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
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
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
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
ITEM 5
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.
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
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.
ITEM 7
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
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 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:
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:
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:
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:
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:
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:
A reconciliation of the statutory tax rates and the Company's effective tax rates are as follows:
The following table summarizes by component, the net deferred tax assets (liabilities) of the Company as of December 31, 1994 and 1993.
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:
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:
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
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10
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
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.
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
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: