
to one share at an exercise price of FF 632, for the 1997 principal plan.
- -- from December, 2002 through December 31, 2004, each option giving the right
to one share at an exercise price of FF 687, for the 1997 complementary
plan.
The fair values at grant-date of options granted during the years 1997 and
1996 have been estimated using the Black Scholes model and the following
characteristics:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
interest rate:............................... 5.7% 5%
expected life:............................... 5 years 5 years
expected volatility:......................... 32% 32.5%
expected dividends:.......................... 2.5% 2.25%
</TABLE>
The group continues to apply accounting method prescribed by APB Opinion No.
25 Accounting for Stock Issued to Employees.
The following table discloses the pro-forma net income and earnings per
share, as if the fair value based accounting method had been used to account for
stock-based compensation cost:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net income...................................... (1,472) 2,857
Basic earnings per share
Net income...................................... (9.44) 18.20
Diluted earnings per share
Net income...................................... N/A 17.94
</TABLE>
F-85
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
(6) GEC ALSTHOM FINANCIAL INFORMATION
In accordance with SEC regulations of the U.S. Securities and Exchange
Commission with respect to pro-rata consolidation, summarized financial
information has been prepared for the three years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS OF FRENCH FRANCS)
BALANCE SHEET DATA
Non-current assets............................................................... 16,975 15,130 12,211
Current assets................................................................... 96,555 99,351 92,686
--------- --------- ---------
Total assets..................................................................... 113,530 114,481 104,897
--------- --------- ---------
--------- --------- ---------
Shareholders' equity............................................................. 14,072 13,377 12,158
Minority interests............................................................... 654 576 496
Non current liabilities.......................................................... 2,904 2,297 1,824
Current liabilities.............................................................. 95,900 98,231 90,419
--------- --------- ---------
Total liabilities and shareholders' equity....................................... 113,530 114,481 104,897
--------- --------- ---------
--------- --------- ---------
INCOME STATEMENT DATA
Net sales........................................................................ 68,898 59,834 58,769
Cost of sales.................................................................... (56,019) (49,064) (49,046)
Income from operations after financing........................................... 4,078 3,830 3,791
--------- --------- ---------
Net income....................................................................... 1,647 2,025 1,843
--------- --------- ---------
--------- --------- ---------
CASH FLOW DATA
Cash flow from operating activities.............................................. (103) 775 (2,543)
Cash flow from investing activities.............................................. (2,928) (3,001) (1,394)
Cash flow from financing activities.............................................. (963) (1,558) (1,848)
</TABLE>
(7) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
(8) DESCRIPTION OF BUSINESS
Alcatel Alsthom, a French company headquartered in Paris (the "Company"),
together with its consolidated subsidiaries and associated companies
(collectively, "Alcatel Alsthom"), is a world leader in providing equipment and
systems for the telecommunications, energy and transport sectors. In 1997,
Alcatel Alsthom had consolidated net sales of FF 185.9 billion (approximately
$30.9 billion). While Alcatel Alsthom has operations in over 100 countries, it
has a particularly strong market base in Europe, where it currently generates
two-thirds of its consolidated net sales. Alcatel Alsthom employs approximately
F-86
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 31 -- RECONCILIATION TO U.S. GAAP (CONTINUED)
189,600 people, primarily in Europe. On the basis of market capitalization at
December 31, 1997, the Company is one of the largest French companies listed on
the Paris Bourse.
(9) RECENTLY ISSUED U.S. ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standard No. 130 ("SFAS 130" Reporting Comprehensive
Income), SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement will
require the Company to present a reconciliation or statement of comprehensive
income in future years.
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standard No. 131 ("SFAS 131") "Disclosures about Segments
of an Enterprise and Related Information". This Statement 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
reports issued to shareholders.
In February 1998, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standard No. 132 ("SFAS 132") "Employers' Disclosure
about Pension and Other Post-retirement Benefits". SFAS No. 132 revises
employers' disclosures about pension and other post-retirement benefits plans
but does not change the measurement or recognition of these plans.
SFAS No. 130, 131 and 132 are effective for financial statements for periods
beginning after December 15, 1997.
F-87
<PAGE>
ALCATEL ALSTHOM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9) OTHER INFORMATION
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM THE RELATED BEGINNING COSTS AND OTHER END
ACCOUNTS OF PERIOD EXPENSES MOVEMENTS OF PERIOD
----------- ------------- ----------- -----------
(IN MILLIONS OF FRENCH FRANCS)
<S> <C> <C> <C> <C>
1997
Other investments and miscellaneous.............................. 873 156 (38) 991
Inventories...................................................... 4,600 (277) 283 4,606
Trade receivables and related accounts........................... 3,375 194 166 3,735
Other accounts receivable........................................ 228 4 (29) 203
1996
Other investments and miscellaneous.............................. 686 209 (22) 873
Inventories...................................................... 4,145 398 57 4,600
Trade receivables and related accounts........................... 2,817 452 106 3,375
Other accounts receivable........................................ 217 (11) 22 228
1995
Other investments and miscellaneous.............................. 700 87 (101) 686
Inventories...................................................... 3,752 683 (290) 4,145
Trade receivables and related accounts........................... 2,838 135 (156) 2,817
Other accounts receivable........................................ 430 (48) (165) 217
ACCRUED CONTRACT COSTS AND OTHER RESERVES
1997
Accrued pensions and retirement obligations...................... 8,455 248 74 8,777
Estimated losses on long-term contracts.......................... 3,196 (327) (27) 2,842
Costs on completed contracts..................................... 5,199 74 358 5,631
Other contract costs............................................. 13,413 493 1,188 15,094
Other reserves................................................... 7,622 858 (518) 7,962
1996
Accrued pensions and retirement obligations...................... 8,330 1,024 (899) 8,455
Estimated losses on long-term contracts.......................... 2,665 1,222 (691) 3,196
Costs on completed contracts..................................... 4,868 3,580 (3,249) 5,199
Other contract costs............................................. 12,564 2,852 (2,003) 13,413
Other reserves................................................... 5,291 1,233 1,098 7,622
1995
Accrued pensions and retirement obligations...................... 7,849 378 103 8,330
Estimated losses on long-term contracts.......................... 2,090 552 23 2,665
Costs on completed contracts..................................... 4,305 396 167 4,868
Other contract costs............................................. 11,737 1,251 (423) 12,565
Other reserves................................................... 4,128 1,082 81 5,291
</TABLE>
F-88
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DSC COMMUNICATIONS CORPORATION,
ALCATEL ALSTHOM
AND
NET ACQUISITION, INC.
Dated as of June 3, 1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.1 The Merger........................................................................... A-5
SECTION 1.2 Effect on Common Stock............................................................... A-6
SECTION 1.3 Exchange of Certificates............................................................. A-6
SECTION 1.4 Transfer Taxes; Withholding.......................................................... A-8
SECTION 1.5 Stock Options; Employee Stock Purchase Plan.......................................... A-8
SECTION 1.6 Lost Certificates.................................................................... A-9
SECTION 1.7 Merger Closing....................................................................... A-9
ARTICLE II
[INTENTIONALLY OMITTED].............................................................. A-9
ARTICLE III
THE SURVIVING CORPORATION
SECTION 3.1 Amended and Restated Certificate of Incorporation.................................... A-9
SECTION 3.2 By-laws.............................................................................. A-9
SECTION 3.3 Officers and Directors............................................................... A-10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.1 Corporate Existence and Power........................................................ A-10
SECTION 4.2 Corporate Authorization.............................................................. A-10
SECTION 4.3 Consents and Approvals; No Violations................................................ A-11
SECTION 4.4 Capitalization....................................................................... A-11
SECTION 4.5 Subsidiaries......................................................................... A-12
SECTION 4.6 SEC Documents........................................................................ A-12
SECTION 4.7 Financial Statements................................................................. A-13
SECTION 4.8 Absence of Undisclosed Liabilities................................................... A-13
SECTION 4.9 Proxy Statement; Form F-4............................................................ A-13
SECTION 4.10 Absence of Material Adverse Changes, etc. ........................................... A-13
SECTION 4.11 Taxes................................................................................ A-14
SECTION 4.12 Employee Benefit Plans............................................................... A-15
SECTION 4.13 Litigation; Compliance with Laws..................................................... A-16
SECTION 4.14 Labor Matters........................................................................ A-17
SECTION 4.15 Certain Contracts and Arrangements................................................... A-17
SECTION 4.16 Environmental Matters................................................................ A-17
SECTION 4.17 Intellectual Property................................................................ A-18
SECTION 4.18 Opinion of Financial Advisor......................................................... A-19
SECTION 4.19 Board Recommendation................................................................. A-19
SECTION 4.20 Rights Plan.......................................................................... A-19
SECTION 4.21 Tax Treatment........................................................................ A-19
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
SECTION 4.22 Finders' Fees........................................................................ A-19
SECTION 4.23 Accounting Matters................................................................... A-20
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ALCATEL AND NEWCO
SECTION 5.1 Corporate Existence and Power........................................................ A-20
SECTION 5.2 Authorization........................................................................ A-20
SECTION 5.3 Consents and Approvals; No Violations................................................ A-20
SECTION 5.4 Capitalization....................................................................... A-21
SECTION 5.5 SEC Documents........................................................................ A-21
SECTION 5.6 Financial Statements................................................................. A-21
SECTION 5.7 Absence of Material Adverse Changes, etc. ........................................... A-21
SECTION 5.8 Proxy Statement; Form F-4............................................................ A-22
SECTION 5.9 Share Ownership...................................................................... A-22
SECTION 5.10 Newco's Operations................................................................... A-22
SECTION 5.11 Tax Treatment........................................................................ A-22
SECTION 5.12 Finders' Fees........................................................................ A-22
ARTICLE VI
[INTENTIONALLY OMITTED].............................................................. A-22
ARTICLE VII
COVENANTS OF THE PARTIES
SECTION 7.1 Conduct of the Business of the Company............................................... A-22
SECTION 7.2 Conduct of the Business of Alcatel................................................... A-22
SECTION 7.3 Stockholders' Meeting; Proxy Material................................................ A-23
SECTION 7.4 Access to Information; Confidentiality Agreement..................................... A-23
SECTION 7.5 No Solicitation...................................................................... A-24
SECTION 7.6 Director and Officer Liability....................................................... A-25
SECTION 7.7 [INTENTIONALLY OMITTED].............................................................. A-25
SECTION 7.8 Certain Tax Matters.................................................................. A-25
SECTION 7.9 Reasonable Best Efforts.............................................................. A-25
SECTION 7.10 Certain Filings...................................................................... A-25
SECTION 7.11 Public Announcements................................................................. A-26
SECTION 7.12 Further Assurances................................................................... A-26
SECTION 7.13 Employee Matters..................................................................... A-27
SECTION 7.14 Tax-Free Reorganization Treatment.................................................... A-27
SECTION 7.15 Blue Sky Permits..................................................................... A-28
SECTION 7.16 Listing.............................................................................. A-28
SECTION 7.17 [INTENTIONALLY OMITTED].............................................................. A-28
SECTION 7.18 State Takeover Laws.................................................................. A-28
SECTION 7.19 Certain Notifications................................................................ A-28
SECTION 7.20 Rights Plan.......................................................................... A-28
SECTION 7.21 Supplemental Indenture............................................................... A-28
SECTION 7.22 Affiliate Letters; Accounting Matters................................................ A-28
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.1 Conditions to Each Party's Obligations............................................... A-29
SECTION 8.2 Conditions to the Company's Obligation to Consummate the Merger...................... A-29
SECTION 8.3 Conditions to Alcatel's and Newco's Obligations to Consummate the Merger............. A-30
ARTICLE IX
TERMINATION
SECTION 9.1 Termination.......................................................................... A-31
SECTION 9.2 Effect of Termination................................................................ A-32
SECTION 9.3 Fees................................................................................. A-32
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Notices.............................................................................. A-33
SECTION 10.2 Survival of Representations and Warranties........................................... A-34
SECTION 10.3 Interpretation....................................................................... A-34
SECTION 10.4 Amendments, Modification and Waiver.................................................. A-34
SECTION 10.5 Successors and Assigns............................................................... A-35
SECTION 10.6 Specific Performance................................................................. A-35
SECTION 10.7 Governing Law........................................................................ A-35
SECTION 10.8 Severability......................................................................... A-35
SECTION 10.9 Third Party Beneficiaries............................................................ A-35
SECTION 10.10 Entire Agreement..................................................................... A-35
SECTION 10.11 Counterparts; Effectiveness.......................................................... A-35
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of June 3, 1998 (this
"AGREEMENT"), by and among DSC Communications Corporation, a Delaware
corporation (the "COMPANY"), Alcatel Alsthom, a corporation organized under the
laws of France ("ALCATEL") and Net Acquisition, Inc., a Delaware corporation and
a direct wholly-owned subsidiary of Alcatel ("NEWCO").
W I T N E S S E T H
WHEREAS, the respective Boards of Directors of Alcatel, Newco and the
Company, and Alcatel as sole stockholder of Newco, have each approved this
Agreement and the merger of Newco with and into the Company, upon the terms and
subject to the conditions set forth herein, and in accordance with the Delaware
General Corporation Law (the "DGCL"), whereby each issued and outstanding share
of common stock, par value $.01 per share (the "COMMON STOCK"), of the Company
(other than shares of Common Stock owned, directly or indirectly, by the Company
or by Newco immediately prior to the Effective Time (as defined in Section
1.1(b) hereof)), will, upon the terms and subject to the conditions and
limitations set forth herein, be converted into a fraction of an Alcatel
American Depositary Share (collectively, the "ADSS"), each of which ADS
represents one-fifth of a share, nominal value FF 40 per share of Alcatel (the
"ALCATEL SHARES") in accordance with the provisions of Article I of this
Agreement; and
WHEREAS, for federal income tax purposes, the Merger (as defined in
Section 1.1(a) hereof) is intended to qualify as a reorganization under the
provisions of Section 368(a) of the United States Internal Revenue Code of 1986,
as amended (the "CODE").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, agreements and conditions set forth herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER.
(a) Upon the terms and subject to the conditions of this Agreement, and
in accordance with the DGCL, at the Effective Time, Newco shall be merged (the
"MERGER") with and into the Company, whereupon the separate existence of Newco
shall cease, and the Company shall continue as the surviving corporation
(sometimes referred to herein as the "SURVIVING CORPORATION") and shall continue
to be governed by the laws of the State of Delaware and shall continue under the
name "DSC Communications Corporation."
(b) Concurrently with the Closing (as defined in Section 1.7 hereof),
the Company, Alcatel and Newco shall cause a certificate of merger (the
"CERTIFICATE OF MERGER") with respect to the Merger to be executed and filed
with the Secretary of State of the State of Delaware (the "SECRETARY OF STATE")
as provided in the DGCL. The Merger shall become effective on the date and time
at which the Certificate of Merger has been duly filed with the Secretary of
State or at such other date and time as is agreed between the parties and
specified in the Certificate of Merger, and such date and time is hereinafter
referred to as the "EFFECTIVE TIME."
(c) From and after the Effective Time, the Surviving Corporation shall
possess all rights, privileges, immunities, powers and franchises and be subject
to all of the obligations, restrictions, disabilities, liabilities, debts and
duties of the Company and Newco.
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SECTION 1.2 EFFECT ON COMMON STOCK. At the Effective Time:
(a) CANCELLATION OF SHARES OF COMMON STOCK. Each share of Common Stock
held by the Company as treasury stock and each share of Common Stock owned by
Newco immediately prior to the Effective Time shall automatically be cancelled
and retired and cease to exist, and no consideration or payment shall be
delivered therefor or in respect thereto. All shares of Common Stock to be
converted into ADSs pursuant to this Section 1.2 shall, by virtue of the Merger
and without any action on the part of the holders thereof, cease to be
outstanding, be cancelled and retired and cease to exist; and each holder of a
certificate representing prior to the Effective Time any such shares of Common
Stock shall thereafter cease to have any rights with respect to such shares of
Common Stock except the right to receive (i) the ADSs representing Alcatel
Shares into which such shares of Common Stock have been converted, (ii) any
dividend and other distributions in accordance with Section 1.3(c) hereof and
(iii) any cash, without interest, to be paid in lieu of any fraction of an ADS
in accordance with Section 1.3(d) hereof.
(b) CAPITAL STOCK OF NEWCO. Each share of common stock of Newco issued
and outstanding immediately prior to the Effective Time shall be converted into
one million shares of common stock, par value $.01 per share of the Surviving
Corporation with the same rights, powers and privileges as the shares so
converted and shall constitute the only outstanding shares of capital stock of
the Surviving Corporation.
(c) CONVERSION OF SHARES OF COMMON STOCK. Subject to Section 1.3(d)
hereof, each share of Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares of Common Stock referred to in the first
sentence of Section 1.2(a) hereof) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into .815 of an ADS
(the "EXCHANGE RATIO").
SECTION 1.3 EXCHANGE OF CERTIFICATES.
(a) Prior to the mailing of the Proxy Statement (as defined in Section
7.3(b) hereof) The Bank of New York or such other bank, trust company, Person or
Persons as shall be designated by Alcatel and reasonably acceptable to the
Company shall act as the depositary and exchange agent for the delivery of the
ADSs in exchange for shares of Common Stock (the "EXCHANGE AGENT") in connection
with the Merger. At or promptly following the Effective Time, Alcatel shall
deposit, or cause to be deposited, with the Exchange Agent the receipts
("ADRS"), representing ADSs, for the benefit of the holders of shares of Common
Stock which are converted into ADSs pursuant to Section 1.2(c) hereof (together
with cash as required to (i) pay any dividends or distributions with respect
thereto in accordance with Section 1.3(c) hereof and (ii) make payments in lieu
of fractional ADSs, pursuant to Section 1.3(d) hereof, being hereinafter
referred to as the "EXCHANGE FUND")). To the extent required, the Exchange Agent
will requisition from The Bank of New York, as depositary for the ADSs (the
"Depositary"), from time to time, such number of ADSs as are issuable in respect
of shares of Common Stock properly delivered to the Exchange Agent. For purposes
of this Agreement, "Person" means any natural person, firm, individual,
corporation, limited liability company, partnership, association, joint venture,
company, business trust, trust or any other entity or organization, whether
incorporated or unincorporated, including a government or political subdivision
or any agency or instrumentality thereof.
(b) As of or promptly following the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail (and to make available for
collection by hand) to each holder of record of a certificate or certificates,
which immediately prior to the Effective Time represented outstanding shares of
Common Stock (the "CERTIFICATES"), (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent and which shall be in the form and have such other provisions as
Alcatel and the Company may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for a certificate or
certificates representing that number of whole ADSs, if any, into which the
number of shares of Common Stock previously represented by such Certificate
shall have been converted pursuant to this Agreement (which instructions shall
provide that at the election of the
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<PAGE>
surrendering holder, Certificates may be surrendered, and the ADSs in exchange
therefor collected, by hand delivery). Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with a letter of transmittal duly
completed and validly executed in accordance with the instructions thereto, and
such other documents as may be required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in exchange therefor the
fraction of an ADS for each share of Common Stock formerly represented by such
Certificate, to be mailed (or made available for collection by hand if so
elected by the surrendering holder) within three business days of receipt
thereof (but in no case prior to the Effective Time), and the Certificate so
surrendered shall be forthwith cancelled. The Exchange Agent shall accept such
Certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. No interest shall be paid or accrued for the
benefit of holders of the Certificates on the cash payable pursuant to
subsections (c) and (d) below upon the surrender of the Certificates.
(c) No dividends or other distributions with respect to Alcatel Shares
with a record date on or after the Effective Time shall be paid to the holder of
any unsurrendered Certificate with respect to the ADSs represented thereby by
reason of the conversion of shares of Common Stock pursuant to Sections 1.2(c)
hereof and no cash payment in lieu of fractional ADSs shall be paid to any such
holder pursuant to Section 1.3(d) hereof until such Certificate is surrendered
in accordance with this Article I. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid, without
interest, to the person in whose name the ADSs representing such securities are
registered (i) at the time of such surrender or as promptly after the sale of
the Excess ADSs (as defined in Section 1.3(d) hereof) as practicable, the amount
of any cash payable in lieu of fractional ADSs to which such holder is entitled
pursuant to Section 1.3(d) hereof and the proportionate amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to ADSs, and (ii) at the appropriate payment date or as promptly as
practicable thereafter, the proportionate amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such ADSs.
(d) Notwithstanding any other provision of this Agreement, no fraction
of an ADS will be issued and no dividend or other distribution, stock split or
interest with respect to Alcatel Shares shall relate to any fractional ADS, and
such fractional interest shall not entitle the owner thereof to vote or to any
rights as a security holder of the ADSs. In lieu of any such fractional
security, each holder of shares of Common Stock otherwise entitled to a fraction
of an ADS will be entitled to receive in accordance with the provisions of this
Section 1.3 from the Exchange Agent a cash payment representing such holder's
proportionate interest in the net proceeds from the sale by the Exchange Agent
on behalf of all such holders of the aggregate of the fractions of ADSs which
would otherwise be issued (the "EXCESS ADSS"). The sale of the Excess ADSs by
the Exchange Agent shall be executed on the New York Stock Exchange ("NYSE")
through one or more member firms of the NYSE and shall be executed in round lots
to the extent practicable. Until the net proceeds of such sale or sales have
been distributed to the holders of shares of Common Stock, the Exchange Agent
will, subject to Section 1.3(e) hereof, hold such proceeds in trust for the
holders of shares of Common Stock (the "ADS TRUST"). Alcatel shall pay all
commissions, transfer taxes (other than those transfer taxes for which the
Company's stockholders are solely liable) and other out-of-pocket transaction
costs, including the expenses and compensation, of the Exchange Agent incurred
in connection with such sale of the Excess ADSs. As soon as practicable after
the determination of the amount of cash, if any, to be paid to holders of shares
of Common Stock in lieu of any fractional ADS interests, the Exchange Agent
shall make available such amounts to such holders of shares of Common Stock
without interest.
(e) Any portion of the Exchange Fund which remains undistributed to the
holders of the Certificates for one year after the Effective Time shall be
delivered to Alcatel, upon demand, and any holders of shares of Common Stock
prior to the Merger who have not theretofore complied with this Article I shall
thereafter look for payment of their claim, as general creditors thereof, only
to Alcatel for
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<PAGE>
their claim for ADSs, any cash without interest, to be paid, in lieu of any
fractional ADSs and any dividends or other distributions with respect to ADSs to
which such holders may be entitled.
(f) None of Alcatel, Newco or the Company or the Exchange Agent shall be
liable to any Person in respect of any ADSs held in the Exchange Fund (and any
cash, dividends and other distributions payable in respect thereof) delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates shall not have been surrendered prior to one
year after the Effective Time (or immediately prior to such earlier date on
which (i) any ADSs, (ii) any cash in lieu of fractional ADSs or (iii) any
dividends or distributions with respect to ADSs in respect of such Certificate
would otherwise escheat to or become the property of any Governmental Entity (as
defined in Section 4.3(b) hereof)), any such ADSs, cash, dividends or
distributions in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of Alcatel, free and clear of all claims or
interest of any Person previously entitled thereto.
SECTION 1.4 TRANSFER TAXES; WITHHOLDING. If any certificate for an ADS
is to be issued to, or cash is to be remitted to, a Person (other than the
Person in whose name the Certificate surrendered in exchange therefor is
registered), it shall be a condition of such exchange that the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and that the Person requesting such exchange shall pay to the Exchange Agent any
transfer or other Taxes (as defined in Section 4.11(b) hereof) required by
reason of the issuance of the ADSs (or cash in lieu of fractional ADSs) to a
Person other than the registered holder of the Certificate so surrendered, or
shall establish to the satisfaction of the Exchange Agent that such Tax either
has been paid or is not applicable. Alcatel or the Exchange Agent shall be
entitled to deduct and withhold from the ADSs (or cash in lieu of fractional
ADSs) otherwise payable pursuant to this Agreement to any holder of shares of
Common Stock such amounts as Alcatel or the Exchange Agent are required to
deduct and withhold under the Code, or any provision of state, local or foreign
Tax law, with respect to the making of such payment. To the extent that amounts
are so withheld by Alcatel or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder of
shares of Common Stock in respect of whom such deduction and withholding was
made by Alcatel or the Exchange Agent.
SECTION 1.5 STOCK OPTIONS; EMPLOYEE STOCK PURCHASE PLAN.
(a) The Company shall use its reasonable best efforts to cause each
option (other than an option described in Section 1.5(c) below) granted to a
Company employee, consultant or director of the Company or any Subsidiary of the
Company to acquire shares of Common Stock, which is outstanding immediately
prior to the Effective Time ("OPTION"), to be cancelled immediately prior to the
Effective Time. Immediately upon such cancellation, each holder of an Option so
cancelled, in exchange for the cancellation thereof, shall receive the number of
ADSs determined by dividing (X) the product of (1) the number of shares of
Common Stock subject to such Option and (2) the excess, if any, of the fair
market value of a share of Common Stock immediately prior to the Merger over the
per share exercise price of such Option, by (Y) the fair market value of an ADS
as of immediately prior to the Merger. At the election of Alcatel, in lieu of
the ADSs described in the immediately preceding sentence, immediately prior to
the Effective Time, each holder of a cancelled Option, in exchange for the
cancellation thereof, shall receive the number of shares of Common Stock
determined by dividing (X) the product of (1) the number of shares of Common
Stock subject to such Option and (2) the excess, if any, of the fair market
value of a share of Common Stock immediately prior to the Merger over the per
share exercise price of such Option, by (Y) the fair market value of a share of
Common Stock as of immediately prior to the Merger. Schedule 1.5(a) hereto sets
forth a list of Company executives who have agreed to the cancellation of all of
their Options, effective immediately prior to the Effective Time, in accordance
with the provisions of this Section 1.5(a). For purposes of this Section 1.5,
"fair market value" shall mean (i) in the case of the ADSs, the closing price on
the NYSE on the business day immediately preceding the Effective Time and (ii)
in the case of the Common Stock, the closing price on the NASDAQ National Market
("NASDAQ") on the business day immediately preceding the Effective Time.
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(b) Each Option which is not cancelled in accordance with Section 1.5(a)
above, as of the Effective Time (other than any Options granted under the 1990
Stock Option and Cash Payment Plan or the Special Celcore Incentive Plan, which
Options shall terminate at the Effective Time), shall become and represent an
option to purchase a number of ADSs (a "SUBSTITUTE OPTION"), determined by
multiplying (i) the number of shares of Common Stock subject to such Option
immediately prior to the Effective Time by (ii) the Exchange Ratio, at an
exercise price per ADS (increased to the nearest whole cent) equal to the
exercise price per share of Common Stock immediately prior to the Effective Time
divided by the Exchange Ratio; PROVIDED, HOWEVER, that in the case of an Option
to which Section 421 of the Code applies by reason of its qualification as an
incentive stock option under Section 422 of the Code, the conversion formula
shall be adjusted if necessary to conform with Section 424(a) of the Code. After
the Effective Time, each Substitute Option shall be exercisable upon the same
terms and conditions as were applicable to the related Option prior to the
Effective Time subject to accelerated vesting if and to the extent provided in
the applicable plans as of the date hereof. Alcatel shall take such corporate
action as may be necessary or appropriate to, at or prior to the Effective Time,
file a registration statement on Form S-8 (or any successor or other appropriate
form) with respect to the ADSs subject to any Substitute Options to the extent
such registration is required under applicable law in order for such ADSs to be
sold without restriction in the United States, and Alcatel shall maintain the
effectiveness of such registration statement for so long as such Substitute
Options remain outstanding.
(c) As of July 31, 1998, the Company's 1990 Employee Stock Purchase Plan
and the Company's International Employee Stock Purchase Plan (the "ESPPS") shall
be terminated. If the Effective Time is before July 31, 1998, then as of the
Effective Time each option then outstanding under the ESPPs shall be converted
into an option to acquire ADSs with such adjustments as are appropriate to
preserve the value inherent in such options with no detrimental effect on the
holders thereof.
SECTION 1.6 LOST CERTIFICATES. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such Person of a bond, in such
reasonable amount as the Surviving Corporation may direct (but consistent with
past practice of the Company), as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the ADSs to which the
holder thereof is entitled pursuant to this Article I.
SECTION 1.7 MERGER CLOSING. Subject to the satisfaction or waiver of
the conditions set forth in Article VIII hereof, the closing of the Merger (the
"CLOSING") will take place at 10:00 a.m., New York City time, on a date to be
specified by the parties hereto, and no later than the second business day after
the satisfaction or waiver of the conditions set forth in Article VIII hereof,
at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue,
New York, New York, unless another time, date or place is agreed to in writing
by the parties hereto (such date, the "CLOSING DATE").
ARTICLE II
[INTENTIONALLY OMITTED]
ARTICLE III
THE SURVIVING CORPORATION
SECTION 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. The
certificate of incorporation of the Company in effect on the date hereof (the
"CERTIFICATE OF INCORPORATION"), shall be amended and restated at the Effective
Time to be in the form set forth in Exhibit A hereto, and, as so amended and
restated, shall be the certificate of incorporation of the Surviving Corporation
until thereafter amended in accordance with applicable law.
SECTION 3.2 BY-LAWS. The by-laws of Newco in effect at the Effective
Time shall be the by-laws of the Surviving Corporation until thereafter amended
in accordance with applicable law, the certificate of incorporation of such
entity and the by-laws of such entity.
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SECTION 3.3 OFFICERS AND DIRECTORS.
(a) From and after the Effective Time, the officers of the Company at
the Effective Time shall be the officers of the Company, until their respective
successors are duly elected or appointed and qualified in accordance with
applicable law.
(b) The Board of Directors of the Company effective as of, and
immediately following, the Effective Time shall consist of the directors of
Newco immediately prior to the Effective Time.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Alcatel and Newco as follows:
SECTION 4.1 CORPORATE EXISTENCE AND POWER. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and except as set forth on Schedule 4.1 of the
disclosure schedule delivered by the Company to Alcatel concurrently with the
execution and delivery by the Company of this Agreement and attached hereto (the
"COMPANY DISCLOSURE SCHEDULE"), has all corporate powers and all governmental
licenses, authorizations, consents and approvals (collectively, "LICENSES")
required to carry on its business as now conducted except for failures to have
any such License which would not, in the aggregate, have a Company Material
Adverse Effect (as defined below). The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
character of the property owned, leased or operated by it or the nature of its
activities makes such qualification necessary, except in such jurisdictions
where failures to be so qualified would not reasonably be expected to, in the
aggregate, have a Company Material Adverse Effect. As used herein, the term
"COMPANY MATERIAL ADVERSE EFFECT" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
the Company and its Subsidiaries, taken as a whole, that is not a result of
general changes in the economy in which such entities operate. The Company has
heretofore made available to Alcatel true and complete copies of the Certificate
of Incorporation and the by-laws of the Company as currently in effect.
SECTION 4.2 CORPORATE AUTHORIZATION.
(a) The Company has the requisite corporate power and authority to
execute and deliver this Agreement and, subject to approval of the Company's
stockholders, as set forth in Section 4.2 (b) hereof and as contemplated by
Section 7.3 hereof, to perform its obligations hereunder. The execution and
delivery of this Agreement and the performance of its obligations hereunder have
been duly and validly authorized, and this Agreement has been approved, by the
Board of Directors of the Company and no other corporate proceedings, other than
the approval of the Company's stockholders, on the part of the Company are
necessary to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly executed and delivered by the Company
and constitutes, assuming due authorization, execution and delivery of this
Agreement by Alcatel and Newco, a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
(b) Under applicable law, the Certificate of Incorporation and the rules
of the NASDAQ, the affirmative vote of the holders of a majority of the shares
of Common Stock outstanding on the record date, established by the Board of
Directors of the Company in accordance with the by-laws of the Company,
applicable law and this Agreement, is the vote required to approve the Merger
and adopt this Agreement.
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SECTION 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS.
(a) Except as set forth in Schedule 4.3(a) of the Company Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
performance by the Company of its obligations hereunder will (i) conflict with
or result in any breach of any provision of the Certificate of Incorporation or
the by-laws of the Company; (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or
obligation to repurchase, repay, redeem or acquire or any similar right or
obligation) under any of the terms, conditions or provisions of any note,
mortgage, letter of credit, other evidence of indebtedness, guarantee, license,
lease or agreement or similar instrument or obligation to which the Company or
any of its Subsidiaries is a party or by which any of them or any of their
assets may be bound or (iii) assuming that the filings, registrations,
notifications, authorizations, consents and approvals referred to in subsection
(b) below have been obtained or made, as the case may be, violate any order,
injunction, decree, statute, rule or regulation of any Governmental Entity to
which the Company or any of its Subsidiaries is subject, excluding from the
foregoing clauses (ii) and (iii) such requirements, defaults, breaches, rights
or violations (A) that would not, in the aggregate, reasonably be expected to
have a Company Material Adverse Effect and would not have a material adverse
effect on the ability of the Company to perform its obligations hereunder or (B)
that become applicable as a result of the business or activities in which
Alcatel or Newco or any of their respective affiliates is or proposes to be
engaged or any acts or omissions by, or facts specifically pertaining to,
Alcatel or Newco.
(b) Except as set forth in Schedule 4.3(b) of the Company Disclosure
Schedule, no filing or registration with, notification to, or authorization,
consent or approval of, any government or any agency, court, tribunal,
commission, board, bureau, department, political subdivision or other
instrumentality of any government (including any regulatory or administrative
agency), whether federal, state, multinational (including, but not limited to,
the European Community), provincial, municipal, domestic or foreign (each, a
"GOVERNMENTAL ENTITY") is required in connection with the execution and delivery
of this Agreement by the Company or the performance by the Company of its
obligations hereunder, except (i) the filing of the Certificate of Merger in
accordance with the DGCL and filings to maintain the good standing of the
Surviving Corporation; (ii) compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder (the "HSR ACT"), the EC Merger Regulations (as
defined below) or any foreign laws regulating competition, antitrust, investment
or exchange controls; (iii) compliance with any applicable requirements of the
Securities Act of 1933 and the rules and regulations thereunder (the "SECURITIES
ACT") and the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "EXCHANGE ACT"); (iv) compliance with any applicable
requirements of state blue sky or takeover laws and (v) such other consents,
approvals, orders, authorizations, notifications, registrations, declarations
and filings (A) the failure of which to be obtained or made would not, in the
aggregate, reasonably be expected to have a Company Material Adverse Effect and
would not have a material adverse effect on the ability of the Company to
perform its obligations hereunder or (B) that become applicable as a result of
the business or activities in which Alcatel or Newco or any of their respective
affiliates is or proposes to be engaged or any acts or omissions by, or facts
specifically pertaining to, Alcatel or Newco. For purposes of this Agreement,
"EC MERGER REGULATIONS" mean Council Regulation (EEC) No. 4064/89 of December
21, 1989 on the Control of Concentrations Between Undertakings, OJ (1989) L
395/1 (as amended) and the regulations and decisions of the Commission of the
European Community or other organs of the European Union or European Community
implementing such regulations.
SECTION 4.4 CAPITALIZATION. The authorized capital stock of the
Company consists of 500,000,000 shares of Common Stock and 5,000,000 shares of
preferred stock, par value $1.00 per share, of the Company (the "PREFERRED
STOCK"), of which 500,000 shares were designated as Series B Junior
Participating Preferred Stock. As of March 31, 1998, there were (i) 118,752,003
shares of Common Stock issued and outstanding and (ii) no shares of Preferred
Stock issued and outstanding. All shares of capital
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stock of the Company have been duly authorized and validly issued and are fully
paid and nonassessable and were not issued in violation of any preemptive
rights. As of March 31, 1998, there were outstanding Options in respect of
11,969,488 shares of Common Stock at option prices ranging from $2.44 to $40.25
per share of Common Stock. Except as set forth in this Section 4.4 or Schedule
4.4 of the Company Disclosure Schedule, and except for changes since March 31,
1998, resulting from the exercise of Options outstanding on such date and the
rights to acquire shares through the ESPPs based on elections made by employees
prior to the date hereof and except for the shares of Common Stock issuable upon
conversion of 7% Convertible Subordinated Notes of the Company due 2004 (the
"CONVERTIBLE NOTES") issued pursuant to the Indenture (the "INDENTURE"), dated
as of August 12, 1997 between the Company and The Bank of New York, as trustee
(the "TRUSTEE"), and Rights issued pursuant to the Rights Agreement (as such
terms are defined in Sections 7.20 and 4.20, respectively) there are outstanding
(i) no shares of capital stock or other voting securities of the Company, (ii)
no securities of the Company or any Subsidiary of the Company convertible into
or exchangeable for shares of capital stock or voting securities of the Company
and (iii) no options or other rights to acquire from the Company, and no
obligation of the Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company (the items in clauses (i), (ii) and (iii) being
referred to collectively as the "COMPANY SECURITIES"). Except as set forth in
Schedule 4.4 of the Company Disclosure Schedule, there are no outstanding
obligations of the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any Company Securities. No Subsidiary of the Company owns any
capital stock or other voting securities of the Company.
SECTION 4.5 SUBSIDIARIES.
(a) Each Subsidiary of the Company that is actively engaged in any
business or owns any material assets (each, an "ACTIVE COMPANY SUBSIDIARY") (i)
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, (ii) has all corporate powers and
all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted and (iii) is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for failures
of this representation and warranty to be true which would not, in the
aggregate, have a Company Material Adverse Effect. For purposes of this
Agreement, "Subsidiary" means with respect to any Person, any corporation or
other legal entity of which such Person owns, directly or indirectly, more than
50% of the outstanding stock or other equity interests, the holders of which are
entitled to vote for the election of the board of directors or other governing
body of such corporation or other legal entity. All Active Company Subsidiaries
and their respective jurisdictions of incorporation are identified in Schedule
4.5 of the Company Disclosure Schedule.
(b) Except as set forth in Schedule 4.5(b) of the Company Disclosure
Schedule, all of the outstanding shares of capital stock of each Subsidiary of
the Company are duly authorized, validly issued, fully paid and nonassessable,
and such shares are owned by the Company or by a Subsidiary of the Company free
and clear of any Liens (as defined hereafter) or limitation on voting rights.
Except as set forth in Schedule 4.5(b) of the Company Disclosure Schedule, there
are no subscriptions, options, warrants, calls, rights, convertible securities
or other agreements or commitments of any character relating to the issuance,
transfer, sale, delivery, voting or redemption (including any rights of
conversion or exchange under any outstanding security or other instrument) for
any of the capital stock or other equity interests of any of such Subsidiaries.
There are no agreements requiring the Company or any of its Subsidiaries to make
contributions to the capital of, or lend or advance funds to, any Subsidiaries
of the Company. For purposes of this Agreement, "LIEN" means, with respect to
any asset, any mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset.
SECTION 4.6 SEC DOCUMENTS. The Company has filed all required
reports, proxy statements, registration statements, forms and other documents
with the SEC since January 1, 1995 (the "COMPANY SEC DOCUMENTS"). As of their
respective dates, and giving effect to any amendments thereto,
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(a) the Company SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the applicable rules and regulations of the SEC promulgated thereunder and (b)
none of the Company SEC Documents contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
SECTION 4.7 FINANCIAL STATEMENTS. The financial statements of the
Company (including, in each case, any notes and schedules thereto) included in
the Company SEC Documents (a) were prepared from the books and records of the
Company and its Subsidiaries, (b) comply as to form in all material respects
with all applicable accounting requirements and the rules and regulations of the
SEC with respect thereto, (c) are in conformity with United States generally
accepted accounting principles ("GAAP"), applied on a consistent basis (except
in the case of unaudited statements, as permitted by Form 10-Q as filed with the
SEC under the Exchange Act) during the periods involved and (d) fairly present,
in all material respects, the consolidated financial position of the Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments which
were not and are not expected to be, individually or in the aggregate, material
in amount).
SECTION 4.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth
in Schedule 4.8 of the Company Disclosure Schedule or in the Company SEC
Documents filed prior to the date hereof, and except for liabilities and
obligations incurred in the ordinary course of business since the date of the
most recent consolidated balance sheet included in the Company SEC Documents
filed prior to the date hereof, neither the Company nor any of its Subsidiaries
has any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) except for those that would not, in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
SECTION 4.9 PROXY STATEMENT; FORM F-4.
(a) None of the information contained in the Proxy Statement (and any
amendments thereof or supplements thereto) will at the time of the mailing of
the Proxy Statement to the stockholders of the Company and at the time of the
Special Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representation is made by the Company with
respect to statements made or omitted in the Proxy Statement relating to Alcatel
or Newco based on information supplied by Alcatel for inclusion in the Proxy
Statement. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder, except that no representation is made by the Company
with respect to the statements made or omitted in the Proxy Statement relating
to Alcatel or Newco based on information supplied by Alcatel for inclusion in
the Proxy Statement.
(b) None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in the registration statement on
Form F-4 (and/or such other form as may be applicable and used) to be filed with
the SEC in connection with the issuance of ADSs and, if applicable, the deemed
issuance, if any, of shares of Common Stock by reason of the transactions
contemplated by this Agreement (such registration statement, as it may be
amended or supplemented, is herein referred to as the "FORM F-4") will, with
respect to information relating to the Company, at the time the Form F-4 is
filed with the SEC, and at any time it is amended or supplemented or at the time
it becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 4.10 ABSENCE OF MATERIAL ADVERSE CHANGES, ETC. Except as set
forth in the Company SEC Documents filed on or prior to May 29, 1998, since
March 31, 1998, there has not been a Company Material Adverse Effect, nor have
there been any event(s) which are reasonably likely in the aggregate to
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have a Company Material Adverse Effect. Without limiting the foregoing, except
as disclosed in the Company SEC Documents filed by the Company, as set forth in
Schedule 4.10 of the Company Disclosure Schedule or as contemplated by this
Agreement, since March 31, 1998 (except in the case of subsection (f) below, as
to which the relevant date will be December 31, 1997), (i) the Company and its
Subsidiaries have conducted their business in the ordinary course of business
and (ii) there has not been:
(a) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of the
Company, or any repurchase, redemption or other acquisition by the
Company or any Subsidiary (other than any wholly-owned Subsidiary) of the
Company of any outstanding shares of capital stock or other equity
securities of, or other ownership interests in, the Company or of any
Company Securities;
(b) any amendment of any provision of the Certificate of
Incorporation or by-laws of, or of any material term of any outstanding
security issued by, the Company or any Subsidiary (other than any
wholly-owned Subsidiary) of the Company;
(c) any incurrence, assumption or guarantee by the Company or any
Subsidiary of the Company of any indebtedness for borrowed money other
than borrowings under existing short term credit facilities not in excess
of $180,000,000 in the aggregate;
(d) any change in any method of accounting or accounting practice by
the Company or any Subsidiary of the Company, except for any such change
required by reason of a change in GAAP;
(e) any (i) grant of any severance or termination pay to any
director, officer or employee of the Company or any Subsidiary of the
Company, (ii) employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any
director, officer or employee of the Company or any Subsidiary of the
Company entered into, (iii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements
or (iv) increase in compensation, bonus or other benefits payable to
directors, officers or employees of the Company or any Subsidiary of the
Company other than, in the case of employees (other than directors and
officers), in the ordinary course of business;
(f) issuance of securities of the Company other than pursuant to
Options, ESPPs, Convertible Notes or rights outstanding as of December
31, 1997;
(g) acquisition or disposition of assets material to the Company and
its Subsidiaries, except for sales of inventory in the ordinary course of
business consistent with past practice, or any acquisition or disposition
of capital stock of any third party (other than acquisitions or
dispositions of non-controlling equity interests of third parties in the
ordinary course of business where the aggregate cost of all such
acquisitions and dispositions does not exceed $10,000,000), or any merger
or consolidation with any third party, by the Company or any Subsidiary;
(h) entry by the Company into any joint venture, partnership or
similar agreement with any person other than a wholly-owned Subsidiary;
or
(i) any authorization of, or commitment or agreement to take any of,
the foregoing actions except as otherwise permitted by this Agreement.
SECTION 4.11 TAXES.
(a) Except as set forth in Schedule 4.11 of the Company Disclosure
Schedule, (1) all federal, state, local and foreign Tax Returns required to be
filed by or on behalf of the Company, each of its Subsidiaries, and each
affiliated, combined, consolidated or unitary group of which the Company or any
of its Subsidiaries is a member (a "COMPANY GROUP") have been timely filed, and
all returns filed are complete and accurate except to the extent any failure to
file or any inaccuracies in filed returns would not, individually or in the
aggregate, have a Company Material Adverse Effect; (2) all Taxes due and owing
by
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the Company, any Subsidiary of the Company or any Company Group have been paid,
or adequately reserved for in accordance with GAAP, except to the extent any
failure to pay or reserve would not, individually or in the aggregate, have a
Company Material Adverse Effect; (3) there is no presently pending and, to the
knowledge of the Company, contemplated or scheduled audit examination,
deficiency, refund litigation, proposed adjustment or matter in controversy
which would, individually or in the aggregate, have a Company Material Adverse
Effect with respect to any Taxes due and owing by the Company, any Subsidiary of
the Company or any Company Group nor has the Company or any Subsidiary of the
Company filed any waiver of the statute of limitations applicable to the
assessment or collection of any Tax which would, individually or in the
aggregate, have a Company Material Adverse Effect; (4) all assessments for Taxes
due and owing by the Company, any Subsidiary of the Company or any Company Group
with respect to completed and settled examinations or concluded litigation have
been paid; (5) neither the Company nor any Subsidiary of the Company is a party
to any tax indemnity agreement, tax sharing agreement or other agreement under
which the Company or any Subsidiary of the Company could become liable to
another person as a result of the imposition of a Tax upon any person, or the
assessment or collection of such a Tax; and (6) the Company and each of its
Subsidiaries has complied in all material respects with all rules and
regulations relating to the withholding of Taxes.
(b) For purposes of this Agreement, (i) "TAXES" means all taxes, levies
or other like assessments, charges or fees (including estimated taxes, charges
and fees), including, without limitation, income, corporation, advance
corporation, gross receipts, transfer, excise, property, sales, use,
value-added, license, payroll, withholding, social security and franchise or
other governmental taxes or charges, imposed by the United States or any state,
county, local or foreign government or subdivision or agency thereof, and such
term shall include any interest, penalties or additions to tax attributable to
such taxes and (ii) "TAX RETURN" means any report, return, statement or other
written information required to be supplied to a taxing authority in connection
with Taxes.
SECTION 4.12 EMPLOYEE BENEFIT PLANS.
(a) Except for any plan, fund, program, agreement or arrangement that is
subject to the laws of any jurisdiction outside the United States, Schedule
4.12(a) of the Company Disclosure Schedule contains a true and complete list of
each material deferred compensation, incentive compensation, and equity
compensation plan; material "welfare" plan, fund or program (within the meaning
of section 3(1) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")); material "pension" plan, fund or program (within the meaning
of section 3(2) of ERISA); each material employment, termination or severance
agreement; and each other material employee benefit plan, fund, program,
agreement or arrangement, in each case, that is in writing and sponsored,
maintained or contributed to or required to be contributed to by the Company or
by any trade or business, whether or not incorporated (each, an "ERISA
AFFILIATE"), that together with the Company would be deemed a "single employer"
within the meaning of section 4001(b) of ERISA, or to which the Company or an
ERISA Affiliate is party, whether written or oral, for the benefit of any
employee, consultant, director or former employee, consultant or director of the
Company or any Subsidiary of the Company. The plans, funds, programs, agreements
and arrangements listed on Schedule 4.12(a) of the Company Disclosure Schedule
are referred to herein collectively as the "PLANS".
(b) With respect to each Plan, the Company has heretofore delivered or
made available to Alcatel true and complete copies of the Plan and any
amendments thereto (or if the Plan is not a written Plan, a description
thereof), any related trust or other funding vehicle, the most recent reports or
summaries required under ERISA or the Code and the most recent determination
letter received from the Internal Revenue Service with respect to each Plan
intended to qualify under section 401 of the Code.
(c) No liability under Title IV or section 302 of ERISA that would
reasonably be expected to have a Company Material Adverse Effect has been
incurred by the Company or any ERISA Affiliate that has not been satisfied in
full, and no condition exists that presents a material risk to the Company or
any
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ERISA Affiliate of incurring any such liability, other than liability for
premiums due the Pension Benefit Guaranty Corporation (which premiums have been
paid when due).
(d) No Plan is a "multiemployer plan," as defined in section 3(37) of
ERISA, nor is any Plan a plan described in section 4063(a) of ERISA.
(e) Except as set forth in Schedule 4.12(e) of the Company Disclosure
Schedule, each Plan has been operated and administered in all material respects
in accordance with its terms and applicable law, including, but not limited to,
ERISA and the Code.
(f) Except as set forth in Schedule 4.12(f) of the Company Disclosure
Schedule, each Plan intended to be "qualified" within the meaning of section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service, and the Company is not aware of any circumstances that
would result in revocation of any such favorable determination letter.
(g) Except as set forth in Schedule 4.12(g) of the Company Disclosure
Schedule, no Plan provides medical, surgical, hospitalization, death or similar
benefits (whether or not insured) for employees or former employees of the
Company or any Subsidiary for periods extending beyond their retirement or other
termination of service, other than (i) coverage mandated by applicable law, (ii)
death benefits under any "pension plan," or (iii) benefits the full cost of
which is borne by the current or former employee (or his or her beneficiary),
dependant or other covered person.
(h) There are no pending, or to the knowledge of the Company, threatened
or anticipated, claims that would reasonably be expected to have a Company
Material Adverse Effect by or on behalf of any Plan, by any employee or
beneficiary covered under any such Plan, or otherwise involving any such Plan
(other than routine claims for benefits).
(i) Except as set forth in Schedule 4.12(i) of the Company Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not, either alone or in combination with another event, (i) entitle any
current or former employee or officer of the Company or any ERISA Affiliate to
severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement, or (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or
officer, other than payments, accelerations or increases (x) under any employee
benefit plan that is subject to the laws of a jurisdiction outside of the United
States or (y) mandated by applicable law.
(j) Except as set forth in Schedule 4.12(j) of the Company Disclosure
Schedule, no amounts payable under the Plans will fail to be deductible for
federal income tax purposes by virtue of section 280G of the Code.
(k) To the knowledge of the Company, all employee benefit plans that are
subject to the laws of any jurisdiction outside the United States are in
material compliance with such applicable laws, including relevant Tax laws, and
the requirements of any trust deed under which they were established, except for
such exceptions to the foregoing which, in the aggregate, would not reasonably
be expected to have a Company Material Adverse Effect. Schedule 4.12(k) lists
all material employee pension benefit plans that are subject to the laws of any
jurisdiction outside the United States except for such plans that are
governmental or statutory plans.
SECTION 4.13 LITIGATION; COMPLIANCE WITH LAWS.
(a) Except as set forth in either the Company SEC Documents or in
Schedule 4.13(a) of the Company Disclosure Schedule or otherwise fully covered
by insurance, there is no action, suit or proceeding pending against, or to the
knowledge of the Company threatened against, the Company or any Subsidiary of
the Company or any of their respective properties before any court or arbitrator
or any Governmental Entity which would reasonably be expected to have a Company
Material Adverse Effect.
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(b) Except as set forth in Schedule 4.13(b) of the Company Disclosure
Schedule, the Company and its Subsidiaries are in compliance with all applicable
laws, ordinances, rules and regulations of any federal, state, local or foreign
governmental authority applicable to their respective businesses and operations,
except for such violations, if any, which, in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect. All
governmental approvals, permits and licenses (collectively, "PERMITS") required
to conduct the business of the Company and its Subsidiaries have been obtained,
are in full force and effect and are being complied with except for such
violations and failures to have Permits in full force and effect, if any, which,
individually or in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect.
SECTION 4.14 LABOR MATTERS. Except to the extent set forth in
Schedule 4.14 of the Disclosure Schedule as of the date of this Agreement (i)
there is no labor strike, dispute, slowdown, stoppage or lockout actually
pending or, to the knowledge of the Company, threatened against the Company;
(ii) to the knowledge of the Company, no union organizing campaign with respect
to the Company's employees is underway; (iii) there is no unfair labor practice
charge or complaint against the Company pending or, to the knowledge of the
Company, threatened before the National Labor Relations Board or any similar
state or foreign agency; (iv) there is no written grievance pending relating to
any collective bargaining agreement or other grievance procedure; (v) to the
knowledge of the Company, no charges with respect to or relating to the Company
are pending before the Equal Employment Opportunity Commission or any other
agency responsible for the prevention of unlawful employment practices; and (vi)
there are no collective bargaining agreements with any union covering employees
of the Company, except for such exceptions to the foregoing clauses (i) through
(vi) which, individually or in the aggregate, would not reasonably be expected
to have a Company Material Adverse Effect.
SECTION 4.15 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth
in Schedule 4.15 of the Company Disclosure Schedule, each material contract or
agreement to which the Company or any of its Subsidiaries is a party or by which
any of them is bound is in full force and effect, and neither the Company nor
any of its Subsidiaries, nor, to the knowledge of the Company, any other party
thereto, is in breach of, or default under, any such contract or agreement, and
no event has occurred that with notice or passage of time or both would
constitute such a breach or default thereunder by the Company or any of its
Subsidiaries, or, to the knowledge of the Company, any other party thereto,
except for such failures to be in full force and effect and such breaches and
defaults which, in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect.
SECTION 4.16 ENVIRONMENTAL MATTERS.
(a) (i) "CLEANUP" means all actions required to: (A) cleanup, remove,
treat or remediate Hazardous Materials (as defined hereafter) in the indoor or
outdoor environment; (B) prevent the Release (as defined hereafter) of Hazardous
Materials so that they do not migrate, endanger or threaten to endanger public
health or welfare or the indoor or outdoor environment; (C) perform pre-remedial
studies and investigations and post-remedial monitoring and care; or (D) respond
to any government requests for information or documents in any way relating to
cleanup, removal, treatment or remediation or potential cleanup, removal,
treatment or remediation of Hazardous Materials in the indoor or outdoor
environment.
(ii) "ENVIRONMENTAL CLAIM" means any claim, action, cause of action,
investigation or written notice by any Person alleging potential liability
(including, without limitation, potential liability for investigatory costs,
Cleanup costs, governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based on or resulting
from (A) the presence or Release of any Hazardous Materials at any location,
whether or not owned or operated by the Company or any of its Subsidiaries or
(B) circumstances forming the basis of any violation of any Environmental Law
(as defined hereafter).
(iii) "ENVIRONMENTAL LAWS" means all federal, state, local and
foreign laws and regulations relating to pollution or protection of the
environment, including, without limitation, laws relating to
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Releases or threatened Releases of Hazardous Materials or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, transport or
handling of Hazardous Materials.
(iv) "HAZARDOUS MATERIALS" means all substances defined as Hazardous
Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous
Substances Pollution Contingency Plan, 40 C.F.R. Section 300.5, or defined as
such by, or regulated as such under, any Environmental Law.
(v) "RELEASE" means any release, spill, emission, discharge,
leaking, pumping, injection, deposit, disposal, dispersal, leaching or migration
into the environment (including, without limitation, ambient air, surface water,
groundwater and surface or subsurface strata) or into or out of any property,
including the movement of Hazardous Materials through or in the air, soil,
surface water, groundwater or property.
(b) (i) Except as set forth in Schedule 4.16(b)(i) of the Company
Disclosure Schedule, to the knowledge of the Company, the Company and its
Subsidiaries are in compliance with all applicable Environmental Laws (which
compliance includes, but is not limited to, the possession by the Company and
its Subsidiaries of all permits and other governmental authorizations required
under applicable Environmental Laws, and compliance with the terms and
conditions thereof), except where failures to be in compliance would not, in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
Except as set forth in Schedule 4.16(b)(i) of the Company Disclosure Schedule,
since January 1, 1996 and prior to the date of this Agreement, neither the
Company nor any of its Subsidiaries has received any communication (written or
oral), whether from a Governmental Entity, citizens' group, employee or
otherwise, alleging that the Company or any of its Subsidiaries is not in such
compliance, except where failures to be in compliance would not, in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
(ii) Except as set forth in Schedule 4.16(b)(ii) of the Company
Disclosure Schedule, there is no Environmental Claim pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries or, to the knowledge of the Company, against any Person whose
liability for any Environmental Claim the Company or any of its Subsidiaries has
or may have retained or assumed either contractually or by operation of law that
would reasonably be expected to have a Company Material Adverse Effect.
(iii) Except as set forth in Schedule 4.16(b)(iii) of the Company
Disclosure Schedule, there are no present or, to the knowledge of the Company,
past, actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the Release or presence of any Hazardous Material
that could form the basis of any Environmental Claim against the Company or any
of its Subsidiaries or, to the knowledge of the Company, against any Person
whose liability for any Environmental Claim the Company or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law that would, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
(iv) The Company agrees to cooperate with Alcatel to effect the
retention of any permits or other governmental authorizations under
Environmental Laws that will be required to permit the Company to conduct the
business as conducted by the Company and its Subsidiaries immediately prior to
the Closing Date.
SECTION 4.17 INTELLECTUAL PROPERTY.
(a) The Company and its Subsidiaries own or have the right to use all
material Intellectual Property (as defined hereafter) reasonably necessary for
the Company and its Subsidiaries to conduct their business as it is currently
conducted.
(b) Except as set forth in Schedule 4.17 of the Company Disclosure
Schedule, to the knowledge of the Company: (i) all of the registrations relating
to material Intellectual Property owned by the Company and its Subsidiaries are
subsisting and unexpired, free of all liens or encumbrances, have not been
abandoned; (ii) the Company does not infringe the intellectual property rights
of any third party in
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any respect that would reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect; (iii) no judgment, decree,
injunction, rule or order has been rendered by Governmental Entity which would
limit, cancel or question the validity of, or the Company's or its Subsidiaries'
rights in and to, any Intellectual Property owned by the Company in any respect
that would reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect; and (iv) the Company has not received notice of
any pending or threatened suit, action or adversarial proceeding that seeks to
limit, cancel or question the validity of, or the Company's or its Subsidiaries'
rights in and to, any Intellectual Property, which would reasonably be expected
to have, individually or in the aggregate, a Company Material Adverse Effect.
(c) For purposes of this Agreement "INTELLECTUAL PROPERTY" shall mean
all rights, privileges and priorities provided under U.S., state and foreign law
relating to intellectual property, including without limitation all (x) (1)
proprietary inventions, discoveries, processes, formulae, designs, methods,
techniques, procedures, concepts, developments, technology, new and useful
improvements thereof and proprietary know-how relating thereto, whether or not
patented or eligible for patent protection; (2) copyrights and copyrightable
works, including computer applications, programs, software, databases and
related items; (3) trademarks, service marks, trade names, and trade dress, the
goodwill of any business symbolized thereby, and all common-law rights relating
thereto; (4) trade secrets and other confidential information; (y) all
registrations, applications and recordings for any of the foregoing and (z)
licenses or other similar agreements granting to the Company or any of its
Subsidiaries the rights to use any of the foregoing.
SECTION 4.18 OPINION OF FINANCIAL ADVISOR. The Company has received
the opinion or advice of Goldman, Sachs & Co. ("GOLDMAN SACHS") to the effect
that, as of such date, the consideration to be received by the Company's
stockholders in the Merger is fair to the stockholders of the Company.
SECTION 4.19 BOARD RECOMMENDATION. The Board of Directors of the
Company, at a meeting duly called and held, has approved this Agreement and (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, taken together are fair to and in the best interests of
the stockholders of the Company; (ii) taken all actions necessary on the part of
the Company to render the restrictions on business combinations contained in
Section 203 of the DGCL inapplicable to this Agreement, the Merger and Alcatel
and its Subsidiaries following the Effective Time; (iii) resolved to recommend
that the stockholders of the Company adopt this Agreement and approve the Merger
and (iv) determined that Article VI of the Certificate of Incorporation is not
applicable to the Merger or any of the transactions contemplated hereby.
SECTION 4.20 RIGHTS PLAN. The Board of Directors of the Company has
approved, and the Company and the Rights Agent referred to below have entered
into, an amendment to the Rights Agreement, dated as of April 25, 1996, by and
between the Company and Harris Trust and Savings Bank (formerly, KeyCorp
Shareholder Services, Inc.), as Rights Agent (the "RIGHTS AGREEMENT"),
substantially in the form of Exhibit B hereto (the "RIGHTS AMENDMENT"). Pursuant
to the Rights Amendment, neither the execution and delivery and performance of
this Agreement nor the Merger will result in the distribution of separate
certificates representing rights or the occurrence of a Distribution Date (as
defined in Section 3(a) of the Rights Agreement) or a "flip-in" or "flip-over"
event (that is, an event described in Sections 11(a)(ii) and 13(a) of the Rights
Agreement).
SECTION 4.21 TAX TREATMENT. Neither the Company nor any of its
affiliates has taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from qualifying as
a reorganization under the provisions of Section 368(a) of the Code.
SECTION 4.22 FINDERS' FEES. Except for Goldman Sachs, whose fees will
be paid by the Company, there is no investment banker, broker, finder or other
intermediary which has been retained by, or is authorized to act on behalf of,
the Company or any Subsidiary of the Company that would be entitled to any fee
or commission from the Company, any Subsidiary of the Company, Alcatel or any of
Alcatel's affiliates upon consummation of the transactions contemplated by this
Agreement.
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SECTION 4.23 ACCOUNTING MATTERS. Except as otherwise disclosed in the
Company Disclosure Schedule, to the best knowledge of the Company, neither the
Company nor any of its Subsidiaries have taken any action or failed to take any
action, which action or failure (without giving effect to any action or failure
to act by Alcatel or any of its Subsidiaries), or knows of any fact which, would
prevent the treatment of the Merger as a pooling of interests under applicable
U.S. accounting standards (including applicable standards of the SEC).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ALCATEL AND NEWCO
Alcatel and Newco, jointly and severally, represent and warrant to the
Company as follows:
SECTION 5.1 CORPORATE EXISTENCE AND POWER. Each of Alcatel and Newco
is a corporation duly incorporated (or other entity duly organized), validly
existing and in good standing under the laws of its jurisdiction of
incorporation, has all corporate or other power, as the case may be, and all
Licenses required to carry on its business as now conducted except for failures
to have any such License which would not, in the aggregate, have a Alcatel
Material Adverse Effect (as defined below). Each of Alcatel and Newco is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the property owned, leased or operated by it or the nature of its
activities makes such qualification necessary, except for those jurisdictions
where failures to be so qualified would not reasonably be expected to, in the
aggregate, have a Alcatel Material Adverse Effect. As used herein, the term
"ALCATEL MATERIAL ADVERSE EFFECT" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
Alcatel and its Subsidiaries, taken as a whole, that is not the a result of
general changes in the economies in which such entities operate. Alcatel has
heretofore delivered or made available to the Company true and complete copies
of the governing documents or other organizational documents of like import, as
currently in effect, of each of Alcatel and Newco.
SECTION 5.2 AUTHORIZATION. Each of Alcatel and Newco has the
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
and the performance of its obligations hereunder have been duly and validly
authorized by the Boards of Directors of Alcatel and Newco, by Alcatel as the
sole stockholder of Newco, this Agreement has been approved by the Board of
Directors of Newco, and no other proceedings on the part of Alcatel or Newco are
necessary to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly executed and delivered by each of
Alcatel and Newco and constitutes, assuming due authorization, execution and
delivery of this Agreement by the Company, a valid and binding obligation of
each of Alcatel and Newco, enforceable against each of them in accordance with
its terms.
SECTION 5.3 CONSENTS AND APPROVALS; NO VIOLATIONS.
(a) Except as set forth in Schedule 5.3(a) of the disclosure schedule
delivered by Alcatel to the Company concurrently with the execution and
delivery by Alcatel of this Agreement and attached hereto (the "ALCATEL
DISCLOSURE SCHEDULE"), neither the execution and delivery of this
Agreement nor the performance by each of Alcatel and Newco of its
obligations hereunder will (i) conflict with or result in any breach of
any provision of the certificate of incorporation or by-laws (or other
governing or organizational documents) of Alcatel or Newco, as the case
may be, or (ii) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise
to any right of termination, cancellation or acceleration or obligation
to repurchase, repay, redeem or acquire or any similar right or
obligation) under any of the terms, conditions or provisions of any note,
mortgage, letter of credit, other evidence of indebtedness, guarantee,
license, lease or agreement or similar instrument or obligation to which
any of Alcatel or Newco is a party or by which any of them or any of the
respective assets used or held for use by any of them may be bound or
(iii) assuming that the filings, registrations, notifications,
authorizations, consents and approvals referred to in subsection (b)
below have
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been obtained or made, as the case may be, violate any order, injunction,
decree, statute, rule or regulation of any Governmental Entity to which
either Alcatel or Newco is subject, excluding from the foregoing clauses
(ii) and (iii) such requirements, defaults, breaches, rights or
violations (A) that would not, in the aggregate, reasonably be expected
to have a Alcatel Material Adverse Effect and would not reasonably be
expected to have a material adverse effect on the ability of either
Alcatel or Newco to consummate the transactions contemplated hereby or
(B) that become applicable as a result of any acts or omissions by, or
facts specifically pertaining to, the Company.
(b) Except as set forth in Schedule 5.3(b) of the Alcatel Disclosure
Schedule, no filing or registration with, notification to, or
authorization, consent or approval of, any Governmental Entity is
required in connection with the execution and delivery of this Agreement
by each of Alcatel and Newco or the performance by any of them of their
respective obligations hereunder, except (i) the filing of the
Certificate of Merger in accordance with the DGCL and filings to maintain
the good standing of the Surviving Corporation; (ii) compliance with any
applicable requirements of the HSR Act or the EC Merger Regulations or
any other foreign laws regulating competition, antitrust, investment or
exchange controls; (iii) compliance with any applicable requirements of
the Securities Act and the Exchange Act; (iv) compliance with any
applicable requirements of state blue sky or takeover laws and (v) such
other consents, approvals, orders, authorizations, notifications,
registrations, declarations and filings (A) the failure of which to be
obtained or made would not reasonably be expected to have a Alcatel
Material Adverse Effect and would not have a material adverse effect on
the ability of either Alcatel or Newco to perform their respective
obligations hereunder or (B) that become applicable as a result of any
acts or omissions by, or facts specifically pertaining to, the Company.
SECTION 5.4 CAPITALIZATION. As of December 31, 1997 the issued share
capital of Alcatel amounted to FF 6,527,963,200 which is divided into
163,199,080 Alcatel Shares. The authorized capital stock of Newco consists of
1,000 shares of common stock, par value $.01 per share, of which 100 shares are
outstanding, all of which are owned by Alcatel. All ADSs to be issued at the
Effective Time shall be, when issued, duly authorized and validly issued and
fully paid and non-assessable and free of preemptive rights with respect
thereto. As of December 31, 1997, there were outstanding options and securities
convertible into or exchangeable or exercisable for 20,239,544 Alcatel Shares
(representing a capital increase of nominal value FF 809,581,760).
SECTION 5.5 SEC DOCUMENTS. Alcatel has filed all required periodic
reports on Forms 20-F and 6-K with the SEC since January 1, 1995 (the "ALCATEL
SEC DOCUMENTS"). As of their respective dates, and giving effect to any
amendments thereto, (a) the Alcatel SEC documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the applicable rules and regulations of the SEC promulgated
thereunder and (b) none of the reports on Form 20-F contained in the Alcatel SEC
Documents contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
SECTION 5.6 FINANCIAL STATEMENTS. The financial statements of Alcatel
(including, in each case, any notes and schedules thereto) included in the
Alcatel SEC Documents (a) were prepared from the books and records of Alcatel
and its Subsidiaries, (b) comply as to form in all material respects with all
applicable accounting requirements and the rules and regulations of the SEC with
respect thereto and (c) are in conformity with applicable accounting principles
applied on a consistent basis (except in the case of unaudited statements, as
permitted by the rules and regulations of the SEC).
SECTION 5.7 ABSENCE OF MATERIAL ADVERSE CHANGES, ETC. Since December
31, 1997 there has not been a Alcatel Material Adverse Effect, nor have there
been any event(s) which are reasonably likely to have a Alcatel Material Adverse
Effect.
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SECTION 5.8 PROXY STATEMENT; FORM F-4.
(a) None of the information supplied or to be supplied by Alcatel or
Newco, as the case may be, in writing for inclusion in the Proxy
Statement (and any amendments thereof or supplements thereto) will, with
respect to information relating to such entities, at the time of the
mailing the Proxy Statement to the stockholders of the Company and at the
time of the Special Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) None of the information supplied or to be supplied by Alcatel or
Newco, as the case may be, for inclusion or incorporation by reference in
the Form F-4 will, with respect to information relating to such entities,
at the time the Form F-4 is filed with the SEC, and at any time it is
amended or supplemented or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
SECTION 5.9 SHARE OWNERSHIP. Neither Alcatel nor Newco beneficially
owns shares of Common Stock.
SECTION 5.10 NEWCO'S OPERATIONS. Newco was formed solely for the
purpose of engaging in the transactions contemplated hereby and has not (i)
engaged in any business activities, (ii) conducted any operations other than in
connection with the transactions contemplated hereby or (iii) incurred any
liabilities other than in connection with the transactions contemplated hereby.
SECTION 5.11 TAX TREATMENT. Neither Alcatel nor any of its affiliates
has taken any action or knows of any fact, agreement, plan or other circumstance
that is reasonably likely to prevent the Merger from qualifying as a
reorganization under the provisions of Section 368(a) of the Code.
SECTION 5.12 FINDERS' FEES. Except for Lehman Brothers Inc., whose
fees will be paid by Alcatel, there is no investment banker, broker, finder or
other intermediary that might be entitled to any fee or commission in connection
with or upon consummation of the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Alcatel or Newco.
ARTICLE VI
[INTENTIONALLY OMITTED]
ARTICLE VII
COVENANTS OF THE PARTIES
SECTION 7.1 CONDUCT OF THE BUSINESS OF THE COMPANY. From the date
hereof until the Closing Date, the Company and its Subsidiaries shall conduct
their businesses in the ordinary course consistent with past practice and shall
use their reasonable best efforts to preserve intact their business
organizations and relationships with third parties and to keep available the
services of their present officers and employees. Without limiting the
generality of the foregoing, from the date hereof until the Closing Date, the
Company will not (and will not permit any of its Subsidiaries to) take any
action or knowingly omit to take any action that would make any of its
representations and warranties contained herein false in any material respect at
or prior to the Closing Date.
SECTION 7.2 CONDUCT OF THE BUSINESS OF ALCATEL. From the date hereof
until the Closing Date, Alcatel will not (and will not permit any of its
Subsidiaries to) take any action or knowingly omit to take any action that would
make any of its representations and warranties contained herein false in any
material respect at or prior to the Closing Date.
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SECTION 7.3 STOCKHOLDERS' MEETING; PROXY MATERIAL.
(a) Subject to the last sentence of this Section 7.3(a), the Company
shall, in accordance with applicable law and the Certificate of
Incorporation and the by-laws of the Company duly call, give notice of,
convene and hold a special meeting of its stockholders (the "SPECIAL
MEETING") as promptly as practicable after the date hereof for the
purpose of considering and taking action upon this Agreement and the
Merger. The Board of Directors of the Company shall recommend approval
and adoption of this Agreement and the Merger by the Company's
stockholders; PROVIDED that the Board of Directors of the Company may
withdraw, modify or change such recommendation if but only if (i) it
believes in good faith, based on such matters as it deems relevant,
including the advice of the Company's financial advisors, that a
Financially Superior Proposal (as defined in Section 7.5 hereof) has been
made and (ii) it has determined in good faith, based on the advice of
outside counsel, that the failure to withdraw, modify or change such
recommendation is reasonably likely to result in a breach of the
fiduciary duties of the Board of Directors of the Company under
applicable law. The Company may, if it receives a bona fide unsolicited
Acquisition Proposal (as defined in Section 7.5 hereof) delay the mailing
of the Proxy Statement or the holding of the Special Meeting, in each
case for such reasonable period as would provide a reasonable opportunity
for the Company's Board of Directors to consider such Acquisition
Proposal and to determine the effect, if any, on its recommendation in
favor of the Merger.
(b) Promptly following the date of this Agreement, the Company shall
prepare a proxy statement relating to the adoption of this Agreement and
the approval of the Merger by the Company's stockholders (the "PROXY
STATEMENT"), and Alcatel shall prepare and file with the SEC, following
resolution of any comments the SEC may have with respect to the Proxy
Statement, the Form F-4, in which the Proxy Statement will be included.
Alcatel and the Company shall cooperate with each other in connection
with the preparation of the foregoing documents. Alcatel and the Company
shall each use its reasonable best efforts to have the Form F-4 declared
effective under the Securities Act as promptly as practicable after such
filing. The Company will use its reasonable best efforts to cause the
Proxy Statement to be mailed to the Company's stockholders as promptly as
practicable after the Form F-4 is declared effective under the Securities
Act.
(c) The Company shall as promptly as practicable notify Alcatel of
the receipt of any comments from the SEC relating to the Proxy Statement.
Each of Alcatel and the Company shall as promptly as practicable notify
the other of (i) the effectiveness of the Form F-4, (ii) the receipt of
any comments from the SEC relating to the Form F-4 and (iii) any request
by the SEC for any amendment to the Form F-4 or for additional
information. All filings by Alcatel and the Company with the SEC in
connection with the transactions contemplated hereby, including the Proxy
Statement, the Form F-4 and any amendment or supplement thereto, shall be
subject to the prior review of the other, and all mailings to the
Company's stockholders in connection with the transactions contemplated
by this Agreement shall be subject to the prior review of Alcatel.
SECTION 7.4 ACCESS TO INFORMATION; CONFIDENTIALITY AGREEMENT. Upon
reasonable advance notice, between the date hereof and the Closing Date, the
Company shall (i) give Alcatel, its respective counsel, financial advisors,
auditors and other authorized representatives (collectively, "ALCATEL'S
REPRESENTATIVES") reasonable access during normal business hours to the offices,
properties, books and records of the Company and its Subsidiaries, (ii) furnish
to Alcatel's Representatives such financial and operating data and other
information relating to the Company, its Subsidiaries and their respective
operations as such Persons may reasonably request and (iii) instruct the
Company's employees, counsel and financial advisors to cooperate with Alcatel in
its investigation of the business of the Company and its Subsidiaries; PROVIDED
THAT any information and documents received by Alcatel or Alcatel's
Representatives (whether furnished before or after the date of this Agreement)
shall be held in accordance with the Confidentiality Agreement dated October 1,
1997, and the amendment thereto dated October 17, 1997, between Alcatel and the
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Company (as so amended, and after giving effect to the last sentence of this
Section 7.4, the "CONFIDENTIALITY AGREEMENT"), which shall remain in full force
and effect pursuant to the terms thereof (subject, however, to potential
modifications of the Confidentiality Agreement set forth in Section 7.5 hereof),
notwithstanding the execution and delivery of this Agreement or the termination
hereof until the Effective Time. Notwithstanding the foregoing, but, without
prejudice to the rights and obligations of the parties under this Agreement, the
Confidentiality Agreement is hereby amended by deleting the second sentence of
the language added by Amendment No.1, dated as of October 17, 1997, to the
Confidentiality Agreement.
SECTION 7.5 NO SOLICITATION. From the date hereof until the Effective
Time or, if earlier, the termination of this Agreement, the Company shall not
(whether directly or indirectly through advisors, agents or other
intermediaries), and the Company shall cause its respective officers, directors,
advisors, representatives or other agents of the Company not to, directly or
indirectly, (a) solicit, initiate or encourage any Acquisition Proposal (as
defined hereafter) or (b) engage in discussions or negotiations with, or
disclose any non-public information relating to the Company or its Subsidiaries
or afford access to the properties, books or records of the Company or its
Subsidiaries to, any Person that has made an Acquisition Proposal or has advised
the Company that it is interested in making an Acquisition Proposal; PROVIDED
THAT, if and only if (i) the Company's Board of Directors believes in good
faith, based on such matters as it deems relevant, including the advice of the
Company's financial advisor, that such Acquisition Proposal is a Financially
Superior Proposal or that there is a reasonable likelihood that such Person will
make a Financially Superior Proposal and (ii) the Company's Board of Directors
determines in good faith, based on such matters as it deems relevant, including
the advice of the Company's outside legal counsel, that the failure to engage in
such negotiations or discussions or provide such information is reasonably
likely to result in a breach of the fiduciary duties of the Board of Directors
of the Company under applicable law, then the Company may furnish information
with respect to the Company and its Subsidiaries and participate in negotiations
regarding such Acquisition Proposal; PROVIDED THAT the Company will not disclose
any information to such Person without entering into an Acceptable
Confidentiality Agreement (as defined below). The Company shall provide Alcatel
with a copy of any written Acquisition Proposal received and a written statement
with respect to any non-written Acquisition Proposal received, which statement
shall include the identity of the parties making the Acquisition Proposal and
the terms thereof. The Company shall keep Alcatel informed on a current basis of
the status and content of any discussions regarding any Acquisition Proposal
with a third party. For purposes of this Agreement, "ACQUISITION PROPOSAL" means
any offer or proposal for a merger, consolidation, recapitalization, liquidation
or other business combination involving the Company or any of its Material
Subsidiaries or the acquisition or purchase of over 30% or more of any class of
equity securities of the Company or any of its Material Subsidiaries, or any
tender offer (including self-tenders) or exchange offer that if consummated
would result in any Person beneficially owning 30% or more of any class of
equity securities of the Company or any of its Material Subsidiaries, or a
substantial portion of the assets of, the Company or any of its Subsidiaries
taken as a whole, other than the transactions contemplated by this Agreement. As
used herein, a "FINANCIALLY SUPERIOR PROPOSAL" shall mean an Acquisition
Proposal which in the reasonable judgment of the Company's Board of Directors,
based on such matters as it deems relevant, including the advice of the
Company's financial advisor, (i) is likely to result in a transaction providing
aggregate value greater than that provided pursuant to this Agreement and (ii)
is reasonably capable of being financed by the Person making such Proposal. As
used herein, "MATERIAL SUBSIDIARY" means any Subsidiary whose consolidated
revenues, net income or assets constitutes 30% or more of the revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole. Nothing
contained in this Section 7.5 shall prohibit the Company or the Company's Board
of Directors from taking and disclosing to the Company's stockholders a position
with respect to a tender or exchange offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or from making any
disclosure required by applicable law. As used herein, an "ACCEPTABLE
CONFIDENTIALITY AGREEMENT" shall mean a confidentiality agreement substantially
similar to the Confidentiality Agreement; PROVIDED THAT it may contain
standstill provisions different than in the Confidentiality Agreement if the
Board of Directors of the Company determines its fiduciary duties so require;
PROVIDED FURTHER that, if such executed Acceptable Confidentiality Agreement
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does not contain any standstill restrictions or contains standstill restrictions
less restrictive than those in the Confidentiality Agreement or contains
standstill restrictions which are then waived or not enforced by the Company,
then Alcatel shall similarly be released from the standstill restrictions in the
Confidentiality Agreement or the standstill restrictions in the Confidentiality
Agreement shall automatically be modified to be no more restrictive than those
contained in the executed Acceptable Confidentiality Agreement or the Company
shall waive and not enforce the standstill restrictions in the Confidentiality
Agreement.
SECTION 7.6 DIRECTOR AND OFFICER LIABILITY.
(a) Alcatel and the Company agree that all rights to indemnification and
all limitations on liability existing in favor of any Indemnitee (as defined
hereafter) as provided in the Certificate of Incorporation or by-laws of the
Company or an agreement between an Indemnitee and the Company or a Subsidiary of
the Company as in effect as of the date hereof shall survive the Merger and
continue in full force and effect in accordance with its terms.
(b) For six years after the Effective Time, Alcatel shall or shall cause
the Surviving Corporation to indemnify and hold harmless the individuals who on
or prior to the Effective Time were officers or directors of the Company and any
of its Subsidiaries (the "INDEMNITEES") to the same extent as set forth in
subsection (a) above. In the event any claim in respect of which indemnification
is available pursuant to the foregoing provisions is asserted or made within
such six-year period, all rights to indemnification shall continue until such
claim is disposed of or all judgments, orders, decrees or other rulings in
connection with such claim are fully satisfied.
(c) For six years after the Effective Time, the Surviving Corporation
shall provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such Person
currently covered by the Company's officers' and directors' liability insurance
policy on terms with respect to coverage and amount no less favorable than those
of such policy in effect on the date hereof; PROVIDED, HOWEVER, that in no event
shall the Surviving Corporation be required to expend more than an amount per
year equal to 200% of current annual premiums paid by the Company for such
insurance (the "MAXIMUM AMOUNT") to maintain or procure insurance coverage
pursuant hereto; PROVIDED, FURTHER, that if the amount of the annual premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, the Surviving Corporation shall maintain or procure, for such six-year
period, the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Amount.
(d) The obligations of Alcatel and the Surviving Corporation under this
Section 7.6 shall not be terminated or modified in such a manner as to adversely
affect any Indemnitee to whom this Section 7.6 applies without the consent of
such affected Indemnitee (it being expressly agreed that the Indemnitees to whom
this Section 7.6 applies shall be third party beneficiaries of this Section
7.6).
SECTION 7.7 [INTENTIONALLY OMITTED]
SECTION 7.8 CERTAIN TAX MATTERS. As soon as practicable after the
public announcement of the Agreement, the Company will provide Alcatel with
written schedules of (i) the taxable years of the Company for which the statutes
of limitations have not expired, (ii) those years for which examinations have
been completed, those years for which examinations are presently being
conducted, and those years for which examinations have not yet been initiated
and (iii) the jurisdictions in which the Company and each of its Subsidiaries is
required to file a Tax Return.
SECTION 7.9 REASONABLE BEST EFFORTS. Upon the terms and subject to
the conditions of this Agreement, each party hereto shall use its reasonable
best efforts to take, or cause to be taken, all actions and to do, or cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the transactions contemplated by this Agreement.
SECTION 7.10 CERTAIN FILINGS.
(a) The Company and Alcatel shall cooperate with one another (i) in
connection with the preparation of the Proxy Statement and the Form F-4
Registration Statement, (ii) in determining whether
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any action by or in respect of, or filing with, any Governmental Entity is
required, or any actions, consents, approvals or waivers are required to be
obtained from parties to any material contracts, in connection with the
consummation of the transactions contemplated by this Agreement and (iii) in
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith or with the
Proxy Statement and the Form F-4 Registration Statement and seeking timely to
obtain any such actions, consents, approvals or waivers. Without limiting the
provisions of this Section 7.10, each party hereto shall file with the
Department of Justice and the Federal Trade Commission a Pre-Merger Notification
and Report Form pursuant to the HSR Act in respect of the transactions
contemplated hereby within ten (10) days of the date of this Agreement, and each
party will use its reasonable best efforts to take or cause to be taken all
actions necessary, including to promptly and fully comply with any requests for
information from regulatory Governmental Entities, to obtain any clearance,
waiver, approval or authorization relating to the HSR Act that is necessary to
enable the parties to consummate the transactions contemplated by this
Agreement. Without limiting the provisions of this Section 7.10, each party
hereto shall use its reasonable best efforts to promptly make the filings
required to be made by it with all foreign Governmental Entities in any
jurisdiction in which the parties believe it is necessary or advisable.
(b) The Company and Alcatel shall each use its reasonable best efforts
to resolve such objections, if any, as may be asserted with respect to the
Merger or any other transaction contemplated by this Agreement under any
Antitrust Law (as defined below). If any administrative, judicial or legislative
action or proceeding is instituted (or threatened to be instituted) challenging
the Merger or any other transaction contemplated by this Agreement as violative
of any Antitrust Law, the Company and Alcatel shall each cooperate to contest
and resist any such action or proceeding, and to have vacated, lifted, reversed
or overturned any decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) that is in effect and that restricts,
prevents or prohibits consummation of the Merger or any other transaction
contemplated by this Agreement, including, without limitation, by pursuing all
reasonable avenues of administrative and judicial appeal. Notwithstanding
anything to the contrary in this Agreement, none of Alcatel, any of its
Subsidiaries or the Surviving Corporation, shall be required (and the Company
shall not, without the prior written consent of Alcatel, agree, but shall, if so
directed by Alcatel, agree) to hold separate or divest any of their respective
assets or operations or enter into any consent decree or licensing or other
arrangement with respect to any of their assets or operations; PROVIDED,
HOWEVER, that to the extent necessary to satisfy the conditions set forth in
Sections 8.1(b) and (c) and 8.3(g) insofar as Antitrust Laws are concerned,
Alcatel shall agree to, and, if so directed by Alcatel, the Company shall agree
to and shall, hold separate and/or divest assets or operations of the Company
with net revenues not greater than $175,000,000 for the year ended December 31,
1997.
(c) Each of the Company and Alcatel shall promptly inform the other
party of any material communication received by such party from the Federal
Trade Commission, the Antitrust Division of the Department of Justice, the
Commission of the European Community or any other governmental or regulatory
authority regarding any of the transactions contemplated hereby.
(d) "ANTITRUST LAW" means the Sherman Act, as amended, the Clayton Act,
as amended, EC Merger Regulations and all other federal, state and foreign
statutes, rules, regulations, orders, decrees, administrative and judicial
doctrines, and other laws that are designed or intended to prohibit, restrict or
regulate competition or actions having the purpose or effect of monopolization
or restraint of trade.
SECTION 7.11 PUBLIC ANNOUNCEMENTS. Neither the Company, Alcatel nor
any of their respective affiliates shall issue or cause the publication of any
press release or other public announcement with respect to the Merger, this
Agreement or the other transactions contemplated hereby without the prior
consultation with the other party, except as may be required by law or by any
listing agreement with, or the policies of, a national securities exchange.
SECTION 7.12 FURTHER ASSURANCES. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of
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the Company or Newco, any deeds, bills of sale, assignments or assurances and to
take and do, in the name and on behalf of the Company or Newco, any other
actions to vest, perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and under any of the
rights, properties or assets of the Company acquired or to be acquired by the
Surviving Corporation, as a result of, or in connection with, the Merger.
SECTION 7.13 EMPLOYEE MATTERS.
(a) For a period of one year immediately following the date of the
Closing, Alcatel agrees to cause the Surviving Corporation and its Subsidiaries
to provide to all active employees of the Company who continue to be employed by
the Company as of the Effective Time ("CONTINUING EMPLOYEES") coverage by
benefit plans or arrangements that are, in the aggregate, substantially similar
(including, with respect to eligibility requirements, exclusions and the
employee portion of the cost of such benefit plans or arrangements) to those
provided to the employees of the Company immediately prior to the date of the
Closing (other than stock option or other equity-based plans and other than
employment, severance or similar plans and agreements); PROVIDED, HOWEVER, that
nothing herein shall interfere with the Surviving Corporation's or any of its
Subsidiaries' right to make such changes as are necessary to conform with
applicable law or to terminate the employment of any employee of the Surviving
Corporation or of any of its Subsidiaries.
(b) The Surviving Corporation shall, and shall cause its Subsidiaries
to, honor in accordance with their terms all agreements, contracts,
arrangements, commitments and understandings described in Schedule 7.13 of the
Company Disclosure Schedule.
(c) The Surviving Corporation shall not, and shall not permit any of its
Subsidiaries to, at any time prior to 90 days following the date of the Closing,
without complying fully with the notice and other requirements of the Worker
Adjustment Retraining and Notification Act of 1988 (the "WARN ACT"), effectuate
(a) a "plant closing" as defined in the WARN Act affecting any single site of
employment or one or more facilities or operating units within any single site
of employment of the Surviving Corporation or any of its Subsidiaries; or (b) a
"mass layoff" as defined in the WARN Act affecting any single site of employment
of the Surviving Corporation or any of its Subsidiaries; or any similar action
under applicable state, local or foreign law requiring notice to employees in
the event of a plant closing or layoff.
SECTION 7.14 TAX-FREE REORGANIZATION TREATMENT.
(a) The Company, Alcatel and Newco shall each execute and deliver to
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Alcatel and Newco, and to
Baker & McKenzie, counsel to the Company, a certificate substantially in the
form attached hereto as Exhibit C (the "COMPANY TAX CERTIFICATE" and the
"ALCATEL AND ALCATEL SUBSIDIARY TAX CERTIFICATE", as the case may be) at such
time or times as reasonably requested by either such law firm in connection with
its delivery of an opinion with respect to the transactions contemplated hereby,
and shall provide a copy thereof to Alcatel or the Company, as the case may be.
Whether prior to or following the Effective Time, none of the Company, Alcatel
or Newco shall, or shall permit any Subsidiary thereof, including following the
Effective Time, to, take or cause to be taken any action which would cause to be
untrue (or fail to take or cause not to be taken any action which causes to be
untrue) any of the information, representations or covenants set forth in the
Alcatel and Alcatel Subsidiary Tax Certificate or the Company Tax Certificate,
as the case may be. Alcatel, Newco and the Company agree that Skadden, Arps,
Slate, Meagher & Flom LLP and Baker & McKenzie may rely on the Alcatel and
Alcatel Subsidiary Tax Certificate and the Company Tax Certificate in rendering
their respective opinions as to the qualification of the Merger as a
reorganization under the provisions of section 368(a) of the Code.
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(b) Each of Alcatel and the Company shall take all reasonable actions
necessary to cause the Merger to qualify as a reorganization under the
provisions of section 368(a) of the Code and to obtain the opinions of counsel
referred to in Sections 8.2(d) and 8.3(e) hereof, and neither party will take
any action inconsistent therewith.
SECTION 7.15 BLUE SKY PERMITS. Alcatel shall use its reasonable best
efforts to obtain, prior to the effective date of the Form F-4 Registration
Statement, all necessary state securities laws or "blue sky" permits and
approvals required to carry out the transactions contemplated by this Agreement
and the Merger, and will pay all expenses incident thereto.
SECTION 7.16 LISTING. Alcatel shall use its reasonable best efforts
to cause the ADSs to be issued in the Merger or upon exercise of Substitute
Options or upon cancellation of Options to be listed on the NYSE, subject to
notice of official issuance thereof, prior to the Closing Date.
SECTION 7.17 [INTENTIONALLY OMITTED]
SECTION 7.18 STATE TAKEOVER LAWS. If any "fair price," "business
combination" or "control share acquisition" statute or other similar statute or
regulation is or may become applicable to the Merger, the Company and Alcatel
shall each take such actions as are necessary so that the transactions
contemplated by this Agreement may be consummated as promptly as practicable on
the terms contemplated hereby and otherwise act to eliminate or minimize the
effects of any such statute or regulation on the Merger.
SECTION 7.19 CERTAIN NOTIFICATIONS. Between the date hereof and the
Effective Time, each party shall promptly notify the other party hereto in
writing after becoming aware of the occurrence of any event which will, or is
reasonably likely to, result in the failure to satisfy any of the conditions
specified in Article VIII.
SECTION 7.20 RIGHTS PLAN. Prior to the earlier of (i) the vote of the
stockholders of the Company at the Special Meeting or (ii) October 31, 1998,
without the consent of Alcatel, the Company shall not (a) redeem the rights
issued under the Rights Agreement (the "RIGHTS"), or amend or modify or
terminate the Rights Agreement other than to delay the Distribution Date (as
defined therein) or to render the rights inapplicable to the execution, delivery
and performance of this Agreement and the Merger or (b) permit the Rights to
become non-redeemable at the redemption price currently in effect.
Notwithstanding the foregoing, immediately prior to the Closing, the Company
shall redeem the Rights.
SECTION 7.21 SUPPLEMENTAL INDENTURE. The Company and the Trustee and,
at its option, Alcatel (or its designee) shall enter into and execute a
supplemental indenture to the Indenture providing that, from and after the
Effective Time, the Convertible Notes will be converted into ADSs on the terms
and ratios provided for in the Indenture.
SECTION 7.22 AFFILIATE LETTERS; ACCOUNTING MATTERS.
(a) The Company shall, at least 45 days prior to the date of the Special
Meeting, deliver to Alcatel a list reasonably satisfactory to Alcatel setting
forth the names and addresses of all persons who at the time of the Special
Meeting are, in the Company's reasonable judgment, "affiliates" of the Company
for purposes of Rule 145 under the Securities Act or under applicable SEC
accounting releases with respect to pooling of interests accounting treatment.
The Company shall furnish such information and documents as Alcatel may
reasonably request for the purpose of reviewing such list. The Company shall use
its reasonable best efforts to cause each person who is identified as an
affiliate on such list to execute a written agreement at least 30 days prior to
the date of the Special Meeting in the form of Exhibit D hereto (collectively,
the "AFFILIATE AGREEMENTS").
(b) The Company shall cooperate with Alcatel and, unless otherwise
requested by Alcatel, shall use its reasonable efforts to cause the Merger to be
accounted for as a pooling of interests under applicable U.S. accounting
standards. Following the date hereof, the Company shall not take any action that
would
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preclude, or reasonably be expected to preclude, the application of pooling of
interests accounting to the Merger.
(c) As soon as practicable (but in no event later than 45 days after the
end of the first full calendar month in which there are at least 30 days of
combined post-Merger operations), Alcatel shall publish financial results
(including, by filing a press release) which satisfy the requirements of
Accounting Series Release No. 135 so as to permit the disposition by affiliates
of the Company of the ADSs received in the Merger consistent with the
requirements for treating the Merger as a pooling of interests for financial
accounting purposes.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of the Company, Alcatel and Newco to consummate the Merger are
subject to the satisfaction or, to the extent permitted by applicable law, the
waiver on or prior to the Effective Time of each of the following conditions:
(a) This Agreement shall have been adopted, and the Merger approved, by
the stockholders of the Company in accordance with applicable law;
(b) Any applicable waiting periods under the HSR Act and the EC Merger
Regulation relating to the Merger shall have expired or been terminated;
(c) No provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger or the
other transactions contemplated by this Agreement;
(d) The Form F-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a stop
order, and any material "blue sky" and other state securities laws applicable to
the registration and qualification of the Common Stock following the Closing
shall have been complied with; and
(e) The ADSs issuable in accordance with the Merger shall have been
approved for listing on the NYSE, subject to official notice of issuance.
SECTION 8.2 CONDITIONS TO THE COMPANY'S OBLIGATION TO CONSUMMATE THE
MERGER. The obligation of the Company to consummate the Merger shall be
further subject to the satisfaction or, to the extent permitted by applicable
law, the waiver on or prior to the Effective Time of each of the following
conditions:
(a) Alcatel and Newco shall each have performed in all material respects
its respective agreements and covenants contained in or contemplated by this
Agreement that are required to be performed by it at or prior to the Effective
Time pursuant to the terms hereof;
(b) The representations and warranties of Alcatel and Newco contained in
Article V hereof, without giving effect to any materiality qualifications or
limitations therein or any references therein to Alcatel Material Adverse
Effect, shall be true and correct in all respects as of the Effective Time (or,
to the extent such representations and warranties speak as of an earlier date,
they shall be true in all respects as of such earlier date), except (i) as
otherwise contemplated by this Agreement and (ii) for such failures to be true
and correct which in the aggregate would not reasonably be expected to have an
Alcatel Material Adverse Effect;
(c) The Company shall have received certificates signed by any senior
executive vice president of Alcatel, dated the Closing Date, to the effect that,
to such officer's knowledge, the conditions set forth in Sections 8.2(a) and
8.2(b) hereof have been satisfied or waived; and
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(d) The Company shall have received an opinion of Baker & McKenzie, its
tax counsel, in form and substance reasonably satisfactory to it, dated the
Closing Date, to the effect that the Merger will constitute a reorganization for
United States federal income tax purposes within the meaning of Section 368(a)
of the Code.
SECTION 8.3 CONDITIONS TO ALCATEL'S AND NEWCO'S OBLIGATIONS TO
CONSUMMATE THE MERGER. The obligations of Alcatel and Newco to effect the Merger
shall be further subject to the satisfaction, or to the extent permitted by
applicable law, the waiver on or prior to the Effective Time of each of the
following conditions:
(a) The Company shall have performed in all material respects each of
its agreements and covenants contained in or contemplated by this Agreement
that are required to be performed by it at or prior to the Effective Time
pursuant to the terms hereof;
(b) The representations and warranties of the Company contained in
Article IV hereof, without giving effect to any materiality qualifications
or limitations therein or any references therein to Company Material Adverse
Effect, shall be true and correct in all respects as of the Effective Time
(or, to the extent such representations and warranties speak as of an
earlier date, they shall be true in all respects as of such earlier date),
except (i) as otherwise contemplated by this Agreement and (ii) for such
failures to be true and correct which in the aggregate would not reasonably
be expected to have a Company Material Adverse Effect;
(c) Alcatel shall have received a certificate signed by the chief
executive officer of the Company, dated the Closing Date, to the effect
that, to such officer's knowledge, the conditions set forth in Sections
8.3(a) and 8.3(b) hereof have been satisfied or waived;
(d) All foreign laws regulating competition, antitrust, investment or
exchange control shall have been complied with, and all approvals required
under such foreign laws shall have been received;
(e) Alcatel shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, its tax counsel, in form and substance reasonable
satisfactory to it, dated the Closing Date, to the effect that the Merger
will constitute a reorganization for United States federal income tax
purposes within the meaning of Section 368(a) of the Code;
(f) All consents, approvals and waivers of third parties in respect of
each item listed on Schedule 4.3(a) of the Company Disclosure Schedule shall
have been obtained and the representation set forth in Section 4.3(a)(ii)
shall be true and correct in all respects as of the closing without giving
effect to the Company Disclosure Schedule;
(g) No suit, action, proceeding or investigation by any Governmental
Entity, including the European Commission or any organ of the European
Union, shall have been commenced (and be pending) against Alcatel, the
Company or Newco or any of their respective affiliates, partners,
associates, officers or directors, or any officers or directors of such
partners, seeking (i) to prevent or delay the transactions contemplated
hereby, (ii) material damages in connection therewith, (iii) any other
remedy which would materially impair the intended benefits to Alcatel of the
Merger or otherwise have a Company Material Adverse Effect or an Alcatel
Material Adverse Effect or (iv) to impose criminal liability on any of the
foregoing entities or persons (each of (i)-(iv), a "Material Adverse
Consequence") and in each case, other than (iv), which Alcatel reasonably
believes is reasonably likely to result in a Material Adverse Consequence;
and
(h) Alcatel shall have received the Affiliate Agreements from each
person set forth on the list referred to in Section 7.22(a).
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ARTICLE IX
TERMINATION
SECTION 9.1 TERMINATION. Notwithstanding anything herein to the
contrary, this Agreement may be terminated and the transactions contemplated by
this Agreement may be abandoned at any time prior to the Closing Date, whether
before or after the Company has obtained stockholder approval:
(a) by the mutual written consent of the Company and Alcatel;
(b) by either the Company or Alcatel, if the Merger has not been
consummated by March 31, 1999, or such other date, if any, as the Company
and Alcatel shall agree upon; provided, that the party seeking to terminate
this Agreement pursuant to this Section 9.1(b) shall not have breached in
any material respect its obligations under this Agreement;
(c) by either the Company or Alcatel, if there shall be any law or
regulation that makes consummation of the transactions contemplated by this
Agreement illegal or if any judgment, injunction, order or decree enjoining
Alcatel, Newco or the Company from consummating the transactions
contemplated by this Agreement is entered and such judgment, injunction,
order or decree shall have become final and nonappealable;
(d) by Alcatel, if (i) the Board of Directors of the Company shall have
withdrawn or modified or amended in any respect adverse to Alcatel or Newco
its approval or recommendation of the Merger or (ii) the Board of Directors
of the Company shall have recommended to the shareholders of the Company any
Acquisition Proposal or shall have resolved or announced an intention to do
so, or (iii) a tender offer or exchange offer for 30% or more of the
outstanding shares of the Company Common Stock is announced or commenced
and, either (A) the Board of Directors of the Company recommends acceptance
of such tender offer or exchange offer by its shareholders or (B) within ten
(10) business days thereof, the Board of Directors of the Company shall have
failed to recommend against acceptance of such tender offer or exchange
offer by its shareholders, or (iv) the Company shall have otherwise breached
any of its obligations set forth in Sections 7.3(a), 7.5 or 7.20 hereof;
(e) by either the Company or Alcatel, if the approval of the
stockholders of the Company of the Merger and the adoption of this Agreement
shall not have been obtained at a duly held meeting of stockholders of the
Company or any adjournment thereof;
(f) by the Company, if the average of the daily closing prices per ADS
as reported on the NYSE Composite Tape for the twenty consecutive full NYSE
trading days immediately preceding the second full NYSE trading day prior to
the Special Meeting shall be less than the Floor Price (as hereinafter
defined). As used herein, the term "Floor Price" shall mean $37 unless the
average of the Standard & Poor's 500 Index for such 20 consecutive day
period is less than or equal to 92% of the Standard & Poor's 500 Index
immediately following the close of business on June 3, 1998, in which event
the Floor Price shall be $35;
(g) by the Company, after October 31, 1998, for the purpose of accepting
a Financially Superior Proposal, so long as the adoption of this Agreement
and the approval of the Merger by the Company's stockholders at the Special
Meeting shall not have been obtained prior to such termination; or
(h) by the Company, if the Closing does not occur as a result of the
nonfulfillment of the condition set forth in Section 8.3(g) and all other
conditions necessary for the Closing have been satisfied or waived, sixty
days after the Closing would otherwise have been required to occur had
Section 8.3(g) been satisfied or waived.
The party desiring to terminate this Agreement shall give written notice
of such termination to the other party.
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SECTION 9.2 EFFECT OF TERMINATION. Except for any breach of this
Agreement by any party hereto (which breach and liability therefor shall not be
affected by the termination of this Agreement or the payment of any Termination
Fee (as defined in Section 9.3(a) hereof) or expenses pursuant to Section 9.3
hereof), if this Agreement is terminated pursuant to Section 9.1 hereof, then
this Agreement shall become void and of no effect with no liability on the part
of any party hereto; PROVIDED, HOWEVER THAT notwithstanding such termination the
agreements contained in Sections 9.2, 9.3 and 10.7 hereof and the proviso to
Section 7.4 hereof shall survive the termination hereof.
SECTION 9.3 FEES.
(a) The Company agrees to pay Alcatel in immediately available funds
by wire transfer an amount equal to $120 million (the "Termination
Fee")(less, in the case of (ii) below, any amount previously paid
pursuant to Section 9.3(b)) if:
(i) this Agreement is terminated by Alcatel pursuant to Section
9.1(d) hereof;
(ii) this Agreement is terminated by either the Company or
Alcatel pursuant to Section 9.1(e) hereof and an Acquisition Proposal
had been commenced, proposed or disclosed, and had not been
irrevocably withdrawn, prior to the vote of stockholders of the
Company and, within one year of such termination, the Company accepts
a written offer or enters into an agreement to consummate (or there
is actually consummated) (A) an Acquisition Proposal with such party
or an affiliate thereof, or (B) an Acquisition Proposal providing for
consideration in excess of either that contained in the initial
Acquisition Proposal or the consideration provided for pursuant to
this Agreement; PROVIDED THAT for purposes of this subsection (a) and
Section 9.3(b), an Acquisition Proposal shall not be deemed to be
irrevocably withdrawn if the offeror or any related party thereto or
affiliate thereof shall have indicated any intent or evidenced any
reasonable likelihood, of resubmitting (or, within one year after
termination of this Agreement, actually makes or proposes) such
proposal or any amended or substitute proposal (or enters into
substantive negotiations with the Company with respect thereto);
(iii) this Agreement is (A) terminated by either the Company or
Alcatel pursuant to Section 9.1(b) hereof, (B) the Special Meeting
had not been held prior to such termination and (C) an Acquisition
Proposal had been commenced, proposed or disclosed, and, at least
sixty days prior to such termination, had not been irrevocably
withdrawn; or
(iv) this Agreement is terminated by the Company pursuant to
Section 9.1(g) hereof.
(b) The Company agrees to pay Alcatel in immediately available funds
by wire transfer an amount equal to $60 million (the "ALTERNATIVE
TERMINATION FEE") if this Agreement is terminated by either the Company
or Alcatel pursuant to Section 9.1(e) hereof and an Acquisition Proposal
had been commenced, proposed or disclosed and had not been irrevocably
withdrawn, prior to the vote of the stockholders of the Company.
(c) The Company shall pay the Termination Fee or Alternative
Termination Fee required to be paid pursuant to Section 9.3(a) or (b)
hereof (if all conditions thereto have been satisfied) (x) prior to the
termination of this Agreement by the Company, (y) not later than one
business day after the termination of this Agreement by Alcatel or (z) in
the case of Section 9.3(a)(ii) hereof, one business day after such fee
becomes due; PROVIDED THAT in the case of Section 9.3(b) hereof, if the
Acquisition Proposal is determined not to have been irrevocably withdrawn
by reason of an Acquisition Proposal having been made or proposed after
termination of this Agreement, then such fee will be payable not later
than one business day after such event. Notwithstanding the foregoing,
Alcatel shall have the right to treat any termination by the Company of
this Agreement as invalid, and the right to so terminate as waived, if
the Company fails to pay to Alcatel, at the appropriate time specified
above, any Termination Fee required to be so paid pursuant to Section
9.3(a) or 9.3 (b) hereof.
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(d) In the event this Agreement is (i) terminated and the
representations and warranties of the Company are not true in all
material respects at the time of termination, (ii) terminated and there
had been a Company Material Adverse Effect prior to the time of
termination or (iii) terminated (A) pursuant to Section 9.1(b) hereof and
the Special Meeting had not been held prior to such termination, or (B)
pursuant to Section 9.1(e) hereof, the Company agrees to pay Alcatel in
immediately available funds an amount equal to Alcatel's reasonable
out-of-pocket expenses, but not in any event to exceed $10,000,000,
including expenses of financial advisors, outside legal counsel and
accountants, incurred in connection with the transactions contemplated by
this Agreement. In no event shall the Company be liable for any payments
under this Section 9.3(d) if it has paid the Termination Fee or the
Alternative Termination Fee pursuant to Section 9.3(a) or 9.3(b) hereof.
(e) Except as provided otherwise in this Section 9.3, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
(f) For purposes of this Section 9.3 only, "ACQUISITION PROPOSAL"
means any bona fide offer or proposal for a merger, consolidation,
recapitalization, liquidation or other business combination involving the
Company or the acquisition or purchase of over 30% or more of any class
of equity securities of the Company, or any tender offer (including
self-tenders) or exchange offer that if consummated would result in any
Person beneficially owning 30% or more of any class of equity securities
of the Company, or 30% of the assets of the Company and its Subsidiaries
taken as a whole, other than the Merger, in each case providing for a
specific amount, range of amounts or formula for determination of amount,
of consideration to be paid to the Company or its stockholders; PROVIDED,
HOWEVER, that an offer or proposal made prior to the termination of this
Agreement shall not, for purposes of Section 9.3(b) hereof, be deemed to
be an "Acquisition Proposal" if there is no reasonable basis to conclude
that it is capable of being financed by the Person making such proposal;
PROVIDED FURTHER that the preceding proviso shall not apply in the event
that the Company entered into negotiations with such Person or furnished
information to such Person pursuant to Section 7.5 hereof.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 NOTICES. All notices, requests, demands, waivers and
other communications required or permitted to be given under this Agreement to
any party hereunder shall be in writing and deemed given upon (a) personal
delivery, (b) transmitter's confirmation of a receipt of a facsimile
transmission, (c) confirmed delivery by a standard overnight carrier or when
delivered by hand or (d) when mailed in the United States by certified or
registered mail, postage prepaid, addressed at the following addresses (or at
such other address for a party as shall be specified by notice given hereunder):
If to the Company, to:
DSC Communications Corporation
1000 Coit Road
Plano, Texas 75075
Fax: (972) 519-2321
Attention: George B. Brunt, Esq.
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Fax: (212) 403-2000
Attention: Seth A. Kaplan, Esq.
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and
Baker & McKenzie
2001 Ross, Suite 4500
Dallas, Texas 75201
Fax: (214) 978-3099
Attention: Daniel W. Rabun, Esq.
If to Alcatel or Newco, to:
Alcatel Alsthom
54, rue La Boetie
75008 Paris
France
Fax: 33 1 4076 1486
Attention: Jean-Pierre Halbron
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-9931
Fax: (212) 735-2000
Attention: Roger S. Aaron, Esq.
Lou R. Kling, Esq.
SECTION 10.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained herein and in any certificate or other
writing delivered pursuant hereto shall not survive the Effective Time. All
other covenants and agreements contained herein which by their terms are to be
performed in whole or in part, or which prohibit actions, subsequent to the
Effective Time, shall survive the Merger in accordance with their terms.
SECTION 10.3 INTERPRETATION. References in this Agreement to
"reasonable best efforts" shall not require a Person obligated to use its
reasonable best efforts to obtain any consent of a third party to incur
out-of-pocket expenses or indebtedness or, except as expressly provided herein,
to institute litigation. References herein to the "knowledge of the Company"
shall mean the actual knowledge of the officers (as such term is defined in Rule
3b-2 promulgated under the Exchange Act) of the Company. Whenever the words
"include," "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation." The phrase "made
available" when used in this Agreement shall mean that the information referred
to has been made available if requested by the party to whom such information is
to be made available. As used in this Agreement, the term "affiliate" shall have
the meaning set forth in Rule 12b-2 promulgated under the Exchange Act.
The article and section headings contained in this Agreement are solely
for the purpose of reference, are not part of the agreement of the parties
hereto and shall not in any way affect the meaning or interpretation of this
Agreement. Any matter disclosed pursuant to any Schedule of the Company
Disclosure Schedule or the Alcatel Disclosure Schedule shall not be deemed to be
an admission or representation as to the materiality of the item so disclosed.
SECTION 10.4 AMENDMENTS, MODIFICATION AND WAIVER. (a) Except as may
otherwise be provided herein, any provision of this Agreement may be amended,
modified or waived by the parties hereto, by action taken by or authorized by
their respective Board of Directors, prior to the Closing Date if, and only if,
such amendment or waiver is in writing and signed, in the case of an amendment,
by the Company and Alcatel or, in the case of a waiver, by the party against
whom the waiver is to be effective; PROVIDED THAT after the adoption of this
Agreement by the stockholders of the Company, no such amendment shall be made
except as allowed under applicable law.
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(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that neither the Company nor Alcatel
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the consent of the other parties hereto.
SECTION 10.6 SPECIFIC PERFORMANCE. The parties acknowledge and agree
that any breach of the terms of this Agreement would give rise to irreparable
harm for which money damages would not be an adequate remedy and accordingly the
parties agree that, in addition to any other remedies, each shall be entitled to
enforce the terms of this Agreement by a decree of specific performance without
the necessity of proving the inadequacy of money damages as a remedy.
SECTION 10.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof) as to all matters, including, but not limited to, matters of
validity, construction, effect, performance and remedies.
SECTION 10.8 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated herein are not affected in any manner
materially adverse to any party hereto. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner.
SECTION 10.9 THIRD PARTY BENEFICIARIES. This Agreement is solely for
the benefit of the Company and its successors and permitted assigns, with
respect to the obligations of Alcatel and Newco under this Agreement, and for
the benefit of Alcatel and Newco, and their respective successors and permitted
assigns, with respect to the obligations of the Company under this Agreement,
and this Agreement shall not, except to the extent necessary to enforce the
provisions of Article I and Section 7.6 hereof be deemed to confer upon or give
to any other third party any remedy, claim, liability, reimbursement, cause of
action or other right.
SECTION 10.10 ENTIRE AGREEMENT. This Agreement, including any
exhibits or schedules hereto and the Confidentiality Agreement constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all other prior agreements or understandings, both written
and oral, between the parties or any of them with respect to the subject matter
hereof.
SECTION 10.11 COUNTERPARTS; EFFECTIVENESS. This Agreement may be
signed in any number of counterparts, each of which shall be deemed an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.
A-35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
<TABLE>
<S> <C> <C>
DSC COMMUNICATIONS CORPORATION
By: /s/ JAMES L. DONALD
----------------------------
Name: James L. Donald
Title: Chairman, President and
Chief Executive Officer
ALCATEL ALSTHOM
By: /s/ SERGE TCHURUK
----------------------------
Name: Serge Tchuruk
Title: Chairman and Chief Executive
Officer
NET ACQUISITION, INC.
BY: /S/ JEAN-PIERRE HALBRON
----------------------------
Name: Jean-Pierre Halbron
Title: President
</TABLE>
A-36
<PAGE>
ANNEX B
FIRST AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT, dated as of July 21, 1998 (this "Amendment") to the
Agreement and Plan of Merger, dated as of June 3, 1998 (the "Merger Agreement"),
by and among DSC Communications Corporation, a Delaware corporation (the
"Company"), Alcatel Alsthom, a corporation organized under the laws of the
Republic of France ("Alcatel"), and Net Acquisition, Inc., a Delaware
corporation and a direct, wholly owned subsidiary of Alcatel ("Newco").
WHEREAS, the Company, Alcatel, and Newco desire to amend the Merger
Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, the Company, Alcatel and Newco agree as follows:
1. Section 1.5(a) of the Merger Agreement shall be replaced, to read in its
entirety as follows:
"(a) The Company shall use its reasonable best efforts to cause each option
(other than an option described in Section 1.5(c) below) granted to an employee,
consultant or director of the Company or any Subsidiary of the Company to
acquire shares of Common Stock, which is outstanding immediately prior to the
Effective Time ("OPTION"), to be cancelled immediately prior to the Effective
Time. Immediately upon such cancellation, each holder of an Option so cancelled,
in exchange for the cancellation thereof, shall receive from the Company an
amount in cash equal to the product of (1) the number of shares of Common Stock
subject to such Option and (2) the excess, if any, of the fair market value of
an ADS multiplied by the Exchange Ratio over the per share exercise price of
such Option. Schedule 1.5(a) hereto sets forth a list of Company executives who
have agreed to the cancellation of all of their Options, effective immediately
prior to the Effective Time, in accordance with the provisions of this Section
1.5(a). For purposes of this Section 1.5, "fair market value" shall mean the
closing price of the ADSs on the NYSE on the business day immediately preceding
the Effective Time."
2. Schedule 1.5(a) of the Merger Agreement shall be replaced with a new
Schedule 1.5(a) attached to this amendment.
3. The second sentence of Section 1.5(c) of the Merger Agreement shall be
deleted in its entirety.
4. Section 4.23 of the Merger Agreement shall be deleted in its entirety.
5. The first sentence of Section 7.22(a) of the Merger Agreement shall be
amended to delete therefrom the words "or under applicable SEC accounting
releases with respect to pooling of interests accounting treatment" at the end
of such sentence. Section 7.22(a) of the Merger Agreement shall be redesignated
as "Section 7.22 AFFILIATE LETTERS." Sections 7.22(b) and 7.22(c) of the Merger
Agreement shall be deleted in their entirety.
6. Exhibit D of the Merger Agreement shall be replaced with the new Exhibit
D attached to this amendment.
7. Section 8.1(d) of the Merger Agreement shall be amended to replace the
words "Common Stock" with "ADSs" at the end of such section.
8. Section 8.3(h) of the Merger Agreement shall be amended to replace the
words "Section 7.22(a)" with "Section 7.22."
B-1
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf by its respective officer thereunto duly authorized, all
as of the day and year first above written.
<TABLE>
<S> <C> <C>
DSC COMMUNICATIONS CORPORATION
By: /s/ JAMES L. DONALD
-----------------------------------------
Name: James L. Donald
Title: CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
ALCATEL ALSTHOM
By: /s/ SERGE TCHURUK
-----------------------------------------
Name: Serge Tchuruk
Title: CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
NET ACQUISITION, INC.
By: /s/ JEAN-PIERRE HALBRON
-----------------------------------------
Name: Jean-Pierre Halbron
Title: PRESIDENT
</TABLE>
B-2
<PAGE>
ANNEX C
[LOGO]
PERSONAL AND CONFIDENTIAL
June 3, 1998
Board of Directors
DSC Communications, Inc.
1000 Coit Road
Plano, TX 75075
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.01
per share (the "Shares"), of DSC Communications, Inc. (the "Company") of the
exchange ratio of 0.815 shares of the American Depositary Shares of Alcatel
Alsthom to be received for each Share (the "Exchange Ratio") by such holders
pursuant to the Agreement and Plan of Merger, dated as of June 3, 1998, by and
among Alcatel Alsthom ("Alcatel"), Net Acquisition, Inc., a wholly-owned
subsidiary of Alcatel, and the Company (the "Agreement").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We have
served as an underwriter for the Company, including as an underwriter for the
Company's equity and for its offering of 7% Convertible Subordinated Notes due
August 1, 2004. We have also acted as its financial advisor in connection with,
and participated in certain of the negotiations leading to, the Agreement. We
are also familiar with the markets for Alcatel's securities, and have acted,
from time to time, as a financial advisor and underwriter on behalf of Alcatel
for both equity and debt. Goldman, Sachs & Co. is currently serving as global
coordinator and co-book runner for the Initial Public Offering of Alstom, an
affiliate of Alcatel. Goldman Sachs may, from time to time, hold positions in
the securities of both the Company and Alcatel. In connection with this opinion,
we have reviewed, among other things, the Agreement; Annual Reports to
Stockholders and Annual Reports on Form 10-K of the Company for the five years
ended December 31, 1997; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of the Company; Annual Reports to Shareholders and Annual
Reports on Form 20-F of Alcatel for the four years ended December 31, 1996;
certain Quarterly Reports on Form 6-K of Alcatel; certain internal financial
analyses and forecasts for the Company prepared by its management and certain
internal financial analyses and forecasts for certain United States operations
of Alcatel prepared by their management. We have not reviewed internal financial
analyses and forecasts for Alcatel on a consolidated basis. We have held
discussions with members of the senior management of the Company and Alcatel
regarding the strategic rationale for, and potential benefits of, the
transaction contemplated by the Agreement and the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, we have reviewed the reported price and trading activity
for the Shares and Alcatel's American Depositary Shares; compared certain
financial and stock market information for the Company and Alcatel with similar
information for certain other companies, the securities of which are publicly
traded; reviewed the financial terms of certain
C-1
<PAGE>
recent business combinations in the communications equipment industry
specifically and in other industries generally; and performed such other studies
and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In addition, we have not
made an independent evaluation or appraisal of the assets or liabilities of the
Company or Alcatel or any of their subsidiaries and we have not been furnished
with any such evaluation or appraisal. Our advisory services and the opinion
expressed herein are provided for the information and assistance of the Board of
Directors of the Company in connection with its consideration of the transaction
contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair from a financial point of view to the
holders of Shares.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
GOLDMAN, SACHS & CO.
C-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENTS
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of June 3, 1998, by and among DSC, Alcatel and Newco
(Included as Annex A to the Proxy Statement/Prospectus).*
2.2 First Amendment to the Agreement and Plan of Merger, dated as of July 21, 1998 to the Agreement
and Plan of Merger, dated as of June 3, 1998 by and among DSC, Alcatel and Newco (Included as
Annex B to the Proxy Statement/Prospectus).*
4.1 Form of Amended and Restated Deposit Agreement, dated as of March 10, 1997, among Alcatel and The
Bank of New York, as Depositary and the holders from time to time of the ADRs issued thereunder,
including the form of ADR. (Incorporated by reference to Exhibit A(1) to Alcatel's Registration
Statement on Form F-6, dated February 21, 1997.) (File No. 1-11130.)
5.1 Opinion of Pascal Durand-Barthez as to the validity of the Alcatel Shares.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters.
8.2 Opinion of Baker & McKenzie as to certain tax matters.
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (to be included
in Exhibit 8.1).
23.2 Consent of Baker & McKenzie (to be included in Exhibit 8.2).
23.3 Consent of Pascal Durand-Barthez (to be included in Exhibit 5.1).
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Ernst & Young LLP.
24.1 Power of Attorney.
99.1 Opinion of Goldman, Sachs & Co. (Included as Annex C to the Proxy Statement/ Prospectus).*
99.2 Restated Certificate of Incorporation of DSC. (Incorporated by reference to Exhibit 3.1 to DSC's
Registration Statement Form S-8, dated December 10, 1997.) (File No. 0-10018).
99.3 Amended and Restated Bylaws of DSC. (Incorporated by reference to Exhibit 3.4 to DSC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.) (File No. 0-10018).
99.4 STATUTS (Charter) of the Registrant (English translation) (Incorporated by reference to Alcatel's
Registration Statement on Form F-1 dated April 10, 1992) (File No. 1-11130).
99.5 Amendment to Rights Agreement, dated June 3, 1998, to the Rights Agreement, dated as of April 25,
1996 between DSC and Harris Trust Savings Bank.
99.6 Proxy Card.
</TABLE>
II-1
<PAGE>
* Schedules to the Merger Agreement have been omitted in accordance with Item
601(b)(2) of Regulation S-K and a summary of such schedules is provided in
lieu thereof. The registrant undertakes to furnish supplementally to the
Commission copies of any omitted schedule on the request of the Commission.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering;
(4) to file a post-effective amendment to the registration statement
to include any financial statements required by Rule 3-19 of Regulation
S-X under the Securities Act of 1933 at the start of any delayed offering
or throughout a continuous offering;
(b) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
initial BONA FIDE offering thereof;
(c) (1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(2) every prospectus: (i) that is filed pursuant to paragraph (c)(1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment
to the registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
II-2
<PAGE>
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
(d) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue;
(e) (1) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form F-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means, and (2) to arrange or provide for a facility in the United States for
the purpose of responding to such requests; and
(f) to supply by means of a post-effective amendment all information
concerning a transaction and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Paris, France on the
28th day of July, 1998.
<TABLE>
<S> <C> <C>
By: /s/ JEAN-PIERRE HALBRON
--------------------------------------
Name: Jean-Pierre Halbron
Title: Senior Executive Vice President
Attorney-In-Fact
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on its behalf by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ SERGE TCHURUK Chairman of the Board
- ------------------------------ (Chief Executive Officer July 28, 1998
Serge Tchuruk and Director)
Senior Executive Vice
/s/ JEAN-PIERRE HALBRON President
- ------------------------------ (Principal Financial and July 28, 1998
Jean-Pierre Halbron Accounting Officer)
Director
- ------------------------------ July 28, 1998
Ambroise Roux
* Director
- ------------------------------ July 28, 1998
Rand V. Araskog
Director
- ------------------------------ July 28, 1998
Daniel Bernard
* Director
- ------------------------------ July 28, 1998
Philippe Bissara
Director
- ------------------------------ July 28, 1998
Paolo Cantarella
Director
- ------------------------------ July 28, 1998
Guy Dejouany
Director
- ------------------------------ July 28, 1998
Jacques Friedmann
* Director
- ------------------------------ July 28, 1998
Noel Goutard
* Director
- ------------------------------ July 28, 1998
Francois de Laage de Meux
Director
- ------------------------------ July 28, 1998
Pierre-Louis Lions
* Director
- ------------------------------ July 28, 1998
Thierry De Loppinot
II-4
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
* Director
- ------------------------------ July 28, 1998
Bruno Vaillant
* Director
- ------------------------------ July 28, 1998
Marc Vienot
* Director
- ------------------------------ July 28, 1998
Helmut Werner
<TABLE>
<S> <C>
*By: /s/ JEAN-PIERRE HALBRON
-------------------------
Jean-Pierre Halbron
Attorney-In-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENTS
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of June 3, 1998, by and among DSC, Alcatel and Newco
(Included as Annex A to the Proxy Statement/Prospectus).*
2.2 First Amendment to the Agreement and Plan of Merger, dated as of July 21, 1998 to the Agreement
and Plan of Merger, dated as of June 3, 1998 by and among DSC, Alcatel and Newco (Included as
Annex B to the Proxy Statement/Prospectus).*
4.1 Form of Amended and Restated Deposit Agreement, dated as of March 10, 1997, among Alcatel and The
Bank of New York, as Depositary and the holders from time to time of the ADRs issued thereunder,
including the form of ADR. (Incorporated by reference to Exhibit A(1) to Alcatel's Registration
Statement on Form F-6, dated February 21, 1997.) (File No. 1-11103.)
5.1 Opinion of Pascal Durand-Barthez as to the validity of the Alcatel Shares.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters.
8.2 Opinion of Baker & McKenzie as to certain tax matters.
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (to be included
in Exhibit 8.1).
23.2 Consent of Baker & McKenzie (to be included in Exhibit 8.2).
23.3 Consent of Pascal Durand-Barthez (to be included in Exhibit 5.1).
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Ernst & Young LLP.
24.1 Power of Attorney.
99.1 Opinion of Goldman, Sachs & Co. (Included as Annex C to the Proxy Statement/ Prospectus).*
99.2 Restated Certificate of Incorporation of DSC. (Incorporated by reference to Exhibit 3.1 to DSC's
Registration Statement Form S-8, dated December 10, 1997.) (File No. 0-10018).
99.3 Amended and Restated Bylaws of DSC. (Incorporated by reference to Exhibit 3.4 to DSC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.) (File No. 0-10018).
99.4 STATUTS (Charter) of the Registrant (English translation) (Incorporated by reference to Alcatel's
Registration Statement on Form F-1 dated April 10, 1992) (File No. 1-11130).
99.5 Amendment to Rights Agreement, dated June 3, 1998, to the Rights Agreement, dated as of April 25,
1996 between DSC and Harris Trust Savings Bank.
99.6 Proxy Card.
</TABLE>
* Schedules to the Merger Agreement have been omitted in accordance with Item
601(b)(2) of Regulation S-K and a summary of such schedules is provided in
lieu thereof. The registrant undertakes to furnish supplementally to the
Commission copies of any omitted schedule on the request of the Commission.
<PAGE>
Exhibit 5.1
[Alcatel Alsthom Letterhead]
July 28, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs:
I am familiar with the Registration Statement on Form F-4 covering
shares of Common Stock, par value FF 40 per share, of Alcatel Alsthom (the
"Company") to be issued in connection with the merger (the "Merger") of Net
Acquisition, Inc., a wholly owned subsidiary of the Company ("Net") into
DSC Communications Corporation ("DSC"), pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") dated as of June 3, 1998, as amended, among
the Company, Net and DSC.
I am of the opinion that the shares of Common Stock of the Company to be
issued in connection with the Merger (the "Shares"), when issued in
accordance with the Merger Agreement, will be duly and validly issued and
fully paid.
My opinion is based on the following interpretation of French law.
I believe that the exchange of the Shares for shares of DSC pursuant to
the Merger Agreement amounts substantially to "une offre publique d'echange"
for the purpose of Article 193-1 of the French Company Act no. 66-537 of July
24, 1966 (the "Law"), for the reasons summarized below.
(i) An "offre publique d'echange" for the purpose of Article 193-1 of
the Law is not limited to (x) an "offre publique d'echange" as
defined by the rules of the Reglement General du Conseil des
Marches Financiers, since these rules only apply to offers made on
French companies, or (y) a public exchange offer within the meaning
of the U.S. Securities Act of 1933;
(ii) The exchange of shares to be consummated through the Merger is
different from any procedure available under French law and, in
particular, is different from a "fusion" within the meaning of
article 1844-4 of the French Civil Code and articles 371 et seq of
the Law, in that both DSC and the Company will survive the Merger;
and
(iii) The Merger has the characteristics of an "offre publique
d'echange" for the purpose of Article 193-1 of the Law, as:
<PAGE>
(a) it amounts to an exchange of shares, proposed to public
shareholders in the United States through a procedure which is
under the control of U.S. stock exchange authorities and
governed by U.S. stock exchange laws and regulations; and
(b) it is comparable in its consequences, calendar and disclosure
obligations to a public exchange offer, and either procedure
could have been used by the Company.
I believe that there are strong grounds to support this interpretation,
but I cannot predict whether a court of competent jurisdiction in the
Republic of France or elsewhere would uphold this interpretation in any
judicial proceeding on this question.
I hereby consent to the reference to me under "Legal Matters and
Experts" in such Registration Statement.
Very truly yours,
/s/ Pascal Durand-Barthez
Pascal Durand-Barthez
General Counsel
<PAGE>
Exhibit 8.1
[Skadden, Arps, Slate, Meagher & Flom LLP Letterhead]
July 28, 1998
Alcatel Alsthom
54, rue La Boetie
75008 Paris
France
Dear Ladies and Gentlemen:
You have requested our opinion regarding the discussion of the material
U.S. federal income tax consequences set forth under the headings "SUMMARY - The
Merger -- Certain U.S. Federal Income Tax Consequences" and "THE MERGER -
Certain U.S. Federal Income Tax Consequences" in the Proxy Statement/Prospectus
(the "Proxy Statement/Prospectus") which will be included in the Registration
Statement on Form F-4 (the "Registration Statement") filed by Alcatel Alsthom on
the date hereof with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"). The Proxy
Statement/Prospectus relates to the proposed merger of Net Acquisition, Inc.,
("Newco"), a newly-formed, direct wholly-owned subsidiary of Alcatel Alsthom
with and into DSC Communications Corporation ("DSC"), pursuant to an Agreement
and Plan of Merger dated as of June 3, 1998, as amended (the "Merger Agreement")
among Alcatel Alsthom, Newco and DSC. This opinion is delivered in accordance
with the requirements of Item 601(b)(8) of Regulation S-K under the Securities
Act.
We have reviewed the Proxy Statement/Prospectus and such other materials as
we have deemed necessary or appropriate as a basis for our opinion described
therein, and have considered the applicable provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury regulations promulgated
thereunder, pertinent judicial authorities, interpretive rulings of the Internal
Revenue Service and such other authorities as we have considered relevant all as
in effect on the date hereof. It should be noted that statutes, regulations,
judicial decisions and administrative interpretations are subject to change at
any time and, in some circumstances, with
<PAGE>
Alcatel Alsthom
July 28, 1998
Page 2
retroactive effect. A change in the authorities upon which our opinion is based
could affect our conclusions.
Based upon the foregoing, it is our opinion that the statements made under
the headings "SUMMARY - The Merger - Certain U.S. Federal Income Tax
Consequences" and "THE MERGER - Certain U.S. Federal Income Tax Consequences"
in the Proxy Statement/Prospectus, to the extent that they constitute matters of
law or legal conclusions, are correct in all material respects. There can be no
assurance that contrary positions may not be asserted by the Internal Revenue
Service.
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name under the
heading "THE MERGER - Certain U.S. Federal Income Tax Consequences" in the Proxy
Statement/Prospectus and to the filing of this opinion as an Exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
Exhibit 8.2
[Baker & McKenzie Letterhead]
July 28, 1998
DSC Communications Corporation
1000 Coit Road
Plano, Texas 75075
Ladies and Gentleman:
You have requested our opinion regarding the discussion of the material
United States ("U.S.") federal income tax consequences set forth under the
headings "SUMMARY--The Merger--Certain U.S. Federal Income Tax Consequences"
and "THE MERGER--Certain U.S. Federal Income Tax Consequences" contained in
the DSC Communications Corporation Proxy Statement/Alcatel Alsthom Prospectus
(the "Proxy Statement/Prospectus") which will be included in the Registration
Statement on Form F-4 (the "Registration Statement") filed by Alcatel Alsthom
("Alcatel") on the date hereof with the Securities and Exchange Commission
(the "SEC") under the Securities Act of 1933, as amended (the "Act").
The Proxy Statement/Prospectus relates to the proposed merger of Net
Acquisition, Inc., ("Newco"), a newly-formed, direct wholly-owned subsidiary
of Alcatel with and into DSC Communications Corporation ("DSC"), pursuant to
an Agreement and Plan of Merger dated as of June 3, 1998, as amended, by and
among DSC, Alcatel, and Newco (the "Merger Agreement"). This opinion is
delivered in accordance with the requirements of Item 601(b)(8) of Regulation
S-K under the Act.
In preparing our opinion, we have reviewed the Proxy
Statement/Prospectus and such other materials as we have deemed necessary or
appropriate, and have considered the applicable provisions of the Internal
Revenue Code of 1986, as amended ("Code"), the Treasury Regulations
promulgated under the Code, interpretive rulings of the Internal Revenue
Service ("IRS"), judicial decisions, and such other authorities as we have
considered relevant all as in effect on the date hereof. Such
<PAGE>
DSC Communications Corporation
July 28, 1998
Page 2
authorities are all subject to change at any time, either prospectively or
retroactively. A change in the authorities upon which our opinion is based
could affect our conclusions.
Based upon the foregoing, it is our opinion that the statements made
under the headings "SUMMARY--The Merger--Certain U.S. Federal Income Tax
Consequences" and "THE MERGER--Certain U.S. Federal Income Tax Consequences"
contained in the Proxy Statement/Prospectus, to the extent that they
constitute matters of law or legal conclusions, are correct in all material
respects. There can be no assurance that contrary positions may not be
asserted by the IRS. Except as set forth above, we express no other opinion
as to any matter, and the opinion and statements expressed herein are
rendered as of the date of this letter.
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Act, we hereby consent to the use of our name under the heading
"THE MERGER--Certain U.S. Federal Income Tax Consequences" in the Proxy
Statement/Prospectus and to the filing of this opinion as an Exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the SEC promulgated thereunder.
Sincerely,
/s/ BAKER & MCKENZIE
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the use of our report included
in this registration statement dated July 28, 1998 relating to the projected
merger with DSC Communications Corporation and to the incorporation by
reference in this registration statement of our report dated March 19, 1998
included in Alcatel Alsthom's Form 20-F for the year ended December 31, 1997
and to all reference to our Firm included in this registration statement. It
should be noted that we have not audited any financial statements of the
company subsequent to December 31, 1997 or performed any audit procedures
subsequent to the date of our report.
Arthur Andersen LLP
Paris, France
July 24, 1998
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Legal Matters and
Experts" in the Registration Statement (Form F-4) and related Proxy
Statement/Prospectus of DSC Communications Corporation and related Proxy
Statement/Prospectus of Alcatel Alsthom for the registration of 110,020,000
shares of its American Depositary Shares and to the inclusion and incorporation
by reference therein of our report dated January 26, 1998 with respect to the
consolidated financial statements of DSC Communications Corporation
incorporated by reference in its Annual Report (Form 10-K) for the year ended
December 31, 1997 and the related financial statement schedules included
therein, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
July 27, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Jean-Pierre
Halbron, as attorney-in-fact and agent, with full powers of substitution, to
sign on his or her behalf, individually and in any and all capacities, including
the capacities stated below, and to file the Registration Statement on Form F-4
(or such other Form as may be appropriate) in connection with the registration
of American Depositary Shares, American Depositary Receipts and/or the related
Ordinary Shares of the Company and any and all amendments (including
pre-effective and post-effective amendments) to the Registration Statement with
the Securities and Exchange Commission, granting to said attorney-in-fact and
agent full power and authority to perform any other act on behalf of the
undersigned required to be done in the premises.
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
/s/ RAND V. ARASKOG Director July 3, 1998
------------------------------------
Rand V. Araskog
/s/ PHILIPPE BISARA Director July 3, 1998
------------------------------------
Philippe Bisara
/s/ NOEL GOUTARD Director July 3, 1998
------------------------------------
Noel Goutard
/s/ FRANCOIS DE LAAGE DE MEUX Director July 3, 1998
------------------------------------
Francois de Laage de Meux
/s/ THIERRY DE LOPPINOT Director July 3, 1998
------------------------------------
Thierry De Loppinot
/s/ BRUNO VAILLANT Director July 3, 1998
------------------------------------
Bruno Vaillant
/s/ MARC VIENOT Director July 3, 1998
------------------------------------
Marc Vienot
/s/ HELMUT WERNER Director July 3, 1998
------------------------------------
Helmut Werner
</TABLE>
<PAGE>
EXHIBIT 99.5
AMENDMENT TO RIGHTS AGREEMENT
AMENDMENT (the "Amendment"), dated as of June 3, 1998, to the Rights
Agreement, dated as of April 25, 1996 (the "Rights Agreement"), between DSC
Communications Corporation, Delaware corporation (the "Company") and Harris
Trust and Savings Bank, as Rights Agent (the "Rights Agent").
RECITALS
I. The Company and the Rights Agent have heretofore executed and entered
into the Rights Agreement.
The Company, Alcatel Alsthom, a corporation organized under the laws of
France ("Alcatel") and Net Acquisition, Inc., a Delaware corporation and wholly
owned subsidiary of Alcatel ("Sub"), contemplate entering into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which, among other things,
Sub will merge with and into the Company (the "Merger").
Pursuant to Section 27 of the Rights Agreement, the Company and the Rights
Agent may from time to time supplement and amend the Rights Agreement in order
to make any change which the Company may deem necessary or desirable and which
shall be consistent with, and for the purposes of fulfilling, the objectives of
the Board of Directors of the Company in adopting the Rights Agreement.
The Board of Directors of the Company has determined that an amendment to
the Rights Agreement as set forth herein is necessary and desirable and is
consistent with the objectives of the Board of Directors of the Company in
adopting the Rights Agreement, and the Company and the Rights Agent desire to
evidence such amendment in writing.
All acts and things necessary to make this Amendment a valid agreement,
enforceable according to its terms, have been done and performed, and the
execution and delivery of this Amendment by the Company and the Rights Agent
have been in all respects duly authorized by the Company and the Rights Agent.
Accordingly, the parties agree as follows:
A. Amendment of Section 1. Section 1 of the Rights Agreement is supplemented
to add the following definitions in the appropriate locations:
"Merger Agreement' shall mean the Agreement and Plan of Merger, dated as
of June 3, 1998, by and among DSC Communications Corporation, Alcatel
Alsthom and Net Acquisition, Inc., as it may be amended from time to time."
"Merger' shall have the meaning set forth in the Merger Agreement."
B. Amendment of the definition of "Acquiring Person". The definition of
"Acquiring Person" in Section 1(a) of the Rights Agreement is amended by adding
the following sentence at the end thereof:
"Notwithstanding anything in this Agreement to the contrary, Alcatel
Alsthom, Net Acquisition, Inc. and their Affiliates and Associates shall
not, individually or collectively, be deemed to be an Acquiring Person by
virtue of (i) the execution of the Merger Agreement, (ii) the consummation
of the Merger, or (iii) the consummation of the other transactions
contemplated in the Merger Agreement."
C. Amendment of the definition of "Distribution Date". The definition of
"Distribution Date" in Section 1(i) of the Rights Agreement is amended by adding
the following sentence at the end thereof.
"Notwithstanding anything in this Agreement to the contrary, a
Distribution Date shall not be deemed to have occurred as the result of (i)
the execution of the Merger Agreement, (ii) the consummation of the Merger,
or (iii) the consummation of the other transactions contemplated in the
Merger Agreement."
<PAGE>
D. Amendment of Expiration Date of Rights. Section 7(a) of the Rights
Agreement is amended and restated to read in its entirety as follows:
"Except as otherwise provided herein, the Rights shall become
exercisable on the Distribution Date, and thereafter the registered holder
of any Right Certificate may, subject to Section 11(a)(ii) hereof and except
as otherwise provided herein, exercise the Rights evidenced hereby in whole
or in part upon surrender of the Right Certificate, with the form of
election to purchase on the reverse side thereof duly executed, to the
Rights Agent at the office or agency of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect
to the total number of one one-thousandths of a share of Preferred Stock (or
other securities, cash or other assets, as the case may be) as to which the
Rights are exercised, at any time which is both after the Distribution Date
and prior to the time (the "Expiration Date") that is the earliest of (i)
the Close of Business on April 25, 2006 (the "Final Expiration Date"), (ii)
the time at which the Rights are redeemed as provided in Section 23 hereof
(the "Redemption Date"), (iii) the time at which such Rights are exchanged
as provided in Section 24 hereof, or (iv) immediately prior to the
consummation of the Merger."
E. Amendment of Section 29. Section 29 of the Rights Agreement is amended to
add the following sentence at the end thereof.
"Nothing in this Agreement shall be construed to give any holder of
Rights or any other Person any legal or equitable rights, remedies or claims
under this Agreement by virtue of the execution of the Merger Agreement or
by virtue of any of the transactions contemplated by the Merger Agreement.'
E. Effectiveness. This Amendment shall be deemed effective as of the date
first written above, as if executed on such date. Except as amended hereby, the
Rights Agreement shall remain in full force and effect and shall be otherwise
unaffected hereby.
Miscellaneous. This Amendment shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts to be made and performed entirely therein. This Amendment may be
executed in any number of counterparts, each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument. If any provision, covenant or
restriction of this Amendment is held by a court of competent jurisdiction or
other authority to be invalid, illegal or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Amendment shall remain in
full force and effect and shall in no way be effected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and attested, all as of the date and year first above written.
<TABLE>
<CAPTION>
Attest: DSC COMMUNICATIONS CORPORATION
<S> <C>
Name: /s/ Holly Harris Name: /s/ George B. Brunt
Title: Vice President, Secretary and
Title: Attorney General Counsel
Attest: HARRIS TRUST AND SAVINGS BANK
Name: /s/ Jill Wessell Name: /s/ Mark Asbury
Title: Vice President Title: Vice President
</TABLE>
<PAGE>
EXHIBIT 99.6
DSC COMMUNICATIONS CORPORATION
Please mark your votes as in this example.
/X/ FOR / / AGAINST / / ABSTAIN
1. Approve and adopt (i) the Agreement and Plan of Merger, dated as of June 3,
1998, as amended, (the "Merger Agreement"), by and among DSC, Alcatel Alsthom
and Net Acquisition, Inc. ("Newco") pursuant to which Newco will be merged with
and into DSC, with DSC continuing as the surviving corporation in the merger
(the "Merger") and (ii) the Merger.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment thereof.
/ / FOR / / AGAINST / / ABSTAIN
__________________________________
SIGNATURE(S)
__________________________________
DATE
__________________________________
SIGNATURE(S)
__________________________________
DATE
IMPORTANT: Please sign exactly as name appears hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
<PAGE>
DSC COMMUNICATIONS CORPORATION
PROXY CARD
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF STOCKHOLDERS TO BE HELD ON AUGUST 27, 1998
The undersigned hereby (a) acknowledges receipt of the Notice of Special
Meeting of Stockholders of DSC Communications Corporation ("DSC") to be held on
August 27, 1998, and the Proxy Statement in connection therewith, each dated
July 28, 1998; (b) appoints James L. Donald, Gerald F. Montry and George B.
Brunt as Proxies, or any of them, each with the power to appoint a substitute;
(c) authorizes the Proxies to represent and vote, as designated hereon, all the
shares of Common Stock of DSC held of record by the undersigned on July 23,
1998, at such Special Meeting and at any adjournment(s) thereof; and (d) revokes
any proxies heretofore given.
------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
-- SEE REVERSE SIDE --
