SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended June 30, 1994
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, [X] YES [ ] NO.
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock at June 30, 1994.
Securities registered pursuant to Section 12(b) of the Act.
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value, 12,317,398
with Purchase Rights attached
Common Stock Purchase Warrants 758,184
(expiring December 31, 1995)
DATA SWITCH CORPORATION
INDEX
PAGE NO.
PART I. UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1994 and
December 31, 1993 2
Consolidated Statements of Operations for the three
and six months ended June 30, 1994 and June 30, 1993 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1994 and June 30, 1993 4
Notes to Unaudited Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Security Holders 7
Item 6. Exhibits and Reports on Form 8-K 7
(11) Computation of Earnings Per Share
for the three and six months ended
June 30, 1994 and June 30, 1993 9
DATA SWITCH CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994, (unaudited), AND DECEMBER 31, 1993
(000's except share data)
June 30, December 31,
1994 1993
_________ ____________
Current assets:
Cash and cash equivalents $ 657 $ 491
Accounts receivable
(net of allowance for doubtful
accounts of $670 in 1994
and $ 656 in 1993) 20,464 25,245
Income taxes receivable
117 144
Lease receivables, net
1,218 1,095
Inventories 16,141 19,795
Prepaid expenses and other 829 966
__________ _________
Total current assets 39,426 47,736
Long-term lease receivables, net 3,243 3,135
Property and equipment, net 5,018 5,801
Goodwill, net 2,384 2,469
Other 1,168 1,143
__________ _________
Total assets $ 51,239 $ 60,284
========== =========
Current liabilities:
Accounts payable, trade $ 2,921 $ 5,253
Accrued compensation 1,308 2,368
Other accrued liabilities 4,345 4,889
Income taxes payable 283 37
Other taxes payable 432 599
Current portion of capital
lease obligations 273 240
__________ _________
Total current liabilities 9,562 13,386
Long-term debt 19,515 25,487
Capital lease obligations,
less current portion 608 724
Deferred income taxes 127 139
Redeemable warrants 927 885
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 12,365,827 and
12,224,278 shares
at June 30, 1994 and
December 31, 1993, respectively 124 122
Additional paid-in capital 50,576 50,413
Accumulated deficit (29,715) (30,287)
Cumulative translation adjustment (196) (272)
Less:
Receivables from stock purchases - (24)
Treasury stock, at cost
(48,429 shares at June 30, 1994
and December 31, 1993) (289) (289)
__________ _________
Total shareholders' equity 20,500 19,663
__________ _________
Total liabilities and
shareholders' equity $ 51,239 $ 60,284
========== =========
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
/TABLE
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except per share data)
(unaudited)
Three months ended Six months ended
June 30 June 30
Revenues: 1994 1993 1994 1993
__________________ __________________
Product revenues $ 17,399 $ 18,353 $ 33,959 $ 37,090
Service revenues 4,819 5,054 9,469 9,555
________ ________ ________ ________
Revenues, net 22,218 23,407 43,428 46,645
Cost of revenues:
Cost of product
revenues 9,435 10,053 18,397 19,386
Cost of service
revenues 2,881 3,037 5,627 5,970
_________ ________ _________ _________
Cost of revenues 12,316 13,090 24,024 25,356
Gross profit 9,902 10,317 19,404 21,289
Operating expenses:
Selling, general and
administrative 5,996 6,479 12,108 12,543
Engineering and
development 2,849 3,033 5,591 6,340
_________ _________ _________ _________
Total operating
expenses 8,845 9,512 17,699 18,883
Income from operations 1,057 805 1,705 2,406
Other income (expense):
Interest expense (482) (500) (1,010) (1,014)
Foreign exchange
gain (loss) 79 (17) 126 14
Other, net 22 12 19 26
_________ _________ _________ _________
Total other income
(expense) (381) (505) (865) (974)
Income before income
taxes 676 300 840 1,432
Provision for income
taxes 219 92 268 475
Net income $ 457 $ 208 $ 572 $ 957
========= ========= ========= =========
Primary earnings per
share $ .04 $ .02 $ .05 $ .08
========= ========= ========= =========
Fully diluted
earnings per share (a) (a) (a) (a)
========= ========= ========= =========
Weighted average
number of common
shares outstanding 12,333 12,314 12,325 12,297
========= ========= ========= =========
<FN>
(a) Not presented as a result of being anti-dilutive.
The accompanying notes are an integral part of the consolidated
financial statements.
/TABLE
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
(unaudited)
Six months ended
June 30,
1994 1993
____ ____
Cash flows from operating activities:
Net income $ 572 $ 957
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation
1,791 1,640
Goodwill amortization
85 85
Effect of utilizing acquired NOLs - 173
Deferred income taxes (23) 22
Changes in operating assets
and liabilities:
(Increase) decrease in:
Receivables 4,766 (982)
Inventories 3,743 (4,630)
Prepaid expenses and other 213 (692)
Increase (decrease) in:
Accounts payable, trade (2,351) 3,552
Accruals (1,694) (2,826)
Income taxes payable 246 84
Other taxes payable (184) 8
Other, net (251) 80
_________ ________
Net cash provided (used)
by operating activities 6,913 (2,529)
Cash flows from investing activities:
Property and equipment additions (959) (2,266)
_________ ________
Net cash used in investing activities (959) (2,266)
_________ ________
Net cash provided (used)
before financing activities 5,954 (4,795)
Cash flows from financing activities:
Payments of short-term debt - (574)
Proceeds under long-term borrowings 14,572 13,263
Principal payments and repurchases
under long-term borrowings (20,627) (9,715)
Proceeds from issuance of common stock 208 176
--------- --------
Net cash provided (used) by
financing activities (5,847) 3,150
Effect of exchange rate changes on cash 59 (2)
_________ ________
Net increase (decrease) in cash
and cash equivalents 166 (1,647)
Cash and cash equivalents at
beginning of the period 491 2,208
_________ ________
Cash and cash equivalents at end
of the period $ 657 $ 561
========= ========
Supplemental disclosures of cash
flow information:
Cash paid (received) during the
period for:
Interest $ 953 $ 914
Income taxes $ 30 $ (61)
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
/TABLE
DATA SWITCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
necessary, consisting of normal recurring items, to fairly present
the financial position of the Company as of June 30, 1994 and the
results of operations for the six months ended June 30, 1994 and
1993 and cash flows for such six month periods. The December 31,
1993 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required
by generally accepted accounting principles. The financial
statements contained herein should be read in conjunction with the
financial statements and related notes included in Form 10-K for
the year ended December 31, 1993 as filed with the Securities and
Exchange Commission.
2. Inventories consist of (000's):
June 30, 1994 December 31, 1993
Raw materials $ 9,066 $ 11,075
Systems in process 1,690 1,821
Finished goods 4,112 5,409
Demo equipment 1,273 1,490
$ 16,141 $ 19,795
3. 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, of which $8,000,000 was available
as of June 30, 1994 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. 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%.
4. 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 appealed the court's decision. The appeal was argued in
June 1994, but the court has not yet rendered its decision. The
Company believes 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.
DATA SWITCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the three and six month periods ended June 30, 1994
decreased 5.1% to $22,218,000 and 6.9% to $43,428,000,
respectively, from the comparable 1993 period. This decrease was
due to lower domestic revenues partially offset by an increase in
international revenues. Service revenues declined 4.6% in the
second quarter of 1994 compared with the second quarter of 1993,
while service revenues for the first half of 1994 remained
relatively constant at $9,469,000, when compared with 1993.
The gross margin percentage for the second quarter of 1994 was
44.6%, basically unchanged from second quarter 1993 margins of
44.1%, but reflecting a trend of improvement over the latter half
of 1993. The gross margin percentage for the first half of 1994
decreased 0.9% to 44.7% from the first half of 1993, primarily due
to an unfavorable product mix partially offset by manufacturing
efficiencies. Service margins for the second quarter and first
half of 1994 were 40.2% and 40.6%, compared with 39.9% and 37.5%
for the second quarter and first half of 1993, as a result of lower
overheads due to the restructuring that took place in late 1993 and
lower parts costs.
Selling, general and administrative expense-to-revenue ratio for
the second quarter of 1994 decreased to 26.8%, compared with 27.5%
in 1993. Actual expenses for the second quarter decreased $483,000
compared with the second quarter of 1993, due to headcount
reductions. The expense-to-revenue ratio for the first half of
1994 increased to 27.7%, as compared with 26.7% in 1993, as a
result of a lower revenue base in 1994. Actual expenses were
$435,000 less than in the second quarter of 1993.
Engineering and development expenditures for the three and six
months ended June 30, 1994 decreased to 12.8% and 12.9% of
revenues, versus 13.0% and 13.6% of revenues for comparable periods
in 1993. Actual expenditures in the second quarter and first half
of 1994 decreased by approximately $184,000 and $749,000,
respectively, compared with the second quarter and first half of
1993, reflecting a reduction in headcount and expense controls.
Interest expense for the second quarter and first half of 1994
decreased 3.6% and .4%, respectively, from the comparable 1993
period as a result of reduced debt levels.
Provision for income taxes was $219,000 and $268,000 for the three
and six month period ended June 30, 1994, respectively, based on
the estimated annual effective tax rate of 32%, versus a provision
of $92,000 and $475,000 for the second quarter and first half of
1994. The estimated effective tax rate for 1994 is less than the
federal statutory rate of 34.0%, due to the anticipated utilization
of net operating loss carryforwards and tax credits.
Liquidity and Capital Resources
The Company generated $5,954,000 of cash before financing
activities in the first half of 1994, compared with using
$4,795,000 in the first half of 1993. Working capital at June 30,
1994 decreased by $4,486,000 from December 31, 1993 as a result of
significant decreases in accounts receivable and inventories
partially offset by a reduction in accounts payable. These
decreases are a result of the collection of a large outstanding
receivable, and increased inventory controls. The ratio of current
assets to current liabilities is 4.1:1 at June 30, 1994. 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.
Long-term debt consisted of $19,515,000 of convertible subordinated
debentures. The Company had no borrowings outstanding at June 30,
1994 under an $8,000,000 revolving line of credit 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.
There are no significant capital expenditures planned for 1994; the
aggregate amount of spending is anticipated to be less than 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
1993 and is not expected to do so in 1994.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the report on Legal Proceedings
contained in the Form 10-K for the year ended December 31, 1993.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on June 22,
1994, the following matters were voted upon.
(a) The election of the following directors:
Name Votes For Withheld
William J. Lifka 10,690,079 258,486
Brandt R. Allen 10,696,604 251,961
D. David Cohen 10,695,465 253,100
Richard E. Greene 10,690,180 258,385
Norman L. Rasmussen 10,679,229 269,336
Irwin J. Sitkin 10,696,659 251,906
Michael D. Stashower 10,678,282 270,283
(b) The election of Coopers & Lybrand as the Company's
accountants for the 1994 fiscal year.
Votes For Votes Against Abstained
10,868,626 34,945 31,992
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(11) Computation of Earnings Per Share
Reports on Form 8-K
The issuer has not filed any reports on Form 8-K during
the quarter for which this report is filed.
DATA SWITCH CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) 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
(Registrant)
Date: August 15, 1994 /s/ William J. Lifka
William J. Lifka
Chairman, President and
Chief Executive Officer
Date: August 15, 1994 /s/ W. James Whittle
W. James Whittle
Vice President and
Chief Financial Officer
Exhibit 11
DATA SWITCH CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(000's except per share data)
For the three months For the six months
ended June 30, ended June 30,
1994 1993 1994 1993
____________________ __________________
Primary
_______
Shares outstanding at
the beginning of the
period 12,290 12,084 12,176 12,041
Weighted average
number of shares
issued and
issuable share
equivalents 43 230 149 256
_________ _________ _________ _________
Weighted average
number of common
shares outstanding 12,333 12,314 12,325 12,297
========= ========= ========= =========
Net income $ 457 $ 208 $ 572 $ 957
========= ========= ========= =========
Primary earnings
per share $ 0.04 $ 0.02 $ 0.05 $ 0.08
========= ========= ======== =========
Fully Diluted
_____________
Shares outstanding at
the beginning of
the period 12,290 12,084 12,176 12,041
Weighted average
number of shares
issued and issuable
shares equivalents 61 230 158 301
Assumed conversion of
debentures 2,820 2,820 2,820 2,820
_________ _________ _________ _________
Weighted average
number of shares
issued and issuable
share equivalents
as adjusted
for full dilution 15,171 15,134 15,154 15,162
========= ========= ========= =========
Net income $ 457 $ 208 $ 572 $ 957
========= ========= ========= =========
Adjustment for
interest, net of tax,
on convertible
debentures 243 243 486 483
_________ _________ _________ _________
Adjusted net income $ 700 $ 451 $ 1,058 $ 1,443
========= ========= ========= ==========
Fully diluted earnings (a) (a) (a) (a)
per share $ 0.05 $ 0.03 $ 0.07 $ 0.10
========= ========= ========= ==========
<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 increase the reported net income per share.