SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1993
Commission File Number 0-10745
DATA SWITCH CORPORATION
_____________________________________________________
(Exact name of Registrant as specified in its Charter)
DELAWARE 06-0962862
_______________________________ ____________________________
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
One Enterprise Drive, Shelton, Connecticut 06484
__________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (203) 926-1801
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for
the past 90 days. YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of
the registrant at February 28, 1994:
Approximately $24,928,300.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock and common stock purchase warrants at
December 31, 1993.
Securities registered pursuant to Section 12(b) of the Act.
Title of Each Class Symbol Shares Outstanding
___________________ ______ __________________
Common Stock, $.01 DASW 12,175,849
par value, with
Purchase Rights attached
Common Stock Purchase Warrants DASWZ 758,184
(expiring December 31, 1995)
ITEM 1 -- BUSINESS
The Company
Data Switch Corporation (referred to as the "Company") designs,
develops, manufactures, markets and services products for large
scale data center networks. These products include fiber-based
systems, channel networking systems, channel switches and data
communication switches. The Company's products are intended to
facilitate the flow of data through complex information processing
resources, such as airline reservation systems, financial networks
and common carrier networks. These products reduce system
downtime, improve performance and increase total equipment
flexibility by switching the flow of data from overloaded or failed
equipment to available equipment.
The Company was incorporated in Delaware in April 1977 and became
a public company on the over-the- counter market in April 1982. In
December 1986, the Company acquired controlling interest in T-Bar
Incorporated ("T-Bar"). The remaining outstanding shares were
acquired in the third quarter of 1987. T-Bar was merged into the
Company in January 1990. The Company continues to manufacture and
sell certain of its products under the T-Bar name and logo.
Products
Product Line Breakdown % of Total Revenue
1993 1992 1991
____ ____ ____
Fiber-Based Systems 20% 2% 0%
Channel Networking Systems 16 18 22
Channel Switches 23 35 36
Data Communications Switches 10 14 15
T-Bar Products 7 8 9
Service 20 21 16
Other 4 2 2
____ ____ ____
Total 100% 100% 100%
accounting for 24% of total revenues in 1993. Fiber-based systems
revenue increased substantially due to the market acceptance of the
Company's Fiber Management System, high density fiber channel
connectors and fiber switch systems. Channel networking systems
revenue increased slightly, with revenue contribution from early
customer shipments of the Model DDS 9090 offsetting a decline in
channel extenders. Revenue for the Company's channel switches
declined due primarily to customers' transition to new IBM
fiber-optic-based mainframes and weak international sales. Data
communications switch revenue was down as a result of competitive
pressures and a modest decline in the market. T-Bar revenue
increased slightly despite external production problems.
Service revenue increased due to the increased customer base.
Fiber-Based Systems
The newest generation of IBM mainframes is fiber-based. Data
Switch offers products that facilitate the connectivity and
networking of these new systems.
The Company's Fiber Management System (FMS) consists of
pre-assembled fiber-optic cabling and components, as well as a
planning and installation service for interconnecting these new
data center systems. FMS began shipping in late 1992. FMS prices
range from $50,000 to $750,000, depending on the size and
complexity of the installation.
Within the data center, a device called a "director" dynamically
networks new mainframes and fiber-based peripheral devices. A
director can re-distribute data traffic and bypass failed
computers, computer channels, or control units, thus enabling
companies to avoid downtime. In early 1993, the Company began
shipping a High-Density Director Array product. The Company
manufactures the Director Array through a reseller agreement for
key technology, and adds other features, such as enhanced
redundancy, increased density packaging and control features.
Prices for the Director Array range from $100,000 to $230,000,
depending on the number of connections required.
The new generation of fiber-based mainframes cannot directly
communicate with older, copper-based mainframes or peripherals.
Protocol converters enable products from the different generations
to work together. The Company's High-Density FX (HDFX) converter
packages together up to 32 fiber-to-copper protocol systems. The
High-Density MX (HDMX) product converts a multi-mode fiber-optic
signal into a single mode signal. The High-Density BX (HDBX)
product allows older copper-based channels and devices to operate
over fiber-optic cables and extends their operational range up to
3km. The High-Density CX (HDCX) product extends the repeat
capability of a fiber signal. The first of these products were
to $275,000, depending on application requirements.
In mid-1993, the Company introduced the Configuration Change
Management System (CCMS), a software support system for
multi-generation data centers. CCMS builds a data center
configuration database that generates reports and graphical,
logical configurations. While applicable across many of the
Company's products, CCMS is typically sold with FMS. The CCMS
central information database complements FMS by generating its own
real-time for use at any point during planning for data center
consolidations, migration and equipment changes. The CCMS site
license is $25,000.
Channel Networking Systems
The Company's 9090 Distributed Director System (DDS) converts the
mainframe's signals for transmission over high-speed telephone
company lines to connect to other mainframes, high-speed printers,
tape storage units, and workstations at user sites located anywhere
in the world. DDS enables a company to share resources, provides
alternate paths in case a line fails, and balances traffic over the
lines to optimize performance. The Company began customer
shipments of DDS in the first half of 1993. The cost of a typical
Model 9090 system with support for a multi-site network is
approximately $250,000.
Channel extenders provide point-to-point connections between a
mainframe and a peripheral. Historically, the layout of large
computer facilities was restricted by a 200- or 400-foot copper
cable limitation for connecting peripheral equipment to mainframe
computers. Channel extension overcomes this limitation. The
Company's current primary channel extension products, the Models
9200 and 9400, were introduced in early 1991 to multiplex several
channels over one or two high-speed communications lines, thereby
providing the customer with greater flexibility and economies than
previous products. In late 1992, the Company began shipping an
enhanced ChannelPlexer product, which combines eight channels for
transmission over a single communications line. These systems
range in price from approximately $25,000 to $400,000, depending on
application requirements.
Channel Switches
Channel switches serve in copper-based networks of mainframes and
peripherals.
The Company's Models 2400, 1800 and 1200 route data between
multiple, copper-based mainframe computers and peripheral
equipment. The Model 1800 is the industry's largest switch,
supporting up to 48 computer channels by 96 device ports. These
switches range in price from approximately $25,000 to $2,000,000,
depending on size, sophistication and capacity.
The Model 3600 Single and Redundant Matrix switches, introduced in
early 1992, offer static matrix switching of non-fiber channels,
and integrated fiber-optic switching and conversion, easing the
customer's migration to the newer fiber architecture. Prices range
from $57,000 to $2,000,000, depending on the modules included.
The HostNet Models 9088 and 9089 dynamically switch as many as 32
computer channels, allowing users to access applications or
information residing on any attached computer. The Model 9088
provides local connectivity at channel speeds, and the Model 9089
integrates channel extension to provide high-speed interconnection
of computers at different metropolitan sites. These products range
in price from approximately $60,000 to $2,000,000.
Data Communications Switches
Data communications switching systems maintain connections between
front-end processors attached to a large computer network and
potentially thousands of communications lines connecting remote
network sites. Typical applications require high availability of
communications lines, such as for travel reservation systems and
banking automated teller machines. The Company's family of
distributed matrix switches includes the Universe, the
Monolith-Plus, and the Remote Monitoring Unit. These products can
handle communications traffic that ranges in speed from 50 bps to
2.048Mbps. The Universe system handles up to 4,096 ports, and
multiple systems can be combined under common control to provide as
many as 32,000 available ports. Monolith-Plus is a self-contained
320-port switch that can be upgraded to a satellite cabinet of a
Universe system. The Remote Monitoring Unit gives users with
communications matrix switches the ability to perform centralized
real-time monitoring of remote site communications lines. From a
central console, an operator can initiate monitoring of any line
attached to the switch at a remote, unmanned data center. A
LAN-based network management system provides disaster recovery
capability for network control. These systems range in price from
approximately $26,000 to $1,500,000, with a typical system price of
$350,000.
T-Bar Products
The Company's T-Bar division develops and markets a variety of
switches and components for voice, video and data applications.
T-Bar's exclusive multi-pole relay is used in military applications
demanding the highest reliability in potentially harsh operating
environments. These products range in price from $65 to $900.
The Variswitch product provides sparing for critical network
components and systems. Value-added resellers for mini-computer
systems integrate the Variswitch into their products to address
failsafe applications. Switching is provided for LANs, voice,
fiber-optics and data channels in addition to all standard data
communications interfaces. The Variswitch ranges in price from
$5,000 to $300,000.
T-Bar offers switching, monitoring and cable management products
for the fiber-optic market. T-Bar's Optiswitch product is a
photonic matrix switch transparent to speed and protocol. The
Optiswitch product is typically priced from $15,000 to $162,000.
T-Bar expanded into the LAN management market with the announcement
of LANtap in August 1993. LANtap reduces the expense of managing
large LAN networks by sharing expensive diagnostic equipment and
facilitating centralized remote testing. The Company will begin
shipment of this product in the first quarter of 1994.
Sales and Marketing; Foreign Sales; and Backlog
The Company's customers are large companies with IBM and
IBM-compatible mainframe computers and related peripheral devices.
Typical customers include airlines, telecommunications companies,
manufacturing firms, power utilities, insurance companies, banks
and securities firms.
The Company has a worldwide sales force of 76 sales managers,
representatives and systems engineers, located in 26 offices
throughout the United States and overseas. Products are sold
internationally through wholly-owned subsidiaries in Canada, the
United Kingdom, Germany, and Italy, and through independent
distributors worldwide.
The Company does not emphasize financing as part of its sales and
marketing efforts. The Company maintains a leasing arrangement for
customers who elect lease financing. Sales-type leases accounted
for approximately 2% of the Company's annual sales in 1993 and 8%
in 1992. The equipment leases generally range from two to five
years and include an option to purchase the equipment at the end of
the lease term.
The Company generally sells its equipment with a 90-day warranty
covering both parts and labor. The Company also provides
installation and maintenance services for its products. As of
February 1, 1994, the Company had 97 service personnel located in
26 offices in the United States and overseas. The Company also
provides service to certain of its customers through third-party
arrangements.
For the year ended December 31, 1993, the Company's sales to
customers in foreign countries were approximately $17,000,000,
representing approximately 18% of sales compared to $19,800,000, or
24% of sales, in 1992 and $28,100,000, or 27% of sales, in 1991,
reflecting a decrease in sales in all foreign markets from 1992 to
1993 and the severe adverse impact of European economic conditions
from 1991 to 1992. In 1993, the company established a direct sales
subsidiary in Italy and signed reseller agreements with IBM Japan
and Hitachi Data Systems. The Company expects to increase its
market presence in foreign countries in 1994.
All product orders are generally cancelable without penalty to the
customer. Substantially all of the Company's backlog is shipped
within 90 days. Backlog at any particular date depends on the
timing of orders, and therefore is not necessarily a reliable
indicator of future sales over an extended period of time. The
Company did not experience a material amount of order cancellations
in 1993 or 1992. The Company's backlog was approximately
$7,781,000 at December 31, 1993, compared with approximately
$12,003,000 at December 31, 1992.
During 1992 Data Switch received two multi-million dollar,
multi-year contracts from the Federal Reserve and Harris
Corporation. The Federal Reserve's contract with the Company is
for communication switches and control systems for its network
modernization program. Harris Corporation's contract with the
Company is for communications switching equipment for its project
to modernize the nation's air traffic control system. During 1993
the Federal Reserve and Harris Corporation purchased $2.2 million
and $1.1 million, respectively, of goods related to these
contracts. These contracts are subject to change and are thus not
included in the backlog. However, it is anticipated that future
releases under these contracts will amount to $2.8 million and $2.0
million for the Federal Reserve and Harris Corporation,
respectively.
Engineering and Development
The industry in which the Company operates is subject to rapid
technological change. The Company is committed to the development
of new products and the application of new technologies to existing
products. Engineering and development activities resulted in
expenditures of $12,970,000, $12,725,000 and $11,733,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
Engineering and development expenditures are expensed as incurred.
The Company anticipates engineering and development expenditures of
approximately $12,000,000 in 1994.
Manufacturing
Manufacturing operations consist of the assembly and testing of
equipment. Some assemblies are fabricated from purchased
components, and other subsystems are manufactured and assembled by
third parties. All components and assembled equipment undergo
rigorous quality-control testing as part of the manufacturing
process. Components and subassemblies are generally available from
more than one source. The Company has not experienced any
significant difficulties or delays in securing components.
Competition
The marketing for data center networking equipment is intensely
competitive. Competition is based on technology, equipment
features, quality, availability, price and service. The Company
believes that it is competitive in all of these areas.
In the fiber-based systems market, the Company primarily competes
with IBM and regional cabling companies. Conversion products are
sold by Comparex, IBM, Fibercom, McData and other companies. While
IBM holds the dominant market share, it does not offer a
high-density product with enhanced redundancy features, which the
Company does. In addition, the IBM-compatible mainframe
manufacturers do not make protocol conversion products. Data
Switch competes with IBM and a small number of resellers in the
director market.
In the field of channel networking and channel extension, the
Company competes with Computer Network Technology and Network
Systems Corporation. A number of other companies also manufacture
and market channel extension products.
In the channel switching market, the Company traditionally sold
against IBM. The Company believes that IBM no longer actively
markets switching systems that support its older-architecture
mainframes because IBM is emphasizing its new fiber-based systems.
Principal competitors in the data communications switching market
include Telenex (a division of General Signal), Bytex, which was
acquired by Network Systems in mid-1993 and Dynatech.
T-Bar primarily competes with Hadax Electronics and Telenex.
Employees
As of February 1, 1994, the Company had a total of 479 employees,
including 9 officers, 59 administrative personnel, 219 sales,
service and marketing personnel, 85 engineering personnel and 107
production personnel. None of the Company's employees is
represented by a labor organization, and the Company considers its
relationship with its employees to be good.
Patents and Trademarks
The Company has registered the name "DATA SWITCH". The Company
also acquired certain patents and trademarks in connection with its
acquisition of T-Bar, including the trademark "T-BAR". The Company
believes that although its patents and trademarks have value, they
are not material to its businesses, either individually or in the
aggregate.
ITEM 2 -- PROPERTIES
The Company currently leases a 59,000-square-foot facility in
Shelton, Connecticut, for its executive, administrative, sales and
engineering offices. The lease has a current annual rent of
$1,021,000 and expires in 2005, with a no-cost cancellation option
in mid-1995. The Company leases production facilities and office
space of approximately 64,000 square feet in Orange, Connecticut,
under a lease expiring June 30, 1995, with a two and one-half year
renewal option. Annual rental in 1994 will be approximately
$308,000. The Company also leases approximately 23,000 square feet
in Milford, Connecticut which was formerly used for manufacturing
purposes at an annual rental of $156,000 under a lease expiring
June 30, 1997, with a renewal option through June 30, 2002. The
Company has sublet approximately 7,300 square feet of this facility
at an annual rental income of $36,000. The Company is currently
using the remainder of such space as a warehouse facility, but is
attempting to sublet such space. The Company believes that the
current facilities are adequate for anticipated operating
requirements.
The Company leases sales or service office space in 27 cities in
the United States, Canada and Europe. The leases have varying
expirations through March 2013, and the aggregate annual rent is
currently approximately $1,118,000.
ITEM 3 -- LEGAL PROCEEDINGS
A former officer of the Company who sued the Company for breach of
an alleged promise of lifetime employment was awarded a jury
verdict of $413,000 in October 1991. In May 1993, the court
granted the Company's motion to set aside the verdict. Such former
officer has appealed the court's decision. The Company believes
that it has meritorious grounds on which to defend such appeal.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The common stock and the warrants (see Note 10 to the Consolidated
Financial Statements) of the Company are traded on the
over-the-counter market under the NASDAQ symbols DASW and DASWZ,
respectively. The following table sets forth the quarterly high
and low trade prices for each of the common stock and the warrants
as reported by NASDAQ for the periods indicated.
Common Stock (DASW)($'s)
High Low
1992
First Quarter 3-3/8 1-3/4
Second Quarter 2-1/2 7/8
Third Quarter 2-3/8 1-5/16
Fourth Quarter 2-7/8 1-5/8
1993
First Quarter 4-5/8 2-3/16
Second Quarter 4-1/4 2-5/8
Third Quarter 3-3/8 1-7/8
Fourth Quarter 2-3/4 1-1/2
1995 Warrants (DASWZ)($'s)
High Low
1992
First Quarter 1 3/4
Second Quarter 7/8 1/2
Third Quarter 3/4 1/2
Fourth Quarter 3/4 5/8
1993
First Quarter 1-7/8 11/16
Second Quarter 1-1/2 1-1/8
Third Quarter 1-1/4 1
Fourth Quarter 1-1/4 1-1/8
On February 28, 1994 the closing price of the common stock, as
reported by NASDAQ, was $2.50 per share. The closing price of the
1995 Warrants was $1.13 per warrant. As of February 28, 1994,
there were approximately 2,400 holders of record of the Company's
common stock and 24 holders of record of the 1995 Warrants.
Dividend Policy
The Company has never paid a cash dividend on its common stock and
does not contemplate doing so in the forseeable future.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations data of the Company for the five years ended December
31, 1989 through 1993, and selected consolidated balance sheet data
as of December 31 for each of the five years. Such selected
consolidated financial data has been derived from the consolidated
financial statements of the Company and should be read in
conjunction therewith and the related footnotes thereto.
Years Ended December 31,
_____________________________________________
1993 1992 1991 1990 1989
STATEMENT OF
OPERATIONS DATA (000's except per share data)
Revenues, net $95,078 $84,020 $103,000 $121,798 $106,385
Cost of revenues 55,042 42,682 52,147 59,441 53,361
________ ________ _________ _________ _________
Gross profit 40,036 41,338 50,853 62,357 53,024
Selling, general
and administrative 24,994 26,705 32,827 34,142 32,138
Engineering and
development 12,970 12,725 11,733 11,915 10,861
Restructuring
charge (a) 1,780 - - - -
Goodwill amorti-
zation and
write-down (b) 171 171 34,450 2,888 3,041
________ ________ _________ _________ _________
Income (loss)
from operations 121 1,737 (28,157) 13,412 6,984
Other expense (2,189) (2,978) (3,775) (5,269) (6,980)
________ ________ _________ _________ _________
Income (loss)
before income
taxes (2,068) (1,241) (31,932) 8,143 4
Provision for
(benefit from)
income taxes (75) (228) 916 4,872 1,114
________ ________ _________ _________ _________
Income (loss)
before extra-
ordinary gain (1,993) (1,013) (32,848) 3,271 (1,110)
Extraordinary
gain (c) - - 425 2,820 578
________ ________ _________ _________ _________
Net income (loss) $(1,993) $(1,013) $(32,423) $ 6,091 $ (532)
Income (loss) ======== ======== ========= ========= =========
before extra-
ordinary gain
per common share $ (0.16) $ (0.08) $ (2.76) $ 0.28 $ (0.10)
Net income (loss) ======== ======== ========= ========= =========
per common
share (d) $ (0.16) $ (0.08) $ (2.73) $ 0.52 $ (0.05)
Weighted average ======== ======== ========= ========= =========
number of common
and common
equivalent
shares
outstanding 12,120 11,993 11,892 11,693 11,157
December 31,
_____________________________________________
1993 1992 1991 1990 1989
BALANCE SHEET DATA (000's)
Working capital $34,350 $27,786 $ 40,756 $ 41,167 $ 44,663
Total assets 60,284 56,814 68,685 104,865 126,484
Short-term debt
and current
portion of
long-term
debt and
capital lease
obligations 240 1,095 1,780 726 5,825
Capital lease
obligations,
less current
portion 724 646 576 441 617
Long-term debt,
less current
portion 25,487 19,515 30,614 33,952 54,449
Redeemable
warrants 885 802 718 635 -
Total share-
holders' equity 19,663 21,476 22,724 54,999 47,866
<FN>
(a) In the fourth quarter of 1993, the Company reduced its
workforce by approximately 10% and accrued the cost of severance
and related expenses.
(b) In the third quarter of 1991, the Company wrote down goodwill
associated with the T-Bar purchase, to estimated recoverable value
of $2.4 million, and wrote off the goodwill associated with the
purchase of the minority interest in IntelliNet Corporation. The
charge amounted to $32,996,000.
(c) Net gain from exchange of convertible debentures in 1990 and
from repurchases of debt in 1991, 1990 and 1989.
(d) The Company has never paid a cash dividend on its common
stock.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1993 vs 1992
The Company's product revenues increased in 1993 due to the
shipment of new products. Product revenues increased 14.1%
compared with 1992, reversing a trend of declining revenues from
1990 to 1992. Revenues in 1994 are expected to be stable or
increase slightly as new product revenues continue to increase
while established product lines decline. However, it is difficult
to predict with certainty the speed of transition from the older
copper-based technology to the newer fiber-based products. Service
revenues increased 9.6% from 1992, due to an increase in the
installed base, but are not expected to increase significantly in
1994. Revenues in Europe declined from $13,096,000 in 1992 to
$12,254,000 in 1993 due to continued weak economic conditions and
as a result the European operations reported a loss of $504,000 in
1993. The Company does not expect a decline to continue in the
European market due to anticipated results from its new Italian
subsidiary coupled with steps taken to strengthen the European
organization. The Company reported a net loss of $1,993,000 in
1993 compared with a net loss of $1,013,000 in 1992. The net loss
in 1993 included a one-time pre-tax restructuring charge of
$1,780,000 for employee severance and related expenses as the
Company reduced its staffing levels approximately 10% to structure
the Company to operate profitably at current revenue levels. The
accrued costs of this restructuring will be expended by the end of
1994. The future reduction in annual employee costs is anticipated
to be approximately $3,000,000.
Cost of product revenues increased in 1993 to 56.3% from 46.7% in
1992. Cost of service revenues declined to 64.2% in 1993 from
66.1% in 1992. The increase in cost of product revenues resulted
primarily from product mix, including a significant increase in
sales by the Company of products manufactured by third parties,
which products have lower gross margins than those manufactured by
the Company. The Company also experienced a decline in margins due
to discounts on large dollar sales. The Company believes that in
1994 the cost of product revenues will be similar to such costs in
1993.
The Company reduced operating expenses in 1993, including a
$1,711,000 reduction in selling, general and administrative
expenses. This decrease was achieved through the consolidation of
facilities in 1993, and a smaller average workforce in 1993 versus
1992. As a result of these savings and increased revenues in 1993,
selling, general and administrative expenses as a percentage of
revenue decreased to 26.3% in 1993 compared with 31.8% in 1992.
Engineering and development expenditures increased to $12,970,000
in 1993 from $12,725,000 in 1992, comprising 13.6% and 15.1% of
revenues in 1993 and 1992, respectively. These expenditures
supported development of strategic new products which began
shipping in 1993. The Company anticipates spending approximately
$12,000,000 in engineering and development in 1994.
Although long and short-term debt outstanding was $5,195,000 more
(including capital lease obligations) at December 31, 1993 than at
December 31, 1992, interest expense was substantially less in 1993
versus 1992 because the average outstanding debt and interest rates
were lower in 1993 than 1992.
The Company recorded an income tax benefit in 1993 primarily as a
result of the reversal of temporary differences on which the
Company had previously provided deferred taxes. The tax benefit
in amount and percentage was lower in 1993 than in 1992, as a
result of limitations on the ability to recognize the tax benefit
of both domestic and foreign subsidiary losses. The Company
adopted SFAS No. 109, Accounting for Income Taxes in 1993. The net
effect of adoption of the statement was not material to the
consolidated results of operations or financial position of the
Company.
In November 1992 the Financial Accounting Standards Board issued
SFAS No. 112 Employers' Accounting for Post Employment Benefits
effective for fiscal years beginning after December 15, 1993.
Under this statement employers are required to recognize the
obligation to provide post employment benefits if the obligation is
attributable to employee services already rendered, employee rights
to those benefits accumulate or vest, payment of the benefits is
probable, and the amount of benefits can be reasonably estimated.
The Company believes that the net effect of adoption of the
statement will not be material to the consolidated results of
operations or financial position of the Company.
1992 vs 1991
The Company's revenues declined in 1992 due to a continued weak
economy both domestically and in major foreign markets. Also
revenue anticipated from new product sales was not attained due to
a delay in shipment of new products. Due to late release of new
products, shipment of these products did not begin until the first
quarter of 1993, delaying revenue recognition until the second
quarter of 1993. Service revenues increased 4.8% compared with
1991, while product revenues decreased 23.0% from 1991. Revenues
in Europe declined from $18,208,000 in 1991 to $13,096,000 in 1992
due to weakened economic conditions in that area and as a result
the European operations reported a loss of $372,000 in 1992.
The Company reported a net loss of $1,013,000 in 1992 compared with
a net loss of $32,423,000 in 1991. The net loss in
1991 included a goodwill write-down of $32,996,000 and an
extraordinary gain of $425,000.
Cost of product revenues increased slightly in 1992 to 46.7% from
45.9% in 1991. Cost of service revenues declined significantly to
66.1% in 1992 from 74.7% in 1991. The reduction in cost of service
revenues resulted from a revenue increase of $816,000, generated
from the increased installed base, while costs decreased $911,000
as the Company reduced service overhead expenditures.
The Company reduced operational expenses substantially in 1992,
including a $6,122,000 reduction in selling, general and
administrative expenses. This decrease in expenses was achieved
primarily through a workforce reduction of approximately 18%. As
a result of these savings, although revenues declined 18.4% in
1992, selling, general and administrative expenses as a percentage
of revenue did not increase, remaining at 31.8% in 1992 compared
with 31.9% in 1991.
The significant reduction in selling, general and administrative
costs allowed the Company to redirect some of these savings to
product development. Engineering and development expenditures
increased to $12,725,000 in 1992 from $11,733,000 in 1991,
comprising 15.1% and 11.4% of revenues in 1992 and 1991,
respectively. These expenditures supported development of
strategic new products that began shipment in 1993.
In the third quarter of 1991 the Company wrote down goodwill
associated with the purchase of T-Bar, to estimated recoverable
value of approximately $2.4 million, and wrote off goodwill
associated with the purchase of the minority interest in IntelliNet
Corporation. This write-down, which amounted to $32,996,000,
resulted from the assessment of the data communications product
line and the IntelliNet product which is sold in conjunction with
the Company's data communications products. T-Bar was acquired in
1986 and had three primary product lines: (i) a data processing
switch which was less technologically advanced than that of Data
Switch; (ii) a data communication matrix switch that was
substantially ahead of Data Switch's product offering; and (iii)
a range of small switches and components which was a declining and
relatively small product line. The Company's intention at the time
of the acquisition was to emphasize the product strengths of each
company, that is, the T-Bar data communication matrix switch and
the Data Switch data processing switch.
This strategy was followed with some success and these product line
revenues grew through 1988, but the data communication revenues
began to decline in 1989. During this period the Company invested
heavily in the next generation data communication switch which was
introduced in 1990. Initial market acceptance of the new Universe
switch produced an increase in revenues in the second half of 1990
and the expectation for continued profitability in the data
communication line was high. However, this anticipated growth was
not sustained and the first half of 1991 reflected a 25% decline
versus second half of 1990.
In addition to these trends, in September 1991 IBM made significant
product announcements that caused many competitors in the industry,
including the Company, to re-examine its long-term strategy. These
announcements made it clear that there was to be an imminent range
of products used in the mainframe environment for which the Company
had no products that could compete with the IBM Escon product line.
Also, the demand for the Company's existing data processing
switches would be negatively impacted by the new architecture.
Management determined that failure to respond to the change in
market condition caused by the introduction of the IBM Escon
architecture would have resulted in a major continuing
deterioration in the Company's operating results within a two to
three year time-frame. As a result the Company decided to put the
majority of its development emphasis on the data processing product
line. The Company believes these factors resulted in an impairment
to the value of the goodwill, and it wrote down goodwill to its
estimated recoverable value.
Interest expense declined significantly as a result of reduced debt
levels achieved through positive cash flow in 1992.
The Company recorded an income tax benefit in 1992 primarily as a
result of foreign subsidiary losses, which can be carried-back to
offset taxes in prior profitable years. The effective tax rate,
excluding goodwill amortization and write-down from pre-tax income,
was lower in 1992 than in 1991, as a result of domestic losses for
which no income tax benefit was recognized in 1992.
Liquidity and Capital Resources
The Company used $7,258,000 of cash before financing activities in
1993, compared to generating $12,880,000 in 1992. As of December
31, 1993 the Company had working capital of $34,350,000 reflecting
an increase of $6,564,000 from the prior year. The cash used
before financing activities and this increase in working capital
was primarily a result of the increase in accounts receivable
during the year, which was generated from increased revenues in
1993. In addition to selling its products, the Company also leases
its products under sales-type lease agreements. These lease
receivables are available for sale as a source of financing. The
Company received approximately $3,043,000 in 1993 from the sale of
leases.
The ratio of current assets to current liabilities was 3.6:1 at
year-end 1993 compared to 3.0:1 at year-end 1992.
Long-term debt consisted of $19,515,000 of convertible subordinated
debentures and $5,972,000 of indebtedness under a revolving line of
credit of $8,000,000 with People's Bank all of which was available
based on a formula of eligible receivables (as defined). This line
of credit is collateralized by a first lien on substantially all of
the Company's assets, and is available, subject to maintenance of
certain covenants and financial ratios, through March 1, 1996. At
December 31, 1993 the Company was not in compliance with a
financial covenant contained in its credit agreement; however the
Company has obtained a waiver of this covenant for 1993.
There are no significant capital expenditures planned for 1994; the
aggregate amount of spending is anticipated to be close to the
level of depreciation for the year.
In the opinion of management, existing financial resources,
including cash anticipated to be generated by operations and
available under existing credit facilities, will be adequate to
meet current and expected operating and capital requirements.
Impact of Inflation
Inflation did not have a significant impact on the Company during
1991, 1992 and 1993, and is not expected to do so in 1994.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEX
Page No.
Financial Statements
Report of Independent Accountants 16
Consolidated Balance Sheets - December 31, 1993 and 1992 17
Consolidated Statements of Operations
for the years ended December 31, 1993, 1992 and 1991 18
Consolidated Statements of Cash Flows
for the years ended December 31, 1993, 1992 and 1991 19
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1993, 1992 and 1991 20
Notes to Consolidated Financial Statements 21
Schedules (Refer to Item 14) 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Data Switch Corporation
We have audited the consolidated financial statements and the
financial statement schedules of Data Switch Corporation listed in
the index of consolidated financial statements and schedules in
Item 8 of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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 Data Switch Corporation at December 31, 1993 and 1992,
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand
Stamford, Connecticut
February 11, 1994, except
for Note 9, as to which
the date is March 22, 1994
DATA SWITCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's except share data)
December 31,
__________________________
1993 1992
____ ____
Current assets:
Cash and cash equivalents $ 491 $ 2,208
Accounts receivable
(net of allowance for doubtful
accounts of $656 in 1993
and 1992) 25,245 16,222
Income taxes receivable 144 581
Lease receivables, net 1,095 1,799
Inventories 19,795 20,008
Prepaid expenses and other 966 1,066
_________ _________
Total current assets 47,736 41,884
Long-term lease receivables, net 3,135 4,867
Property and equipment, net 5,801 6,177
Goodwill, net 2,469 2,640
Other 1,143 1,246
_________ _________
Total assets $ 60,284 $ 56,814
========= =========
Current liabilities:
Accounts payable, trade $ 5,253 $ 3,711
Short-term debt - 606
Current portion of long-term debt - 165
Accrued compensation 2,368 1,476
Other accrued liabilities 4,889 7,388
Income taxes payable 37 15
Other taxes payable 599 413
Current portion of capital lease
obligations 240 324
_________ _________
Total current liabilities 13,386 14,098
Long-term debt, less current portion 25,487 19,515
Capital lease obligations, less
current portion 724 646
Deferred income taxes 139 277
Contingencies
Redeemable warrants 885 802
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 12,224,278 and 12,089,131
shares at December 31, 1993
and 1992, respectively 122 121
Additional paid-in capital 50,413 50,226
Accumulated deficit (30,287) (28,294)
Cumulative translation adjustment (272) (210)
Less:
Receivables from stock purchases (24) (78)
Treasury stock, at cost
(48,429 shares in 1993 and 1992) (289) (289)
_________ _________
Total shareholders' equity 19,663 21,476
_________ _________
Total liabilities and shareholders'
equity $ 60,284 $ 56,814
========= =========
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except per share data)
For the Years Ended December 31,
________________________________
1993 1992 1991
_________ _________ _________
Revenues:
Product revenues $ 75,739 $ 66,368 $ 86,164
Service revenues 19,339 17,652 16,836
_________ _________ _________
Revenues, net 95,078 84,020 103,000
Cost of revenues:
Cost of product revenues 42,617 31,012 39,566
Cost of service revenues 12,425 11,670 12,581
_________ _________ _________
Cost of revenues 55,042 42,682 52,147
Gross profit 40,036 41,338 50,853
Operating expenses:
Selling, general and administrative 24,994 26,705 32,827
Engineering and development 12,970 12,725 11,733
Restructuring charge 1,780 - -
Goodwill amortization and
write-down 171 171 34,450
_________ _________ _________
Total operating expenses 39,915 39,601 79,010
Income (loss) from operations 121 1,737 (28,157)
Other income (expense):
Interest expense (2,077) (2,684) (3,817)
Foreign exchange gain (loss) (87) (207) 144
Other, net (25) (87) (102)
_________ _________ _________
Total other income (expense) (2,189) (2,978) (3,775)
Loss before income taxes (2,068) (1,241) (31,932)
Provision for (benefit from)
income taxes (75) (228) 916
_________ _________ _________
Loss before extraordinary gain (1,993) (1,013) (32,848)
Extraordinary gain on repurchase
of debt (net of $291 of taxes
in 1991) - - 425
_________ _________ _________
Net loss $ (1,993) $ (1,013) $(32,423)
========= ========= =========
Primary loss per share before
extraordinary gain $ (.16) $ (.08) $ (2.76)
Extraordinary gain per share - - .03
_________ _________ _________
Primary loss per share after
extraordinary gain $ (.16) $ (.08) $ (2.73)
========= ========= =========
Fully diluted earnings per share
after extraordinary gain $ (a) $ (a) $ (a)
========= ========= =========
Weighted average number of common
shares outstanding 12,120 11,993 11,892
========= ========= =========
<FN>
(a) Not presented as a result of being anti-dilutive.
The accompanying notes are an integral part of the consolidated
financial statements.
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
For the Years Ended December 31,
________________________________
1993 1992 1991
Cash flows from operating activities:
Net loss $ (1,993) $ (1,013) $(32,423)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation 3,492 3,208 4,193
Goodwill amortization and
write-down 171 171 34,450
Effect of utilizing acquired
NOLs - - 822
Deferred income taxes (130) 19 (335)
Extraordinary gain - - (425)
Changes in operating assets
and liabilities:
(Increase) decrease in:
Receivables (6,710) 12,185 (2,473)
Inventories 491 (163) 2,063
Prepaid expenses and other 517 (668) 93
Increase (decrease) in:
Accounts payable, trade 1,551 (986) 1,114
Accruals (1,562) 2,356 (480)
Income taxes payable 22 (79) (1,905)
Other taxes payable 197 9 (163)
Other, net 199 640 341
Net cash provided (used) by
operating activities (3,755) 15,679 4,872
Cash flows from investing
activities:
Property and equipment additions (3,503) (2,799) (3,245)
Acquisition of minority interest
in subsidiaries - - (701)
Net cash used in investing
activities (3,503) (2,799) (3,946)
Net cash provided (used) before
financing activities (7,258) 12,880 926
Cash flows from financing
activities:
Net payments of short-term debt (598) (8,156) (160)
Proceeds under long-term
borrowings 36,523 10,042 34,071
Principal payments and
repurchases under long-term
borrowings (30,723) (13,424) (35,488)
Proceeds from issuance of
common stock 325 244 441
Net cash provided (used) by
financing activities 5,527 (11,294) (1,136)
Effect of exchange rate
changes on cash 14 (131) (167)
Net increase (decrease) in cash
and cash equivalents (1,717) 1,455 (377)
Cash and cash equivalents at
beginning of the period 2,208 753 1,130
Cash and cash equivalents at
end of the period $ 491 $ 2,208 $ 753
Supplemental disclosures of cash
flow information:
Cash paid (received) during the
period for:
Interest $ 1,913 $ 2,419 $ 3,757
Income taxes $ (405) $ 178 $ 2,342
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
DATA SWITCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts
of Data Switch Corporation and its subsidiaries (the
"Company"). All intercompany transactions and balances
are eliminated.
Inventories:
Inventories are stated at the lower of cost, which
approximates a first-in, first-out basis, or market.
Property and Equipment:
Property and equipment are stated at cost and depreciated
using the straight-line method over estimated useful lives
of two to ten years or, in the case of leasehold
improvements, over the term of the lease, if shorter.
The cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss
on disposition is charged to income.
Goodwill:
The excess of cost over the fair value of net assets
acquired in ChannelNet minority interest acquisitions
is being amortized using the straight-line method
over 10 years. The excess of cost over the fair value
of net assets acquired in T-Bar and IntelliNet purchases
had been amortized using the straight-line method over
periods of 10 to 25 years. The Company assesses the
recoverability of goodwill on acquired lines of business
by determining whether amortization of goodwill over its
original estimated useful life can be recovered through
estimated future undiscounted operating income, excluding
goodwill amortization. (See Note 4.)
Deferred Debt Issuance Costs:
Included in other assets in 1993 and 1992 are deferred
debt issuance costs. These costs are being amortized over
the term of the debt and are being included in the
determination of any gain or loss realized as debt is
retired.
Revenue Recognition:
The Company recognizes revenues from system sales and
sales-type leases when risk of loss transfers to the
customer, generally when the equipment is shipped. On new
products or substantial modifications to existing
products, revenue is deferred until customer acceptance.
Unearned finance income on sales-type leases is
recognized over the lease term. Service revenues are
recognized over the contractual period for maintenance
contracts, or as services are performed. Rental income on
systems leased to customers under operating leases is
recorded monthly, as earned.
Warranty:
It is the Company's general policy to give 90 day
warranties on its product sales. Estimated warranty
expense is accrued in cost of sales in connection with
product sales.
Income Taxes:
In 1991 and 1992, the Company used the liability method of
accounting for income taxes. In 1993, the Company adopted
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109), effective
January 1, 1993. The cumulative effect of the change in
accounting principle as of January 1, 1993 was not
material to the consolidated results of operations or
financial position of the Company.
Foreign Currency Translation:
The Company recognizes the local currency of its European
subsidiaries as their functional currency and accordingly,
translates assets and liabilities at year-end exchange
rates and revenue and expense items at average exchange
rates prevailing during the year. The resulting
translation adjustments are recorded as a separate
component of shareholders' equity.
Cash Flows:
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents.
Earnings Per Share:
Primary earnings per share is computed on the basis of the
weighted average number of shares outstanding plus the
common stock equivalents that would arise from the
exercise of stock options and stock warrants, where not
anti-dilutive.
Fully diluted earnings per share is computed on the basis
of the weighted average number of shares outstanding plus
the common stock equivalents that would arise from the
exercise of stock options and stock warrants, where not
anti-dilutive, plus the effect of the additional shares
arising from the conversion of the convertible
subordinated debentures.
2. Inventories
Inventories consist of the following as of December 31,
1993 and 1992:
(000's)
1993 1992
________ ________
Raw materials $ 11,075 $ 10,094
Systems in process 1,821 1,903
Finished goods 5,409 5,741
Demonstration equipment 1,490 2,270
________ ________
Total $ 19,795 $ 20,008
======== ========
3. Property and Equipment
Property and equipment include the following as of
December 31, 1993 and 1992:
(000's)
1993 1992
________ _________
Machinery and equipment $ 17,362 $ 16,805
Furniture, fixtures,
and leasehold
improvements 10,790 11,777
Equipment under capital
leases 1,395 1,475
Systems leased to customers 1,411 991
________ _________
30,958 31,048
Less, accumulated depreci-
ation and amortization (25,157) (24,871)
Net property and equipment $ 5,801 $ 6,177
4. Goodwill
In the third quarter of 1991 the Company wrote down
goodwill associated with the purchase of T-Bar to
estimated recoverable value of approximately $2.4 million,
and wrote off goodwill associated with the purchase of the
minority interest in IntelliNet Corporation. This
write-down, which amounted to $32,996,000, resulted from
the assessment of the data communications product line and
the IntelliNet product which is sold in conjunction with
the Company's data communications products.
To the extent that T-Bar pre-acquisition net operating
loss carryforwards and tax credit carryforwards are
utilized, the Company recognizes income tax expense and
reduces goodwill rather than recognizing a tax benefit.
Goodwill consisted of the following at December 31, 1993
and 1992:
(000's)
1993 1992
________ ________
Goodwill - gross $ 51,444 $ 51,444
Benefit from pre-acquisition
NOL carryforwards utilized (5,505) (5,505)
Amortization/Write-down (43,470) (43,299)
_________ _________
Goodwill, net $ 2,469 $ 2,640
========= =========
5. Leasing Arrangements, as Lessor
Sales-Type Leases:
In addition to selling its products, the Company also
leases its products under sales-type lease agreements
expiring at various dates through 1998. The Company's net
investment in sales-type leases consists of the following
as of December 31, 1993 and 1992:
(000's)
1993 1992
________ ________
Minimum lease payments
receivable $ 2,673 $ 5,740
Estimated unguaranteed
residual values 1,955 1,728
Less, unearned finance income (398) (802)
_________ _________
Lease receivables, net 4,230 6,666
Less, current portion (1,095) (1,799)
_________ _________
Long-term portion $ 3,135 $ 4,867
========= =========
Estimated unguaranteed residual values include those
related to lease receivables sold to third parties.
Future minimum amounts receivable at December 31, 1993
under sales-type leases for the next five years were:
(000's)
________
1994 $ 1,154
1995 835
1996 458
1997 177
1998 49
The Company has entered into various arrangements for the
sale of lease receivables under which the Company received
proceeds of approximately $3,043,000 in 1993, $3,906,000
in 1992 and $3,288,000 in 1991. As of December 31, 1993
and December 31, 1992, lease receivables sold under these
arrangements totaled $4,747,000 and $6,015,000,
respectively. In the event of a default by a lessee,
recourse is limited to the collateralized equipment, with
an estimated unguaranteed residual value of $1,134,000 and
$893,000 at December 31, 1993 and 1992, respectively.
Operating Leases:
The Company leases systems to customers under operating
leases, generally with terms of up to 24 months, with
provisions for early termination with a penalty.
6. Leasing Arrangements, As Lessee
Operating Leases:
The Company conducts all of its operations from leased
facilities. Future minimum rental payments at December
31, 1993 under non-cancelable operating leases were as
follows:
(000's)
________
1994 $ 2,463
1995 1,579
1996 769
1997 547
1998 309
Thereafter 2,260
________
Total $ 7,927
========
The rent expense for all leased facilities amounted to
$2,704,000, $3,117,000, and $3,314,000 for 1993, 1992
and 1991, respectively.
Capital Leases:
The Company leases equipment and automobiles (included in
property and equipment) under capital lease agreements
that extend through 1998. Depreciation expense on these
assets amounted to $253,000, $374,000 and $467,000 for
1992 and 1991, respectively. As of December 31, 1993,
equipment under capital leases had a net book value of
$838,000.
Future minimum lease payments under capital leases,
together with the present value of such payments as
of December 31, 1993, were as follows:
(000's)
________
1994 $ 310
1995 269
1996 215
1997 200
1998 148
________
Total 1,142
Less, imputed interest (at
rates ranging from
7.25% to 12.0%) (178)
Present value of capital
lease obligations 964
Less, current portion (240)
_________
Long-term portion $ 724
=========
7. Other Accrued Liabilities
Included in other accrued liabilities are deferred
revenues related to maintenance contracts of $1,126,000
and $1,385,000 at December 31, 1993 and 1992, respectively
and a prepayment for an order delivered in the first
quarter of 1993 of $1,670,000 at December 31, 1992.
8. Short-Term Debt
Borrowings from banks of the Company's foreign
subsidiaries, collateralized by the subsidiaries'
receivables, were included in short-term debt at December
31, 1993, 1992 and 1991. All borrowings were paid off by
March, 1993. Average borrowings were computed using month
end balances. Weighted average interest rate was
calculated using total interest for the year divided by
average borrowings.
(000's except interest rate)
1993 1992 1991
________ ________ ________
Average borrowings $ 91 $ 601 $ -
Maximum borrowings 905 1,256 -
Weighted average
annual interest 8.9% 12.1% -
rate
Weighted average
interest
rate at year end - 11.2% -
Balance out-
standing, end
of year $ - $ 606 $ -
9. Long-Term Debt
Long-term debt consisted of the following as of December
31, 1993 and 1992:
(000's)
1993 1992
________ ________
Lines of credit (a) $ 5,972 $ -
9% convertible subordinated
debentures (b) 3,539 3,539
8-1/4% convertible subord-
inated debentures (c)(d)(e) 15,976 15,976
15% senior subordinated
notes (d)(e) - 91
Chase promissory note (f) - 74
________ ________
25,487 19,680
Less, current portion - (165)
________ _________
$ 25,487 $ 19,515
======== =========
<FN>
(a) As of December 31, 1992, the Company had an agreement with
Chemical Bank and Marine Midland Bank, N.A., providing for
borrowings of up to $11,400,000. This agreement matured
on March 13, 1993. On March 11, 1993, the Company entered
into a new long-term credit agreement with People's Bank
providing for domestic borrowings of up to $8,000,000, all
of which was available at December 31, 1993, based on a
formula of eligible receivables (as defined). The credit
facility is collateralized by a first lien on
substantially all of the Company's assets, and the
agreement contains, among other provisions and covenants,
the following: (1) subordination of all existing and
future indebtedness (as defined) of the Company to the
indebtedness under the credit facility; (2) limitations on
dividend payments, stock purchases and subordinated debt
repurchases; (3) maintenance of levels of Consolidated
Adjusted Tangible Net Worth (as defined) and (4)
achievement of various financial ratios. At December 31,
1993 the Company was not in compliance with a financial
covenant contained in its credit agreement; however, the
Company has obtained a waiver of this covenant for 1993.
The Company is required to pay a commitment fee equal to
1% of the unused borrowings under the line of credit. The
loans mature on March 1, 1996, and bear interest at the
People's prime rate plus 1 1/4%.
(b) The 9% convertible subordinated debentures are convertible
into the Company's common stock at a price of $6.92 per
share. These debentures, due in 1996, are redeemable at a
premium of 4% decreasing to par in 1995, in whole or in
part, at the option of the Company.
(c) The 8-1/4% convertible subordinated debentures, which
mature on June 1, 2002, are convertible into the
Company's common stock at $6.92 per share and are
redeemable in whole or in part, at the option of the
Company. The Company is required to redeem on June 1,
1998, and on each June 1 thereafter through 2001,
$7,000,000 aggregate principal amount of debentures at a
redemption price of 100% of principal amount together with
interest accrued to the redemption date, calculated to
retire 80% of the debentures prior to maturity. As of
December 31, 1993 $19,024,000 or 54.4% of the original
amount had been purchased or exchanged, which satisfies
the repurchase requirements of the Company for 1998 and
1999. This agreement contains, among other provisions and
covenants, the following: (1) prepayment options at
a premium of 4.95% decreasing to par in 1997; (2)
subordination of the debentures to all existing and future
indebtedness (as defined); (3) restrictions on the payment
of dividends and stock purchases and (4) maintenance of
levels of Consolidated Tangible Net Worth (as defined).
(d) During the first quarter of 1990, the Company concluded an
exchange offer to replace each $1,000 principal amount of
existing 8-1/4% convertible subordinated debentures with
a new $700 principal amount of 15% senior subordinated
notes due February 1, 2000 ("New Notes"), plus 56 warrants
("1995 Warrants," See Note 10).
Pursuant to the terms of the indenture in connection with
the New Notes, as a result of the goodwill write-
down (See Note 4), the Company was obligated to offer to
repurchase the balance of the outstanding New Notes, at a
purchase price equal to the principal amount of New Notes
tendered for payment, plus accrued interest. As a result,
$1,141,000 of New Notes were repurchased in 1992. As of
December 31, 1992, $91,000 principal amount of New Notes
were outstanding and were classified as short term. In
March 1993 the Company redeemed the balance of the
remaining New Notes at a purchase price equal to 107% of
the principal amount, plus accrued interest through March
31, 1993.
(e) In 1991 the Company repurchased 8-1/4% convertible
subordinated debentures and 15% New Notes on the
open market. These transactions resulted in extraordinary
gains in 1991.
(f) In May 1990 the Company entered into an installment loan
agreement with Chase Manhattan Service Corporation under
which the Company received $462,000. This note was
collateralized by certain assets of the Company and was
repaid in monthly installments over three years at an
interest rate of 12%. The final payment was made in May
1993.
10. Common Stock
Each 1995 Warrant issued pursuant to the debenture
exchange offer in 1990 entitles the holder to purchase
one share of common stock at a price of $5.00 per share,
subject to adjustment, from January 1, 1991 through
December 31, 1995. The expiration date is subject to
extension under certain circumstances. The 1995 Warrants,
which had a fair value of $0.75 per 1995 Warrant at the
date of the exchange, are redeemable at the option of the
holder for $1.25 during the last quarter of 1994. There
were no 1995 Warrants exercised in 1993 or 1992. As of
December 31, 1993, 758,184 of the 1995 Warrants were
outstanding.
The Company agreed in July 1992 to issue warrants to an
investment banking firm for services rendered, pursuant to
which such investment bank may, at any time after August
1, 1993 and prior to July 31, 1997, purchase 100,000
shares of the Company's common stock at $2.38 per share.
The Company has reserved, as of December 31, 1993,
3,678,271 shares to be issued upon conversion of the
8-1/4% convertible subordinated debentures, the 9%
convertible subordinated debentures, the 1995 Warrants and
the investment banking warrants.
In 1988, the Company declared a dividend of common share
purchase rights in the amount of one right for each 10
shares of the Company's common stock. The rights are
attached to and trade with the shares of common stock, and
each right entitles the holder to acquire one additional
share of common stock at a price of $16.00 per share,
subject to adjustment. In the event of any merger or
other combination of the Company not submitted to a vote
of the shareholders, the rights, along with the exercise
price, are exchangeable into 4 shares of the voting stock
of the Company or its successor or survivor (but the
then-market value of such shares shall not exceed 4 times
the exercise price of the rights). The rights are
redeemable by the Company for $.01 per right at any time
prior to the occurrence of certain events constituting
change of control or intention to effect a change of
control of the Company.
11. Employee Incentive Plans
Stock Options:
The Company has one incentive stock option plan ("ISOP")
and one non-qualified stock option plan ("NQSOP") under
which stock options may be granted to employees to
purchase the Company's common stock at a price not less
than fair market value at date of grant. Options are
granted for a term of 10 years under the ISOP, and are
serially exercisable at the rate of 33% per annum
commencing 18 months after the date of grant.
Options under the 1988 NQSOP are granted for a term of
five years. The plan provides for the same calculation of
exercise price as under the ISOP, but permits option
grants to employees, outside directors, advisors, and
consultants who are not full-time employees of the
Company, and permits flexible exercise terms, except as to
outside directors. All outside director option grants
under the NQSOP are fixed at 10,000 shares (but not more
than an aggregate exercise price of $100,000) on such
person's election to the Board of Directors, with an
additional option grant of 5,000 shares to be awarded
after each anniversary of service. All outside director
options are exercisable as follows: one-third of the
shares after the first anniversary date of grant,
two-thirds of the shares after the second anniversary, and
all of the shares after the third anniversary.
The changes in the number of common shares issuable under
outstanding options, the number of shares reserved
for issuance, and the price range of options are as follows:
1982 1983 1988 1989
(000's except price range data) ISOP(a) ISOP(a) NQSOP ISOP
Outstanding: December 31, 1990 180 461 317 483
Options granted - 283 23 -
Exchange of ChannelNet options - 102(b) - -
Exercised (6) (13) - -
Cancelled (15) (69) (71) (70)
Outstanding: December 31, 1991 159 764 269 413
Options granted 6 209 120 102
Exercised - - - (96)
Cancelled (16) (181) (114) -
Outstanding: December 31, 1992 149 792 275 419
Options granted - 88 137 309
Exercised - (3) - -
Cancelled (44) (115) (228) (259)
Outstanding: December 31, 1993 105 762 184 469
Exercisable at
December 31, 1993 80 410 63 271
Available for grant at
December 31, 1993 - - 316 531
Total shares reserved for
future issuance at
December 31, 1993 105 762 500 1,000
Price range of options Low $4.00 $2.00 $1.81 $2.00
outstanding at
December 31, 1993 High $6.50 $8.13 $7.75 $4.63
Price range of options exercised
1991 Low $1.26 $1.07 - -
High $1.26 $1.07
1992 Low - - - -
High - - - -
1993 Low - $2.00 - -
High - $3.21 - -
<FN>
(a) The 1982 and 1983 ISOP's have expired.
(b) Under terms of the purchase agreement with ChannelNet, the
options held by ChannelNet employees to purchase common stock of
ChannelNet were converted into an equivalent number of options to
purchase the Company's common stock.
Stock Purchase Plan:
The 1981 Stock Purchase Plan provided directors, officers
and managers of the Company the opportunity to purchase
the Company's common stock. The total number of shares
authorized under the plan cannot exceed 375,000. The
purchase price of the stock cannot be less than fair
market value of the stock on the date of purchase. In
accordance with the terms of the plan, the Company has
taken notes, for 90% of the purchase price, for certain
purchases under the plan. These notes, which are shown as
a reduction of shareholders' equity, totalled $24,000 at
December 31, 1993 and $78,000 at both December 31, 1992
and 1991. Notes are due 10 years from the date of the
note and bear interest at rates of 6% or 9%, payable
annually. The plan expired with respect to future
purchases on January 4, 1983.
The 1991 Employee Stock Purchase Plan, which succeeded a
similar prior plan, grants to all regular full-time
employees of the Company and its subsidiaries the right to
purchase up to an aggregate of 500,000 shares of the
Company's stock through payroll deductions, at a purchase
price equal to 85% of the fair market value of the
shares during each quarterly period that the plan is in
effect. During 1993, 1992 and 1991, employees purchased
121,997, 153,401 and 127,055 shares, respectively, of the
Company's stock through this non-compensatory plan
and its predecessor. As of December 31, 1993, there were
150,738 shares reserved for future issuance under this
Plan.
Stock Bonus Plan:
Under the 1983 Stock Bonus Plan, 150,000 shares were
reserved for issuance. The Board of Directors awarded
9,810, 8,550 and 12,775 shares to employees during 1993,
1992 and 1991, respectively. Such awards are charged
to expense and valued at the fair market value of the
stock at the date awarded. As of December 31, 1993, there
were 10,541 shares reserved for future issuance under this
plan.
Data Switch Bonus Plan:
Under the Data Switch Bonus Plan ("Bonus Plan"), up to 10%
of the Company's pre-tax, pre-bonus profit is placed
into a pool to make cash awards to officers and other key
employees based on base salary and grade level. This
plan, adopted as of July 1, 1992, replaced the 1992
Executive Bonus Compensation Plan. Prior to January 1,
1994, payments under the Bonus Plan were made quarterly,
based upon quarterly results. The Bonus Plan was
amended effective January 1, 1994 to provide for annual
payments, based upon annual results. Compensation
expense under these plans was $173,000, $96,000, and $0 in
1993, 1992 and 1991, respectively. The Bonus Plan
is administered by the Compensation and Stock Option
Committee of the Board of Directors.
In 1992, the shareholders approved the 1992 Executive
Stock Incentive Plan, which is designed to provide
incentive to a limited number of key executive employees
of the Company. Under this plan, 500,000 shares of
the Company's common stock were reserved for issuance. On
an annual basis, up to 6% of the pre-tax, pre-bonus,
pre-incentive profits of the Company are placed in a bonus
pool. Of that pool, 83.3% will be paid in shares and the
balance in cash, based upon the participant's base salary.
The shares issued pursuant to this plan are restricted as
to transfer by the recipient for a period of 2 years.
There were no cash or stock payments made under this plan
in 1993 or 1992.
12. Retirement Savings Plan
In August 1986, the Board of Directors adopted the
Retirement Savings Plan ("Savings Plan") for the benefit
of all full-time employees, effective as of January 1,
1987. The Savings Plan is a defined contribution plan.
The Company's contribution to the Savings Plan was
$395,000, $344,000 and $367,000 in 1993, 1992 and 1991,
respectively.
13. Income Taxes:
The components of the provision (benefit) for income
taxes, excluding the tax provision of $291,000 allocated
to extraordinary gain in 1991 are as follows:
(000's)
1993 1992 1991
_________ _________ _________
U.S. federal
income taxes:
Current $ 30 $ 19 $ 104
Deferred (48) (19) 20
Charge equivalent
to acquired
net operating
loss carry-
forward benefits - - 822
State taxes:
Current 63 - 214
Deferred (150) 150 -
Foreign taxes:
Current (40) (257) 111
Deferred 70 (121) (355)
_________ _________ _________
Total tax provision $ (75) $ (228) $ 916
========= ========= =========
A reconciliation of the statutory tax amounts and the
Company's effective taxes excluding amounts allocated to
the extraordinary gain are as follows:
(000's)
1993 1992 1991
____ ____ ____
U.S. federal taxes
at statutory rates $ (703) $ (422) $(10,857)
Increase (reduc-
tion) in taxes
resulting from:
Domestic losses
without tax
benefit 430 113 -
Goodwill amort-
ization and
write-down --
not deductible
for tax purposes 58 58 11,713
State taxes (57) 99 141
Varying tax rates
of foreign
subsidiaries 172 (98) (115)
Other, net 25 22 34
_________ _________ _________
$ (75) $ (228) $ 916
========= ========= =========
The following table summarizes by component, the net
deferred tax assets (liabilities) of the Company as of
December 31, 1993, and January 1, 1993.
(000's)
December 31 January 1
1993 1993
____ ____
Current tax assets
related to:
Inventory reserves $ 2,056 $ 1,637
Allowance for doubtful
accounts 202 220
Other 166 572
_________ _________
2,424 2,429
Non-current tax assets
related to:
Depreciation 1,294 1,627
Loss carryforward 766 901
Tax credits 3,752 3,752
Alternative minimum credits 606 588
_________ _________
6,418 6,868
Current tax liabilities
related to:
Lease receivables (776) (1,135)
Other (509) (516)
_________ _________
(1,285) (1,651)
Non-current tax liabilities
related to:
Lease receivables (2,209) (3,069)
Valuation allowance (5,487) (4,704)
State deferred tax liability - (150)
_________ __________
Net deferred tax liability $ (139) $ (277)
========= ==========
At December 31, 1993 the Company had net operating loss
carryforwards of approximately $2,909,000 for financial
accounting purposes, of which $1,042,000 resulted from the
acquisition of T-Bar, $2,252,000 for federal income tax
purposes and $2,465,000 for alternative minimum tax
purposes, which if not utilized, will expire in 2000
through 2001. The tax net operating loss carryforwards
are less than the net operating loss carryforwards for
financial reporting purposes, due to the temporary
differences noted above.
The Company has investment and research and development
tax credits of $3,752,000 for both financial reporting and
federal income tax purposes, which will expire between
1996 and 2001. Included in these amounts are T-Bar
preacquisition credits of $1,494,000, which will expire
between 1998 and 2001.
At December 31, 1993, the Company had unused alternative
minimum tax credits of $606,000 for financial reporting
and federal income tax purposes, which can be carried
forward indefinitely to offset future regular taxes
payable.
The cumulative amounts of income of the foreign
subsidiaries for which no U.S. federal deferred income tax
liabilities have been recorded were $965,000 and
$1,502,000 at December 31, 1993 and 1992, respectively.
The Company intends to reinvest undistributed earnings of
its foreign subsidiaries and thereby indefinitely postpone
their remittance. Such earnings would become taxable upon
the sale or liquidation of these international
subsidiaries or upon the remittance of dividends. It is
not practicable to estimate the amount of the deferred tax
liability on such earnings. Upon remittance, certain
foreign countries impose withholding taxes that are then
available, subject to certain limitations, for use as
credits against the Company's U.S. tax liability, if any.
The amount of withholding tax that would be payable upon
remittance of the entire amount of undistributed earnings
would approximate $161,000.
14. Supplemental Profit and Loss and Balance Sheet Information
The Company operates in one industry segment, which
includes the design, development, manufacture, marketing
and maintenance of products for large scale data center
networks. Net revenue and income before income taxes for
the three years ended December 31, 1993, 1992 and 1991 and
identifiable assets at the end of each of those years,
classified by geographic area, were as follows:
North European
(000's) America Subsidiaries Consolidated
1993
Revenues, net $ 82,824 $ 12,254 $ 95,078
Loss before
income taxes (1,526) (542) (2,068)
Identifiable assets 54,768 5,516 60,284
1992
Revenues, net $ 70,924 $ 13,096 $ 84,020
Loss before
income taxes (542) (699) (1,241)
Identifiable assets 50,578 6,236 56,814
1991
Revenues, net $ 84,792 $ 18,208 $103,000
Income (loss)
before income
taxes (32,453) 521 (31,932)
Identifiable assets 57,920 10,765 68,685
Research and development expenses were $12,491,000,
$12,380,000 and $10,633,000 in 1993, 1992 and 1991,
respectively.
The Company sells its products primarily to airlines,
telecommunication companies, manufacturing firms, power
utilities, insurance companies, banks and securities
firms. The Company performs ongoing credit evaluations
of its customers' financial condition and requires no
collateral from its customers. There were no sales to
major customers in excess of 10% of consolidated revenues
for 1993 or 1992. At December 31, 1993, one customer
accounted for approximately 19.0% of the Company's
consolidated accounts receivable balance. The Company
believes it did not have a significant concentration of
credit risk at December 31, 1992.
15. Quarterly Income Data (Unaudited)
Selected quarterly data is as follows:
(000's except per share data)
1993
___________________________________________
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Year
Revenues,
net $23,238 $23,407 $26,164 $22,269 $95,078
Gross profit 10,972 10,317 10,025 8,722 40,036
Net income (a)
(loss) 749 208 (676) (2,274) (1,993)
Primary
earnings
(loss) per
share 0.06 0.02 (0.06) (0.19) (0.16)
(000's except per share data)
1992
____________________________________________
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Year
Revenues,
net $20,063 $23,405 $21,919 $18,633 $84,020
Gross profit 9,182 11,206 11,117 9,833 41,338
Net income
(loss) (2,532) 587 699 233 (1,013)
Primary
earnings
(loss) per
share (0.21) 0.05 0.06 0.02 (0.08)
<FN>
(a) Includes a one-time pre-tax restructuring charge of
$1,780,000 for employee severance and related expenses as
the Company reduced its staffing levels approximately 10%
to structure the Company to operate profitably at current
revenue levels. The accrued cost of this restructuring
will be expended by the end of 1994. The future reduction
in annual employee costs is anticipated to be
approximately $3,000,000.
16. Minority Interest Acquisitions
In January 1990, the Company acquired approximately 10% of
the ChannelNet common stock for a total value of $820,000.
In August 1991, the Company purchased the remaining
outstanding shares of ChannelNet for $701,000 and
ChannelNet was merged with and into the Company.
17. Contingencies
A former officer of the Company who sued the Company for
breach of an alleged promise of lifetime employment was
awarded a jury verdict of $413,000 in October 1991. In
May 1993, the court granted the Company's motion to set
aside the verdict. Such former officer has appealed the
court's decision. The Company believes that it has
meritorious grounds on which to defend such appeal and
that the ultimate resolution of this matter will not have
a significant effect upon the consolidated results of
operations or financial position of the Company.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of February
28, 1994, are as set forth below.
Name Age Office
William J. Lifka 64 Chairman of the Board of
Directors, President and
Chief Executive Officer
Frederick Dietz 48 President, T-Bar Division
Robert J. Connolly 48 Vice President, Operations
Anthony J. Fusarelli 46 Vice President, Domestic
Sales, Marketing and Service
Scott L. Gellis 38 Vice President, Engineering
Gerd A. Ordelheide 51 Vice President, International
Operations
Michael A. Ruggieri 42 Vice President, Strategic
Marketing
W. James Whittle 42 Vice President, Chief
Financial Officer and
Treasurer
Shawn A. Smith 35 Secretary and Corporate
Counsel
Brandt R. Allen 53 Director
D. David Cohen 53 Director
Richard E. Greene 56 Director
Norman L. Rasmussen 65 Director
Irwin J. Sitkin 63 Director
Michael D. Stashower 67 Director
No officer holds his office for a fixed term, and the Board of
Directors may terminate an officer's employment at any time. The
term of each director will end at the 1994 annual meeting of
shareholders, which is expected to be held on May 19, 1994. There
are no family relationships among the directors and officers.
William J. Lifka became Chairman, President and Chief Executive
Officer of the Company in December 1993, and has been a director of
the Company since 1985. From 1984 to 1993, Mr. Lifka was Chairman,
President and Chief Executive Officer of Summagraphics Corporation.
From 1979 to 1984, Mr. Lifka held various key management positions
at International Telephone and Telegraph Corporation, where his
most recent title was Vice President and Group General Manager,
Communications.
Frederick Dietz is President of the Company's T-Bar Division. Mr.
Dietz joined the Company in 1983. From 1971 to 1983, Mr. Dietz
held various key management positions at Harris Corporation, where
his most recent title was National Sales Manager for the
Information Systems Group.
Robert Connolly is the Vice President of Operations of the Company.
He joined the Company in 1982. Prior to his employment with the
Company, he served as Manager of Quality Assurance for Data
Products New England.
Anthony J. Fusarelli is Vice President of Domestic Sales, Marketing
and Service of the Company. He joined the Company in 1985. From
1980 through 1985 he was employed by Harris Corporation, where he
held various sales and sales management positions.
Scott Gellis is the Vice President of Engineering of the Company.
He joined the Company in September 1992. Previously, he was
Director of Product Development of Microcom Inc. Prior to joining
Microcom Inc., he served as Vice President of Product Development
of Coordination Technology, Inc.
Gerd A. Ordelheide is the Vice President of International
Operations of the Company. He joined the Company in September
1993. From 1987 to 1993, he was employed by Siemens-Nixdorf USA,
where his most recent position was Executive Vice President.
Michael Ruggieri is Vice President of Strategic Marketing of the
Company. He joined the Company in 1982. From 1978 to 1982, Mr.
Ruggieri was an engineer at Perkin-Elmer Corporation.
W. James Whittle is Vice President and Chief Financial Officer of
the Company. He joined the Company in 1986. From 1975 to 1986, he
held various positions with Sterling Fluid Products, Inc., where
his most recent position was General Manager, TorrVac Division.
Shawn A. Smith is Secretary and Corporate Counsel of the Company.
She joined the Company in 1988. From 1985 to 1988, Ms. Smith was
an associate in the law firm of Robinson & Cole in Hartford,
Connecticut.
Brandt R. Allen has been a director of the Company since October
1993. Since 1970, he has been on the faculty of the Darden
Business School, University of Virginia, where he is currently
Associate Dean and the James C. Wheat Professor of Business
Administration. Prior to joining the University of Virginia
faculty, Mr. Allen was a professor at the Harvard Business School.
D. David Cohen has been a director of the Company since May 1992.
He previously served as a director of the Company from 1986 to
1988. He is currently engaged in the private practice of law in
New York and is Of Counsel to the New York law firm of Parker
Duryee Rosoff & Haft. From December 1988 to December 1990, while
also engaged in the practice of law as a member of Parker Duryee
Rosoff & Haft, Mr. Cohen served as Vice President and General
Counsel of the Company. From 1983 to 1988 he was a partner in the
law firm of Cooper, Cohen, Singer & Ecker.
Richard E. Greene is founder of the Company and has been a director
since the inception of the Company in 1977 and was Chairman of the
Board until December 1993. Mr. Greene was employed from 1974 until
1976 as General Manager of the Computer Switch Division of T-Bar.
From 1963 to 1974, he served in various sales, marketing and
management capacities with IBM. Mr. Greene is also a trustee of
Ward Technical College and The Computer Museum.
Norman L. Rasmussen has been a director of the Company since
October 1993. Since 1991, he has been President and Chief
Executive Officer of SofTech, Inc., and has been a director of
SofTech, Inc. since 1975. Prior to his employment with SofTech, he
headed Teleprocessing, Inc., a systems integration firm which he
founded. Mr. Rasmussen was a member of the Massachusetts
Governor's Industry Advisory Committee on Information Processing
from 1986 to 1994. He was employed by IBM in various marketing and
development positions from 1953 to 1974.
Irwin J. Sitkin has been a director of the Company since 1989. Mr.
Sitkin is a retired Vice President, Corporate Administration, of
Aetna Life and Casualty Company. During his 35 years at Aetna, Mr.
Sitkin held executive positions in data processing and information
systems. Mr. Sitkin is also a director of HaL Computer Systems
Incorporated.
Michael D. Stashower has been a director of the Company since 1985.
From 1990 until February 1994, he served as Executive Vice
President, Chief Financial Officer and Treasurer of the Company.
Previously, Mr. Stashower served as Executive Vice President for
Softstrip, Inc. Prior to joining Softstrip, Mr. Stashower held
various key management positions at Perkin-Elmer Corporation, where
his most recent title was Senior Vice President, Finance.
Compliance with Section 16(a) of the Exchange Act
Each director, officer and beneficial owner of ten percent (10%) or
more of a registered class of the Company's equity securities is
required to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of
the Common Stock and other equity securities of the Company by
specific due dates. During the year ended December 31, 1993, all
such filing requirements were complied with, except that Mr. D.
David Cohen filed one late report on Form 4, covering one purchase
transaction.
ITEM 11 -- EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the
Chief Executive Officer and former Chief Executive Officer of the
Company and the Company's four other most highly compensated
executive officers whose salary and bonus exceeded $100,000 in
1993, for services rendered during fiscal years 1993, 1992 and
1991.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
Commis- All
sions Other
and Compen-
Name and Title Year Salary Bonuses Options sation
($) ($) (#) ($)(1)
___________________________________________________________________
William J. 1993(2) 10,923 - - -
Lifka, Chairman, 1992 - - - -
President and 1991 - - - -
Chief Executive
Officer
Richard E. 1993 210,000 10,128 30,000 8,003
Greene, 1992 210,000 6,004 - 6,624
Founder 1991 210,000 - 60,000 -
Frederick Dietz, 1993 175,000 6,077 7,500 5,014
President 1992 158,333 21,894 32,500 4,862
T-Bar Division 1991 138,000 57,665 3,500 -
Anthony J. 1993 120,000 63,802 12,500 4,797
Fusarelli, 1992 110,000 64,253 16,500 2,537
Vice President 1991 98,333 68,013 1,250 -
of Domestic
Sales, Marketing
and Service
Michael D. 1993 158,269 6,451 32,500 10,157
Stashower, 1992 146,333 2,932 - 8,738
Executive 1991 134,000 7,568 7,500 -
Vice President
and Chief
Financial Officer
(3) (4)
J. Roger Moody 1993 240,000 13,890 115,000 33,160
1992 208,522 6,147 200,000 7,008
1991 - - - -
<FN>
(1) Includes Company-paid life insurance premiums for the benefit
of each such executive officer and Company contributions for the
account of each such executive officer under the Company's Employee
Retirement Savings Plan.
(2) Mr. Lifka joined the Company as Chairman, President and Chief
Executive Officer on December 16, 1993.
(3) Mr. Moody resigned as President and Chief Executive Officer on
December 15, 1993.
(4) Includes certain amounts in connection with Mr. Moody's
relocation.
Stock Option Plans
Set forth below is a summary of stock option grants made during the
year ended December 31, 1993 to the Chief Executive Officer and
former Chief Executive Officer of the Company and each of the four
other most highly compensated executive officers.
OPTION GRANTS IN FISCAL YEAR 1993
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants For Option Term (1)
___________________________________________________________________
% of
Total
Options
Granted
to Exercise
Options Employees or Base Expir-
Granted in Fiscal Price ation 5% 10%
Name (#) Year ($/Sh) Date ($) ($)
William
J. Lifka - - - - - -
Richard E. 20,000 7.1 7.75 7/22/1998 - -
Greene 10,000 3.23 1/28/1998 5,223 15,040
Frederick 7,500 1.8 2.94 1/28/2003 13,868 35,142
Dietz
Anthony J. 7,500 2.4 2.94 1/28/2003 13,868 35,142
Fusarelli 2,500 2.94 7/22/2003 4,622 11,714
Michael D. 7,500 7.7 2.94 1/28/1998 6,092 13,462
Stashower 25,000 2.94 7/22/1998 20,307 44,873
(2)
J. Roger 80,000 27.3 2.81 7/14/1998 62,108 141,376
Moody 20,000 2.81 7/14/2003 35,344 89,568
15,000 2.94 1/28/2003 27,734 70,284
<FN>
(1) Potential realizable value is based on an assumption that the
stock price of the common stock appreciates at the annual rate
shown from the date of grant until the end of the option term. The
numbers are calculated based on the requirements of the Securities
and Exchange Commission and do not reflect the Company's estimate
of future stock price growth.
(2) Expiration dates when granted. Mr. Moody's options have
expired due to the cessation of his employment with the Company.
OPTION EXERCISES IN 1993 AND OPTION VALUES AT YEAR-END 1993
There were no options exercised in 1993 by any of the persons in
the table below.
The following table provides information as to the value of options
held by the persons named below, measured in terms of the closing
price of the Common Shares on December 31, 1993.
Number of Shares Value of
Subject to Unexercised Unexercised In-the-
Options at Year-End Money Options at Year-End
($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
____ ___________ _____________ ___________ _____________
William J. 10,000 - - -
Lifka
Richard E. 80,000 50,000 - -
Greene
Frederick 61,496 45,834 - -
Dietz
Anthony J. 9,917 29,000 - -
Fusarelli
Michael D. 45,833 54,167 - -
Stashower
J. Roger 76,666 248,334 - -
Moody
<FN>
(1) Value at year-end was $1.75 per Common Share
Compensation of Directors
Directors who are not employees or officers of the Company receive
the following compensation: (1) $8,000 per year as a retainer; (2)
$1,000 per Board meeting attended; and (3) $500 per committee
meeting attended, when the committee convenes on a day in which no
Board meeting is held. In addition to the cash compensation, each
outside director is granted a non-qualified stock option upon
appointment to the Board to purchase 10,000 shares of the Company's
common stock, and additional options to purchase 5,000 shares each
year thereafter in which the director continues to serve. The
options vest in three (3) equal installments on each of the first
three (3) successive anniversaries of the date of grant, subject to
continued service.
Employment Contracts and Change in Control Agreements
On December 15, 1993 the Company entered into an Employment
Agreement with William J. Lifka pursuant to which Mr. Lifka was
hired as President and Chief Executive Officer of the Company for
a 6-month period, at a monthly salary of $20,000. Pursuant to such
agreement, Mr. Lifka is responsible for recruitment of a successor
President and Chief Executive Officer. In January 1994, Mr. Lifka
was also awarded a restricted stock grant of 50,000 shares, full
vesting of which is contingent upon Mr. Lifka's completion of full
service during the agreement term.
The Company has entered into Executive Severance Compensation
Agreements with its executive officers pursuant to which such
officers would be entitled to receive payments of up to 50% of such
officer's aggregate total compensation during the five fiscal years
preceding a change in control of the Company, based upon length of
service with the Company, or its successor, subsequent to such
change in control, if the individual officer's employment with the
Company is involuntarily terminated (or the individual receives a
reduction in compensation or demotion in title, etc.) for reasons
other than cause following such change in control, or during the
six month period preceding such change in control.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of December 31, 1993 certain
information with respect to the beneficial ownership of the
Company's Common Stock by (a) each person known by the Company to
beneficially own 5% or more of the outstanding shares of its Common
Stock; (b) all directors of the Company; (c) the Chief Executive
Officer and four other most highly compensated executive officers;
and (d) all directors and officers of the Company as a group.
Except as otherwise specified, each named beneficial owner has sole
voting and investment power with respect to the shares set forth
opposite his name:
Amount and Nature of Percent
Name and Address Beneficial Ownership Class
________________ ____________________ _______
Richard E. Greene* 2,212,079(a) 18.0%
4255 Gulf Drive #125
Holmes Beach, FL 34217
Beall Technologies, Inc. 1,489,300 12.3%
and Purnendu Chatterjee
100 Lighting Way
Secaucus, NJ 07094
Wechsler & Co., Inc. 898,016(b) 6.9%
105 South Bedford Road
Suite 310
Mount Kisco, NY 10549
Dimensional Fund Advisors Inc. 788,700 6.5%
1299 Ocean Avenue
Santa Monica, CA 90401
William J. Lifka* 40,000(c) 0.3%
610 N. Flagship Drive
Salem, SC 29676
Frederick Dietz 100,357(d) 0.8%
31 Doe Hollow Road
Trumbull, CT 06611
Anthony J. Fusarelli 26,334(e) 0.2%
6 Crescent Lane
Trumbull, CT 06611
Michael D. Stashower* 86,305(f) 0.7%
14 Cardinal Lane
Westport, CT 06880
Brandt R. Allen* 0 0.0%
1208 Blueridge Road
Charlottesville, VA 22903
D. David Cohen* 25,168(g) 0.2%
82 Tara Drive
Roslyn, NY 11576
Norman L. Rasmussen* 0 0.0%
59 Commercial Wharf
Boston, MA 92110
Irwin J. Sitkin* 25,533(h) 0.2%
3500 Mystic Pointe Drive
Aventura, FL 33180
All directors and officers
as a group 2,552,249(i) 20.5%
(14 persons)
<FN>
*Director
(a) Includes 131,249 shares owned of record by a trust for the
benefit of Mr. Greene's children. Also includes 48,000 shares
owned of record by Mr. Greene's wife. Mr. Greene disclaims
beneficial ownership as to such shares. Also includes vested
options to purchase a total of 80,000 shares.
(b) Assumes conversion of Data Switch 8-1/4% Convertible
Subordinated Debentures, T-Bar 9% Convertible Subordinated
Debentures and exercise of Data Switch Common Stock Purchase
Warrants, representing a total of 898,016 shares.
(c) Includes vested options to purchase 10,000 shares.
(d) Includes vested options to purchase 61,496 shares.
(e) Includes vested options to purchase 9,917 shares.
(f) Assumes conversion of Data Switch 8-1/4% Convertible
Subordinated Debentures, representing 7,225 shares. Also
includes vested options to purchase 45,833 shares.
(g) Includes 505 shares owned of record by trusts for the benefit
of Mr. Cohen's children and 864 shares owned of record
by Mr. Cohen's wife. Mr. Cohen disclaims beneficial ownership as
to such shares. Also includes vested options to purchase
3,333 shares.
(h) Includes vested options to purchase 13,337 shares.
(i) Includes vested options to purchase 259,930 shares of the
Company's Common Stock, and assumes conversion of Data
Switch 8-1/4% Convertible Subordinated Debentures representing
7,225 shares.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
Exhibits
Management Contracts and Compensatory Arrangements
10.1 1988 Non Qualified Stock Option Plan
(Previously filed pursuant to S-8 Registration Statement)
10.2 1989 Incentive Stock Option Plan
(Previously filed pursuant to S-8 Registration Statement)
10.3 1992 Executive Stock Incentive Plan
(Previously filed pursuant to 1992 10-K)
10.4 Data Switch Bonus Plan
(Previously filed pursuant to 1992 10-K)
10.5 Executive Severance Compensation Agreement
(Previously filed pursuant to 1992 10-K)
10.6 Employment Agreement with William J. Lifka
11. Computation of Earnings (Loss) per Share
24. Consent of Coopers & Lybrand
Financial Statements
See Item 8 for index
Schedules
II. Amounts Receivable from Related Parties and Employees
other than Related Parties
VIII. Valuation and Qualifying Accounts
8-K Filings
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATA SWITCH CORPORATION
By: /s/ W. James Whittle
W. James Whittle
Vice President and
Chief Financial Officer
Date: June 14, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/ William J. Lifka June 14, 1994
William J. Lifka
Chairman of the Board, President and
Chief Executive Officer
/s/ W. James Whittle June 14, 1994
W. James Whittle
Vice President and Chief Financial Officer
/s/ Michael D. Stashower June 14, 1994
Michael D. Stashower
Director
/s/ Richard E. Greene June 14, 1994
Richard E. Greene
Director
/s/ Irwin J. Sitkin June 14, 1994
Irwin J. Sitkin
Director
/s/ D. David Cohen June 14, 1994
D. David Cohen
Director
/s/ Brandt R. Allen June 14, 1994
Brandt R. Allen
Director
/s/ Norman L. Rasmussen June 14, 1994
Norman L. Rasmussen
Director
Exhibit 10.6
LIFKA EMPLOYMENT AGREEMENT
This AGREEMENT made as of this 15th day of December, 1993 and
between Data Switch Corporation, a Delaware corporation with
offices at One Enterprise Drive, Shelton, Connecticut 06484 (the
"Company") and William J. Lifka, an individual residing at 610 N.
Flagship Drive, Salem, SC 29676 ("Lifka" or the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to retain Lifka to serve as
President and Chief Executive Officer, and Lifka is willing to so
serve on the terms and subject to the conditions
hereof.
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Term: The term of Lifka's employment under this Agreement
(the "Term") shall begin as of December 16, 1993 and continue until
June 15, 1995, unless sooner terminated by Lifka or the Company in
accordance with the terms hereof, or extended by the mutual
agreement of the parties in writing.
2. Duties: Lifka hereby agrees to devote substantially his
full business time and best efforts to his position as President
and Chief Executive Officer of the Company during the Term of this
Agreement, and to perform such other senior executive duties
appropriate to the office of the President, as may be assigned to
him from time to time by the Board of Directors of the Company.
3. Base Compensation, Fringes, and Bonus Participation:
(a) The Company shall pay to Lifka, and Lifka shall
accept as his base compensation for all services rendered and to be
rendered hereunder, the amounts set forth on the Schedule of Base
Compensation attached as Schedule A hereto, said base compensation
to be payable according to the Company's standard payroll policies.
(b) Lifka will also be entitled to participate, in
accordance with the provisions of any applicable plans and
programs, in all life and health insurance and other fringe benefit
programs, plans and arrangements, whether now existing or hereafter
instituted, available to senior executives of the Company.
Notwithstanding the foregoing, Lifka shall not be eligible for any
bonus or other incentive compensation programs.
4. Restricted Stock: In lieu of the receipt of any stock
options and/or participation in Company bonus plans, the Company
has awarded to Lifka, and Lifka has accepted, a restricted stock
award grant in the amount of 50,000 shares of Data Switch Common
Stock (the "Shares"). Said Shares are being awarded to Executive
for full service during the term of this Agreement, including the
Executive's conducting to completion, to the reasonable
satisfaction of the Board, the search for a successor President and
Chief Executive Officer. The Executive understands that the Shares
being transferred to him hereunder have not been registered under
the Securities Act of 1933, as amended (the "Act") and that the
certificate representing the Shares shall bear a legend
accordingly. The Executive represents and warrants to the Company
that he is acquiring the Shares for investment and not with a view
to transfer or re-distribution. The Executive shall hold the
Shares for a period of two (2) years, unless the same are
registered under the Act. The Company shall have no duty to
register the Shares.
5. Expenses; Automobile: Lifka is authorized to incur
reasonable travel, entertainment and related expenses incidental to
the performance of his duties under this Agreement. The Company
will pay or reimburse Lifka for commutation expenses to and from
South Carolina on a weekly basis, and local living expenses in the
area of Shelton, Connecticut. If Lifka advances the funds for any
such expenses, the Company will reimburse him upon his presentation
of adequate documentation of expenses, in accordance with standard
Company practices. Lifka shall also be entitled to the use of a
Company-paid leased or rented automobile in accordance with
standard Company policy for senior executives.
6. Termination: Except as otherwise expressly provided
herein, this Employment Agreement may be terminated as follows:
(a) By the resignation of Executive, upon the date of
such resignation;
(b) Automatically, upon the death of the Executive; or
(c) At any time, upon election by the Board
of Directors of the Company
7. Compensation Upon Termination:
(a) Termination by the Company. Lifka agrees he is
employed by the Company at the will of the Board and his employment
may be terminated with or without cause of any kind at the
direction of the Board. All salary and other cash compensation
shall cease upon any such termination; however, Lifka shall be
entitled to retain all of the Shares.
(b) Termination by Lifka. In the event of any
resignation by Lifka, his compensation shall terminate upon the
happening of such resignation, except that if Lifka provides the
Board with reasonable notice of such resignation, the Board may
elect to continue Executive's base compensation for a period
selected by it, following the date of resignation. Executive shall
make reasonable efforts to make himself available to his successor
as Chief Executive Officer in order to coordinate matters relating
to the business and affairs of the Company. If the Executive
resigns as President prior to expiration of the Term hereof and
without locating a successor acceptable to the Board, he shall
return to the Company for cancellation a proportional number of the
Shares awarded to him hereunder.
8. Director: The Executive is currently a director of the
Company, and shall continue to so serve without additional
compensation hereunder. The Executive has been asked to serve as
Chairman of the Board of Directors of the Company. For serving as
Chairman, the Executive shall be paid a stipend at the rate of
Fifty Thousand Dollars ($50,000) per annum, payable in quarterly
installments at the first Board meeting in each fiscal quarter.
The Executive shall serve as Chairman at the pleasure of the Board,
which may elect to continue him as Chairman or elect a new Chairman
at any time and from time to time. The stipend shall cease in the
fiscal quarter when the Executive shall cease to serve as Chairman.
9. Arbitration: Any disputes arising under this Agreement
shall be resolved by arbitration under the rules of the American
Arbitration Association, and judgment on any award rendered may be
entered in any court having competent jurisdiction. The place of
arbitration shall be the office of the American Arbitration
Association in or nearest to Shelton, Connecticut.
10. No Assignment: This Agreement shall be binding upon the
parties hereto, their legal representatives, heirs, successors and
assigns, and neither party may assign this Agreement without the
prior written consent of the other party.
11. No Waiver: Failure to insist upon strict compliance with
any of the terms, covenants or conditions of this Agreement shall
not be deemed a waiver or such term, covenant or condition, nor
shall any waiver or relinquishment of such right or power
constitute a waiver or relinquishment at any other term or terms.
12. Notices: Any notices required or permitted to be given
hereunder to either party shall be deemed given if delivered or
sent by registered or certified mail, return receipt requested, to
such party at his or its address as hereinabove set forth, or to
such other address as such party may designate by notice similarly
given.
13. Headings: Section headings are used herein for
convenience only and shall not affect the meaning of any provision
hereof.
14. Governing Law: This Agreement shall be governed by and
interpreted in accordance with the laws of the State of
Connecticut.
15. Remedies: In addition to any other rights or remedies the
parties may have under this Agreement or applicable law, the
parties shall have the right to enforce the terms of this Agreement
by specific performance or other equitable remedies, enforceable
through arbitration, or in aid of arbitration, in accordance with
the provisions of paragraph 9 hereof.
16. Entire Agreement: This instrument contains the entire
agreement between the Company and Lifka relating to the matters
herein set forth other than the Agreement to Conditions of
Employment between Lifka and the Company, which will remain in full
force and effect and is not modified hereby, except to the extent
of requiring arbitration of any dispute arising thereunder. This
Agreement may not be amended or terminated orally but only in a
writing signed by both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
DATA SWITCH CORPORATION
/s/ Shawn A. Smith By:_/s/ Irwin J. Sitkin
Witnesseth Irwin J. Sitkin
Chairman
Compensation/Stock
Option Committee
/s/ Deborah A. Hurvul /s/ William J. Lifka
Witnesseth William J. Lifka
SCHEDULE A
BASE COMPENSATION
Twenty Thousand Dollars ($20,000) per month for a six (6)
month period.
Exhibit 11
DATA SWITCH CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(000's except per share data)
Years Ended December 31,
__________________________
1993 1992 1991
____ ____ ____
Primary
- - - -------
Shares outstanding at the
beginning of the period 12,041 11,797 11,638
Weighted average number of
shares issued and issuable
share equivalents 79 196 254
_________ _________ __________
Weighted average number of
common shares outstanding 12,120 11,993 11,892
========= ========= ==========
Loss before extraordinary gain $ (1,993) $ (1,013) $ (32,848)
========= ========= ==========
Net income $ (1,993) $ (1,013) $ (32,423)
========= ========= ==========
Primary loss per share before
extraordinary gain $ (0.16) $ (0.08) $ (2.76)
========= ========= ==========
Primary loss per share after
extraordinary gain $ (0.06) $ (0.08) $ (2.73)
========= ========= ==========
Fully Diluted
- - - -------------
Shares outstanding at the
beginning of the period 12,041 11,797 11,638
Weighted average number of
shares issued and issuable
share equivalents as above 237 225 254
Assumed conversion of debentures 2,820 2,820 2,850
_________ _________ __________
Weighted average number of
shares issued and issuable
share equivalent as adjusted
for full dilution 15,098 14,842 14,742
========= ========= ==========
Loss before extraordinary gain $ (1,993) $ (1,013) $ (32,848)
========= ========= ==========
Net income (loss) $ (1,993) $ (1,013) $ (32,423)
========= ========= ==========
Adjustment for interest, net
of tax, on convertible
debentures 972 972 1,091
_________ _________ __________
Adjusted income before extra-
ordinary gain $ (1,021) $ (41) $ (31,757)
========= ========= ==========
Adjusted net income $ (1,021) $ (41) $ (31,332)
========= ========= ==========
Fully diluted loss per share (a) (a) (a)
before extraordinary gain $ 0.07 $ (0.00) $ (2.15)
========= ========= ==========
Fully diluted loss per share (a) (a) (a)
after extraordinary gain $ 0.07 $ (0.00) $ (2.13)
========= ========= ==========
<FN>
(a) These calculations are submitted in accordance with SEC Release
No. 9083, although they are not in accordance with APB opinion
No. 15 because the additional incremental shares are
anti-dilutive and decrease the reported net loss per share.
Exhibit 24.1
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statements of Data Switch Corporation on Form S-8 (File Nos. 2-
80296, 2-80297, 2-80298, 2-82533, 33-35834, 33-35835, and 33-39785)
and on Form S-1 (File Nos. 33-13057 and 33-36227) of our
report dated February 11, 1994, except for Note 9, as to which the
date is March 22, 1994, on our audits of the consolidated
financial statements and financial statement schedules of Data
Switch Corporation as of December 31, 1993 and 1992, and for each
of the three years in the period ended December 31, 1993, which
report is included in this annual Report on Form 10-K.
Coopers & Lybrand
Stamford, Connecticut
March 29, 1994
SCHEDULE II
DATA SWITCH CORPORATION
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND EMPLOYEES
OTHER THAN RELATED PARTIES
Years Ended December 31, 1993, 1992, and 1991
Balance at Collections Balance at
Beginning and Other End of 1991
Debtor of 1991 Additions Deductions Current Non-Current
John
DeSantis
(a) $116,000 - $116,000 - -
$116,000 - $116,000 - -
<FN>
(a) A $116,000 non-interest bearing note payable on demand. This
note was repaid in 1991.
SCHEDULE VIII
DATA SWITCH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1993, 1992 and 1991
(000's)
Additions
Balance at Charged to Balance
Beginning of Costs and at End
Description Period Expenses Deductions of Period
_________________________________________________________________
Allowance for Doubtful Accounts
1993 $ 656 $ 8 $ 8 $ 656
1992 1,049 (311) 82 656
1991 771 366 88 1,049