-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TYjQn5y7RE4NwbA1DXQHCbOSdyYNbnG0mfxTCdDovzBlvTWdqj/VZNe1rMghtf/L WeyaJ7iNtxx8Z3HvDBQoIQ== 0000912057-97-008869.txt : 19970317 0000912057-97-008869.hdr.sgml : 19970317 ACCESSION NUMBER: 0000912057-97-008869 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTICAL DATA SYSTEMS INC CENTRAL INDEX KEY: 0000736012 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 751911917 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20191 FILM NUMBER: 97556868 BUSINESS ADDRESS: STREET 1: 1101 E ARAPAHO ROAD CITY: RICHARDSON STATE: TX ZIP: 75081 BUSINESS PHONE: 2142346400 MAIL ADDRESS: STREET 1: 1101 E ARAPAHO ROAD CITY: RICHRICHARDSON STATE: TX ZIP: 75081 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ________________________ TO ________________________. COMMISSION FILE NUMBER 0-20191 ------------------------ OPTICAL DATA SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1911917 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1101 EAST ARAPAHO ROAD RICHARDSON, TEXAS 75081 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-6400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of class) 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 such filing requirements for the past 90 days. Yes_X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 28, 1997, the aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant was approximately $166,762,540. As of February 28, 1997, 16,378,447 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996 are incorporated by reference into Items 5, 6, 7 and 8 under Part II and Item 14 under Part IV hereof. Portions of the Registrant's definitive Proxy Statement filed in connection with the Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 13 under Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. GENERAL Optical Data Systems, Inc. ("ODS", the "Company" or the "Registrant") develops, manufactures, markets and supports switches, intelligent hubs, sophisticated management software and related computer networking and internetworking products for application in local area networks ("LANs"). The Company's products are designed to support the four major industry standards currently applicable in the LAN industry: Ethernet, Token Ring, Fiber Distributed Data Interface ("FDDI") and Asynchronous Transfer Mode ("ATM"). These products allow customers to integrate a wide variety of computer equipment in numerous flexible configurations into enterprise-wide computer networks. The Company's strategy is to provide a wide variety of technologically advanced LAN products to satisfy an ever expanding range of customer requirements. To accomplish its objectives, the Company engages in ongoing efforts to (i) enhance and expand its existing products in response to rapidly changing customer preferences and evolving industry standards and technologies, and (ii) develop and introduce, in a timely manner, products which incorporate new technologies, comply with industry standards and achieve market acceptance. The Company markets and distributes its products primarily through a direct sales force to end-users supplemented by several domestic and international system integrators and value added resellers. The Company's end-user customers include manufacturing, telecommunications, retail, transportation, health care, insurance, utilities and energy companies; government agencies; financial institutions; and academic institutions. The Company was organized in Texas in September 1983 and reincorporated in Delaware in October 1995. The Company's principal executive offices are located at 1101 E. Arapaho Road, Richardson, Texas 75081, and its telephone number is (972) 234-6400. THE LAN INDUSTRY The power of personal computers ("PCs"), workstations and network servers has increased dramatically during the past decade. The rapid proliferation of these devices has created a demand for an effective method to enable users to communicate with each other to access common databases, software and peripheral devices. The LAN industry has evolved to provide a means by which computers and related devices ("nodes") located within a limited geographical area, such as a single office building or a campus, can be interconnected by means of a common cabling system to permit communication and the sharing of data and resources. These LANs can then be interconnected into wide area networks ("WANs") that enable all of the client and server devices in an enterprise to communicate with each other. Over the past decade, LAN technologies such as Ethernet and Token Ring have required networked devices to take turns communicating on a singe LAN. Such technologies are often referred to as shared-media or shared-bandwidth technologies because they require computers to contend for the total capacity or "bandwidth" of a LAN. Intelligent shared-media hubs, each of which functions as a single LAN, interconnected with routers have represented the most widely used network architecture over the past decade. The Company's Infinity intelligent hub product family, introduced during the fourth quarter of 1992, represents one of the industry's most reliable, flexible and manageable intelligent hubs. However, the performance of these shared-bandwidth LANs has declined in recent years due to the increased processor speeds of computers, increased size of LANs and higher bandwidth requirements of software applications such as document image processing, medical imaging, video and the World Wide Web. Recently, a new generation of LAN technology has emerged utilizing "switching" to relieve the performance issues experienced in shared-bandwidth LANs. Some switches, such as the Company's 2 Warrior products, have been designed to enhance the performance of existing shared-bandwidth LANs by reducing the number of devices taking turns and sharing the capacity of a single LAN Ethernet segment or token ring. More recently, switches such as the Company's InfiniteSwitch product line have been designed to replace the traditional hub and router architecture. In a totally switched network, each PC, workstation and server has its own dedicated network connection; thus, networked devices do not experience the performance constraints of taking turns transmitting information over the LAN. THE ODS STRATEGY The Company's strategy is to provide a wide variety of technologically advanced LAN products to satisfy evolving customer requirements. Currently, the Company's objective is to be a market leader in the migration of LAN technology to switched, dedicated bandwidth connections by offering a family of LAN switching products that lead the industry in price/performance, features, flexibility, reliability and investment protection. The key elements of the Company's strategy are outlined below. LAN MARKET LEADERSHIP. The Company has focused on the high end of the LAN market. The Company believes that high-end customers tend to be early adopters of new technology. The Company works closely with selected large end users to identify market needs and define product specifications early in the development process. This approach results in a thorough understanding of end-user requirements prior to commencement of the design process. The Company believes that its InfiniteSwitch product line is the early market leader to provide switched, dedicated bandwidth, high-speed connections in a modular, flexible and reliable chassis system with pricing competitive with prior generation shared-bandwidth LAN products. Further, the Company believes that this early leadership position can lead to increased market share as LAN switching technology becomes more widely accepted. NETWORK MANAGEMENT. As LANs become more diverse and complex and provide increased bandwidth capacity, organizations require more sophisticated network management systems. The Company has developed advanced network management systems to allow network administrators to monitor and control all of the physical layer components of a network including third-party products. Further, security issues created by unauthorized access to sensitive data within an organization's intranet by employees, or by competitors, thieves and vandals through the Internet, have created the need for additional network security capabilities. By working closely with selected large organizations with stringent requirements for network security, the Company gains a thorough understanding of security requirements and develops products to address those requirements. The Company intends to continue to differentiate itself from its competitors by enhancing its current advanced network management and security systems and developing new technology to meet evolving end-user specifications. INVESTMENT PROTECTION. The LAN market is constantly changing due to higher bandwidth requirements, the need for better network management and new technological innovations. The Company believes that customers should not be required to completely replace their installed LAN solutions every year or every few years to satisfy their evolving network requirements. Instead, the Company has an upgrade philosophy to allow its customers to upgrade their installed base of modular chassis systems with the most recent technology available from ODS. For example, customers with an installed base of the Company's Infinity intelligent shared-media hubs can easily upgrade each hub's backplane and install the Company's new InfiniteSwitch dedicated bandwidth modules. By providing a cost-effective upgrade method, an ODS customer can benefit from technological innovations while also improving its return-on-investment from its installed base of LAN equipment and its network management system. Few competitors stress the need for customer investment protection in this manner. INDUSTRY STANDARDS. A LAN is based on "protocols" or rules that govern access to and communication over the network. To facilitate communication with each other, connected nodes must obey protocols to access the network and communicate with other nodes. The Company's diverse product lines include products compliant with Ethernet, Token Ring, FDDI, ATM and other industry standards. The Company 3 intends to continue its strategy of compliance with industry standards rather than develop proprietary networking solutions. The Company's research and development efforts are, in significant part, devoted to the continued introduction and development of new products and enhancement of existing products based on existing as well as emerging industry standards. SALES, MARKETING AND SUPPORT. The Company plans to increase its sales in North America by expanding its direct sales and marketing programs, continuing its relationship with several large system integrators, establishing strategic relationships with selected original equipment manufacturers, and developing relationships with additional value added resellers. Internationally, the Company intends to expand the number of third-party value added resellers supported by the Company's direct sales force. The Company's sales force and its field sales engineers are knowledgeable in a wide variety of hardware and software networking environments and provide valuable consulting services to ODS customers and partners. ODS intends to continue to assist its partners and end-user customers to design LAN solutions, develop a migration path to implement advanced LAN solutions while leveraging a customer's existing investment and provide numerous other valuable technical services for LAN applications. ODS PRODUCTS NETWORK MANAGEMENT. All ODS chassis-based products can be managed by the ODS LanVision HubTool, the LanVision RMON manager and the LanVision Health Monitor. These network management tools can operate concurrently with client manager platforms such as HP OpenView, SunNet Manager, IBM NetView 6000 and others, and are designed to enable network administrators to monitor and control the network from a single network management workstation. ODS LanVision network management systems combine user-friendly graphical user interfaces ("GUI") and simple point and click management capabilities with sophisticated abilities to model every element of a network to diagnose problems and proactively manage the network at the individual node level. By integrating simple network management protocol ("SNMP") and remote monitoring protocol ("RMON") agents in each ODS chassis, the ODS LanVision RMON manager can diagnose problems on each segment of the network using a central network management workstation. ODS LanVision network management systems also enable proactive management of networks. By capturing a complete set of statistical data about the network, real-time alarms on critical statistical parameters can be established, thus enabling automated notification of deviations from those parameters and the resolution of potential network problems before they adversely impact network users. Also, historical data for long-term trend analysis enables network administrators to tune network configuration parameters for performance optimization and capacity utilization and to perform other network management procedures. ODS network management systems include numerous security features such as port level alarms for unauthorized workstations connected to a network and unauthorized user log-ins, separate SNMP management pathways for protection from directed packet flooding, monitoring of communication sessions for disallowed connections, and firewall leak detection. INFINITESWITCH. The expansion of bandwidth intensive operating systems and applications, coupled with rapid advancement in client/server computing, is driving the transition from shared-bandwidth architectures to switched architectures. Switched architectures, which began as high-speed switching in the network backbone, are now extending to users' desktops to maximize network performance and the productivity of each individual user. The ODS InfiniteSwitch product family, introduced in 1996, comprises flexible, competitively priced, switched connectivity while providing scaleable, high-speed ATM, FDDI and Fast Ethernet uplinks that fully integrate each LAN device into more complex, enterprise networks. 4 The ODS InfiniteSwitch product family includes modular chassis, switch and uplink modules, and network management software. The modular chassis are available with 12, 7, 4 and 2 slots. Each switch, uplink and management module is re-deployable across these modular chassis platforms, including the Company's prior generation Infinity intelligent hub chassis, thereby reducing the operating costs associated with spare units and enabling a cost-effective migration from shared-bandwidth network architectures and small work groups to large switched networks. The ODS InfiniteSwitch product family offers numerous configurations of dedicated 10 megabit per second ("Mbps") Ethernet and 100 Mbps Fast Ethernet connections to every device in a network using unshielded twisted pair cabling or fiber optic transmission media. The InfiniteSwitch utilizes a single 1.28 Gbps backplane with a dual bus architecture. Each bus is independent of the other, providing both load balancing capabilities and a high degree of fault tolerance. By separating the management function from the switching operation and providing distributed memory architecture, fault tolerance is enhanced. Additionally, every ODS InfiniteSwitch module can operate in stand-alone mode over its own 640 Mbps of bandwidth. The dual bus architecture, number of possible Ethernet and Fast Ethernet module configurations, modular stand-alone mode capabilities and range of uplink options enable flexible network configurations by network administrators using the ODS LanVision network management system. INFINITY INTELLIGENT HUBS. The ODS Infinity intelligent hub product family, introduced in 1992, was designed to be used in large or multi-story buildings and campus settings. The ODS Infinity series has a flexible backplane that supports Ethernet, Token Ring, ATM and FDDI modules in a single chassis platform and features a large number of modules and options designed to create highly manageable and reliable network architectures. Each intelligent hub ranges in size from 4 to 12 modular slots and supports up to 528 Ethernet ports with up to 44 separate Ethernet segments or up to 352 Token Ring ports with up to 44 managed Token Rings. The Company's ATM and FDDI products are used by customers in several applications such as metropolitan area networks ("MANs"), campus backbones, interconnections for high performance workstations and file servers, and direct connections between host computers. Certain third-party products, such as segment switching and router modules, can also be integrated in Infinity intelligent hubs. The Infinity intelligent hubs are managed by the ODS LanVision HubTool, the LanVision RMON manager and the LanVision Health Monitor. MICRO-INFINITY. The ODS Micro-Infinity product family features a micro-modular design for growing businesses, remote branch offices and work groups within organizations. This product family supports Ethernet, Token Ring, ATM and FDDI modules, third-party segment switching and remote access router modules. This product family is also managed by the ODS LanVision HubTool, the LanVision RMON manager and the LanVision Health Monitor. NANO HUB. The ODS Nano Hub product line features a managed, fixed-port configuration with 12 to 24 ports of shared Ethernet connections. The Nano Hub is available with integrated Frame Relay Access Device ("FRAD") or Integrated Service Digital Network ("ISDN") to provide reliable LAN connectivity with remote access for branches and remote offices. THIRD-PARTY PRODUCTS. The Company believes that it is beneficial to work with third parties with complementary technologies to broaden the appeal of the Company's switches and intelligent hub products. These alliances allow ODS to provide integrated solutions to its customers, combining ODS developed technology with third-party products such as certain routers from Cisco Systems, Inc. and ATM switches from Fore Systems, Inc. As the Company also competes with these technology partners in certain segments of the market, there can be no assurance that the Company will have access to all of the third-party products which may be desirable in order to offer fully integrated solutions to ODS customers. CUSTOMER SERVICES. In addition to manufacturing broad lines of LAN products, the Company also offers a wide range of services for LANs, including consulting, design and configuration, project planning and management, performance analysis and installation and maintenance. 5 PRODUCT DEVELOPMENT The LAN industry is characterized by rapidly changing technology, standards and customer demands. Management believes that the Company's future success depends in large part upon the timely enhancement of existing products as well as the development of technologically advanced new products which meet industry standards, perform successfully and achieve market acceptance. The Company is currently developing and marketing next-generation LAN switching products that will support data applications, video and audio applications as well as intranet and Internet applications. The Company is also investing in the development of products which comply with emerging industry standards and is continuously engaged in testing to ensure that the Company's products interoperate with other manufacturers' products which comply with industry standards. However, there can be no assurance that the Company will be successful in enhancing its existing products or in selecting, developing, manufacturing and marketing new products which will perform satisfactorily and achieve market acceptance. Nor can there be any assurance that the Company will be able to respond effectively to technological changes or new product announcements by competitors, which could render portions of the Company's inventory obsolete. During 1996, 1995 and 1994, the Company's research and development expenditures were $10.4 million, $8.0 million and $7.5 million, respectively. All of the Company's expenditures for hardware and software research and development costs have been expensed as incurred. At December 31, 1996, the Company had 58 employees engaged in research and product development. The Company intends to continue to increase its research and development staff and expenditures. MANUFACTURING AND SUPPLIERS The Company's manufacturing operations consist primarily of final assembly, testing and quality control of subassemblies and finished units. Materials used by the Company in its manufacturing processes include semiconductors such as microprocessors, memory chips and application specific integrated circuits ("ASICs"), printed circuit boards, power supplies and enclosures. All of the materials used in the Company's products are purchased under contracts or purchase orders with third parties. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain components such as microprocessors and ASICs are available from one or a limited number of suppliers. The lead times for delivery of components vary significantly and exceed ten weeks for certain components. If the Company should fail to forecast its requirements accurately for components, it may experience excess inventory or shortages of certain components which could have an adverse effect on the Company's business and operating results. Further, any interruption in the supply of any of these components, or the inability of the Company to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse effect on the Company's business and operating results. The Company's operational strategy relies on outsourcing of printed circuit board assembly and certain other operations to reduce fixed costs and to provide flexibility in meeting market demand. The Company inserts the printed circuit board-based modules, assembled by a variety of domestic third-party contract assembly companies, into product enclosures in combination with power supplies, ODS software and other components to configure systems to meet the needs of end-user customers. There can be no assurance that the Company will effectively manage its third-party contractors or that these contractors will meet the Company's future requirements for timely delivery of products of sufficient quality and quantity. Further, the Company intends to introduce a number of new products and product enhancements in 1997 which will require that the Company rapidly achieve volume production of those new products by coordinating its efforts with those of its suppliers and contractors. The inability of the third-party contractors to provide ODS with adequate supplies of high-quality products could cause a delay in the Company's ability to fulfill orders and could have an adverse effect on the Company's business and operating results. 6 INTELLECTUAL PROPERTY AND LICENSES The Company's success and its ability to compete is dependent, in part, upon its proprietary technology. The Company does not hold any issued patents and currently relies on a combination of contractual rights, trade secrets and copyright laws to establish and protect its proprietary rights in its products. The Company has also entered into confidentiality agreements with its employees and enters into non-disclosure agreements with its suppliers, resellers and certain customers to limit access to and disclosure of proprietary information. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. There are many patents held by companies which relate to the design and manufacture of networking systems. Potential claims of infringement could be asserted by the holders of those patents. The Company could incur substantial costs in defending itself and its customers against any such claim regardless of the merits of such claims. In the event of a successful claim of infringement, the Company may be required to obtain one or more licenses from third parties. There can be no assurance that the Company could obtain the necessary licenses on reasonable terms. The Company has entered into several software and product license agreements. These license agreements provide the Company with additional software and hardware components that add value to its intelligent hub, switch and management products. These license agreements do not provide proprietary rights which are unique or exclusive to the Company and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license fees and royalties. SALES, MARKETING AND CUSTOMERS The Company markets and distributes its products primarily through a direct sales force to end users supplemented by several domestic and international system integrators and value added resellers. The Company's direct sales and marketing organization currently consists of 131 individuals, including managers, sales representatives, marketing personnel and technical support personnel. FIELD SALES FORCE. The Company's direct sales organization focuses on major account sales, promotes the Company's products to current and potential customers, and monitors evolving customer requirements. The field sales and technical support force provides training and technical support to the Company's resellers and end users and assists ODS customers to design LAN solutions and to develop a migration path to implement advanced LAN solutions while leveraging an end user's existing investment. The Company currently conducts its direct sales and marketing efforts from its principal office in Richardson (Dallas), Texas; through domestic field offices located in the following metropolitan areas: Atlanta, Boston, Chicago, Cleveland, Denver, Detroit, Honolulu, Houston, Los Angeles, Minneapolis, New York City, Philadelphia, San Francisco, Seattle, St. Louis, Tampa and Washington, D.C.; and through its foreign sales offices located in the following regions: Brazil, Canada, England, France, Germany, Japan, Malaysia, Singapore, South Korea and Taiwan. RESELLERS. Domestic and international system integrators and value added resellers (collectively, "resellers") sell ODS products as stand-alone solutions to end users and integrate ODS products with products sold by other LAN and WAN vendors into networking systems that are sold to end users. The Company's field sales force and technical support organization provide support to these resellers. Historically, resellers have sold the Company's products to large corporations and government agencies. In 1996, the Company initiated a "Partners Plus" program targeted at resellers who serve medium sized organizations. The Company's agreements with resellers are non-exclusive, and the Company's resellers generally sell other products which may compete with ODS products. Resellers may place higher priority on 7 products of other suppliers who are larger than and have more name recognition than ODS, and there can be no assurance that resellers will continue to sell and support the Company's products. FOREIGN SALES. The Company believes that rapidly evolving international markets are important sources of future net sales for the Company. The Company's export sales are currently being made through a direct sales force supplemented by international resellers in Europe, Asia, Latin America and Canada. Export sales accounted for approximately 14.4%, 11.6% and 15.0% of net sales in 1996, 1995 and 1994, respectively. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report for a geographic breakdown of the Company's product revenue from sales to customers outside the United States for the years ended December 31, 1996, 1995 and 1994. Sales to foreign customers and resellers generally have been made in United States dollars. The Company's international operations may be affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand, as well as by risks such as increases in duty rates, difficulties in distribution, regulatory approvals and other constraints upon international trade. MARKETING. The Company has implemented several methods to market its products, including regular participation in trade shows and seminars, advertisement in trade journals, telemarketing, distribution of sales literature and product specifications and ongoing communications with its resellers and installed base of end-user customers. CUSTOMERS. The Company's end-user customers include manufacturing, telecommunications, retail, transportation, health care, insurance, utilities and energy companies; government agencies; financial institutions; and academic institutions. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval cycles, and sales to customers within certain geographic regions can be subject to seasonal fluctuations in demand. Although the Company sells its products to many customers, direct sales to three such resellers and end-user customers, Electronic Data Systems Corporation ("EDS"), AT&T Corp. ("AT&T") and various agencies of the U.S. Government (aggregated as one), have each accounted for 10% or more of the Company's net sales in at least one of the past three fiscal years as indicated in the following schedule. CUSTOMER PERCENTAGE OF NET SALES 1996 1995 1994 EDS 19.4% 28.3% 19.4% AT&T 12.1 12.0 18.1 U.S. GOVERNMENT 13.5 9.6 9.8
A large portion of the products sold to EDS during the periods shown were integrated with other products or services and sold to end users by EDS. A large portion of sales to AT&T in 1995 and 1994 were attributable to a major U.S. Army customer of AT&T. No other customer accounted for as much as 10% of the Company's net sales in 1996, 1995 or 1994, respectively. The loss of any of these customers could have a material adverse effect on the Company and its operating results if not replaced. Most of the Company's business with the U.S. Government is on a fixed-price basis. Government contracts customarily include provisions which provide for cancellation at the convenience of the Government. In addition, upon cancellation by the Government, the Company generally would be entitled to reimbursement of costs incurred, plus a pro rata share of profit. The Company has never received a cancellation of a material government contract and has no reason to anticipate any such cancellation. The products sold, characteristics and business risks associated with the Company's sales to U.S. Government 8 agencies do not differ materially from those associated with sales of the Company's products to commercial customers. BACKLOG. The Company believes that only a small portion of its order backlog is noncancelable and that the dollar amount associated with the noncancelable portion is immaterial. The Company manufactures its products based upon its forecast of customers' demand and maintains inventories of sub- assemblies and finished products in advance of receiving firm orders from customers. Orders are generally fulfilled by the Company within one to four weeks following receipt of an order. Because of the generally short cycle between order and shipment and occasional customer-initiated changes in delivery schedules or cancellation of orders which are made without significant penalty, the Company does not believe that its backlog as of any particular date is indicative of future net sales. CUSTOMER SUPPORT, SERVICE AND WARRANTY. The Company services, repairs and provides technical support for its products. The ODS field sales and technical support force work closely with resellers and end-user customers on-site and by telephone to assist with pre- and post-sales support services such as network design, system installation and technical consulting. By working closely with the Company's customers, ODS employees gain a thorough understanding of end-user requirements and provide input to the product development process. The Company warrants all its products against defects in materials and workmanship for periods ranging from 90 days to 12 months. Before and after expiration of the product warranty period, the Company offers both on-site and factory-based support, parts replacement and repair services. Extended warranty services are separately invoiced on a time and materials basis or on an annual maintenance contract. COMPETITION The market for network intelligent hubs and switches is intensely competitive and subject to frequent product introductions with improved price/performance characteristics. Networking suppliers compete in areas such as conformity to existing and emerging industry standards, interoperability with other networking products, network management capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support. The Company believes that its solutions-oriented approach to networking (combining network design services, ODS products and third-party products to provide superior networking systems to customers) provides the Company a competitive advantage with large organizations with complex networking requirements. There are numerous companies competing in various segments of the intelligent hub and switch markets. The Company's principal competitors include Cisco Systems, Inc., Cabletron Systems, Inc., Bay Networks, Inc., 3Com Corporation, Fore Systems, Inc., Xylan Corporation and International Business Machines Corporation. Several of the Company's competitors have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than the Company. In addition, many of the Company's competitors offer customers a broader product line which provides a more comprehensive networking solution than the Company currently offers. Certain companies in the networking industry have expanded their product lines or technologies in recent years as a result of acquisitions. Further, more companies have developed products which conform to existing and emerging industry standards and have sought to compete on the basis of price. Increased competition in the networking industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully in the future with current or new competitors. 9 EMPLOYEES As of December 31, 1996, the Company employed a total of 389 persons, including 131 in sales, marketing and technical support, 184 in manufacturing and operations, 58 in research and product development, and 16 in administration and finance. None of the Company's employees are represented by a labor organization, and the Company is not a party to any collective bargaining agreement. The Company has not experienced any work stoppages and considers its relations with its employees to be good. Competition in the recruiting of personnel in the computer and communications industry is intense. The Company believes that its future success will depend in part on its continued ability to hire, motivate and retain qualified management, sales and marketing, and technical personnel. To date, the Company has not experienced significant difficulties in attracting and retaining qualified employees. ITEM 2. PROPERTIES. The Company's headquarters is located in a modern, two-story building in Richardson, Texas, with an aggregate of approximately 95,000 square feet of floor space. This facility includes the Company's corporate administration, manufacturing, marketing, sales and technical support personnel. The Company occupies this facility under a lease, the base term of which expires in February 2005, with two seven-year options to extend the lease term, subject to compliance with certain conditions. The Company owns a one-story building consisting of approximately 50,000 square feet of floor space adjacent to the Company's headquarters, and the Company's research and development staff are located in this facility. The Company also leases a separate warehouse facility consisting of approximately 8,000 square feet adjacent to its headquarters under a lease which expires in June 1997. In addition, the Company and its subsidiaries lease small amounts of office space for sales and technical support personnel domestically in California, Colorado, Florida, Georgia, Hawaii, Illinois, Massachusetts, Michigan, Minnesota, Missouri, New York, Ohio, Pennsylvania, Texas, Virginia and Washington, and internationally in Brazil, Canada, England, France, Germany, Japan, Malaysia, Singapore, South Korea and Taiwan R.O.C. The Company believes that these existing facilities will be adequate to meet its requirements through 1997. See Note 5 of Notes to Consolidated Financial Statements for additional information regarding the Company's obligations under leases. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any material litigation and is not aware of any threatened litigation which would have a material adverse effect on the Company, its operating results or its financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders of the Company during the fourth quarter of 1996. PART II The information required by Items 5 through 8, inclusive, of this report is contained in the Company's Annual Report to Stockholders for its fiscal year ended December 31, 1996 (the "1996 Annual Report"), selected portions of which are incorporated herein by reference, as described below. With the exception of the material incorporated by reference herein, the 1996 Annual Report is not deemed filed as a part of this Annual Report on Form 10-K. 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the caption "Stock Market Information" on page 27 of the 1996 Annual Report, is incorporated herein by reference and appears in Exhibit 13, herein. ITEM 6. SELECTED FINANCIAL DATA. The information appearing in the "Selected Consolidated Financial Data" table on the inside cover of the 1996 Annual Report, is incorporated herein by reference and appears in Exhibit 13, herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 12 through 16, inclusive, of the 1996 Annual Report, is incorporated herein by reference and appears in Exhibit 13, herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of Optical Data Systems, Inc. and Subsidiaries and Notes thereto appearing on pages 18 through 27, inclusive, the Report of Independent Auditors thereon appearing on page 17, and the Supplemental Financial Data appearing on page 27 of the 1996 Annual Report, are incorporated herein by reference and appears in Exhibit 13, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS The information regarding Directors of the Company appearing under the captions "Election of Directors" and "Compliance with Section 16 Reporting Requirements" contained in the Company's definitive Proxy Statement filed in connection with the Company's 1997 Annual Meeting of Stockholders is incorporated herein by reference. 11 EXECUTIVE OFFICERS The following table sets forth the names and ages of all executive officers of the Company, their respective positions with the Company, and the period during which each has served as an executive officer.
SERVED AS EXECUTIVE NAME AGE POSITION(S) OFFICER SINCE - ------------------------ --- ----------------------------------------------- --------------- G. Ward Paxton 61 Chairman of the Board of Directors, President 1983 and Chief Executive Officer T. Joe Head 40 Senior Vice President and Director 1983 Timothy W. Kinnear 33 Vice President and Chief Financial Officer 1996 Billie J. Cottongim 66 Vice President--Manufacturing Engineering 1987 Gregory E. Geiger 38 Vice President--Hardware Engineering 1992 Eric H. Gore 43 Vice President--Strategic Business Development 1994 Garry L. Hemphill 48 Vice President--Operations 1987 Joseph V. Howard 38 Vice President--North American Sales 1994 Jerry W. Pate 44 Vice President--Chief Engineer 1987 Michael L. Paxton 36 Vice President and Secretary 1987 Joe W. Tucker, Jr. 54 Vice President--International Sales 1992 D. Keith Willette 40 Vice President--Software Engineering 1992 Timothy E. Woods 36 Vice President--Technical Customer Services 1992 Kandis L. Tate Thompson 30 Controller--Finance and Accounting 1995 Donna J. Combs 48 Assistant Secretary and Director of 1987 Administration
G. WARD PAXTON is a co-founder of the Company and has served as Chairman of the Board of Directors, President and Chief Executive Officer since the Company's inception in September 1983 and served as Chief Financial Officer from 1983 until 1994. Prior to founding the Company, Mr. Paxton was Vice President of Honeywell Optoelectronics, a division of Honeywell, Inc., from 1978 to 1983. From 1969 to 1978, Mr. Paxton was Chairman of the Board of Directors, President, Chief Executive Officer and founder of Spectronics, Inc., which was acquired by Honeywell, Inc. in 1978. Prior to founding Spectronics, Inc., Mr. Paxton held various managerial and technical positions at Texas Instruments Incorporated from 1959 to 1969. Mr. Paxton holds Ph.D., M.S. and B.S. degrees in Physics from the University of Oklahoma. T. JOE HEAD is co-founder of the Company and has served as Senior Vice President and a director since the Company's inception in September 1983. Prior to co-founding the Company, Mr. Head held the positions of Product Marketing Manager and Marketing Engineer at Honeywell Optoelectronics from 1980 to 1983. Mr. Head holds a B.S. degree in Electrical Engineering from Texas A & M University. TIMOTHY W. KINNEAR has served as Vice President and Chief Financial Officer of the Company since September of 1996. Prior to joining the Company, Mr. Kinnear held various managerial positions, including Vice President of Finance, at Cyrix Corporation from 1992 to 1996. Prior to joining Cyrix 12 Corporation, Mr. Kinnear held various positions, including Audit Manager, at Ernst & Young from 1986 to 1992. Mr. Kinnear holds a B.B.A. degree in Accounting from Texas Tech University. BILLIE J. COTTONGIM has served as Vice President--Manufacturing Engineering of the Company since 1987 and previously served as its Director of Manufacturing Engineering from 1983 to 1987. Prior to joining the Company, Mr. Cottongim held the position of Senior Engineer at Honeywell Optoelectronics from 1982 to 1983. GREGORY E. GEIGER has served the Company as Vice President--Hardware Engineering since February 1992. Mr. Geiger previously held positions with the Company as Director of Hardware Engineering in 1991 and Design Engineer from 1987 to 1990. Prior to joining the Company, Mr. Geiger held the position of Design Engineer at E-Systems, Inc. from 1985 to 1987. ERIC H. GORE has served the Company as Vice President--Strategic Business Development since February 1994. Mr. Gore previously held positions with the Company as Director of Strategic Business Development from 1992 to 1994, Area Sales Manager from 1989 to 1992 and Regional Sales Manager from 1984 to 1989. Prior to joining the Company, Mr. Gore served Texas Instruments Incorporated as Marketing Manager--Eastern United States from 1982 to 1983 and Product Marketing Representative from 1979 to 1982. GARRY L. HEMPHILL has served the Company as Vice President--Operations since 1987 and previously served as its Manager of Operations from 1984 to 1987. Prior to joining the Company, Mr. Hemphill held the position of Supervisor of Military Products at Honeywell Optoelectronics from 1979 to 1983. JOSEPH V. HOWARD has served the Company as Vice President--North American Sales since October 1996. Mr. Howard previously held positions with the Company as Vice President--Federal Systems from 1994 to 1996, Manager of the Federal Systems Group from 1991 to 1994 and National Accounts Manager from 1988 to 1991. Prior to joining the Company, Mr. Howard held the position of Account Representative for May-Craft Information Systems from 1986 to 1988. JERRY W. PATE has served the Company as Vice President--Chief Engineer since February 1992 and previously served as its Vice President from 1987 to February 1992 and Director of Engineering from 1983 to 1987. Prior to joining the Company, Mr. Pate served as an independent consultant for Honeywell Optoelectronics and Siemens, A.G. from 1980 to 1983. MICHAEL L. PAXTON has served the Company as Vice President and Secretary of the Company since June 1995 and previously served as its Controller of Finance and Accounting from 1987 to 1995 and Accounting Manager from 1986 to 1987. Prior to joining the Company, Mr. Paxton held the position of Staff Accountant for Clifford E. Wall, Certified Public Accountant, from 1984 to 1986. JOE W. TUCKER, JR. has served the Company as Vice President--International Sales since June 1996 and previously served as its Vice President--North American Sales from 1992 to 1996. Prior to joining the Company, Mr. Tucker held the positions of Vice President--U.S. Operations of Datapoint, Inc. from 1990 to 1992; Vice President and General Manager of United Detector Technology, a division of ILC, Inc., from 1988 to 1990; Worldwide Marketing and Sales Director from 1986 to 1988 and various sales management positions from 1980 to 1986 at Honeywell Optoelectronics; and various marketing and sales management positions at Texas Instruments Incorporated from 1969 to 1980. D. KEITH WILLETTE has served the Company as Vice President--Software Engineering since February 1992. Mr. Willette previously held positions with the Company as Director of Software Engineering from 1991 to 1992 and Software Engineer from 1990 to 1991. Prior to joining the Company, Mr. Willette held the positions of Lead Software Engineer from 1989 to 1990 and Software Engineer from 1988 to 1989 at Harris Adacom Corporation, and Senior Software Engineer at Ascom Timeplex, Inc. from 1987 to 1988. TIMOTHY E. WOODS has served the Company as Vice President--Customer Technical Services since February 1992 and previously held positions with the Company as Manager of Technical Support and 13 Product Support Engineer from 1990 to 1991. Prior to joining the Company, Mr. Woods held the position of Systems Design Engineer at Jaycor Technical Services, Incorporated from 1987 to 1990. KANDIS L. TATE THOMPSON has served the Company as Controller of Finance and Accounting since June 1995 and previously held positions as Accounting Manager for the Company from 1991 to June 1995 and Staff Accountant from 1989 to 1991. Prior to joining the Company, Ms. Thompson held the position of Staff Accountant for Armstrong and Associates, Certified Public Accountants, from 1988 to 1989. Ms. Thompson has been a Certified Public Accountant since 1990. DONNA J. COMBS has served as Assistant Secretary of the Company since 1994 and previously served as its Secretary from 1987 to 1994. Ms. Combs has held the position of Director of Administration since joining the Company in 1984. Neither the Company nor any of its subsidiaries has employment agreements with any of its executives. All executive officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board. G. Ward Paxton is the father of Michael L. Paxton. There are no other family relationships between any director or executive officer and any other such person. ODS 401(K) SAVINGS PLAN The Company has adopted the ODS 401(k) Savings Plan, as amended, (the "Savings Plan"), which is intended to comply with Sections 401(a) and 401(k) of the Internal Revenue Code, as amended (the "Code"), and the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended. Amounts contributed to the Savings Plan are held under a trust intended to be exempt from income tax pursuant to Section 501(a) of the Code. All employees of the Company (except nonresident aliens who receive no earned income from the Company within the United States) who have completed three months of service are eligible to participate in the Savings Plan. Participating employees may make pre-tax contributions to their accounts of not less than 1% nor more than 15% of their compensation each year, subject to certain maximum limits imposed by law ($9,500 in 1996). In its discretion, the Company may make (i) annual matching contributions to the accounts of participating employees not to exceed 4% of their annual base compensation and (ii) annual employer contributions. The accounts of participating employees are 100% vested immediately as to salary reduction amounts contributed to the Savings Plan and vest at the rate of 20% per year of service as to all other benefits, with all rights being 100% vested under the Savings Plan after five years of service or upon death, disability or normal retirement. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "Executive Compensation" contained in the Company's definitive Proxy Statement filed in connection with the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Company's definitive Proxy Statement filed in connection with the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "Certain Transactions" contained in the Company's definitive Proxy Statement filed in connection with the 1997 Annual Meeting of Stockholders is incorporated herein by reference. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE IN 1996 ANNUAL REPORT* ----------------- (a) 1. CONSOLIDATED FINANCIAL STATEMENTS. Report of Independent Auditors...................................................... 17 Consolidated Balance Sheets at December 31, 1996 and 1995........................... 18 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 19 1994............................................................................... Consolidated Statements of Stockholders' Equity for the years ended December 31, 20 1996, 1995 and 1994................................................................ Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 21 and 1994........................................................................... Notes to Consolidated Financial Statements.......................................... 22-27 * Pages 17-27 referenced above of the 1996 Annual Report are incorporated herein by reference, and appear in Exhibit 13, herein. 2. FINANCIAL STATEMENT SCHEDULES. PAGE NO. ----------------- SCHEDULE II - Valuation and Qualifying Accounts..................................... S-1
All other schedules are omitted because they are either not required or not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed during the fourth quarter of 1996. (c) EXHIBITS. The following Exhibits are filed herewith pursuant to Item 601 of Regulation S-K or are incorporated herein by reference to previous filings as noted:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------- --------------------------------------------------------------------------------------------------- 3.1(1) ......... Certificate of Incorporation of the Registrant. 3.2(1) ......... Bylaws of the Registrant. 4.1(2) ......... Specimen of Common Stock Certificate. 4.2(2) ......... Form of Common Stock Purchase Warrants issued to William F. Earthman, III. 10.1(2) ......... Lease Agreement, dated September 12, 1989, between G.D.A.F. Associates and the Registrant for the Registrant's headquarters and executive office building. 10.2(2) ......... 1983 Incentive Stock Option Plan of Optical Data Systems, Inc., as amended. 10.3(2) ......... 1987 Incentive Stock Option Plan of Optical Data Systems, Inc., as amended. 10.4(2) ......... Copy of Stock Option granted to Robert Anderson. 10.5(2) ......... Form of Indemnification Agreement. 10.6(3) ......... ODS 401(k) Savings Plan, dated May 19, 1993, effective April 1, 1993. 10.7(4) ......... Amendment Number One to the ODS 401(K) Savings Plan, dated December 30, 1994.
15
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------- --------------------------------------------------------------------------------------------------- 10.8(5) ......... 1995 Stock Option Plan of Optical Data Systems, Inc. 10.9(5) ......... 1995 Non-Employee Directors Stock Option Plan of Optical Data Systems, Inc. 10.10(6) ......... Amended and Restated Revolving Credit Loan Agreement, dated April 13, 1995, between NationsBank of Texas, N.A. (formerly, NCNB Texas National Bank) and the Registrant. 10.11(6) ......... Supplemental Lease Agreement, dated March 7, 1995, between G.D.A.F. Associates, subsequently assigned to CIIF Associates II Limited Partnership, Landlord, and the Registrant, as Tenant, relative to the Registrant's headquarters and executive office building. 11(7) ......... Statement regarding Computation of Per Share Earnings. 13(7) ......... Annual Report to Stockholders of the Registrant for the fiscal year ended December 31, 1996, to the extent specified in Parts II, III and IV hereof. 21(7) ......... Subsidiaries of the Registrant. 23(7) ......... Consent of Independent Auditors. 27(7) ......... Financial Data Schedule.
- ------------------------ (1) Filed as an Exhibit in the Registrant's Current Report on Form 8-K dated November 6, 1995 (Date of Event: October 31, 1995; Commission File No. 0-20191), which Exhibit is incorporated herein by reference. (2) Filed as an Exhibit in the Registrant's Registration Statement on Form S-1, as amended (File No. 33-6899) which was declared effective on May 21, 1992, by the Securities and Exchange Commission, which Exhibit is incorporated herein by reference. (3) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1993 (File No. 0-20191), which Exhibit is incorporated herein by reference. (4) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1994 (File No. 0-20191), which Exhibit is incorporated herein by reference. (5) Filed as an Exhibit to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1995 Annual Meeting of Stockholders (File No. 0-20191), which Exhibit is incorporated herein by reference. (6) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995 (File No. 0-20191), which Exhibit is incorporated herein by reference. (7) Filed herewith. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPTICAL DATA SYSTEMS, INC. Dated: March 14, 1997 (Registrant) By: /s/ G. WARD PAXTON ----------------------------------------- G. Ward Paxton CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman of the Board of /s/ G. WARD PAXTON Directors, President and - ------------------------------ Chief Executive Officer March 14, 1997 G. Ward Paxton (Principal Executive Officer) Vice President and Chief /s/ TIMOTHY W. KINNEAR Financial Officer - ------------------------------ (Principal Financial March 14, 1997 Timothy W. Kinnear Officer) /s/ KANDIS TATE THOMPSON Controller - Finance and - ------------------------------ Accounting (Principal March 14, 1997 Kandis Tate Thompson Accounting Officer) /s/ T. JOE HEAD - ------------------------------ Senior Vice President March 14, 1997 T. Joe Head and Director /s/ ROBERT ANDERSON - ------------------------------ Director March 14, 1997 Robert Anderson /s/ J. FRED BUCY - ------------------------------ Director March 14, 1997 J. Fred Bucy /s/ DONALD M. JOHNSTON - ------------------------------ Director March 14, 1997 Donald M. Johnston 17 SCHEDULE II OPTICAL DATA SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD - ---------------------------------------------------------------- ------------- ----------- ----------- ----------- Year ended December 31, 1994: Deducted from asset accounts: Allowance for Doubtful Accounts and Returns................... $ 294 $ 90 $ 28** $ 356 Inventory Obsolescence Reserve................................ $ 217 $ 1,850 $ 1,761* $ 306 Year ended December 31, 1995: Deducted from asset accounts: Allowance for Doubtful Accounts and Returns................... $ 356 $ 382 $ 121** $ 617 Inventory Obsolescence Reserve................................ $ 306 $ 1,989 $ 1,664* $ 631 Year ended December 31, 1996: Deducted from asset accounts: Allowance for Doubtful Accounts and Returns................... $ 617 $ 227 $ 22** $ 822 Inventory Obsolescence Reserve................................ $ 631 $ 2,421 $ 1,067* $ 1,985
- ------------------------ * Obsolete inventory written off. ** Uncollectible accounts written off. S-1 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------- --------------------------------------------------------------------------------------------------- 3.1(1) ......... Certificate of Incorporation of the Registrant. 3.2(1) ......... Bylaws of the Registrant. 4.1(2) ......... Specimen of Common Stock Certificate. 4.2(2) ......... Form of Common Stock Purchase Warrants issued to William F. Earthman, III. 10.1(2) ......... Lease Agreement, dated September 12, 1989, between G.D.A.F. Associates and the Registrant for the Registrant's headquarters and executive office building. 10.2(2) ......... 1983 Incentive Stock Option Plan of Optical Data Systems, Inc., as amended. 10.3(2) ......... 1987 Incentive Stock Option Plan of Optical Data Systems, Inc., as amended. 10.4(2) ......... Copy of Stock Option granted to Robert Anderson. 10.5(2) ......... Form of Indemnification Agreement. 10.6(3) ......... ODS 401(k) Savings Plan, dated May 19, 1993, effective April 1, 1993. 10.7(4) ......... Amendment Number One to the ODS 401(K) Savings Plan, dated December 30, 1994. 10.8(5) ......... 1995 Stock Option Plan of Optical Data Systems, Inc. 10.9(5) ......... 1995 Non-Employee Directors Stock Option Plan of Optical Data Systems, Inc. 10.10(6) ......... Amended and Restated Revolving Credit Loan Agreement, dated April 13, 1995, between NationsBank of Texas, N.A. (formerly, NCNB Texas National Bank) and the Registrant. 10.11(6) ......... Supplemental Lease Agreement, dated March 7, 1995, between G.D.A.F. Associates, subsequently assigned to CIIF Associates II Limited Partnership, Landlord, and the Registrant, as Tenant, relative to the Registrant's headquarters and executive office building. 11(7) ......... Statement regarding Computation of Per Share Earnings. 13(7) ......... Annual Report to Stockholders of the Registrant for the fiscal year ended December 31, 1996, to the extent specified in Parts II, III and IV hereof. 21(7) ......... Subsidiaries of the Registrant. 23(7) ......... Consent of Independent Auditors. 27(7) ......... Financial Data Schedule.
- ------------------------ (1) Filed as an Exhibit in the Registrant's Current Report on Form 8-K dated November 6, 1995 (Date of Event: October 31, 1995; Commission File No. 0-20191), which Exhibit is incorporated herein by reference. (2) Filed as an Exhibit in the Registrant's Registration Statement on Form S-1, as amended (File No. 33-6899) which was declared effective on May 21, 1992, by the Securities and Exchange Commission, which Exhibit is incorporated herein by reference. (3) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1993 (File No. 0-20191), which Exhibit is incorporated herein by reference. (4) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1994 (File No. 0-20191), which Exhibit is incorporated herein by reference. (5) Filed as an Exhibit to the Registrant's definitive Proxy Statement in connection with the solicitation of proxies for its 1995 Annual Meeting of Stockholders (File No. 0-20191), which Exhibit is incorporated herein by reference. (6) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995 (File No. 0-20191), which Exhibit is incorporated herein by reference. (7) Filed herewith. EX-11 2 EXHIBIT 11 EXHIBIT 11 OPTICAL DATA SYSTEMS, INC. COMPUTATIONS OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For the Year Ended December 31, ------------------------------- 1996 1995 1994 -------- -------- -------- PRIMARY Weighted average common shares outstanding 16,261 16,037 15,742 Net effect of dilutive stock options and warrants based on the treasury stock method using average market price 564 839 682 -------- -------- -------- Weighted average common and common equivalent shares 16,825 16,876 16,424 -------- -------- -------- -------- -------- -------- Net income $ 11,051 $ 13,678 $ 8,562 -------- -------- -------- -------- -------- -------- Net income per common and common equivalent share $ 0.66 $ 0.81 $ 0.52 -------- -------- -------- -------- -------- -------- FULLY DILUTED* Weighted average common shares outstanding 16,261 16,037 15,742 Net effect of dilutive stock options and warrants based on the treasury stock method using the year-end market price if higher than the average market price 564 844 900 -------- -------- -------- Weighted average common and common Equivalent shares 16,825 16,881 16,642 -------- -------- -------- -------- -------- -------- Net income $ 11,051 $ 13,678 $ 8,562 -------- -------- -------- -------- -------- -------- Net income per common and common equivalent share $ 0.66 $ 0.81 $ 0.52 -------- -------- -------- -------- -------- --------
- -------------------- * Fully diluted earnings per share is not presented in the consolidated statements of income as the resulting dilution is less than 3% compared to primary earnings per share. EX-13 3 EXHIBIT 13 OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- ------- ------- ------- Net sales $117,864 $111,450 $86,608 $55,948 $49,244 Operating income 16,897 21,160 13,290 7,570 7,874 Net income 11,051 13,678 8,562 4,904 5,029 Net income per share $ .66 $ .81 $ .52 $ .30 $ .33 Weighted average shares outstanding 16,825 16,876 16,424 16,274 15,050 BALANCE SHEET DATA: DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- ------- ------- ------- Working capital $ 54,529 $ 49,645 $38,242 $29,610 $24,495 Total assets 81,935 71,685 52,551 40,469 35,033 Total stockholders' equity 70,938 58,698 43,361 34,272 28,039 See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, certain financial data as a percentage of net sales. YEAR ENDED DECEMBER 31, 1996 1995 1994 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 51.5 49.8 54.0 ----- ----- ----- Gross profit 48.5 50.2 46.0 Operating expenses: Sales and marketing 22.0 20.2 18.4 Research and development 8.8 7.2 8.7 General and administrative 3.3 3.8 3.5 ----- ----- ----- Operating income 14.4 19.0 15.4 Interest income, net 0.8 0.8 0.6 ----- ----- ----- Income before income taxes 15.2 19.8 16.0 Income taxes 5.8 7.5 6.1 ----- ----- ----- Net income 9.4% 12.3% 9.9% ----- ----- ----- ----- ----- ----- 1996 1995 1994 ------ ------ ------ Ethernet sales 61.9% 64.1% 57.0% Token Ring sales 16.6 14.5 22.0 FDDI sales 15.9 17.2 15.0 ATM sales 3.6 2.9 4.5 Other sales 2.0 1.3 1.5 ----- ----- ----- Net sales 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- 1996 1995 1994 ------ ------ ------ Domestic sales 85.6% 88.4% 85.0% Export sales to: Europe 7.9 6.6 10.0 Canada 2.9 3.3 4.3 Asia 2.9 1.1 0.4 Latin America 0.7 0.6 0.3 ----- ----- ----- Net sales 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- 1996 COMPARED WITH 1995 NET SALES Net sales in 1996 increased by 5.8% to $117.9 million from $111.5 million in 1995. The Infinity Intelligent Hub and Switch product line increased to $101.2 million of net sales in 1996 compared to $98.9 million in 1995 but decreased as a percentage of net sales to 85.9% in 1996 from 88.7% in 1995. Sales of the Infinity Intelligent Hub product line are expected to decrease as a percentage of net sales in future periods as the market is migrating to higher performance switch products, such as the Company's InfiniteSwitch product line introduced in September of 1996. Export sales in 1996 increased to $17.1 million, or 14.4% of net sales, compared to $12.9 million , or 11.6% of net sales in 1995. Export sales increased in 1996 as the Company increased its international sales and marketing efforts, especially in Asia. In 1996, 19.4% of net sales were to Electronic Data Systems Corporation ("EDS") compared to 28.3% of net sales in 1995; 13.5% of net sales in 1996 were to various agencies of the U.S. Government (aggregated as one), compared to 6.4% of net sales in 1995; and 12.1% of net sales in 1996 were to AT&T Corp. ("AT&T") compared to 12.0% of net sales in 1995. GROSS PROFIT Gross profit increased to $57.1 million in 1996 compared to $56.0 million in 1995 but decreased as a percentage of net sales to 48.5% in 1996 from 50.2% in 1995. Gross profit as a percentage of net sales was impacted during 1996 by an increase in reserves for slow-moving inventory, product mix and the market transition to higher performance switch products. Gross profit margins in future periods may be affected by several factors such as sales volume, shifts in product mix, fluctuation in manufacturing costs, pricing strategies of the Company and its competitors and fluctuations in sales of integrated third-party products. Gross profit margins are typically lower on sales of integrated third-party products. SALES AND MARKETING Sales and marketing expenses increased to $26.0 million or 22.0% of net sales in 1996 compared to $22.6 million or 20.2% of net sales in 1995. The increase in sales and marketing expense was primarily due to expansion of domestic and international sales and marketing personnel and associated costs. The Company anticipates sales and marketing expenses will continue to increase in amount, but may vary as a percentage of net sales in the future. RESEARCH AND DEVELOPMENT Research and development expenses increased to $10.4 million or 8.8% of net sales in 1996 compared to $8.0 million or 7.2% of net sales in 1995. The Company's research and development costs are expensed in the period incurred. The increase in research and development expenses in 1996 was primarily due to an increase in the number of developmental personnel, additional product development expenses and increased costs related to the development and testing of new switching products. The Company expects to continue to invest in research and development activities in the future in order to broaden its family of switching products. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased in amount to $3.8 million in 1996 compared to $4.2 million in 1995 and declined as a percentage of net sales to 3.3% in 1996 from 3.8% in 1995. As the Company continues to expand its domestic and foreign operations, general and administrative expenses are expected to increase in amount. General and administrative expenses may vary as a percentage of net sales in the future. NET INTEREST INCOME Net interest income remained constant at $0.9 million for both 1996 and 1995. Net interest income may vary in the future based on the Company's cash flow and interest rates. INCOME TAXES The Company's effective tax rate remained unchanged at 38.1% for both 1996 and 1995. See Note 7 of Notes to Consolidated Financial Statements. 1995 COMPARED WITH 1994 NET SALES Net sales in 1995 increased by 28.7% to $111.5 million from $86.6 million in 1994 as the result of an increased new customer base and continued strong sales to existing customers. The Infinity Intelligent Hub product line grew to 88.7% of net sales in 1995 compared to 80.0% of net sales in 1994. Export sales in 1995 were $12.9 million, or 11.6% of net sales, compared to $13.0 million or 15.0% of net sales in 1994. In 1995, 28.3% of net sales were to EDS compared to 19.4% of net sales in 1994; and 12.0% of net sales in 1995 were to AT&T compared to 18.1% of net sales in 1994. A large portion of sales to AT&T in 1995 and 1994 were attributable to a major U.S. Army customer of AT&T. GROSS PROFIT Gross profit increased to $56.0 million in 1995 compared to $39.8 million in 1994 and increased as a percentage of net sales to 50.2% in 1995 from 46.0% in 1994. The increase in gross profit as a percentage of net sales resulted primarily from variations of product mix, economies of scale achieved through higher production volumes and manufacturing efficiencies achieved through product cost reductions. SALES AND MARKETING Sales and marketing expenses increased in amount to $22.6 million or 20.2% of net sales compared to $16.0 million or 18.4% of net sales in 1994. The increase in sales and marketing expenses was related to the expansion of the Company's sales personnel and associated supporting costs. RESEARCH AND DEVELOPMENT Research and development expenses increased to $8.0 million in 1995 compared to $7.5 million in 1994 but decreased as a percentage of net sales to 7.2% in 1995 from 8.7% in 1994. The growth in research and development expenses was primarily due to increased software and hardware engineering expenses relating to new product development. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $4.2 million or 3.8% of net sales in 1995 from $3.0 million or 3.5% of net sales in 1994. The increase in these expenses was due primarily to increased personnel costs, insurance and professional services. NET INTEREST INCOME Net interest income was $0.9 million for 1995 compared to $0.5 million for 1994. Interest income increased as a result of increases in cash, cash equivalents and short-term investment amounts and increased interest rates. INCOME TAXES The Company's effective tax rate remained unchanged at 38.1% for both 1995 and 1994. See Note 7 of Notes to Consolidated Financial Statements. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS TECHNOLOGICAL CHANGES The market for the Company's products is characterized by frequent product introductions, rapidly changing technology and continued evolution of new industry standards. The market for network intelligent hubs and switches requires the Company's products to be compatible and interoperable with products and architectures offered by various vendors, including other networking products, workstation and personal computer architectures and computer and network operating systems. The Company's success will depend to a substantial degree upon its ability to develop and introduce in a timely manner new products and enhancements to its existing products that meet changing customer requirements and evolving industry standards. The development of technologically advanced products is a complex and uncertain process requiring high levels of innovation as well as the accurate anticipation of technological and market trends. There can be no assurance that the Company will be able to identify, develop, manufacture, market and support new or enhanced products successfully in a timely manner. Further, the Company or its competitors may introduce new products or product enhancements that shorten the life cycle of or obsolete the Company's existing product lines which could have a material adverse effect on the Company's business, operating results and financial condition. COMPETITION AND MARKET ACCEPTANCE The market for network intelligent hubs and switches is intensely competitive and subject to frequent product introductions with improved price/performance characteristics. Even if the Company does introduce advanced products which meet evolving customer requirements in a timely manner, there can be no assurance that the new Company products will gain market acceptance. Many networking companies, including Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. ("Cabletron"), Bay Networks, Inc.("Bay Networks") and others, have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than the Company. In addition, many of the Company's large competitors offer customers a broader product line which provides a more comprehensive networking solution than the Company currently offers. Increased competition in the networking industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. PRODUCT TRANSITIONS Once current networking products have been in the market place for a period of time and begin to be replaced by higher performance products (whether of the Company's or a competitor's design), the Company expects the net sales of such networking products to decrease. In order to continue to maintain its then current levels of revenue growth, if any, the Company will therefore be required to design, develop and successfully commercialize higher performance products in a timely manner. For example, the Company believes that the market for shared bandwidth intelligent hubs, sales of which have represented the vast majority of the Company's net sales over the past several years, will decrease as switching products with enhanced price/performance characteristics gain market acceptance. Although the Company has introduced network switching products which it believes offer competitive price/performance characteristics and is committed to future product development efforts, there can be no assurance that the Company will be able to introduce new products quickly enough to avoid adverse revenue transition patterns during current or future product transitions. MANUFACTURING AND AVAILABILITY OF COMPONENTS The Company's manufacturing operations consist primarily of final assembly, testing and quality control of subassemblies and finished units. Materials used by the Company in its manufacturing processes include semiconductors such as microprocessors, memory chips and application specific integrated circuits, printed circuit boards, power supplies and enclosures. All of the materials used in the Company's products are purchased under contracts and purchase orders with third parties. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain components are available from one or a limited number of suppliers. The lead times for delivery of components vary significantly and exceed ten weeks for certain components. If the Company should fail to forecast its requirements accurately for components, it may experience excess inventory or shortages of certain components which could have an adverse effect on the Company's business and operating results. Further, any interruption in the supply of any of these components, or the inability of the Company to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse effect on the Company's business and operating results. DEPENDENCE ON KEY CUSTOMERS Although there is a large number of end-users of the Company's products, a relatively small number of customers have accounted for a significant portion of the Company's revenue. U.S. Government agencies and strategic network integrators, such as EDS and AT&T, which purchase the Company's products for internal use and offer the Company's products for resale, are expected to continue to account for a substantial portion of the Company's net revenue. The Company continuously faces competition from Cisco, Cabletron, Bay Networks and others for U.S. Government networking projects and corporate networking installations. Any reduction or delay in sales of the Company's products to these customers could have a material adverse effect on the Company's operating results. INTERNATIONAL OPERATIONS Export sales accounted for approximately 14.4% of the Company's revenue for the year ended December 31, 1996. The Company intends to expand its international presence and expects that export sales will represent a significant portion of its business in the future. While the Company's current products are designed to meet relevant regulatory requirements of the foreign markets in which they are sold, any inability to obtain any required foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's operating results. Additionally, the Company's international operations may be affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand, as well as by risks such as increases in duty rates, difficulties in distribution and other constraints upon international trade. INTELLECTUAL PROPERTY The Company's success and its ability to compete is dependent, in part, upon its proprietary technology. The Company does not hold any issued patents and currently relies on a combination of contractual rights, trade secrets and copyright laws to establish and protect its proprietary rights in its products. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company is also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights of others. The Company could incur substantial costs in defending itself and its customers against any such claim regardless of the merits of such claims. In the event of a successful claim of infringement, the Company may be required to obtain one or more licenses from third parties. There can be no assurance that the Company could obtain the necessary licenses on reasonable terms. GENERAL Sales of networking products fluctuate, from time to time, based on numerous factors, including customers' capital spending levels and general economic conditions. While certain industry analysts believe that there is a significant market for network intelligent hubs and switches, there can be no assurance as to the rate or extent of the growth of such market or the potential adoption of alternative technologies. Future declines in networking product sales as a result of general economic conditions, adoption of alternative technologies or any other reason could have a material adverse effect on the Company's business, operating results and financial condition. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue and earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. Also, the Company participates in a highly dynamic industry which often results in volatility of the Company's common stock price. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical information, the matters discussed in this annual report are forward-looking statements that involve risks and uncertainties, including, but not limited to, economic conditions, trends in the networking market, product acceptance and demand, competitive products and pricing, new product development, availability of competitive components and other risks indicated in this filing and prior filings of the Company with the Securities and Exchange Commission. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity at December 31, 1996 were $6.6 million of cash and cash equivalents, $13.8 million of short-term investments, $5.0 million of highly liquid investments with a stated maturity beyond one year and an available line of credit. As of December 31, 1996, working capital was $54.5 million compared to $49.6 million as of December 31, 1995. Cash flows provided by operations in 1996 were $3.9 million, primarily due to net income partially offset by increases in accounts receivable and inventory balances and decreases in accounts payable. The increase in accounts receivable reflects the increase in net sales to $26.0 million during the quarter ended December 31, 1996 compared to $24.5 million during the quarter ended December 31, 1995. The increase in inventory reflects the continued support of the Company's Infinity Intelligent Hub product line and the increase in inventory of its switching products. Future fluctuations in accounts receivable and inventory balances will be dependent upon several factors, including, but not limited to, quarterly sales, ability to collect accounts receivable timely, the Company's strategy as to building inventory in advance of receiving orders from customers, and the accuracy of the Company's forecasts of product demand and component requirements. Cash used in investing activities during 1996 consisted of purchases of property and equipment of $4.9 million and net purchases of investments of $3.5 million. Cash provided by financing activities in 1996 was $0.6 million which consisted of the issuance of common stock relating to the exercise of certain warrants and employee stock options. During 1996 the Company funded its operations solely through cash flow from operations. The Company's revolving bank credit facility provides an unsecured line of credit of up to $5.0 million, subject to certain limitations and conditions. At December 31, 1996, the Company had no borrowings outstanding under its bank credit facility, and had $5.0 million available for allowable borrowings at an applicable interest rate of 8.25% per annum. See Note 4 of Notes to Consolidated Financial Statements. The Company believes that its cash, cash equivalents and investment balances, cash expected to be generated from operations and the availability of borrowings under its bank credit facility will provide sufficient cash resources to finance its operations and currently projected capital expenditures through 1997. REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS, OPTICAL DATA SYSTEMS, INC. We have audited the accompanying consolidated balance sheets of Optical Data Systems, Inc., and subsidiaries (the Company) as of December 31, 1996, and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 from 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 Optical Data Systems, Inc., and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas January 21, 1997 OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS) DECEMBER 31, ------------------- 1996 1995 ------- ------- ASSETS Current Assets: Cash and cash equivalents $ 6,565 $10,397 Short-term investments 13,790 15,328 Accounts receivable, net of allowance for doubtful accounts and returns of $822 in 1996 and $617 in 1995 16,573 15,238 Income taxes receivable 85 - Inventories, net (Note 3) 25,573 19,374 Deferred tax assets (Note 7) 1,499 951 Other assets 840 837 ------- ------- Total current assets 64,925 62,125 Property and Equipment: Land 600 600 Building and building improvements 2,471 1,796 Machinery and equipment 17,571 13,544 Furniture and fixtures 897 806 Leasehold improvements 936 830 ------- ------- 22,475 17,576 Accumulated depreciation (10,736) ( 8,118) ------- ------- 11,739 9,458 Long-term investments 5,050 - Other assets 221 102 ------- ------- TOTAL ASSETS $81,935 $71,685 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses (Note 3) $10,396 $11,867 Income taxes payable - 612 ------- ------- Total current liabilities 10,396 12,479 Deferred tax liabilities (Note 7) 601 508 Commitments (Note 5) - - Stockholders' Equity (Note 8): Preferred stock, $.01 par value: Authorized shares - 5,000 No shares issued and outstanding - - Common stock, $.01 par value: Authorized shares - 80,000 Issued and outstanding shares - 16,328 in 1996 and 16,150 in 1995 163 162 Additional paid-in capital 18,908 17,729 Retained earnings 51,969 40,918 Foreign currency translation adjustments (102) (111) ------- ------- Total stockholders' equity 70,938 58,698 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $81,935 $71,685 ------- ------- ------- ------- See accompanying notes. OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- ------- Net sales $117,864 $111,450 $86,608 Cost of sales 60,737 55,499 46,804 -------- -------- ------- Gross profit 57,127 55,951 39,804 Operating expenses: Sales and marketing 25,969 22,555 15,965 Research and development 10,417 8,021 7,503 General and administrative 3,844 4,215 3,046 -------- -------- ------- 40,230 34,791 26,514 -------- -------- ------- Operating income 16,897 21,160 13,290 Interest income, net 944 938 546 -------- -------- ------- Income before provision for income taxes 17,841 22,098 13,836 Provision for income taxes 6,790 8,420 5,274 -------- -------- ------- Net income $ 11,051 $ 13,678 $ 8,562 -------- -------- ------- -------- -------- ------- Net income per share $ 0.66 $ 0.81 $ 0.52 -------- -------- ------- -------- -------- ------- Weighted average shares outstanding 16,825 16,876 16,424 -------- -------- ------- -------- -------- ------- See accompanying notes. OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) Foreign Additional Currency Number of Common Paid Retained Translation Stockholders' Shares Stock Capital Earnings Adjustment Equity ------ ----- ------- -------- ---------- ------ Balance at December 31, 1993 15,668 $157 $15,473 $18,678 $ (35) $34,273 Foreign currency translation adjustment - - - - (58) (58) Exercise of employee stock options 172 1 314 - - 315 Tax benefit derived from the exercise of employee stock options - - 269 - - 269 Net income for 1994 - - - 8,562 - 8,562 ------ ---- ------- ------- ------ ------- Balance at December 31, 1994 15,840 158 16,056 27,240 (93) 43,361 Foreign currency translation adjustment - - - - (18) (18) Exercise of stock warrants 52 1 234 - - 235 Exercise of employee stock options 258 3 615 - - 618 Tax benefit derived from the exercise of employee stock options - - 824 - - 824 Net income for 1995 - - - 13,678 - 13,678 ------ ---- ------- ------- ------ ------- Balance at December 31, 1995 16,150 162 17,729 40,918 (111) 58,698 FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - - - 9 9 EXERCISE OF STOCK WARRANTS 5 - 22 - - 22 EXERCISE OF EMPLOYEE STOCK OPTIONS 173 1 614 - - 615 TAX BENEFIT DERIVED FROM THE EXERCISE OF EMPLOYEE STOCK OPTIONS - - 543 - - 543 NET INCOME FOR 1996 - - - 11,051 - 11,051 ------ ---- ------- ------- ------ ------- BALANCE AT DECEMBER 31, 1996 16,328 $163 $18,908 $51,969 $(102) $70,938 ------ ---- ------- ------- ------ ------- ------ ---- ------- ------- ------ -------
See accompanying notes. OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- ------- ------ OPERATING ACTIVITIES: Net income $11,051 $13,678 $8,562 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,618 2,083 1,752 Provision for deferred income taxes (455) (386) 4 Provision for doubtful accounts and returns 227 382 90 Changes in operating assets and liabilities: Accounts receivable (1,300) (3,479) (411) Other receivables (262) 48 52 Inventories (6,199) (5,211) (2,394) Other assets (122) (316) (106) Accounts payable and accrued expenses (1,471) 3,152 3,266 Income taxes payable (154) 1,328 (22) ------- ------- ------- Net cash provided by operating activities 3,933 11,279 10,793 INVESTING ACTIVITIES: Purchases of short-term investments (23,707) (21,473) (43,280) Maturities of short-term investments 25,245 18,130 38,388 Sale of short-term investments - 1,498 - Purchases of long-term investments (5,050) - - Purchases of property and equipment (4,899) (6,123) (2,224) ------- ------- ------- Net cash used in investing activities (8,411) (7,968) (7,116) FINANCING ACTIVITIES: Exercise of stock purchase warrants 22 235 - Exercise of employee stock options 615 618 315 ------- ------- ------- Net cash provided by financing activities 637 853 315 ------- ------- ------- Effect of foreign currency translation adjustment on cash and cash equivalents 9 (18) (58) Net (decrease) increase in cash and cash equivalents (3,832) 4,146 3,934 Cash and cash equivalents at beginning of period 10,397 6,251 2,317 ------- ------- ------- Cash and cash equivalents at end of period $ 6,565 $10,397 $ 6,251 ------- ------- ------- ------- ------- -------
See accompanying notes. OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Optical Data Systems, Inc. and subsidiaries (the Company) designs, develops, manufactures, markets and supports computer networking and internetworking products for application in Local Area Networks (LANs) in compliance with the four industry standards currently applicable in the LAN industry: Ethernet, Asynchronous Transfer Mode (ATM), Fiber Distributed Data Interface (FDDI) and Token Ring. These products allow customers to integrate efficiently a wide variety of computer equipment in numerous flexible configurations into a single, enterprise-wide computer network. Sales of the Company's products are primarily made directly to major corporations and government agencies for networking their internal computer systems and to a lesser extent through reseller channels. On April 3, 1995, the Board of Directors declared a two-for-one common stock split, to be effected in the form of a distribution of one additional share of common stock paid on May 5, 1995 to the holders of record on April 19, 1995. All share and per share data have been retroactively restated to give effect to this stock split. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Optical Data Systems, Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers cash and all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. SHORT-TERM INVESTMENTS The Company's short-term investments consist of U.S. government obligations and money market funds. Short-term investments are classified as available for sale. These investments are valued at market value, which approximates amortized cost, and have maximum maturities of one year. The difference between fair value and amortized cost is not material. RISK CONCENTRATION Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, investments and accounts receivable. The Company places its investments in U.S. government obligations, corporate obligations and money market funds. Substantially all of the Company's cash, cash equivalents and investments are maintained with one major financial institution. The Company sells its products to customers in diversified industries worldwide, primarily in North America, Europe, Asia and Latin America. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management expectations. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain components are available from one or a limited number of suppliers. INVENTORIES Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. Management estimates the allowance required to state inventory at the lower of cost or market. There is a risk that the Company will forecast demand for its products and market conditions incorrectly and produce excess inventories. Therefore, there can be no assurance that the Company will not produce excess inventory and incur inventory lower of cost or market charges in the future. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from 5 to 20 years. Leasehold improvements are amortized over the shorter of their useful lives or the terms of the leases. Repair and maintenance costs are expensed as incurred. LONG-TERM INVESTMENTS Long-term investments consist of U.S. government obligations and corporate obligations with maturities which range up to two years. Long-term investments are classified as available for sale. These investments are valued at market value, which approximates amortized cost. The difference between fair value and amortized cost is not material. FOREIGN CURRENCY TRANSLATION The Company's international subsidiaries use their local currencies as their functional currencies. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date, and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of stockholders' equity. ACCOUNTING FOR STOCK OPTIONS The Company has elected to continue to follow APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, if the exercise price of an employee's stock option equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The FASB has issued Statement of Financial Accounting Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which provides for either recognition or disclosure of a hypothetical charge for stock options. The Company did not recognize any charge in its income statement, but has provided the required disclosure in Note 8. NET INCOME PER SHARE Net income per common share is computed using the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during each period. The dilutive effect of stock options and warrants, treated as common stock equivalents, is calculated using the treasury stock method. REVENUE RECOGNITION The Company generally recognizes product revenue upon shipment of product. The Company accrues for estimated warranty costs, sales returns and other allowances at the time of shipment. Revenue from maintenance contracts is deferred and recognized over the contractual period the services are performed. To date, warranty costs and sales returns have not been material. There is a risk that technical issues on new products could result in unexpected warranty costs and returns. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES The Company accounts for income taxes pursuant to Statement of Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES, which uses the liability method to calculate deferred income taxes. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. RECLASSIFICATION Certain amounts in prior year financial statements have been reclassified to conform with current year presentation. 3. BALANCE SHEET DETAIL (IN THOUSANDS) INVENTORIES DECEMBER 31, ----------------- 1996 1995 ------- ------- Raw materials $ 6,138 $ 4,079 Work in process 2,308 2,724 Finished products 13,530 10,769 Demonstration systems 3,597 1,802 ------- ------- $25,573 $19,374 ------- ------- ------- ------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1996 1995 ------- ------- Trade accounts payable $ 5,440 $ 5,317 Accrued sales commissions 681 934 Accrued incentive bonus - 1,178 Accrued vacation 538 468 Accrued property taxes 631 434 Deferred maintenance revenue 1,714 1,397 Accrued warranty expense 475 600 Other (individually less than 5% of current liabilities) 917 1,539 ------- ------- $10,396 $11,867 ------- ------- ------- ------- 4. LINE OF CREDIT The Company has a line of credit agreement with a bank that allows the Company to borrow amounts up to $5.0 million. Borrowing on this line is unsecured. The Company is also restricted under this agreement as to the payment of dividends. Borrowings accrue interest at prime (8.25% at December 31, 1996) with interest due monthly and principal due April 14, 1997. A fee of 1/4% is paid quarterly on the average unused portion of the line of credit. At December 31, 1996, the Company had not borrowed against this line and had $5.0 million available for additional borrowings allowable under this agreement. The Company made no interest payments during 1996, 1995 or 1994. 5. LEASES The Company leases office space for its corporate headquarters in Richardson, Texas under an operating lease, the base term of which expires in February 2005, with two seven-year options to extend the term of the lease, subject to compliance with certain conditions. The Company also leases a separate warehouse facility adjacent to its headquarters under a lease which expires in June 1997. In addition, the Company leases office space for its U.S. and international sales offices. Future minimum lease payments consisted of the following at December 31, 1996 (in thousands): 1997 $1,316 1998 845 1999 841 2000 805 2001 805 Thereafter 2,503 ------ $7,115 ------ ------ Total rental expense of $1.9 million, $1.3 million and $1.2 million was charged to operations during 1996, 1995, and 1994, respectively. 6. EMPLOYEE BENEFIT PLAN The Company adopted a defined contribution savings plan to provide retirement and incidental benefits for its employees on April 1, 1993, known as the ODS 401(k) Savings Plan (the Plan). The Plan covers substantially all employees who meet minimum age and service requirements. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees. Employees may contribute from 1% to 15% of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service. The Company matches employee contributions at the rate of $.25 per each $1.00 of contribution on the first 4% of deferred compensation. Company matching contributions to the Plan were approximately $110,000, $83,000, and $68,000 in 1996, 1995 and 1994, respectively. 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and December 31, 1995 are as follows (in thousands): 1996 1995 ---- ---- Deferred tax assets: Foreign subsidiaries net operating loss carryforward $560 $588 Vacation accrual 202 176 Allowance for doubtful accounts and returns 309 232 Warranty accrual 178 226 Inventory allowance 745 238 Other 65 79 ------ ------ Deferred tax assets 2,059 1,539 Valuation allowance for deferred tax assets (560) (588) ------ ------ Deferred tax assets, net of allowance 1,499 951 ------ ------ Deferred tax liabilities: Tax over book depreciation 535 423 Other 66 85 ------ ------ Total deferred tax liabilities 601 508 ------ ------ Net deferred tax assets $898 $443 ------ ------ ------ ------ Significant components of the provision for income taxes for the years ended 1996, 1995 and 1994 are as follows (in thousands): YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 Income tax provision ---- ---- ---- Federal: Current $6,437 $7,798 $4,610 Deferred (403) (336) 3 State: Current 766 988 660 Deferred (52) (50) 1 Foreign: Current 42 20 - ------ ------ ------ $6,790 $8,420 $5,274 ------ ------ ------ ------ ------ ------ The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended 1996, 1995 and 1994 are as follows (in thousands): YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ---- ---- ---- Reconciliation of income tax provision to statutory rate: Income tax expense at statutory rate $6,244 $7,734 $4,843 Benefited losses of foreign subsidiaries - - (83) State taxes, less federal benefit 466 620 429 Other 80 66 85 ------ ------ ------ $6,790 $8,420 $5,274 ------ ------ ------ ------ ------ ------ Net operating loss carryforwards of the foreign subsidiaries of $1.1 million at December 31, 1996 is available indefinitely for offset only against taxable income generated by the subsidiary. The Company made income tax payments of $7.4 million, $7.6 million and $5.3 million during 1996, 1995 and 1994, respectively. 8. STOCK OPTIONS AND WARRANTS At December 31, 1996, the Company has four stock-based compensation plans, which are described below . The Company established an Incentive Stock Option Plan in 1983, which provides for the issuance of options to key employees of the Company to purchase common stock of the Company. The 1983 Incentive Stock Option Plan was terminated on November 10, 1993. In 1987, an additional Incentive Stock Option Plan was established with similar provisions to allow for further issuance of options. Each plan provides for the issuance of up to 1.2 million shares of common stock upon exercise of options granted pursuant to the plans. In 1995, the Company adopted the 1995 Stock Option Plan (the 1995 Plan) which provides for the issuance of up to 1.6 million shares of common stock upon exercise of options granted pursuant to the 1995 Plan. The 1995 Plan provides for the issuance of both non-qualified and incentive stock options to employees, officers, and employee-directors of the Company. In 1995, the Company adopted the 1995 Non-employee Director Stock Option Plan (the 1995 Non-employee Director Plan) which provides for the issuance of up to 160,000 shares of common stock upon exercise of options granted pursuant to the 1995 Non-employee Director Plan. The Plan provides for the issuance of non-qualified stock options to non-employee directors. In 1995 and 1994, options to purchase 60,000 shares, and 12,000 shares, respectively, were granted to directors. The terms and exercise prices of these options are similar to the incentive stock options. Common shares reserved for future issuance under all of the stock option plans described above amounted to 1.6 million shares at December 31, 1996. The Compensation Committee of the Board of Directors determines the term of each option, option exercise price within limits set forth in the plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over five years from grant date). However, the exercise price of any incentive stock option may not be less than the fair market value of the shares on the date granted (or less than 110% of the fair market value in the case of optionees holding more than 10% of the voting stock of the Company), and the term cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of the Company's voting stock). A summary of the Company's stock option activity and related information for the years ended December 31, 1996, 1995 and 1994, is as follows: 1996 1995 1994 ------------------------ ------------------------ ------------------------ WEIGHTED Weighted Weighted NUMBER OF AVERAGE Number of Average Number of Average OPTIONS EXERCISE Options Exercise Options Exercise (IN THOUSANDS) PRICE (in Thousands) Price (in Thousands) Price -------------- -------- -------------- -------- -------------- -------- Outstanding at beginning of year 1,086 $9.27 1,083 $4.33 1,063 $2.95 Granted 431 22.63 302 21.47 248 8.34 Exercised (173) 3.53 (258) 2.40 (171) 1.83 Cancelled (144) 17.80 (41) 11.02 (57) 3.69 ------ ------ ----- Outstanding at end of year 1,200 13.88 1,086 9.27 1,083 4.33 ------ ------ ----- ------ ------ ----- Options exercisable at end of year 481 512 417
Information related to options outstanding at December 31, 1996, is summarized below: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ----------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE EXERCISE AT 12/31/96 REMAINING EXERCISE AT 12/31/96 EXERCISE PRICES (IN THOUSANDS) CONTRACTUAL LIFE PRICE (IN THOUSANDS) PRICE -------- -------------- ---------------- -------- -------------- -------- $2.50 - $5.63 402 3.25 YEARS $ 3.41 357 $ 3.22 6.07 - 21.00 478 8.25 YEARS 15.96 111 12.68 22.55 - 36.25 320 8.00 YEARS 23.95 13 25.54 ----- --- 1,200 6.50 YEARS 13.88 481 6.00 ----- --- ----- ---
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, (SFAS 123) requires the disclosure of pro forma net income and earnings per share information computed as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method set forth in SFAS 123. The fair value for these options was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.1% and 5.7%; a dividend yield of 0%; and a volatility factor of .62. In addition, the fair value of these options was estimated based on an expected life of one year from the vesting date using the multiple option method. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In addition, because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, the pro forma information does not reflect the pro forma effect of all previous stock option grants of the Company, and thus the pro forma information is not necessarily indicative of future amounts until SFAS 123 is applied to all outstanding stock options. Information relating to the fair value of option grants made during 1996 and 1995 is as follows: 1996 1995 ------ ------ Options granted with exercise price equal to fair value of common stock: Number of options (in thousands) 393 266 Weighted average exercise price per share $22.35 $21.36 Weighted average fair value of stock option grants per Black-Scholes option valuation model $11.32 $10.95 Options granted with exercise price greater than fair value of common stock: Number of options (in thousands) 38 36 Weighted average exercise price per share $25.57 $22.55 Weighted average fair value of stock option grants per Black-Scholes option valuation model $10.95 $9.92 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. For purposes of pro forma disclosure, the Company assumed that it would not receive a tax deduction or tax benefit for financial reporting purposes related to incentive stock options. In management's opinion, the pro forma disclosure is not necessarily indicative of the net financial effect assuming the Company was required to expense the fair value of employee stock options because an incentive stock option often generates a tax deduction for the Company because the stock option holder does not comply with the holding period requirements under applicable tax laws. The Company's pro forma information follows (in thousands, except earnings per share information): 1996 1995 ------ ------- Pro forma net income $8,946 $12,837 Pro forma earnings per share $ 0.54 $ 0.77 In connection with the Company's private placement of common stock in 1983, the Company issued common stock purchase warrants to purchase 140,000 shares of common stock at an exercise price of $4.50 per share, subject to adjustments under certain circumstances, which are exercisable at any time prior to May 21, 1997. The Company, subject to certain limitations, has granted the holders thereof unlimited incidental registration rights to include their respective shares of common stock in future registration statements. During 1996 and 1995, a total of 5,000 shares and 52,000 shares, respectively, of common stock were issued to holders of the common stock warrants upon exercise. At December 31, 1996, 83,000 common stock purchase warrants remain outstanding. 9. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION The Company's operations are concentrated in one segment - the design, development and manufacture of local area network products. Sales to customers exceeding 10% of total sales were as follows: 1996 - $22.9 million to EDS, $15.9 million to various agencies of the U.S. Government (aggregated as one) and $14.2 million to AT&T; 1995 - $31.6 million to EDS and $13.4 million to AT&T; 1994 - $16.8 million to EDS and $15.7 million to AT&T. A large portion of sales to AT&T in 1995 and 1994 were attributable to a major U.S. Army customer of AT&T. Export sales, primarily to Europe, Asia, Latin America and Canada, were $17.1 million in 1996, $12.9 million in 1995, and $13.0 million in 1994. SUPPLEMENTAL FINANCIAL DATA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUMMARIZED QUARTERLY DATA (UNAUDITED) (In thousands, except per share amounts) 1996 ------------------------------------------------ Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------ REVENUE $29,505 $31,007 $31,303 $26,049 $117,864 GROSS PROFIT 14,366 15,366 14,893 12,502 57,127 NET INCOME 3,494 3,637 2,976 944 11,051 NET INCOME PER SHARE 0.21 0.22 0.18 0.06 0.66 1995 ------------------------------------------------ Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------ Revenue $24,499 $30,873 $31,597 $24,481 $111,450 Gross profit 12,491 14,638 16,132 12,690 55,951 Net income 2,982 3,849 4,243 2,604 13,678 Net income per share 0.18 0.23 0.25 0.15 0.81 STOCK MARKET INFORMATION The Company's common stock is traded on The Nasdaq Stock Market (National Market System) under the symbol ODSI. As of March 3, 1997, there were approximately 225 holders of record of the common stock. The following table sets forth, for the periods indicated, the high and low sales prices for the common stock, as reported by The Nasdaq Stock Market, after giving retroactive effect to the 2-for-1 stock split in 1995. 1996 1995 1994 ----------------- ----------------- ----------------- HIGH LOW High Low High Low ------- ------- ------- ------- ------- ------- First Quarter $28 3/4 $17 1/4 $18 1/4 $13 $ 8 1/2 $5 3/8 Second Quarter 27 3/8 19 1/4 26 3/4 17 5/8 8 5/8 6 5/16 Third Quarter 23 1/4 16 7/8 42 1/4 25 9 5/8 6 3/8 Fourth Quarter 16 5/8 11 3/8 37 1/8 20 1/8 14 3/4 8 1/2 The Company has not paid any cash dividends on its common stock and currently intends to continue its policy of retaining earnings for the Company's operations and planned expansion of its business. In addition, the Company's bank credit facility restricts the payment of dividends. EX-21 4 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following table lists the subsidiaries of the Registrant as of December 31, 1996, the state or other jurisdiction of incorporation and the names under which such subsidiaries do business. The Registrant owns all of the outstanding voting securities of each subsidiary. Name Under Jurisdiction of Which Subsidiary Name of Subsidiary Organization Is Doing Business - ------------------ --------------- ----------------- Optical Data Systems, Inc. Nevada Optical Data Systems, Inc. ODS, Inc. Nevada ODS, Inc. Optical Data Systems-Texas, Inc Texas Optical Data Systems-Texas, Inc. Optical Data Systems GmbH Germany Optical Data Systems GmbH Optical Data Systems Ltd. United Kingdom Optical Data Systems Ltd. ODS Ltd. United Kingdom ODS Ltd. Optical Data Systems SARL France Optical Data Systems SARL Optical Data Systems, Ltda. Brazil Optical Data Systems, Ltda. Optical Data Systems (Barbados) Ltd. Barbados Optical Data Systems (Barbados) Ltd.
EX-23 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Optical Data Systems, Inc. and also into the Registration Statement (Form S- 8, No. 33-58570) pertaining to the 1983 Incentive Stock Option Plan of Optical Data Systems, Inc. and the 1987 Incentive Stock Option Plan of Optical Data Systems, Inc., the Registration Statement (Form S-8, No. 33-34476) pertaining to the 1995 Stock Option Plan of Optical Data Systems, Inc., the Registration Statement (Form S-8, No. 33-34484) pertaining to the 1995 Non-employee Director Stock Option Plan of Optical Data Systems, Inc., and the Registration Statement (Form S-8, No. 33-80898) pertaining to the ODS 401(k) Savings Plan of Optical Data Systems, Inc. of our report dated January 21, 1997, included in the 1996 Annual Report to Stockholders of Optical Data Systems, Inc. Our audits also included the financial statement schedule of Optical Data Systems, Inc. listed in Item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Dallas, Texas March 13, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES 18 AND 19 OF THE COMPANY'S ANNUAL REPORT FOR THE YEAR OF 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 6,565 13,790 17,395 822 25,573 64,925 22,475 10,736 81,935 10,396 0 0 0 163 70,775 81,935 117,864 117,864 60,737 60,737 40,230 0 0 17,841 6,790 11,051 0 0 0 11,051 .66 .66
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