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 September 30, 1994
Commission File Number 0-10745
DATA SWITCH CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 06-0962862
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
One Enterprise Drive, Shelton, Connecticut 06484
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (203) 926-1801
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for
the past 90 days, [X] YES [ ] NO.
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock at September 30, 1994.
Securities registered pursuant to Section 12(b) of the Act.
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value, 12,343,957
with Purchase Rights attached
Common Stock Purchase Warrants 758,184
(expiring December 31, 1995)
INDEX
PAGE NO.
PART I. UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1994 and
December 31, 1993 2
Consolidated Statements of Operations for the three and
nine months ended September 30, 1994 and
September 30, 1993 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1994 and September 30, 1993 4
Notes to Unaudited Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Security Holders 7
Item 6. Exhibits and Reports on Form 8-K 7
(11) Computation of Earnings Per Share
for the three and nine months ended
September 30, 1994 and September 30, 1993 9
<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994, (unaudited), AND DECEMBER 31, 1993
(000's except share data)
<CAPTION>
September 30, December 31,
1994 1993
______________ _____________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,445 $ 491
Accounts receivable
(net of allowance for doubtful
accounts of $665 in 1994
and $ 656 in 1993) 19,364 25,245
Income taxes receivable 120 144
Lease receivables, net 1,401 1,095
Inventories 14,993 19,795
Prepaid expenses and other 795 966
______________ _____________
Total current assets 44,118 47,736
Long-term lease receivables, net 3,220 3,135
Property and equipment, net 4,798 5,801
Goodwill, net 2,341 2,469
Other 1,130 1,143
______________ _____________
Total assets
$ 55,607 $ 60,284
============== =============
Current liabilities:
Accounts payable, trade $ 3,472 $ 5,253
Short-term debt 1,690 -
Accrued compensation 1,526 2,368
Other accrued liabilities 4,659 4,889
Income taxes payable 628 37
Other taxes payable 563 599
Current portion of capital
lease obligations 262 240
______________ _____________
Total current liabilities 12,800 13,386
Long-term debt 19,595 25,487
Capital lease obligations,
less current portion 551 724
Deferred income taxes 130 139
Redeemable warrants 948 885
Shareholders' equity: authorized 20,000,000 shares;
issued 12,392,386 and
12,224,278 shares
at September 30, 1994 and
December 31, 1993, respectively 124 122
Additional paid-in capital 50,603 50,413
Accumulated deficit (28,702) (30,287)
Cumulative translation adjustment (153) (272)
Less:
Receivables from stock purchases - (24)
Treasury stock, at cost
(48,429 shares at
September 30, 1994 and
December 31, 1993) (289) (289)
______________ _____________
Total shareholders' equity 21,583 19,663
______________ _____________
Total liabilities and
shareholders' equity $ 55,607 $ 60,284
============== =============
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except per share data)
(unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
Revenues: 1994 1993 1994 1993
__________________ ___________________
<S> <C> <C> <C> <C>
Product revenues $ 18,318 $ 21,150 $ 52,277 $ 58,240
Service revenues 5,109 5,014 14,578 14,569
_________ _________ _________ _________
Revenues, net 23,427 26,164 66,855 72,809
Cost of revenues:
Cost of product
revenues 9,570 13,031 27,967 32,417
Cost of service
revenues 3,010 3,108 8,637 9,078
_________ _________ _________ _________
Cost of revenues 12,580 16,139 36,604 41,495
Gross profit 10,847 10,025 30,251 31,314
Operating expenses:
Selling, general and
administrative 6,256 6,508 18,364 19,051
Engineering and
development 2,539 3,572 8,130 9,912
_________ _________ _________ _________
Total operating
expenses 8,795 10,080 26,494 28,963
Income (loss) from
operations 2,052 (55) 3,757 2,351
Other income (expense):
Interest expense (487) (550) (1,497) (1,564)
Foreign exchange
gain (loss) 11 (27) 137 (13)
Other, net 22 57 41 83
_________ _________ _________ _________
Total other
income (expense) (454) (520) (1,319) (1,494)
Income (loss) before
income taxes 1,598 (575) 2,438 857
Provision for income
taxes 585 101 853 576
_________ _________ _________ _________
Net income (loss) $ 1,013 $ (676) $ 1,585 $ 281
Primary earnings
(loss) per share $ 0.08 $ (0.06) $ 0.13 $ 0.02
========= ========= ========= =========
Fully diluted
earnings (loss)
per share (a) (a) (a) (a)
========= ========= ========= =========
Weighted average
number of common
shares outstanding 12,374 12,253 12,341 12,283
========= ========= ========= =========
<FN>
(a) Not presented as a result of being anti-dilutive.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
(unaudited)
<CAPTION>
Nine months ended September 30,
1994 1993
_______________________________
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 1,585 $ 281
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 2,568 2,543
Goodwill amortization 128 128
Effect of utilizing
acquired NOLs - 173
Deferred income taxes (23) 139
Changes in operating assets
and liabilities:
(Increase) decrease in:
Receivables 5,766 (2,569)
Inventories 4,917 (1,959)
Prepaid expenses and other 250 (988)
Increase (decrease) in:
Accounts payable, trade (1,813) 2,542
Accruals (1,196) (3,000)
Income taxes payable 591 98
Other taxes payable (63) (17)
Other, net (136) 64
__________ _________
Net cash provided (used) by
operating activities 12,574 (2,565)
Cash flows from investing
activities:
Property and equipment
additions (1,499) (2,531)
___________ __________
Net cash used in
investing activities (1,499) (2,531)
Net cash provided (used)
before financing activities 11,075 (5,096)
Cash flows from financing
activities: Proceeds under long-term
borrowings 15,307 25,707
Principal payments and
repurchases under long-term
borrowings (21,350) (22,021)
Proceeds from issuance of
common stock 255 260
___________ __________
Net cash provided (used) by
financing activities (4,160) 3,344
Effect of exchange rate
changes on cash 39 25
___________ __________
Net increase (decrease) in cash
and cash equivalents 6,954 (1,727)
Cash and cash equivalents at
beginning of the period 491 2,208
___________ __________
Cash and cash equivalents at
end of the period $ 7,445 $ 481
=========== ==========
Supplemental disclosures of
cash flow information:
Cash paid (received) during
the period for:
Interest $ 1,153 $ 1,177
Income taxes $ 224 $ (129)
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
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 September 30,
1994 and the results of operations for the three and nine months
ended September 30, 1994 and 1993 and cash flows for such nine
month periods. The December 31, 1993 condensed balance sheet data
was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting
principles. The financial statements contained herein should be
read in conjunction with the financial statements and related notes
included in Form 10-K for the year ended December 31, 1993 as filed
with the Securities and Exchange Commission.
2. Inventories consist of (000's):
September 30, 1994 December 31, 1993
Raw materials $ 8,201 $ 11,075
Systems in process 2,053 1,821
Finished goods 3,781 5,409
Demo equipment 958 1,490
____________ ___________
$ 14,993 $ 19,795
============ ===========
3. As of March 11, 1993, the Company had a long-term revolving
line of credit agreement with People's Bank providing for domestic
borrowings of up to $8,000,000, of which $5,750,000 was available
as of September 30, 1994 based on a formula of eligible receivables
(as defined). The credit facility is collateralized by a first
lien on substantially all of the Company's assets, and the
agreement contains, among other provisions and covenants, the
following: (1) subordination of all existing and future
indebtedness (as defined) of the Company to the indebtedness under
the credit facility; (2) limitations on dividend payments, stock
purchases and subordinated debt repurchases; (3) maintenance of
levels of Consolidated Adjusted Tangible Net Worth (as defined) and
(4) achievement of various financial ratios. The Company is
required to pay a commitment fee equal to 1% of the unused
borrowings under the line of credit. The loans mature on March 1,
1996, and bear interest at the People's prime rate plus 1-1/4%.
In July 1994 the Company entered into a new international
overdraft line of credit with National Westminster Bank Plc,
enabling its foreign subsidiaries to borrow up to an aggregate of
$2,250,000 of which $578,000 was available as of September 30,
demand, are available until March 29, 1995, and are secured 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%. As the letter of credit
securing this loan was funded under the Company's domestic credit
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 this facility remains available.
In August 1994 the Company received a grant of $100,000 and 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the three and nine months ended September 30, 1994
decreased 10.5% to $23,427,000 and 8.2% to $66,855,000, from the
corresponding periods in 1993. The decrease in the third quarter
was due to lower domestic revenues primarily from products
manufactured by third parties which carry lower gross margins. For
the year, decreased domestic revenues were lower partially offset
by increased international revenues. Service revenues increased
slightly by 1.9% in the third quarter of 1994 compared to the third
quarter of 1993 and remained constant for the nine months in 1994,
compared with 1993.
The gross profit margin for the three months ended September 30,
1994 was 46.3%, compared with 38.3% in 1993, due to a favorable
product mix and manufacturing efficiencies. For the year, gross
profit margin was 45.2% compared with 43.0% in 1993, due to
manufacturing efficiencies offset by an unfavorable product mix.
Service margins for the third quarter and nine months of 1994 were
41.1% and 40.8%, compared with 38.0% and 37.7% in the third quarter
and nine months 1994, primarily as a result of lower parts cost.
Selling, general and administrative expense-to-revenue ratio
increased to 26.7% in the third quarter of 1994 from 24.9% the
third quarter of 1993, primarily as a result of the decreased
revenue base. Actual expenses for the third quarter declined
$252,000 compared with the third quarter 1993, due to headcount
reductions made in late 1993 partially offset by accrued bonus
expense and increased promotional activities. The
expense-to-revenue ratio increased to 27.5% of revenues in the nine
months of 1994, compared with 26.2% in the nine months of 1993, as
a result of a lower revenue base. Actual expenses for the nine
months of 1994 decreased by $687,000 versus the nine months of
1993, due to workforce reductions made in late 1993, partially
offset by promotional activities and the prior-year reversal of an
unfavorable jury verdict.
Engineering and development expenditures for the three and nine
months ended September 30, 1994 decreased to 10.8% and 12.2% of
revenues, respectively, versus 13.7% and 13.6% of revenues for
comparable periods in 1993. Actual expenditures in the three and
nine months of 1994 decreased $1,033,000 and $1,782,000, compared
with the same periods of 1993, reflecting a reduction in headcount
and improved expense controls.
Interest expense in the third quarter of 1994 and nine months of
1994, declined by 11.5% and 4.3%, respectively, from the comparable
1993 period as a result of reduced debt levels.
Provision for income taxes was $585,000 and $853,000 for the three
and nine month period ended September 30, 1994, based on the $101,000
and $576,000 for the third quarter and nine months of
1993.
Liquidity and Capital Resources
_______________________________
The Company generated $11,075,000 of cash before financing
activities in the first nine months of 1994, compared with using
$5,096,000 in the first nine months of 1993. Working capital at
September 30, 1994 decreased by $3,032,000 from December 31, 1993
as a result of significant decreases in accounts receivable and
inventories partially offset by a substantial cash increase. These
decreases are a result of the timely collection of outstanding
receivables and increased inventory controls. The ratio of current
assets to current liabilities is 3.4:1 at September 30, 1994. In
addition to selling its products, the Company also leases its
products under sales-type lease agreements. These receivables are
available for sale as a source of financing.
Short-term debt of $1,690,000 consisted of international borrowings
and the $18,000 short-term portion of the State of Connecticut
loan. Long-term debt was $19,595,000 consisting of $19,515,000
convertible subordinated debentures and $80,000 of the state of
Connecticut loan. The Company had no domestic borrowings
outstanding at September 30, 1994 under its $8,000,000 revolving
line of credit with People's Bank (See Note 3). The Company did
have international borrowings outstanding at September 30, 1994
under a its line of credit with National Westminster Bank Plc, of
which $578,000 was available September 30, 1994.
In November 1994, the Company purchased an 83,000 square foot
facility in Shelton, Connecticut for the purchase price of $2.9
million. This facility will serve as the Company's corporate
headquarters and manufacturing plant when the leases for the
Company's current facilities in Shelton and Orange, Connecticut
expire in mid-1995. The Company intends to spend approximately
$1.2 million in additional capital improvements on the facility,
including the addition of 12,000 square feet of warehouse space.
Under the terms of the Warrant Agreement governing its Common Stock
Purchase Warrants ("Warrants"), the warrantholders have the option
to require the Company to redeem all or part of the outstanding
Warrants at a redemption price of $1.25 per Warrant, during the
period commencing October 1, 1994 and expiring December 31, 1994.
If all outstanding Warrants are redeemed, such redemption price to
the Company will be $947,730.
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.
___________________
Inflation did not have a significant impact on the Company during
1993 and is not expected to do so in 1994.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A former officer of the Company who sued the Company for
breach of an alleged promise of lifetime employment was awarded a
jury verdict of $413,000 in October 1991. In May 1993 the court
granted the Company's motion to set aside the verdict. Such former
officer appealed the court's decision. In August 1994 the
Connecticut Supreme Court upheld the lower court decision, finding
in favor of the Company. The plaintiff's motion for a rehearing of
the case was denied by the court in September 1994.
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.
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: November 14, 1994 /s/ William J. Lifka
William J. Lifka
Chairman, President and
Chief Executive Officer
Date: November 14, 1994 /s/ W. James Whittle
W. James Whittle
Vice President and
Chief Financial Officer
<TABLE>
EXHIBIT 11
DATA SWITCH CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(000's except per share data)
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
1994 1993 1994 1993
_________________ _____________
<S> <C> <C> <C> <C>
Primary
_______
Shares outstanding at
the beginning of the
period 12,318 12,109 12,176 12,041
Weighted average
number of shares
issued and
issuable share
equivalents 56 144 165 242
_________ _________ _________ _________
Weighted average
number of common
shares outstanding 12,374 12,253 12,341 12,283
========= ========= ========= =========
Net income (loss) $ 1,013 $ (676) $ 1,585 $ 281
========= ========= ========= =========
Primary earnings
(loss) per share $ 0.08 $ (0.06) $ 0.13 $ 0.02
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Fully Diluted
_____________
<S> <C> <C> <C> <C>
Shares outstanding at
the beginning of
the period 12,318 12,109 12,176 12,041
Weighted average
number of shares
issued and issuable
share equivalents 56 144 171 271
Assumed conversion of
debentures 2,820 2,820 2,820 2,820
_________ _________ _________ _________
Weighted average
issued and issuable
share equivalents
as adjusted
for full dilution 15,194 15,073 15,167 15,132
========= ========= ========= =========
Net income (loss) $ 1,013 $ (676) $ 1,585 $ 281
========= ========= ========= =========
Adjustment for
interest, net of
tax, on convertible
debentures 243 243 729 729
_________ _________ _________ _________
Adjusted net income
(loss) $ 1,256 $ (433) $ 2,314 $ 1,010
========= ========= ========= =========
Fully diluted earnings (a) (a) (a) (a)
(loss) per share $ 0.08 $ (0.03) $ 0.15 $ 0.07
========= ========= ========= =========
<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/decrease the reported net income (loss)
per share.
</TABLE>
[TYPE] EX-27
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
<PERIOD TYPE> 9-MOS
<FISCAL YEAR END> DEC-31-1994
<PERIOD END> SEP-30-1994
[CASH] 7,445
[SECURITIES] 0
[RECEIVABLES] 20,029
[ALLOWANCES] 665
[INVENTORY] 14,993
<CURRENT ASSETS> 44,118
[PP&E] 26,425
[DEPRECIATION] 21,627
<TOTAL ASSETS> 55,607
<CURRENT LIABILITIES> 12,800
[BONDS] 19,515
[COMMON] 124
0
[PREFERRED] 0
<OTHER SE> 21,459
<TOTAL LIABILITY AND EQUITY> 55,607
[SALES] 66,855
<TOTAL REVENUES> 66,855
[CGS] 36,604
<TOTAL COSTS> 36,604
<OTHER EXPENSES> (178)
<LOSS PROVISION> 0
<INTEREST EXPENSE> 1,497
<INCOME PRETAX> 2,438
<INCOME TAX> 853
<INCOME CONTINUING> 1,585
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 1,585
<EPS PRIMARY> .13
<EPS DILUTED> .15
</TABLE>
