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, 1995
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 March 31, 1995.
Securities registered pursuant to Section 12(b) of the Act.
Title of Each Class Number of Shares Outstanding
Common Stock, $.01 par value, 12,485,929
with Purchase Rights attached
Common Stock Purchase Warrants 10,112
(expiring December 31, 1995)
INDEX
PAGE NO.
PART I. UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1995 and
December 31, 1994 2
Consolidated Statements of Operations for the
three months ended March 31, 1995 and March 31, 1994 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1995 and March 31, 1994 4
Notes to Unaudited Consolidated Condensed Financial
Statements 5-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
Item 5. Other Information 8-9
Item 6. Exhibits and Reports on Form 8-K 9
(2) Agreement and Plan of Merger By and Among
General Signal Corporation, General Signal
Acquisition Corporation and Data Switch
Corporation
(11) Computation of Earnings Per Share
for the three months ended
March 31, 1995 and March 31, 1994 11
<TABLE>
DATA SWITCH CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995, (unaudited), AND DECEMBER 31, 1994
(000's except share data)
<CAPTION>
March 31, December 31,
__________ ____________
1995 1994
_________ ____________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,265 $ 7,757
Accounts receivable
(net of allowance for doubtful
accounts of $556 in 1995
and $553 in 1994) 21,157 18,713
Income taxes receivable - 161
Lease receivables, net 1,587 1,475
Inventories 13,453 14,672
Prepaid expenses and other 854 646
__________ _________
Total current assets 44,316 43,424
Long-term lease receivables, net 2,956 3,288
Property, plant, and equipment,
net 8,103 7,988
Other 2,913 2,988
__________ _________
Total assets $ 58,288 $ 57,688
========== =========
Current liabilities:
Accounts payable, trade $ 3,139 $ 4,525
Short-term debt 1,118 1,578
Current portion of long-term debt 209 18
Accrued compensation 1,420 2,081
Other accrued liabilities 5,728 5,098
Income taxes payable 800 801
Other taxes payable 641 508
Current portion of capital
lease obligations 198 237
__________ _________
Total current liabilities 13,253 14,846
Long-term debt, less
current portion 21,145 19,591
Capital lease obligations,
less current portion 476 506
Deferred income taxes 146 130
Contingencies - -
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 12,534,358 and 12,425,320
shares at March 31, 1995 and
December 31, 1994, respectively 125 124
Additional paid-in capital 50,930 50,669
Accumulated deficit (26,957) (27,724)
Cumulative translation adjustment (41) (165)
Less:
Note receivable from shareholder (500) -
Treasury stock, at cost
(48,429 shares at March 31, 1995
and December 31, 1994) (289) (289)
__________ _________
Total shareholders' equity 23,268 22,615
__________ _________
Total liabilities and
shareholders' equity $ 58,288 $ 57,688
========== ========
<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 March 31,
____________________________
1995 1994
_________ ________
<S> <C> <C>
Revenues:
Product revenues $ 18,053 $ 16,560
Service revenues 5,043 4,650
__________ _________
Revenues, net 23,096 21,210
Cost of revenues:
Cost of product revenues 10,054 8,962
Cost of service revenues 2,949 2,746
__________ _________
Cost of revenues 13,003 11,708
Gross profit 10,093 9,502
Operating expenses:
Selling, general and
administrative 6,034 6,112
Engineering and development 2,500 2,742
Relocation expense 101 -
__________ _________
Total operating expenses 8,635 8,854
Income from operations 1,458 648
Other income (expense):
Interest expense (476) (528)
Foreign exchange gain 17 47
Other, net 35 (3)
__________ _________
Total other income (expense) (424) (484)
Income before income taxes 1,034 164
Provision for income taxes 362 49
__________ _________
Income before extraordinary gain 672 115
Extraordinary gain on repurchase
of debt
(net of income taxes of $63) 95 -
__________ _________
Net income $ 767 $ 115
========== =========
Primary earnings per share
before extraordinary gain $ 0.05 $ 0.01
========== =========
Primary earnings per share $ 0.06 $ 0.01
========== =========
Fully diluted earnings per share (a) (a)
========== =========
Weighted average number of common
shares outstanding 12,716 12,316
========== =========
<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>
Three Months ended March 31,
____________________________
1995 1994
_________ ________
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 767 $ 115
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 753 923
Goodwill amortization 43 43
Extraordinary gain (95) -
Deferred income taxes - (3)
Changes in operating assets
and liabilities:
(Increase) decrease in:
Receivables (2,050) 3,520
Inventories 1,275 2,960
Prepaid expenses and other (24) 252
Increase (decrease) in:
Accounts payable, trade (1,395) (1,538)
Accruals (109) (637)
Income taxes payable (70) 2
Other taxes payable 110 (88)
Other, net 1 (135)
_________ _________
Net cash provided (used) by
operating activities (794) 5,414
Cash flows from investing
activities:
Property and equipment
additions (828) (808)
_________ _________
Net cash used in investing
activities (828) (808)
_________ _________
Net cash provided (used)
before financing activities (1,622) 4,606
Cash flows from financing
activities:
Net payments of short-term debt (291) -
Proceeds under long-term borrowings
4,369 8,919
Principal payments and repurchases
under long-term borrowings (2,702) (13,664)
Loan to shareholder (500) -
Proceeds from issuance of common
stock 262 166
__________ _________
Net cash provided (used) by
financing activities 1,138 (4,579)
Effect of exchange rate changes
on cash (8) 18
__________ _________
Net increase (decrease) in cash
and cash equivalents (492) 45
Cash and cash equivalents at
beginning of the period 7,757 491
__________ _________
Cash and cash equivalents at
end of the period $ 7,265 $ 536
========== =========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 55 $ 258
Income taxes $ 211 $ 15
<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 March 31, 1995 and the
results of operations for the three months ended March 31, 1995 and
1994 and cash flows for such three month periods. The December 31,
1994 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, 1994 as filed with the Securities and
Exchange Commission.
2. Inventories consist of (000's):
March 31, 1995 December 31, 1994
______________ _________________
Raw materials $ 7,646 $ 8,266
Systems in process 1,529 1,541
Finished goods 2,888 3,392
Demo equipment 1,390 1,473
__________ ___________
$ 13,453 $ 14,672
========== ===========
3. In March of 1993, the Company entered into 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 March 31, 1995 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 March 1995 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 $1,132,000 was available as of March 31, 1995.
Borrowings under this line of credit are payable upon demand, are
available until June 30, 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.
In March 1995 the Company received a mortgage loan of
$2,500,000 from the State of Connecticut related to the purchase of
its new facility in Shelton, Connecticut. The loan is payable
monthly over 10 years. The rate is adjusted annually at 1% below
LIBOR. The rate for 1995 is 5.75%.
In January 1995 the Company repurchased $750,000 face amount
of its 8 1/4% convertible subordinated debentures. This repurchase
resulted in an extraordinary gain of $95,000, net of income taxes
and related deferred issuance costs.
4. 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 for 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.
5. On May 8, 1995 the Company entered into an Agreement and Plan
of Merger ("Merger Agreement") with General Signal Corporation
("General Signal") and a direct wholly-owned subsidiary of General
Signal, pursuant to which the Company has agreed, subject to
regulatory approvals and the approval of the Shareholders of the
Company, to an exchange of shares of the Company into shares of
General Signal as determined by to a ratio obtained by dividing
$4.55 by the average market value of the shares of General Signal,
as long as General Signal's shares trade at an average of between
$31 and $43 per share during the the Measuring Period. The
Measuring Period would be calculated during the thirty (30) day
period ending on the last day before the scheduled special meeting
of shareholders of the Company.
The Merger Agreement contains provisions with respect to
representations and warranties and covenants of both parties. In
the event of termination due to certain circumstances, the Company
may be obligated to pay General Signal's expenses in connection
with the Agreement of up to $1.5 million plus an additional fee of
up to $2.4 million. Richard E. Greene, the largest single
shareholder of the Company, has simultaneously entered into a
Letter Agreement with General Signal, approved by the Company,
which provides for his support of the Agreement, and his proxy to
vote for the Merger Agreement and against approval or ratification
of any other acquisition proposal.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net income of $767,000, including a $95,000
extraordinary gain on the repurchase of debentures in the first
quarter of 1995, compared with net income of $115,000 in the first
quarter of 1994.
Revenues for the first three months ended March 31, 1995 were 8.9%
higher than for the first three months of 1994. The Company
experienced an increase in domestic revenues that was only
partially offset by a decrease in international revenues. Service
revenues in the first quarter of 1995 increased 8.5% compared with
the first quarter of 1994, due principally to an increase in
domestic service revenues.
The gross profit margin for the first quarter of 1995 was 43.7%,
compared with 44.8% in the first quarter of 1994. This decrease
was a result of product mix as the Company sold more of its lower
margin products. Service margins were 41.5% in the first quarter
of 1995, compared with 40.9% in the first quarter of 1994,
primarily due to higher revenues without a corresponding increase
in overhead expenses.
Selling, general and administrative expenses decreased to 26.1% of
revenues in the first quarter of 1995 from 28.8% in the first
quarter of 1994. The expense-to-revenue ratio decreased as a result
of a higher revenue base and slightly lower expenditures in the
first quarter of 1995.
Engineering and development expenditures decreased to 10.8% of
revenues in the first quarter of 1995 from 12.9% of revenues in the
first quarter of 1994. The expense-to-revenue ratio decreased as a
result of a higher revenue base and a $242,000 decrease in
expenditures in the first quarter of 1995, reflecting the ongoing
cost controls in most expense areas.
Interest expense decreased by 9.8% in the first quarter of 1995
from the first quarter of 1994 as a result of lower average
outstanding debt in the first quarter of 1995 compared to the first
quarter of 1994. During the first quarter of 1995 the Company
repurchased $750,000 face amount of 8 1/4% convertible subordinated
debentures which resulted in an extraordinary gain of $95,000, net
of taxes and related deferred issuance costs. In April 1995 the
Company repurchased $199,000 face amount of 9% Convertible
Subordinated debentures which resulted in an extraordinary gain of
approximately $13,000, net of taxes and related deferred issuance
costs.
Provision for income taxes was $362,000 in the first quarter of
1995, based on an annual effective tax rate of 35.0% for the
Company versus a provision of $49,000 in the first quarter of 1994
at an effective tax rate of 30.0%. The estimated tax rate for 1995
is higher than the federal statutory rate of 34.0% because of state
taxes and higher international taxes, partially offset by
anticipated utilization of loss carryforwards and tax credits.
On May 8, 1995 the Company entered into an Agreement and Plan of
Merger with General Signal Corporation and a direct wholly-owned
subsidiary of General Signal pursuant to which the Company agreed
to an exchange of shares of the Company into shares of General
Signal (See Note 5).
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of". This statement establishes accounting
standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to
be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. Implementation of the statement is
required for fiscal years beginning after December 15, 1995. The
Company is in the process of reviewing the statement and as of this
date has not determined its impact. The Company has not determined
whether it will adopt the statement prior to the required date.
Liquidity and Capital Resources
_______________________________
The Company used $ 1,622,000 of cash before financing activities in
the first quarter of 1995, compared with generating $4,606,000 in
the first quarter of 1994. Working capital at March 31, 1995
increased by $2,485,000 from December 31, 1994 as a result of
increased accounts receivable and decreased accounts payable offset
partially by decreased inventories. The ratio of current assets to
current liabilities increased to 3.3:1 at March 31, 1995 from 2.9:1
at December 31, 1994. In addition to selling its products, the
Company also leases its products under sales-type lease agreements.
These lease receivables are available for sale as a source of
financing.
The Company financed its new Shelton facility with a $2,500,000 low
interest State of Connecticut mortgage loan. Short-term debt
consisted of $1,118,000 of international borrowings. The current
portion of long-term debt consisted of $18,000 of the State of
Connecticut loan and $191,000 of the State of Connecticut mortgage
loan. Long-term debt consisted of $18,765,000 of convertible
subordinated debentures, $71,000 of the State of Connecticut loan,
and $2,309,000 for the State of Connecticut mortgage loan. The
Company had $6,882,000 of it's $8,000,000 domestic and
international revolving lines of credit available at March 31,
1995.
In November 1994, the Company purchased an 83,000 square foot
facility in Shelton, Connecticut and adjacent land for the
purchase price of approximately $3.1 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.
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
1994 and is not expected to do so in 1995.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On May 8, 1995 the Registrant entered into an Agreement
and Plan of Merger with General Signal Corporation ("General
Signal") and a direct wholly-owned subsidiary of General Signal,
pursuant to which the Registrant has agreed, subject to regulatory
approvals and the approval of the Shareholders of the Registrant,
to an exchange of shares of the Registrant into shares of General
Signal as determined by to a ratio obtained by dividing $4.55 by
the average market value of the shares of General Signal, as long
as General Signal's shares trade at an average of between $31 and
$43 per share during the the Measuring Period. The Measuring
Period would be calculated during the thirty (30) day period ending
on the last day before the scheduled special meeting of
shareholders of the Registrant.
The Merger Agreement contains provisions with respect to
representations and warranties and covenants of both parties. In
the event of termination due to certain circumstances, the
Registrant may be obligated to pay General Signal's expenses in
connection with the Agreement of up to $1.5 million plus an
additional fee of up to $2.4 million. Richard E. Greene, the
largest single shareholder of the Registrant, has simultaneously
entered into a Letter Agreement with General Signal, approved by
the Registrant, which provides for his support of the Agreement,
and his proxy to vote for the Merger Agreement and against approval
or ratification of any other acquisition proposal.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(2) Agreement and Plan of Merger by and Among General Signal
Corporation; General Signal Acquisition Corporation and Data Switch
Corporation.
(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: May 15, 1995 /s/ William J. Lifka
_______________________
William J. Lifka
Chairman, President and
Chief Executive Officer
Date: May 15, 1995 /s/ W. James Whittle
_________________________
W. James Whittle
Senior Vice President and
Chief Financial Officer
<TABLE> Exhibit 11
DATA SWITCH CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(000's except per share data)
<CAPTION>
Three Months Ended March 31,
1995 1994
Primary
_______
<S> <C> <C>
Shares outstanding at
the beginning of the period 12,377 12,176
Weighted average number of
shares issued and issuable
share equivalents 339 140
_________ ________
Weighted average number of common
shares outstanding 12,716 12,316
_________ ________
Income before extraordinary gain $ 672 $ 115
_________ ________
Net income $ 767 $ 115
_________ ________
Primary earnings per share
before extraordinary gain $ 0.05 $ 0.01
_________ ________
Primary earnings per share $ 0.06 $ 0.01
</TABLE> _________ ________
<TABLE>
<CAPTION>
Fully Diluted
_____________
<S> <C> <C>
Shares outstanding at
the beginning of the period 12,377 12,176
Weighted average number of
shares issued and issuable
share equivalents 339 140
Assumed conversion of debentures 2,712 2,820
_________ ________
Weighted average number of
shares issued as adjusted
for full dilution 15,428 15,136
_________ ________
Income before extraordinary gain $ 672 $ 115
========= ========
Net income $ 767 $ 115
_________ ________
Adjustment for interest,
net of tax, on convertible
debentures 234 243
_________ ________
Adjusted net income before
extraordinary gain $ 906 $ 358
========= ========
Adjusted net income $ 1,001 $ 358
========= ========
Fully diluted earnings per
share before extraordinary gain $ 0.06(a) $ 0.02(a)
========= ========
Fully diluted earnings per share $ 0.06(a) $ 0.02(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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 7,265
<SECURITIES> 0
<RECEIVABLES> 21,713
<ALLOWANCES> 556
<INVENTORY> 13,453
<CURRENT-ASSETS> 44,316
<PP&E> 29,875
<DEPRECIATION> 21,772
<TOTAL-ASSETS> 58,288
<CURRENT-LIABILITIES> 13,253
<BONDS> 18,765
<COMMON> 125
0
0
<OTHER-SE> 23,143
<TOTAL-LIABILITY-AND-EQUITY> 58,288
<SALES> 23,096
<TOTAL-REVENUES> 23,096
<CGS> 13,003
<TOTAL-COSTS> 13,003
<OTHER-EXPENSES> (52)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 476
<INCOME-PRETAX> 1,034
<INCOME-TAX> 362
<INCOME-CONTINUING> 672
<DISCONTINUED> 0
<EXTRAORDINARY> 95
<CHANGES> 0
<NET-INCOME> 767
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
