SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended March 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
filesuch reports), and (2) has been subject to filing requirements
forthe past 90 days, [X] YES [ ] NO.
Indicate the number of shares outstanding of each of the
issuer'sclasses of Common Stock at March 31, 1994.
Securities registered pursuant to Section 12(b) of the Act.
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value, 12,289,747
with Purchase Rights attached
Common Stock Purchase Warrants 758,184
(expiring December 31, 1995)
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DATA SWITCH CORPORATION
INDEX
PAGE NO.
PART I. UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1994 and
December 31, 1993 2
Consolidated Statements of Operations for the three months
ended March 31, 1994 and March 31, 1993 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1994 and March 31, 1993 4
Notes to Unaudited Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 4. Submission of Matters to a Vote
of Security Holders 7
Item 6. Exhibits and Reports on Form 8-K 7
(11) Computation of Earnings (Loss) Per Share
for the three months ended
March 31, 1994 and March 31, 1993 9
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<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994, (unaudited), AND DECEMBER 31, 1993
(000's except share data)
<CAPTION>
March 31, December 31,
1994 1993
_________ ____________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 536 $ 491
Accounts receivable
(net of allowance for doubtful
accounts of $668 in 1994
and $ 656 in 1993) 21,076 25,245
Income taxes receivable 126 144
Lease receivables, net 1,220 1,095
Inventories 16,871 19,795
Prepaid expenses and other 889 966
__________ ___________
Total current assets 40,718 47,736
Long-term lease receivables, net 3,581 3,135
Property and equipment, net 5,701 5,801
Goodwill, net 2,426 2,469
Other 1,200 1,143
___________ ___________
Total assets $ 53,626 $ 60,284
Current Liabilities:
Accounts payable, trade $ 3,719 $ 5,253
Accrued compensation 1,516 2,368
Other accrued liabilities 5,129 4,889
Income taxes payable 39 37
Other taxes payable 519 599
Current portion of capital
lease obligations 239 240
___________ ___________
Total current liabilities 11,161 13,386
Long-term debt, less current portion 20,800 25,487
Capital lease obligations,
less current portion 668 724
Deferred income taxes 140 139
Redeemable warrants 906 885
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 12,338,176 and 12,224,278 shares
at March 31, 1994 and
December 31, 1993, respectively 123 122
Additional paid-in capital 50,557 50,413
Accumulated deficit (30,172) (30,287)
Cumulative translation adjustment (268) (272)
Less:
Receivables from stock purchases - (24)
Treasury stock, at cost
(48,429 shares at March 31, 1994
and December 31, 1993) (289) (289)
___________ ___________
Total shareholders' equity 19,951 19,663
___________ ___________
Total liabilities and
shareholders' equity $ 53,626 $ 60,284
___________ ___________
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
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<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except per share data)
(unaudited)
<CAPTION>
Three months ended March 31,
1994 1993
____________ _____________
<S> <C> <C>
Revenues:
Product revenues $ 16,560 $ 18,737
Service revenues 4,650 4,501
___________ ___________
Revenues, net 21,210 23,238
Cost of revenues:
Cost of product revenues 8,962 9,333
Cost of service revenues 2,746 2,933
___________ ___________
Cost of revenues 11,708 12,266
Gross profit 9,502 10,972
Operating expenses:
Selling, general and administrative 6,112 6,064
Engineering and development 2,742 3,307
___________ ___________
Total operating expenses 8,854 9,371
Income from operations 648 1,601
Other income
Interest expense (528) (514)
Foreign exchange gain (loss) 47 31
Other, net (3) 14
___________ ___________
Total other income (expense) (484) (469)
Income before income taxes 164 1,132
Provision for income taxes 49 383
___________ ___________
Net income $ 115 $ 749
___________ ___________
Primary earnings per share $ 0.01 $ 0.06
Fully diluted earnings per share (a) (a)
___________ ___________
Weighted average number of common and
common equivalent shares outstanding 12,316 12,280
___________ ___________
<FN>
(a) Not presented as a result of being anti-dilutive.
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
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<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
(unaudited)
<CAPTION>
Three months ended March 31,
1994 1993
___________ _____________
<S> <C> <C>
Cash flows from operating activities:
Net income $ 115 $ 749
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 923 804
Goodwill amortization 43 43
Effect of utilizing acquired NOLs - 130
Deferred income taxes (3) 21
Changes in operating assets and
liabilities:
(Increase) decrease in:
Receivables 3,520 598
Inventories 2,960 (1,989)
Prepaid expenses
and other 252 101
Increase (decrease) in:
Accounts payable, trade (1,538) 1,307
Accruals (637) (1,410)
Income taxes payable 2 101
Other taxes payable (88) (78)
Other, net (135) (18)
___________ ___________
Net cash provided by operating
activities 5,414 359
Cash flows from investing activities:
Property and equipment additions
(808) (998)
___________ ___________
Net cash used in investing activities (808) (998)
___________ ___________
Net cash provided (used) before
financing activities 4,606 (639)
Cash flows from financing activities:
Payments of short-term debt - (591)
Proceeds under long-term borrowings 8,919 2,999
Principal payments and repurchases
under long-term borrowings (13,664) (3,199)
Proceeds from issuance of common stock 166 117
___________ ___________
Net cash used by financing activities (4,579) (674)
Effect of exchange rate changes on cash 18 1
___________ ___________
Net increase (decrease) in cash
and cash equivalents 45 (1,312)
Cash and cash equivalents at
beginning of the period 491 2,208
___________ ___________
Cash and cash equivalents at end
of the period $ 536 $ 896
___________ ___________
Supplemental disclosures of
cash flow information:
Cash paid (received) during
the period for:
Interest $ 258 $ 60
Income taxes $ 15 $ (141)
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
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DATA SWITCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying
unaudited consolidated condensed financial statements contain all
adjustments necessary, consisting of normal recurring items,
to fairly present the financial position of the Company as of March
31, 1994 and the results of operations for the three months
ended March 31, 1994 and 1993 and cash flows for such three
month periods. The December 31, 1993 condensed balance sheet data
was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting
principles. The financial statements contained herein should be
read inconjunction with the financial statements and related
notes included in Form 10-K for the year ended December 31, 1993 as
filed with the Securities and Exchange Commission.
2. Inventories consist of (000's):
March 31, 1994 December 31, 1993
Raw materials $ 9,986 $ 11,075
Systems in process 1,126 1,821
Finished goods 4,848 5,409
Demo equipment 911 1,490
$ 16,871 $ 19,795
3. On March 11, 1993, the Company entered into a new
long-term credit agreement with People's Bank providing for domestic
borrowings of up to $8,000,000, of which $6,715,000 was
availableas of March 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 subordinateddebt repurchases; (3) maintenance of
levels of Consolidated Adjusted Tangible Net Worth (as defined) and
(4) achievement ofvarious financial ratios. The Company is
required to pay a commitment fee equal to 1% of the unused
borrowings under the line of credit. The loans mature on March 1,
1996, and bear interest at the People's prime rate plus 1-1/4%.
4. A former officer of the Company who sued the Company for
breach of an alleged promise of life time employment was awarded a
jury verdict of $413,000 in October 1991. In May 1993, the
court granted the Company's motion to set aside the verdict. Such
former officer has appealed the court's decision. The
Company believes that it has meritorious grounds on which to defend
such appeal and that the ultimate resolution of this matter
will not have a significant effect upon the consolidated results of
operations or financial position of the Company.
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DATA SWITCH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the first three months ended March 31, 1994 were
8.7% lower than the first three months of 1993. The Company
experienced a decrease in domestic revenue as the first quarter of
1993 was favorably impacted by a large domestic order. This impact
was only partially offset by an increase in international revenues.
Service revenues in the first quarter of 1994 increased 3.3%
compared with the first quarter of 1993, principally due to an
increase ininternational service revenues.
The gross profit margin for the first quarter of 1994 was
44.8% compared with 47.2% in the first quarter of 1993. This
decrease was a result of unfavorable product mix offset in part
by manufacturing efficiencies. Service margins were 40.9% in
the first quarter 1994 compared with 34.8% in the first quarter
1993, as a result of lower overheads due to the restructuring that
took place in late 1993 and the increase in service revenue.
Selling, general and administrative expenses increased to 28.6%
of revenues in the first quarter of 1994 from 25.9% in the
first quarter of 1993. The expense-to-revenue ratio increased
primarily as a result of a lower revenue base in 1994. Actual
expenditures in the first quarter of 1994 increased only $48,000
from expenditures in the first quarter of 1993.
Engineering and development expenditures decreased to 12.9%
of revenues in the first quarter of 1994 compared with 14.2%
of revenues in the first quarter of 1993. The
expense-to-revenue ratio decreased primarily as a result of
decreased expenses, which in the first quarter of 1994 were $565,000
less than in the first quarter of 1993, reflecting significant cost
controls in mostexpense areas.
Interest expense increased by 2.7% in the first quarter of 1994 from
the first quarter of 1993 as a result of higher debt levels in 1994.
Provision for income taxes was $49,000 in the first quarter
1994 based on an annual estimated effective tax rate of 30.0% for
the Company versus a provision of $383,000 in the first quarter of
1993 at an effective tax rate of 33.8%. The estimated effective
tax rate for 1994 is less than the federal statutory rate of
34.0% because of the anticipated utilization of net operating
loss carryforwards and tax credits.
In November 1992 the Financial Accounting Standards Board
issued SFAS No. 112 Employers' Accounting for Post Employment
Benefits effective for fiscal years beginning after December 15,
1993. Under this statement employers are required to recognize
the obligation to provide post employment benefits if the
obligation is attributable to employee services already rendered,
employee rights to those benefits accumulate or vest, payment of the
benefits is probable, and the amount of benefits can be reasonably
estimated. The Company has adopted this statement effective January
1, 1994 and the cumulative effect of the change in accounting
principle as of January 1, 1994 was immaterial.
Liquidity and Capital Resources
_______________________________
The Company generated $5,414,000 of cash before financing activities
in the first quarter of 1994, compared with using $639,000 in the
first quarter 1993. Working capital at March 31, 1994 decreased by
$4,793,000 from December 31, 1993 as a result of significant
decreases in accounts receivable and inventories partially offset by
a reduction in accounts payable. These decreases are a result of
lower revenue in the first quarter of 1994 compared with the fourth
quarter of 1993, collection of a large outstanding receivable, and
increased inventory controls. The ratio of current assets to
current liabilities is constant at3.6:1 at both March 31, 1994 and
December 31, 1993. In addition to selling its products, the Company
also leases its products under sales-type lease agreements. These
lease receivables are availablefor sale as a source of financing.
Long-term debt consisted of $19,515,000 of convertible
subordinated debentures and $1,285,000 of indebtedness under an
$8,000,000 revolving line of credit with People's Bank, all of which
was available based on a formula of eligible receivables (as
defined). This line of credit is collateralized by a first lien
on substantially all of the Company's assets and is available,
subject to maintenance of certain covenants and financial ratios,
through March 1, 1996.
There are no significant capital expenditures planned for 1994;
the aggregate amount of spending is anticipated to be close to
the level of depreciation for the year.
In the opinion of management, existing financial
resources, including cash anticipated to be generated by operations
and available under existing credit facilities, will be adequate
to meet current and expected operating and capital requirements.
Impact of Inflation
___________________
Inflation did not have a significant impact on the Company
during 1993 and is not expected to do so in 1994.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the report on Legal
Proceedingscontained in the Form 10-K for the year ended December
31, 1993.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(11) Computation of Earnings Per Share
Reports on Form 8-K
The issuer has not filed any reports on Form 8-K
during the quarter for which this report is filed.
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DATA SWITCH CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DATA SWITCH CORPORATION
(Registrant)
Date: March 12, 1994 /s/ William J. Lifka
William J. Lifka
Chairman, President and
Chief Executive Officer
Date: March 12, 1994 /s/ W. James Whittle
W. James Whittle
Vice President and
Chief Financial Officer
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<TABLE>
Exhibt 11
DATA SWITCH CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(000's except per share data)
<CAPTION>
Three Months Ended March 31,
1994 1993
____________ ____________
<S> <C> <C>
Primary
Shares outstanding at the beginning
of the period 12,176 12,041
Weighted average number of shares
issued and issuable share equivalents 140 239
___________ ___________
Weighted average number of common
shares outstanding 12,316 12,280
___________ ___________
Net income $ 115 $ 749
___________ ___________
Primary earnings per share $ 0.01 $ 0.06
__________ ___________
</TABLE>
<TABLE>
<CAPTION>
Fully Diluted
<S> <C> <C>
Shares outstanding at the beginning
of the period 12,176 12,041
Weighted average number of shares
issued and issuable share equivalents 140 329
Assumed conversion of debentures 2,820 2,820
___________ ___________
Weighted average number of shares
issued and issuable share equivalents
as adjusted for full dilution 15,136 15,190
___________ ___________
Net income $ 115 $ 749
Adjustment for interest, net of tax,
on convertible debentures 243 243
___________ ___________
Adjusted net income $ 358 $ 992
Fully diluted earnings per share $ 0.02(a) $ 0.07(a)
_____________ _____________
<FN>
(a) These calculations are submitted in accordance with
SEC Release No. 9083, although they are not in accordance with APB
opinion No. 15 because the additional incremental shares
are anti-dilutive and increase the reported net income per share.
</TABLE>
