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, 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. 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. [X]
Aggregate market value of voting stock held by non-affiliates of
the registrant at February 28, 1995: Approximately $35,218,000.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock and common stock purchase warrants at
December 31, 1994.
Securities registered pursuant to Section 12(b) of the Act.
NASDAQ Number of
Title of Each Class Symbol Shares Outstanding
____________________ ______ ___________________
Common Stock, $.01 par value,
with Purchase Rights attached DASW 12,376,891
Common Stock Purchase Warrants
(expiring December 31, 1995) DASWZ 10,112
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. Product categories include fiber-based
systems for connecting fiber processors and peripherals, channel
networking systems for connecting channel-attached devices and
processors over extended distances, communication systems for
connecting users onto the networks entering the Data Center and
channel switches for connecting legacy channels to peripherals. 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 and access by
dynamically 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
1994 1993 1992
____ ____ ____
Fiber-Based Systems 29% 20% 2%
Channel Networking Systems 8 16 18
Channel Switches 15 23 35
Data Communications Switches 13 10 14
T-Bar Products 9 7 8
Service 23 20 21
Other 3 4 2
____ ____ ____
Total 100% 100% 100%
==== ==== ====
Revenues were down slightly in 1994 primarily due to two factors.
First, the decline in channel switches continued as expected. In
addition, revenues in channel networking systems were impacted
adversely by a decline in the older technology units and slower
then expected acceptance of the newer generation of channel
extenders. The introduction of the Enterprise Networking System
9095 in the second half of the year is expected to increase
revenues in this segment of our business. Fiber based products
continued to grow as expected. Revenues from communications systems
were relatively strong.
In late 1994, the Company announced two new products. First the
Company introduced intelligent switching hubs for local area
network applications via a joint marketing, technology and
development agreement with LANNET, Inc. In addition, the Company
introduced the 9800 Multiple Architecture Extender (MAX), designed
to provide ESCON extension of high volume devices such as Direct
Access Storage Devices (DASD).
Fiber-Based Systems
The current 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 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. The Company sells its director
product through a reseller agreement and plans to add other
features to enhance the product. Prices for a director range from
$100,000 to $450,000, 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), MX (HDMX)
and BX (HDBX) products allow fiber to copper, multi-mode fiber to
single-mode and fiber extension capabilities, respectively. Prices
range from $10,000 to $275,000, depending on application
requirements.
The Company's Configuration Change Management System (CCMS) is a
software support system for multi-generation data centers. CCMS
builds a data center configuration database that generates reports
and graphical, logical configurations. The CCMS site license is
$25,000.
Channel Networking Systems
The Company's 9095 Enterprise Networking System (ENS) converts the
mainframe's signals for transmission over high-speed telephone
company lines, including Switched Multimegabit Data Service
(SMDS), to connect to other mainframes, high-speed printers, tape
storage units, and workstations at user sites located anywhere in
the world. The 9095 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 the 9095 in January 1995. The price of a typical Model
9095 system with support for a multi-site network is approximately
$250,000.
The Company's current primary channel extension products, the
Models 9200 and 9400, multiplex several channels over one or two
high-speed communications lines, thereby providing the customer
with greater flexibility and economies than previous products. The
9800, introduced in December 1994, is the industry's first ESCON
channel extender maintaining all of the same functionality of the
9200 and 9400, but adding extension of ESCON DASD. This system's
price ranges from $80,000 to $400,000.
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. 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 offer static
matrix switching of non-fiber channels, and integrated fiber-optic
switching and conversion, facilitiating 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 Model 9088 dynamically switches 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. This product ranges 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. 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.
The Remote Monitoring Unit gives users with communications matrix
switches the ability to perform centralized real-time monitoring of
remote site communications lines. These systems range in price
from approximately $26,000 to $1,500,000, with a typical system
price of $350,000.
As users have migrated to PC-based solutions, new requirements for
connecting the PC's and networking them into the Data Center have
emerged. The Company's solution for this requirement is the
Intelligent Switching Hub. As networks have grown in size,
switching hubs that allow for dedicated bandwidth to each PC have
become important building blocks for Enterprise Networks. The
Company began marketing a switching hub in 1995 as a result of an
alliance formed with LANNET, Inc. The price for these products
ranges from $20,000 to over $1,000,000.
T-Bar Products
The Company develops and markets a variety of switches and
components for voice, video and data applications under the "T-Bar"
name. These products range in price from $65 to $900.
The Variswitch product provides sparing for critical network
components and systems. 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 products also include switching, monitoring and cable
management solutions for the fiber-optic market. The newest
product T-Bar is the Optiswitch, a photonic matrix switch
transparent to speed and protocol. The Optiswitch product is
typically priced from $15,000 to $162,000.
The Company 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 began
shipment of this product in the first quarter of 1994.
Sales and Marketing; Foreign Sales; and Backlog
The Company's customers are large companies, typically with IBM and
IBM-compatible mainframe computers and related peripheral devices.
Customers include airlines, banks, securities firms,
telecommunications companies, manufacturing firms, power utilities
and insurance companies.
The Company has a worldwide sales force of 75 sales managers,
representatives and systems engineers, located in 24 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 3% of the Company's annual sales in 1994 and 2%
in 1993. 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, 1995, the Company had 94 service personnel located in
28 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, 1994, the Company's sales to
customers in foreign countries were approximately $21,400,000,
representing approximately 24% of sales compared to $17,000,000, or
18% of sales, in 1993 and $19,800,000, or 24% of sales, in 1992,
reflecting an increase in sales in German and Italian markets from
1993 to 1994 and the severe adverse impact of European economic
conditions from 1992 to 1993.
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 1994 or 1993. The Company's backlog was approximately
$4,081,000 at December 31, 1994, compared with approximately
$7,781,000 at December 31, 1993.
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 1994
the Federal Reserve and Harris Corporation purchased $2.2 million
and $1.5 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 $.6 million and $1.2
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 $10,524,000, $12,970,000 and $12,725,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
Engineering and development expenditures are expensed as incurred.
The Company anticipates engineering and development expenditures of
approximately $10,000,000 in 1995. The Company believes that
despite the reduction in expense, improved effectiveness of the
department more than offsets the decrease in spending.
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 market 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, 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.
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. In late 1993 Telenex (a Division of General Signal)
entered into this market. 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 products primarily compete with Hadax Electronics and
Telenex.
Employees
As of February 1, 1995, the Company had a total of 449 employees,
including 7 officers, 57 administrative personnel, 211 sales,
service and marketing personnel, 69 engineering personnel and 105
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 May 31, 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. Rent
payable by the Company for the duration of its lease in 1995 will
be approximately $154,000. The Company also leases approximately
23,000 square feet in Milford, Connecticut which was formerly used
for manufacturing purposes at an annual rental of $168,000 in 1994,
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.
In the fourth quarter of 1994, the Company purchased an
83,000-square foot facility and adjacent land in Shelton,
Connecticut for the aggregate purchase price of $3,140,000. The
purchase is expected to be financed in major part by a low-interest
loan and a grant from the State of Connecticut. The Company will
consolidate its current Shelton and Orange operations in such
facility in the spring of 1995. The Company is currently
constructing an additional 10,800 square feet of warehouse space on
such site, at a cost of approximately $750,000. The Company
expects to recognize substantial expense reductions as a result of
such consolidation beginning in the third quarter of 1995.
The Company leases sales or service office space in 28 cities in
the United States, Canada and Europe. The leases have varying
expirations through March 2013, and the aggregate annual rent is
currently approximately $1,105,000.
The Company believes that its purchased and leased properties are
adequate to fulfill its operational requirements.
ITEM 3 -- LEGAL PROCEEDINGS
A former officer of the Company who sued the Company for breach of
an alleged oral promise of lifetime employment was awarded a jury
verdict of $413,000 in October 1991. In May 1993 the court granted
the Company's motion to set aside the verdict. Such former officer
appealed the court's decision. In August 1994 the Connecticut
Supreme Court upheld the lower court decision, finding in favor of
the Company. The plaintiff's motion for rehearing of the case was
denied by the court in September 1994.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The common stock and the warrants (see Note 9 to the Consolidated
Financial Statements) of the Company are traded on the
over-the-counter market under the NASDAQ symbols DASW and DASWZ,
respectively. The following table sets forth the quarterly high
and low trade prices for each of the common stock and the warrants
as reported by NASDAQ for the periods indicated.
Common Stock (DASW)($'s)
________________________
High Low
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
1994
____
First Quarter 3 1-1/2
Second Quarter 2-15/16 2
Third Quarter 2-5/8 2-1/8
Fourth Quarter 3 2-1/8
1995 Warrants (DASWZ)($'s)
__________________________
High Low
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
1994
____
First Quarter 1-1/8 1
Second Quarter 1-1/8 1
Third Quarter 1-1/8 1-1/16
Fourth Quarter 1-1/4 1-1/8
On February 28, 1995 the closing price of the common stock, as
reported by NASDAQ, was $3.50 per share. The closing price of the
1995 Warrants was $1.19 per warrant. As of February 28, 1995,
there were approximately 2,300 holders of record of the Company's
common stock and 6 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, 1990 through 1994, 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
________________________________________________
1994 1993 1992 1991 1990
STATEMENT OF
OPERATIONS DATA (000's except per share data)
Revenues, net $ 90,571 $ 95,078 $ 84,020 $103,000 $121,798
Cost of revenues 49,596 55,042 42,682 52,147 59,441
_________ _________ _________ _________ ________
Gross profit 40,975 40,036 41,338 50,853 62,357
Selling, general
and administrative 24,558 24,994 26,705 32,827 34,142
Engineering and
development 10,524 12,970 12,725 11,733 11,915
Restructuring
charge (a) - 1,780 - - -
Goodwill amort-
ization and
write-down (b) 171 171 171 34,450 2,888
_________ _________ _________ _________ ________
Income (loss)
from operations 5,722 121 1,737 (28,157) 13,412
Other expense (1,779) (2,189) (2,978) (3,775) (5,269)
_________ _________ _________ _________ ________
Income (loss)
before income
taxes 3,943 (2,068) (1,241) (31,932) 8,143
Provision for
(benefit from)
income taxes 1,380 (75) (228) 916 4,872
_________ _________ _________ _________ ________
Income (loss)
before extra-
ordinary gain 2,563 (1,993) (1,013) (32,848) 3,271
Extraordinary
gain (c) - - - 425 2,820
_________ _________ _________ _________ ________
Net income (loss) $ 2,563 $ (1,993) $ (1,013) $(32,423) $ 6,091
========= ========= ========= ========= ========
Income (loss)
before extra-
ordinary gain
per common share $ 0.21 $ (0.16) $ (0.08) $ (2.76) $ 0.28
========= ========= ========= ========= ========
Net income (loss)
per common
share (d) $ 0.21 $ (0.16) $ (0.08) $ (2.73) $ 0.52
========= ========= ========= ========= ========
Weighted average
number of common
shares
outstanding 12,358 12,120 11,993 11,892 11,693
December 31,
________________________________________________
1994 1993 1992 1991 1990
BALANCE SHEET DATA (000's)
Working capital $ 28,578 $ 34,350 $ 27,786 $ 40,756 $ 41,167
Total assets 57,688 60,284 56,814 68,685 104,865
Short-term debt
and current
portion of
long-term debt
and capital
lease obligations 1,833 240 1,095 1,780 726
Capital lease
obligations, less
current portion 506 724 646 576 441
Long-term debt,
less current
portion 19,591 25,487 19,515 30,614 33,952
Redeemable
warrants - 885 802 718 635
Total share-
holders' equity 22,615 19,663 21,476 22,724 54,999
<FN>
(a) In the fourth quarter of 1993, the Company commenced a
workforce reduction of 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 and 1990.
(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
1994 vs. 1993
The Company reported net income of $2,563,000 in 1994, compared
with a net loss of $1,993,000 in 1993 that included a one-time
pre-tax restructuring charge of $1,780,000 for employee severance
and related expenses. Product revenues decreased 7.3% in 1994 to
$70,199,000 compared with $75,739,000 in 1993. The shortfall was
the result of a decline in domestic product revenues, offset
somewhat by an increase in the international arena. Activity in
the Company's older product lines decreased significantly, offset
in part by more recent product introductions. Revenues in 1995 are
expected to increase as a result of new products introduced late in
1994, partially offset by the Company's expectation that its older
product lines will decline in volume. Service revenues continue an
upward trend increasing 5.3% to $20,372,000 in 1994 from
$19,339,000 in 1993. This increase was primarily due to an
increase in the installed base and improved time and materials
management. Revenues from European subsidiaries increased from
$12,254,000 in 1993 to $13,984,000 in 1994 as a result of a full
year of revenues from the Company's Italian subsidiary and an
increase in revenue from its German subsidiary. The Company
expects further growth in the European market due to the recent
reorganization of the European sales and marketing functions.
Cost of product revenues decreased to 54.4% in 1994, from 56.3% in
1993, primarily as a result of lower material costs and increased
manufacturing efficiencies. Cost of service revenues declined
significantly to 56.1% from 64.2% in 1993. This reduction was due
to decreased parts and materials expense resulting from a
concentrated effort in the management of this area, a reduction in
headcount and the impact of the increased revenue base. The
Company believes that in 1995 the cost of revenues will be similar
to those in 1994.
The Company reduced operating expenses in 1994, realizing a
$436,000 savings in selling, general and administrative expenses.
These reduced expenses were primarily attained through a reduction
in headcount achieved in the 1993 restructuring. Selling, general
and administrative expenses as a percentage of revenue were 27.3%
in 1994 versus 26.5% in 1993, due to the decrease in the revenue
base.
Engineering and development expenses decreased $2,446,000 to 11.6%
of revenue in 1994 from 13.6% of revenues in 1993. This reduction
was the result of a downsized and reorganized engineering
department and cost containment program. The Company believes that
despite the reduction in expense, improved effectiveness of the
department more than offsets the decrease in spending. A more
aggressive joint technology sharing strategy was implemented and
the Company entered into agreement with LANNET, Inc. and a
development and marketing agreement with EMC Corporation. We
expect to see initial product revenue related to both of these
arrangements begin in the first quarter of 1995. The Company
anticipates spending approximately $10,000,000 in research and
development in 1995.
In the fourth quarter of 1994 the Company purchased an 83,000
square foot building and adjacent land in Shelton, Connecticut
which will consolidate all the Company's operations in one
location, except for its foreign and regional sales and service
offices, when the Company's current Shelton and Orange leases
expire in mid-1995. The Company expects to incur non-recurring
relocation expenses of approximately $500,000 in the first half of
1995, offset in full by anticipated savings of the same amount as
a result of this consolidation in the second half of 1995.
Long and short-term debt outstanding (including capital lease
obligations) was $4,521,000 less at December 31, 1994 than at
December 31, 1993. Positive cash flow led to the repayment of
revolver debt. Interest expense was less in 1994 versus 1993
because of lower debt balances.
The Company recorded a tax provision of 35% on earnings before tax
of $3,943,000, substantially all of which were domestic. The
effective tax rate was slightly higher than the statutory federal
tax rate of 34% due to state taxes offset in part by the
utilization of loss and credit carryforwards and the reduction of
the valuation allowance due to reversal of temporary differences on
which the Company had previously provided deferred taxes. The
Company recorded an income tax benefit in 1993. This benefit was
limited by the valuation allowance established in 1993.
In 1994, the Company adopted SFAS No. 112 Employers' Accounting for
Post Employment Benefits. 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 adoption of this
statement was not material to the consolidated results of
operations or financial position of the Company.
1993 vs 1992
The Company reported a net loss of $1,993,000 in 1993, compared
with a net loss of $1,013,000 in 1992. The Company's product
revenues increased in 1993 due to the shipment of new products.
Product revenues increased 14.1% compared with those in 1992,
reversing a trend of declining revenues from 1990 to 1992. Service
revenues increased 9.6% from 1992, due to an increase in the
installed base. Revenues in Europe declined from $13,096,000 in
1992 to $12,254,000 in 1993 due to continued weak economic
conditions, resulting in a $504,000 loss in Europe in 1993. The
net loss in 1993 included a one-time pre-tax restructuring charge
of $1,780,000 for employee severance and expenses related to a
reduction in staffing levels of approximately 10% to enable the
Company to operate profitably at current revenue levels. The
accrued costs of this restructuring was expended by the end of
1994. The future reduction in annual employee costs is
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 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 26.5% in 1993, compared with 32.0% 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.
Although long and short-term debt outstanding (including capital
lease obligations) was $5,195,000 more at December 31, 1993 than at
December 31, 1992, interest expense was substantially less in 1993
because the average outstanding debt and interest rates were lower
in 1993 than in 1992.
The Company recorded an income tax benefit in 1993. 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.
Liquidity and Capital Resources
The Company generated $12,454,000 of cash before financing
activities in 1994, as opposed to using $7,258,000 in 1993. As of
December 31, 1994 the Company had working capital of $28,578,000
reflecting a decrease of $5,772,000 from the prior year. This
decrease primarily resulted from substantial reductions in
inventory and receivable levels in 1994 which led to repayment of
the Company's long-term revolving debt. 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
$151,000 in 1994 from the sale of leases compared to $3,043,000 in
1993.
The ratio of current assets to current liabilities was 2.9:1 at
year-end 1994, compared with 3.6:1 at year-end 1992.
Long-term debt consisted of $19,515,000 of convertible subordinated
debentures and $76,000 of indebtedness to the State of Connecticut
for a loan granted under a State financial assistance package.
The loan is subject to certain terms and conditions, one of which
is a promise to maintain operations in Connecticut for a minimum of
10 years from the date of receipt of the last State financial
assistance package payment. In addition, at December 31, 1994, the
Company, based on a formula of eligible receivables (as defined),
has available up to $8,000,000 of revolving credit with People's
Bank. 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, 1994 the Company used $1,578,000
of available credit to finance European operations in the short
term. The Company was in compliance with all financial covenants
contained in its credit agreement.
Capital expenditures in 1995 are expected to exceed depreciation
expense by approximately $750,000 due to the construction of
additional warehouse space needed to maintain operations at a new
83,000 square foot facility in Shelton, Connecticut. The facility
was purchased late in 1994, and will consolidate all the Company's
operations in one location, except for its foreign and regional
sales and service offices.
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
1992, 1993 and 1994, and is not expected to do so in 1995.
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEX
Page No.
________
Financial Statements
Report of Independent Accountants 15
Consolidated Balance Sheets - December 31, 1994 and 1993 16
Consolidated Statements of Operations
for the years ended December 31, 1994, 1993 and 1992 17
Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1993 and 1992 18
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1994, 1993 and 1992 19
Notes to Consolidated Financial Statements 20
Schedules (Refer to Item 14) 41
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors of
Data Switch Corporation
We have audited the consolidated financial statements and the
financial statement schedule 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 the
financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statement and the financial statement schedule
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, 1994 and 1993,
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule
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.
Stamford, Connecticut
January 31, 1995
DATA SWITCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's except share data)
December 31,
_____________________
1994 1993
_________ ________
Current assets:
Cash and cash equivalents $ 7,757 $ 491
Accounts receivable
(net of allowance for doubtful
accounts of $553 in 1994
and $656 in 1993) 18,713 25,245
Income taxes receivable 161 144
Lease receivables, net 1,475 1,095
Inventories 14,672 19,795
Prepaid expenses and other 646 966
_________ ________
Total current assets 43,424 47,736
Long-term lease receivables, net 3,288 3,135
Property, plant and equipment, net 7,988 5,801
Other 2,988 3,612
_________ ________
Total assets $ 57,688 $ 60,284
========= ========
Current liabilities:
Accounts payable, trade $ 4,525 $ 5,253
Short-term debt 1,578 -
Current portion of long-term debt 18 -
Accrued compensation 2,081 2,368
Other accrued liabilities 5,098 4,889
Income taxes payable 801 37
Other taxes payable 508 599
Current portion of capital
lease obligations 237 240
_________ ________
Total current liabilities 14,846 13,386
Long-term debt, less current portion 19,591 25,487
Capital lease obligations,
less current portion 506 724
Deferred income taxes 130 139
Contingencies
Redeemable warrants - 885
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 12,425,320 and 12,224,278
shares at December 31, 1994 and 1993,
respectively 124 122
Additional paid-in capital 50,669 50,413
Accumulated deficit (27,724) (30,287)
Cumulative translation adjustment (165) (272)
Less:
Receivables from stock purchases - (24)
Treasury stock, at cost
(48,429 shares in 1994 and 1993) (289) (289)
_________ _________
Total shareholders' equity 22,615 19,663
_________ _________
Total liabilities and
shareholders' equity $ 57,688 $ 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)
For the Years Ending December 31,
___________________________________
1994 1993 1992
_________ _________ _________
Revenues:
Product revenues $ 70,199 $ 75,739 $ 66,368
Service revenues 20,372 19,339 17,652
_________ _________ _________
Revenues, net 90,571 95,078 84,020
Cost of revenues:
Cost of product revenues 38,176 42,617 31,012
Cost of service revenues 11,420 12,425 11,670
_________ _________ _________
Cost of revenues 49,596 55,042 42,682
Gross profit 40,975 40,036 41,338
Operating expenses:
Selling, general and
administrative 24,729 25,165 26,876
Engineering and
development 10,524 12,970 12,725
Restructuring charge - 1,780 -
_________ _________ __________
Total operating expenses 35,253 39,915 39,601
Income from operations 5,722 121 1,737
Other income (expense):
Interest expense (1,981) (2,077) (2,684)
Foreign exchange
gain (loss) 96 (87) (207)
Other, net 106 (25) (87)
_________ _________ _________
Total other income
(expense) (1,779) (2,189) (2,978)
Income (loss) before
income taxes 3,943 (2,068) (1,241)
Provision for (benefit
from) income taxes 1,380 (75) (228)
_________ _________ _________
Net income (loss) $ 2,563 $ (1,993) $ (1,013)
========= ========= =========
Primary income (loss)
per share $ .21 $ (.16) $ (.08)
========= ========= =========
Fully diluted earnings
per share
(a) (a) (a)
========= ========= =========
Weighted average number
of common shares
outstanding 12,358 12,120 11,993
========= ========= =========
<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)
For the Years Ended December 31,
_____________________________________
1994 1993 1992
Cash flows from operating
activities:
Net income (loss) $ 2,563 $ (1,993) $ (1,013)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation 3,330 3,492 3,208
Goodwill amortization 171 171 171
Reduction of goodwill
from utilization
acquired NOLs 354 - -
Deferred income taxes (23) (130) 19
Changes in operating
assets and liabilities:
(Increase) decrease in:
Receivables 6,174 (6,710) 12,185
Inventories 5,243 491 (163)
Prepaid expenses and
other 358 517 (668)
Increase (decrease) in:
Accounts payable, trade (741) 1,551 (986)
Accruals (168) (1,562) 2,356
Income taxes payable 766 22 (79)
Other taxes payable (111) 197 9
Other, net (6) 199 640
_________ __________ _________
Net cash provided (used)
by operating activities 17,910 (3,755) 15,679
Cash flows from investing
activities:
Property and equipment
additions (5,456) (3,503) (2,799)
_________ _________ _______
Net cash used in
investing activities (5,456) (3,503) (2,799)
_________ _________ _______
Net cash provided (used)
before financing activities 12,454 (7,258) 12,880
Cash flows from financing
activities:
Net proceeds (payments)
of short-term debt 1,582 (598) (8,156)
Proceeds under long-term
borrowings 16,354 36,523 10,042
Principal payments and
repurchases under
long-term borrowings (22,471) (30,723) (13,424)
Proceeds from issuance
of common stock 320 325 244
Redemption of warrants (935) - -
_________ _________ _________
Net cash provided (used)
by financing activities (5,150) 5,527 (11,294)
Effect of exchange rate
changes on cash (38) 14 (131)
_________ _________ _________
Net increase (decrease)
in cash and cash equivalents 7,266 (1,717) 1,455
Cash and cash equivalents at
beginning of the period 491 2,208 753
_________ _________ _________
Cash and cash equivalents
at end of the period $ 7,757 $ 491 $ 2,208
========= ========= =========
Supplemental disclosures
of cash flow information:
Cash paid (received)
during the period for:
Interest $ 1,857 $ 1,913 $ 2,419
Income taxes $ 284 $ (405) $ 178
<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, Plant and Equipment:
Property, plant and equipment are stated at cost and
depreciated using the straight-line method over estimated useful
lives of two to forty 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.
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. The estimated cost of providing such
warranty is charged to cost of sales upon recognition of product
revenue.
Income Taxes:
In 1992, the Company used the liability method of
accounting for income taxes. Effective January 1, 1993, the
Company adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS No. 109). The cumulative
effect of adoption 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. The effect of this
calculation is antidilutive of all years.
2. Inventories
Inventories consist of the following as of December 31,
1994 and 1993:
(000's)
1994 1993
_______ ________
Raw materials $ 8,266 $ 11,075
Systems in process 1,541 1,821
Finished goods 3,392 5,409
Demonstration equipment 1,473 1,490
Total $ 14,672 $ 19,795
3. Property, Plant and Equipment
In the fourth quarter of 1994 the Company purchased an
83,000 square foot building and adjacent land in Shelton,
Connecticut which will consolidate all the Company's operations in
one location, except for its foreign and regional sales and service
offices, when the Company's current Shelton and Orange leases
expire in mid-1995.
Property, plant and equipment include the following as of
December 31, 1994 and 1993:
(000's)
1994 1993
_________ _________
Land $ 712 $ -
Buildings 2,533 -
Machinery and equipment 14,101 17,362
Furniture, fixtures,
and leasehold improvements 8,718 10,790
Equipment under capital leases 1,294 1,395
Systems leased to customers 1,617 1,411
________ _________
28,975 30,958
Less, accumulated depreciation
and amortization (20,987) (25,157)
_________ _________
Net property, plant and equipment $ 7,988 $ 5,801
========= =========
4. 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 1999. The Company's net investment in
sales-type leases consists of the following as of December 31, 1994
and 1993:
(000's)
1994 1993
_________ _________
Minimum lease payments receivable $ 3,691 $ 2,673
Estimated unguaranteed
residual values 1,415 1,955
Less, unearned finance income (343) (398)
_________ _________
Lease receivables, net 4,763 4,230
Less, current portion (1,475) (1,095)
_________ _________
Long-term portion $ 3,288 $ 3,135
========= =========
Estimated unguaranteed residual values include those
related to lease receivables sold to third parties.
Future minimum amounts receivable at December 31, 1994
under sales-type leases for the next five years were:
(000's)
________
1995 $ 1,677
1996 1,310
1997 544
1998 128
1999 32
The Company has entered into various arrangements for the
sale of lease receivables under which the Company received proceeds
of approximately $151,000 in 1994, $3,043,000 in 1993 and
$3,906,000 in 1992. As of December 31, 1994 and December 31, 1993,
lease receivables sold under these arrangements totaled $2,186,000
and $4,747,000, respectively. In the event of a default by a
lessee, recourse is limited to the collateralized equipment, with
an estimated unguaranteed residual value of $621,000 and $1,134,000
at December 31, 1994 and 1993, 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.
5. Leasing Arrangements, As Lessee
Operating Leases:
The Company currently conducts all of its operations from
leased facilities. In the fourth quarter of 1994 the Company
purchased an 83,000 square foot building and adjacent land in
Shelton, Connecticut which will consolidate all the Company's
operations in one location, except for its foreign and regional
sales and service offices, when the Company's current Shelton and
Orange leases expire in mid-1995. Future minimum rental payments
at December 31, 1994 under non-cancelable operating leases were as
follows:
(000's)
1995 $ 1,683
1996 786
1997 585
1998 313
1999 165
Thereafter 2,126
_______
Total $ 5,658
=======
The rent expense for all leased facilities amounted to
$2,486,000, $2,704,000, and $3,117,000 for 1994, 1993 and 1992,
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
$360,000, $253,000 and $374,000 for 1994, 1993 and 1992,
respectively. As of December 31, 1994 and 1993, equipment under
capital leases had a net book value of $500,000 and $838,000
respectively.
Future minimum lease payments under capital leases,
together with the present value of such payments as of December 31,
1994, were as follows:
(000's)
_________
1995 $ 287
1996 215
1997 200
1998 148
________
Total 850
Less, imputed interest (at rates
ranging from 7.25% to 12.0%) (107)
_________
Present value of capital
lease obligations 743
Less, current portion (237)
_________
Long-term portion $ 506
=========
6. Other Accrued Liabilities
Included in other accrued liabilities are deferred
revenues related to maintenance contracts of $2,228,000 and
$1,126,000 at December 31, 1994 and 1993, respectively.
7. Short-Term Debt
Borrowings of the Company's European subsidiaries from
banks, collateralized by the subsidiaries' receivables, were
included in short-term debt at December 31, 1993 and 1992. All
such borrowings were paid off by March, 1993. In July 1994 the
Company entered into a new international overdraft line of credit
with National Westminster Bank, Plc, enabling its European
subsidiaries to borrow up to an aggregate of $2,250,000, of
which $672,000 was available as of December 31, 1994. Borrowings
under this line of credit are payable upon demand, are available
until March 29, 1995 and are supported by a standby letter of
credit and the cross guarantees of the Company and its
subsidiaries. The loans bear interest at the rate of National
Westminster's prime rate plus 1%. The weighted average interest
rate for these loans was 7.6% at December 31, 1994.
8. Long-Term Debt
Long-term debt consisted of the following as of December
31, 1994 and 1993:
(000's)
_____________________
1994 1993
_________ _________
Lines of credit (a) $ - $ 5,972
9% convertible subordinated
debentures (b) 3,539 3,539
8-1/4% convertible subordinated
debentures (c) 15,976 15,976
State of Connecticut loan (d) 94 -
_________ _________
19,609 25,487
Less, current portion (18) -
_________ _________
$ 19,591 $ 25,487
========= =========
<FN>
(a) On March 11, 1993, the Company entered into a 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, 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. At December 31, 1994 the Company was in
compliance with all financial covenants contained in its credit
agreement. 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%. As the letter of credit
supporting the Company's foreign borrowings (See Note 7) was funded
under the Company's domestic line, the Company's borrowing ability
under its domestic line of credit has been reduced for the
aggregate amount of $2,250,000 so long as the foreign facility
remains available.
(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, 1994 $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). In January of 1995 the Company repurchased
$750,000 face amount of these debentures.
(d) In August, 1994 the Company received a loan of $100,000
from the State of Connecticut in connection with the relocation of
its manufacturing facility to Orange, Connecticut in 1992. The
loan is payable monthly over five years at a rate of 5% per annum.
9. 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, were redeemable at the option of the holder
for $1.25 during the last quarter of 1994. During such period,
748,112 warrants were redeemed. There were no 1995 Warrants
exercised in 1994 or 1993. As of December 31, 1994, 10,112 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. None of the warrants were
exercised in 1994 or 1993.
The Company has reserved, as of December 31, 1994,
2,930,198 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.
10. 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
ISOP(a) ISOP(a) NQSOP ISOP
(000's except price range data)
Outstanding: December 31, 1991 159 764 269 413
Options granted 6 209 120 102
Exercised - - - -
Cancelled (16) (181) (114) (96)
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
Options granted - - 138 334
Exercised - (1) - (33)
Cancelled (54) (361) (20) (162)
Outstanding: December 31, 1994 51 400 302 608
Exercisable at
December 31, 1994 51 288 95 206
Available for grant at
December 31, 1994 - - 198 359
Total shares reserved for
future issuance at
December 31, 1994 51 400 500 967
Price range of options Low $4.00 $2.00 $1.81 $2.00
outstanding at
December 31, 1994 High $6.50 $8.13 $7.75 $4.63
Price range of options exercised
1992 Low - - - -
High - - - -
1993 Low - $2.00 - -
High - $3.21 - -
1994 Low - $2.00 - $2.00
High - $2.00 - $2.00
<FN>
(a) The 1982 and 1983 ISOP's have expired.
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 could not exceed 375,000. The purchase price of the stock
could not be less than fair market value of the stock on the date
of purchase. In accordance with the terms of the plan, the Company
had 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, were repaid in full as of
December 31, 1994, totalled $24,000 at December 31, 1993 and
$78,000 at December 31, 1992. 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 1994, 1993 and 1992, employees purchased
107,366, 121,997 and 153,401 shares, respectively, of the Company's
stock through this non-compensatory plan and its predecessor. As
of December 31, 1994, there were 43,372 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 9,736, 9,810
and 8,550 shares to employees during 1994, 1993 and 1992,
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, 1994, there were 805 shares reserved for future issuance under
this plan.
Data Switch Bonus Plans:
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
$469,000, $173,000 and $96,000 in 1994, 1993 and 1992,
respectively.
The 1992 Executive Stock Incentive Plan 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 profits of the Company are placed in
a bonus pool. Of that pool, 83.3% is 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. Compensation expense
under this plan was $247,000 in 1994 and $0 in 1993 and 1992.
The Bonus Plans are administered by the Compensation and
Stock Option Committee of the Board of Directors.
11. Retirement Savings Plan
In August 1986, the Board of Directors adopted the
Retirement Savings Plan ("Savings Plan") for the benefit of all
employees, effective as of January 1, 1987. The Savings Plan is a
defined contribution plan. The Company's contribution to the
Savings Plan was $362,000, $395,000 and $344,000 in 1994, 1993 and
1992, respectively.
12. Income Taxes:
The components of the provision (benefit) for income taxes
are as follows:
(000's)
1994 1993 1992
_________ _________ _________
U.S. federal income taxes:
Current $ 568 $ 30 $ 19
Deferred - (48) (19)
Charge equivalent to
acquired net operating
loss carryforward benefits 354 - -
State taxes:
Current 374 63 -
Deferred - (150) 150
Foreign taxes:
Current 61 (40) (257)
Deferred 23 70 (121)
_________ _________ __________
Total tax provision $ 1,380 $ (75) $ (228)
========= ========= ==========
A reconciliation of the statutory tax rates and the
Company's effective tax rates are as follows:
(000's)
1994 1993 1992
______ _______ _______
U.S. federal statutory rate 34.0% (34.0%) (34.0%)
Increase (reduction) in tax
rate resulting from:
Domestic losses without tax
benefit - 20.8% 9.1%
Benefit of operating loss
carryforward (2.5%) - -
Benefit of tax credit
carryforward (1.6%) - -
Goodwill amortization 1.5% 2.8% 4.6%
State taxes 6.3% (2.7%) 8.0%
Reduction in valuation
allowance (4.5%) - -
Travel and Entertainment 1.4% 1.2% 1.8%
Varying tax rates of foreign
subsidiaries 0.4% 8.3% (7.9%)
______ ________ _______
35.0% (3.6%) (18.4%)
====== ======== =======
The following table summarizes by component, the net
deferred tax assets (liabilities) of the Company as of December 31,
1994 and 1993.
(000's)
_____________________
1994 1993
_________ _________
Current tax assets related to:
Inventory reserves $ 1,553 $ 2,056
Allowance for doubtful
accounts 186 202
Other 236 166
_________ _________
1,975 2,424
Non-current tax assets
related to:
Depreciation 1,065 1,294
Loss carryforward - 766
Tax credits 3,690 3,752
Alternative minimum credits 613 606
_________ _________
5,368 6,418
Current tax liabilities
related to:
Lease receivables (717) (776)
Other (509) (509)
_________ _________
(1,226) (1,285)
Non-current tax liabilities
related to:
Lease receivables (1,595) (2,209)
Other (130) (139)
_________ _________
(1,725) (2,348)
Valuation allowance (4,522) (5,348)
_________ _________
Net deferred tax liability $ (130) $ (139)
========= =========
During 1994 the valuation allowance decreased by
approximately $826,000 due to the utilization of loss and credit
carryforwards and the reversal of temporary differences on which
the Company had previously provided deferred taxes.
At December 31, 1994 the Company had investment and
research and development tax credits of $3,690,000 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. To the extent that T-Bar preaquisition 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. The Company has
unused alternative minimum tax credits of $613,000 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 $1,136,000 and $965,000 at
December 31, 1994 and 1993, 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. As of December 31, 1994 the amount of
withholding tax that would be payable upon remittance of the entire
amount of undistributed earnings would approximate $166,000.
13. 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, 1994, 1993 and 1992 and identifiable assets at the end
of each of those years, classified by geographic area, were as
follows:
North European Consol-
(000's) America Subsidiaries lidated
1994
Revenues, net $ 76,587 $ 13,984 $ 90,571
Income before
income taxes 3,886 57 3,943
Identifiable assets 51,896 5,792 57,688
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
Research and development expenses were $10,093,000,
$12,491,000 and $12,380,000 in 1994, 1993 and 1992, respectively.
The Company sells its products primarily to airlines,
banks, securities firms, telecommunication companies, manufacturing
firms, power utilities and insurance companies. 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 1994, 1993 or 1992. The Company believes it did not
have a significant concentration of credit risk at December 31,
1994. At December 31, 1993, one customer accounted for
approximately 19% of the Company's consolidated accounts receivable
balance.
14. Quarterly Income Data (Unaudited)
Selected quarterly data is as follows:
(000's except per share data)
1994
________________________________________________
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
________ ________ ________ ________ ________
Revenues, net $ 21,210 $ 22,218 $ 23,427 $ 23,716 $ 90,571
Gross profit 9,502 9,902 10,847 10,724 40,975
Net income 115 457 1,013 978 2,563
Primary earnings
per share 0.01 0.04 0.08 0.08 0.21
(000's except per share data)
1993
________________________________________________
1st Qtr 2nd Qtr 3rd Qtr 4th 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
(a) (a)
Net income (loss) 749 208 (676) (2,274) (1,993)
Primary earnings
(loss)
per share 0.06 0.02 (0.06) (0.19) (0.16)
<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%.
15. Subsequent Events
In 1994 and 1995 the Company entered into a series of
arrangements with Mr. Richard E. Greene, founder and, until his
resignation in January 1995, a director of the Company, pursuant to
which Mr. Greene will provide certain advisory services to the
Company through December 31, 1996, in exchange for annual
compensation of $225,000 in 1994, 1995 and $175,000 in 1996.
In addition, in January 1995, the Company made a loan to
Mr. Greene in the amount of $500,000, collateralized by a pledge of
400,000 shares of the Company's common stock, to be repaid in
thirty six (36) equal monthly installments commencing on January 1,
1997, plus interest at the rate charged to the Company by its
principal lender, plus 1%, which interest payments began upon the
effective date of the agreement. In consideration of this loan,
Mr. Greene granted to the Company an option to purchase 200,000
shares of the pledged stock at a price of $3.00 per share, and a
right of first refusal to purchase any other shares of common stock
which Mr. Greene may desire to sell in a private sale transaction.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of February
28, 1995 are as set forth below.
Name Age Office
William J. Lifka 65 Chairman of the Board of
Directors, President and
Chief Executive Officer
W. James Whittle 43 Senior Vice President,
Chief Financial Officer
and Treasurer
Anthony J. Fusarelli 47 Senior Vice President,
Worldwide Sales
and Service
Robert J. Connolly 49 Vice President, Operations
Robert M. McDermott 47 Vice President, Engineering
Michael A. Ruggieri 43 Vice President, Strategic
Marketing
Shawn A. Smith 36 Secretary and Corporate
Counsel
Brandt R. Allen 54 Director
D. David Cohen 54 Director
Norman L. Rasmussen 66 Director
Irwin J. Sitkin 64 Director
Michael D. Stashower 68 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 1995 annual meeting of
shareholders, which is expected to be held on May 18, 1995. 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.
W. James Whittle is Senior Vice President, Chief Financial Officer
and Treasurer 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.
Anthony J. Fusarelli is Senior Vice President of Worldwide Sales
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.
Robert J. Connolly is 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.
Robert M. McDermott is Vice President of Engineering of the
Company. He joined the Company in 1994. From 1986 to 1994 he was
employed by Summagraphics Corporation, where his most recent
position was Vice President of Engineering.
Michael A. 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.
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.
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.
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, 1994, all such filing
requirements were in compliance.
ITEM 11 -- EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the
Chief Executive Officer and the Company's four other most highly
compensated executive officers whose salary and bonus exceeded
$100,000 in 1994, for services rendered during fiscal years 1994,
1993 and 1992.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
Commis- All
sions Restricted Other
and Stock Compen-
Name Year Salary Bonuses Award Options sation
and Title ($) ($) ($) (#) ($)(1)
_________________________________________________________________
William
J. Lifka,
Chairman, 1994 322,500(2) - 106,250 10,000 5,856
President
and Chief
Executive 1993(3) 10,923 - - - -
Officer 1992 - - - - -
W. James
Whittle, 1994 135,771 68,258 - 22,500 3,437
Senior
Vice
President, 1993(4) 122,884 4,027 - 12,500 3,100
Chief
Financial
Officer
and 1992 - - - - -
Treasurer
Anthony J.
Fusarelli,
Senior Vice 1994 125,000 130,173 - 2,500 4,667
President
Worldwide
Sales 1993 120,000 63,802 - 12,500 4,797
and
Service 1992 110,000 64,253 - 16,500 2,537
Michael (5)
Ruggieri, 1994 130,000 65,359 - 20,500 3,294
Vice
President 1993 - - - - -
Strategic
Marketing 1992 - - - - -
Frederick
Dietz,(6) 1994 174,774 98,400 - 2,500 4,723
Deputy
President 1993 175,000 6,077 - 7,500 5,014
1992 158,333 21,894 - 32,500 4,682
<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) Includes $50,000 fee for service as Chairman of the Board of
Directors of the Company.
(3) Mr. Lifka joined the Company as Chairman, President and Chief
Executive Officer on December 16, 1993.
(4) Mr. Whittle was elected an executive officer of the Company in
May 1993.
(5) Mr. Ruggieri was elected an executive officer of the Company
in January 1994.
(6) Mr. Dietz ceased to be an executive officer of the Company on
December 31, 1994.
/TABLE
Stock Option Plans
Set forth below is a summary of stock option grants made during the
year ended December 31, 1994 to the Chief Executive Officer of the
Company and each of the four other most highly compensated
executive officers.
OPTION GRANTS IN FISCAL YEAR 1994
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants For Option Term (1)
_________________________________________________________________
% of
Total
Options
Granted
to Exercise
Options Employees or Base Expir-
Granted in Fiscal Price ation 5% 10%
Name (#) Year ($/Sh) Date ($) ($)
____ _______ _________ ________ ______ ___ ___
William J. 10,000 2.9 2.500 6/30/1995 1,250 2,500
Lifka
W. James 2,500 6.5 2.375 1/21/2004 3,734 9,463
Whittle 20,000 2.375 3/17/2004 29,872 75,703
Anthony J. 2,500 0.7 2.375 1/21/2004 3,734 9,463
Fusarelli
Michael A. 20,500 6.0 2.375 1/21/2004 30,619 77,595
Ruggieri
(2)
Frederick 2,500 0.7 2.375 1/21/2004 371 742
Dietz
<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. Dietz's options will expire
on June 30, 1995, due to the cessation of his employment with the
Company.
/TABLE
OPTION EXERCISES IN 1994 AND OPTION VALUES AT YEAR-END 1994
There were no options exercised in 1994 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 Stock on December 31, 1994.
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.
Lifka 20,000 - 600 -
W. James
Whittle 22,750 35,500 1,494 4,796
Anthony J.
Fusarelli 18,416 23,001 3,360 6,330
Michael A.
Ruggieri 5,732 22,318 168 3,774
Frederick
Dietz 79,333 26,667 7,466 11,183
<FN>
(1) Value at year-end was $2.56 per share.
Compensation of Directors
Directors who are not employees or officers of the Company received
the following compensation in 1994: (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 on
which no Board meeting is held. Such annual retainer was increased
to $10,000 in 1995. 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. In November 1994, each outside director
received an option to purchase 10,000 common shares, vesting
immediately which option will expire at the 1995 annual
meeting of shareholders.
Employment Contracts, Termination of Employment and Change in
Control Agreements Mr. William J. Lifka serves as President and
Chief Executive Officer of the Company pursuant to an Employment
Agreement with the Company, at a monthly salary of $25,000
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, the vesting of which was subject to certain
terms and conditions which have been fulfilled. Mr. Lifka is also
paid an annual stipend of $50,000 under the Employment Agreement
for his services as Chairman of the Board of Directors.
On April 1, 1994, the Company entered into an Employment Agreement
with Mr. Frederick Dietz in connection with Mr. Dietz's service as
Deputy President of the Company. Such agreement provided that in
the event of a termination of Mr. Dietz's employment with the
Company, Mr. Dietz would be entitled to salary continuance for a
period of twelve (12) months. Effective December 31, 1994, Mr.
Dietz ceased to serve as Deputy President of the Company, and
agreed to provide full-time transition services to the Company
through March 31, 1995. The payments made to Mr. Dietz pursuant to
such arrangement run from January 1, 1995 through December 31,
1995, and will total $175,000.
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, 1994 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* 2,152,079(a) 17.4%
4255 Gulf Drive #125
Holmes Beach, FL 34217
Beall Technologies, Inc. 1,489,300 12.0%
and Purnendu Chatterjee
100 Lighting Way
Secaucus, NJ 07094
William J. Lifka* 100,000(b) 0.8%
610 N. Flagship Drive
Salem, SC 29676
Frederick Dietz 124,504(c) 1.0%
31 Doe Hollow Road
Trumbull, CT 06611
Anthony J. Fusarelli 34,833(d) 0.3%
6 Crescent Lane
Trumbull, CT 06611
W. James Whittle 26,539(e) 0.2%
568 Stratfield Road
Fairfield, CT 06430
Michael A. Ruggieri 6,206(f) 0.1%
273 Chestnut Hill Road
Wilton, CT 06897
Michael D. Stashower* 71,588(g) 0.6%
14 Cardinal Lane
Westport, CT 06880
Brandt R. Allen* 20,000(h) 0.2%
1208 Blueridge Road
Charlottesville, VA 22903
D. David Cohen* 33,502(i) 0.3%
82 Tara Drive
Roslyn, NY 11576
Norman L. Rasmussen* 10,000(j) 0.1%
59 Commercial Wharf
Boston, MA 92110
Irwin J. Sitkin* 33,867(k) 0.3%
3500 Mystic Pointe Drive
Aventura, FL 33180
All directors and officers
as a group 2,640,836(l) 20.9%
(15 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 20,000 shares.
(b) Includes vested options to purchase 20,000 shares.
(c) Includes vested options to purchase 79,333 shares.
(d) Includes vested options to purchase 18,416 shares.
(e) Includes vested options to purchase 22,750 shares.
(f) Includes vested options to purchase 5,732 shares.
(g) Assumes conversion of Data Switch 8-1/4% Convertible
Subordinated Debentures, representing 7,225 shares. Also includes
vested options to purchase 28,333 shares.
(h) Includes vested options to purchase 10,000 shares.
(i) Includes 505 shares owned of record by trusts for the benefit
of others 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 6,667 shares.
(j) Includes vested options to purchase 10,000 shares.
(k) Includes vested options to purchase 16,667 shares.
(l) Includes vested options to purchase 258,852 shares of the
Company's Common Stock, and assumes conversion of Data Switch
8-1/4% Convertible Subordinated Debentures representing 7,225
shares.
/TABLE
ITEM 13 -- CERTAIN TRANSACTIONS
In 1994 and 1995 the Company entered into a series of arrangements
with Mr. Richard E. Greene, founder and, until his resignation
in January 1995, a director of the Company, pursuant to which Mr.
Greene will provide certain advisory services to the Company
through December 31, 1996, in exchange for annual compensation of
$225,000 in 1994, 1995 and $175,000 in 1996.
In addition, in January 1995, the Company made a loan to Mr. Greene
in the amount of $500,000, secured by a pledge of 400,000
shares of the Company's common stock, to be repaid in thirty six
(36) equal monthly installments commencing on January 1, 1997,
plus interest at the rate charged to the Company by its principal
lender, plus 1%, which interest payments began upon the
effective date of the agreement. In consideration of this loan,
Mr. Greene granted to the Company an option to purchase 200,000
shares of the pledged stock at a price of $3.00 per share, and a
right of first refusal to purchase any other shares of Common
Stock which Mr. Greene may desire to sell in a private sale
transaction.
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 Severence Compensation Agreement (Previously filed
pursuant to 1992 10-K)
10.6 Employment Agreement with William J. Lifka (Previously filed
Pursuant to 1993 10-K)
10.7 Amendment to Employment Agreement with William J. Lifka
10.8 Employment Agreement with Frederick Dietz
10.9 Termination of Employment Agreement with Frederick Dietz
10.10 Employment Agreement with Richard E. Greene
10.11 First Amendment to Employment Agreement with Richard E.
Greene
10.12 Option and Right of First Refusal Agreement with Richard E.
Greene
11. Computation of Earnings (Loss) per Share
24. Consent of Coopers & Lybrand L.L.P.
Financial Statements
See Item 8 for index
Schedules
II. 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: W. James Whittle
_________________________
W. James Whittle
Senior Vice President and
Chief Financial Officer
Date: March 29, 1995
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.
William J. Lifka March 29, 1995
________________________________
William J. Lifka
Chairman of the Board, President
and Chief Executive Officer
W. James Whittle March 29, 1995
________________________________
W. James Whittle
Senior Vice President and
Chief Financial Officer
Michael D. Stashower March 29, 1995
________________________________
Michael D. Stashower
Director
Irwin J. Sitkin March 29, 1995
________________________________
Irwin J. Sitkin
Director
D. David Cohen March 29, 1995
________________________________
D. David Cohen
Director
Brandt R. Allen March 29, 1995
________________________________
Brandt R. Allen
Director
Norman L. Rasmussen March 29, 1995
________________________________
Norman L. Rasmussen
Director
SCHEDULE II
DATA SWITCH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1994, 1993 and 1992
(000's)
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
___________________________________________________________________
Allowance for
Doubtful Accounts
1994 $ 656 $ (102) $ 1 $ 553
1993 656 8 8 656
1992 1,049 (311) 82 656