-----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, NQDWKoxy2aLTTryGxy6glq7pyE+uwefMlZ48WKLQxKBd/fHbgcNRCANIbTsKSd5y 1wKvi7pgO9GFX+eyJ2aX+Q== 0000912057-96-026346.txt : 19961118 0000912057-96-026346.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026346 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20191 FILM NUMBER: 96663919 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-Q 1 FORM 10-Q - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) (972) 234-6400 (Registrant's telephone number, including area code) NOT APPLICABLE Former name, former address and former fiscal year, if changed since last report * * * * * * 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 --- --- * * * * * * The number of shares outstanding of the Registrant's Common Stock, $.01 par value, on October 31, 1996 was 16,324,497. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ OPTICAL DATA SYSTEMS, INC. INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements ---- Condensed Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Income for the three months ended September 30, 1996 and September 30, 1995 . . . . . . . 4 Condensed Consolidated Statements of Income for the nine months ended September 30, 1996 and September 30, 1995 . . . . . . . 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and September 30, 1995. . . . 6 Notes to Condensed Consolidated Financial Statements . . . . . . . 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. . . . . . . . . . . . . . 8-14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 15 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . 16 -2- OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts) (Unaudited) Sept. 30, Dec. 31, 1996 1995 --------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 3,567 $ 10,397 Short term investments 14,504 15,328 Accounts receivable (net) 22,157 15,238 Income taxes receivable 205 - Inventories 26,685 19,374 Deferred tax assets 1,335 951 Other assets 830 837 ------- ------- Total current assets 69,283 62,125 Property and equipment (net) 11,507 9,458 Other assets 183 102 ------- ------- TOTAL ASSETS $80,973 $71,685 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $10,488 $11,867 Income taxes payable - 612 ------- ------- Total current liabilities 10,488 12,479 Deferred tax liabilities 530 508 Stockholders' Equity: 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 - 16,314 in 1996 and 16,150 in 1995 163 162 Additional paid-in capital 18,869 17,729 Foreign currency translation adjustments (102) (111) Retained earnings 51,025 40,918 ------- ------- Total stockholders' equity 69,955 58,698 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,973 $71,685 ------- ------- ------- ------- See accompanying notes. -3- OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended ------------------------ Sept. 30, Sept. 30, 1996 1995 --------- --------- Net sales $31,303 $31,597 Cost of sales 16,410 15,465 ------- ------- Gross profit 14,893 16,132 Operating expenses: Sales and marketing 6,415 6,226 Research and development 2,989 2,043 General and administrative 895 1,198 ------- ------- Operating income 4,594 6,665 Interest income (net) 205 241 ------- ------- Income before income taxes 4,799 6,906 Income taxes 1,823 2,662 ------- ------- Net income $ 2,976 $ 4,244 ------- ------- ------- ------- Net income per share $ .18 $ .25 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,816 17,018 ------- ------- ------- ------- See accompanying notes. -4- OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Nine Months Ended ------------------------ Sept. 30, Sept. 30, 1996 1995 --------- --------- Net sales $91,815 $86,969 Cost of sales 47,190 43,708 ------- ------- Gross profit 44,625 43,261 Operating expenses: Sales and marketing 18,739 16,547 Research and development 7,598 6,198 General and administrative 2,654 3,218 ------- ------- Operating income 15,634 17,298 Interest income (net) 667 680 ------- ------- Income before income taxes 16,301 17,978 Income taxes 6,194 6,904 ------- ------- Net income $10,107 $11,074 ------- ------- ------- ------- Net income per share $ .60 $ .66 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,826 16,869 ------- ------- ------- ------- See accompanying notes. -5- OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended ----------------------- Sept. 30, Sept. 30, 1996 1995 --------- --------- Operating Activities: Net income $ 10,107 $ 11,074 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,821 1,439 Deferred income taxes (362) (1,018) Changes in operating assets and liabilities: Accounts receivable (6,919) (4,063) Inventories (7,311) (2,984) Other current assets 7 60 Other assets (81) (7) Accounts payable and accrued expenses (1,379) 226 Income taxes payable (276) 1,774 -------- ------- Net cash (used) provided by operating activities (4,393) 6,501 -------- -------- Investing Activities: Purchases of short-term investments (13,776) (16,817) Sale of short-term investments - 1,499 Maturities of short-term investments 14,600 13,630 Purchases of property and equipment (3,870) (2,885) -------- -------- Net cash used in investing activities (3,046) (4,573) -------- -------- Financing Activities: Exercise of employee stock options 600 828 -------- -------- Net cash provided by financing activities 600 828 -------- -------- Effect of foreign currency translation adjustment on cash and cash equivalents 9 (13) -------- -------- Net increase (decrease) in cash and cash equivalents (6,830) 2,743 Cash and cash equivalents at beginning of period 10,397 6,251 -------- -------- Cash and cash equivalents at end of period $ 3,567 $ 8,994 -------- -------- -------- -------- Supplemental disclosure of income taxes paid $ 6,815 $ 6,131 -------- -------- -------- -------- Supplemental schedule of non cash activities: Tax benefit of stock options exercised and sold $ 541 $ 860 -------- -------- -------- -------- See accompanying notes. -6- OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the three and nine month periods ending September 30, 1996 are not necessarily indicative of the results which may be achieved for the full fiscal year or for any future period. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's annual report on Form 10-K for the year ended December 31, 1995. Note B - Inventories (in thousands) Inventories consist of: Sept. 30, Dec. 31, 1996 1995 --------- -------- Raw materials $ 4,971 $ 4,080 Work in process 3,167 2,724 Finished products 18,547 12,570 ------- ------- $26,685 $19,374 ------- ------- ------- ------- Note C - Accounts Payable and Accrued Expenses (in thousands) Included in accounts payable and accrued expenses are the following: Sept. 30, Dec. 31, 1996 1995 --------- -------- Trade accounts payable $ 5,413 $ 5,317 Accrued sales commissions 710 934 Accrued incentive bonus - 1,178 Accrued warranty expense 525 600 Accrued vacation expense 602 468 Deferred maintenance revenue 1,389 1,397 Other (individually less than 5% of current liabilities) 1,849 1,973 ------- ------- $10,488 $11,867 ------- ------- ------- ------- -7- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth items from the Registrant's condensed consolidated statements of income as percentages of net sales: Three Months Ended Nine Months Ended ---------------------- ---------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1996 1995 1996 1995 --------- --------- --------- --------- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 52.4 48.9 51.4 50.3 ----- ----- ----- ----- Gross profit 47.6 51.1 48.6 49.7 Sales and marketing expenses 20.5 19.7 20.4 19.0 Research and development expenses 9.5 6.5 8.3 7.1 General and administrative expenses 2.9 3.8 2.9 3.7 ----- ----- ----- ----- Operating income 14.7 21.1 17.0 19.9 Interest income 0.6 0.7 0.7 0.8 ----- ----- ----- ----- Income before taxes 15.3 21.8 17.7 20.7 Income taxes 5.8 8.4 6.7 8.0 ----- ----- ----- ----- Net income 9.5% 13.4% 11.0% 12.7% ----- ----- ----- ----- ----- ----- ----- ----- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS THIRD QUARTER OF 1996 COMPARED WITH THIRD QUARTER OF 1995 NET SALES. Net sales for the third quarter ended September 30, 1996 decreased slightly to $31.3 million compared to $31.6 million for the third quarter ended September 30, 1995. Ethernet sales were $19.9 million or 63.6% of net sales for the third quarter of 1996 compared to $19.8 million or 62.7% of net sales for the third quarter of 1995. Token Ring sales were $4.2 million or 13.5% of net sales for the third quarter of 1996 compared to $5.3 million or 16.8% of net sales for the third quarter of 1995. FDDI sales were $5.1 million or 16.3% of net sales for the third quarter of 1996 compared to $5.3 million or 16.9% of net sales for the third quarter of 1995. ATM sales for the third quarter of 1996 were $1.4 million or 4.3% of net sales compared to $0.8 million or 2.6% of net sales for the third quarter of 1995. Sales of other data communications products and services were $0.7 million or 2.3% of net sales for the third quarter of 1996 compared to $0.3 million or 1.0% of net sales for the comparable period in 1995. International sales increased to $4.5 million or 14.4% of net sales for the third quarter of 1996 from $3.1 million or 9.7% of net sales for the third quarter of 1995. -8- During the third quarter of 1996, 17.3% of net sales were to AT&T Corp.("AT&T")compared to 6.3% of net sales in the third quarter of 1995. Sales to Electronic Data Systems Corporation("EDS") represented 10.5% of net sales in the third quarter of 1996 compared to 28.5% of net sales in the third quarter of 1995. Direct net sales to various agencies of the U.S. Government in the aggregate amounted to 20.2% of net sales for the third quarter 1996 compared to 9.2% of net sales for the third quarter of 1995. In addition, a portion of the Company's sales to AT&T, EDS, and other corporations were resold by those organizations to various agencies of the U.S. Government. GROSS PROFIT. Gross profit decreased to $14.9 million or 47.6% of net sales for the third quarter of 1996 compared to $16.1 million or 51.1% of net sales for the third quarter of 1995. Gross profit in the third quarter of 1996 was impacted by a $1.0 million increase in reserves for slow-moving inventory. 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 Registrant 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 slightly to $6.4 million or 20.5% of net sales for the third quarter of 1996 from $6.2 million or 19.7% of net sales for the third quarter of 1995. The increase in sales and marketing expense was primarily due to expansion of sales and marketing personnel and associated costs. The Registrant expects sales and marketing expenses to 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 $3.0 million or 9.5% of net sales for the third quarter of 1996 from $2.0 million or 6.5% of net sales for the third quarter of 1995. The increase in research and development expenses in 1996 was primarily due to an increase in the number of development personnel, additional product development expenses and increased costs related to the final development and testing of new switching products. The Registrant 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 slightly to $0.9 million or 2.9% of net sales for the third quarter of 1996 from $1.2 million or 3.8% of net sales for the third quarter of 1995. As the Registrant continues to expand its domestic and foreign sales force, increase its marketing activities and invest in research and development efforts, general and administrative expenses are expected to increase in amount. INTEREST. Net interest income remained constant at $0.2 million for both the third quarter of 1996 and the third quarter of 1995. INCOME TAXES. The Registrant's effective income tax rate remained relatively consistent at 38.0% for the third quarter of 1996 compared to 38.5% for the third quarter of 1995. -9- FIRST NINE MONTHS OF 1996 COMPARED WITH FIRST NINE MONTHS OF 1995 NET SALES. Net sales for the first nine months of 1996 increased by 5.6% to $91.8 million from $87.0 million for the first nine months of 1995. Ethernet sales were $58.6 million or 63.9% of net sales for the first nine months of 1996 compared to $55.0 million or 63.2% of net sales for the first nine months of 1995. Token Ring sales were $14.4 million or 15.7% of net sales for the first nine months of 1996 compared to $12.8 million or 14.7% of net sales for the first nine months of 1995. FDDI sales were $13.8 million or 15.0% of net sales for the first nine months of 1996 compared to $15.5 million or 17.8% of net sales for the first nine months of 1995. ATM sales were $3.3 million or 3.6% of net sales for the first nine months of 1996 compared to $2.8 million or 3.2% of net sales for the first nine months of 1995. Sales of other data communications products and services were $1.7 million or 1.9% of net sales for the first nine months of 1996 compared to $1.0 million or 1.1% of net sales for the first nine months of 1995. International sales increased to $12.7 million or 13.9% of net sales for the first nine months of 1996 compared to $9.1 million or 10.5% for the first nine months of 1995. During the first nine months of 1996, 20.9% of net sales were to EDS compared to 27.0% of net sales in the first nine months of 1995. Sales to AT&T represented 14.8% of net sales in the first nine months of 1996 compared to 13.5% of net sales in the first nine months of 1995. Direct net sales to various agencies of the U.S. Government in the aggregate amounted to 13.8% of net sales for the first nine months of 1996 compared to 6.2% of net sales for the first nine months of 1995. In addition, a portion of the Company's sales to AT&T, EDS, and other corporations were resold by those organizations to various agencies of the U.S. Government. GROSS PROFIT. Gross profit increased in amount to $44.6 million for the first nine months of 1996 compared to $43.3 million for the first nine months of 1995, but decreased as a percentage of net sales to 48.6% of net sales for the first nine months of 1996 compared to 49.7% of net sales for the first nine months of 1995. Gross profit for the first nine months of 1996 was impacted by a $1.0 million increase in reserves for slow-moving inventory. Gross profit margins in future periods may be affected by several factors such as sales volume, variations in product mix, fluctuations in manufacturing costs, pricing strategies of the Registrant 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 $18.7 million or 20.4% of net sales for the first nine months of 1996 from $16.5 million or 19.0% of net sales for the first nine months of 1995. The increase in sales and marketing expense primarily reflects higher levels of staffing in sales, marketing and technical support in the first nine months of 1996. RESEARCH AND DEVELOPMENT. Research and development expenses increased to $7.6 million or 8.3% of net sales for the first nine months of 1996 from $6.2 million or 7.1% of net sales for the first nine months of 1995. The increase in research and development expenses in 1996 was primarily due to an increase in the number of -10- development personnel, additional product development expenses and increased costs related to the final development and testing of new switching products. The Registrant 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 to $2.7 million or 2.9% of net sales for the first nine months of 1996 from $3.2 million or 3.7% of net sales for the first nine months of 1995. As the Registrant continues to expand its domestic and foreign sales force, increase its marketing activities and invest in research and development efforts, general and administrative expenses are expected to increase in amount. INTEREST. Net interest income remained constant at $0.7 million for the first nine months of 1996 and 1995, respectively. INCOME TAXES. The Registrant's effective tax rate remained relatively consistent at 38.0% for the first nine months of 1996 compared to 38.4% for the first nine months of 1995. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS TECHNOLOGICAL CHANGES. The market for the Registrant'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 Registrant'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 Registrant'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 Registrant will be able to identify, develop, manufacture, market and support new or enhanced products successfully in a timely manner. Further, the Registrant or its competitors may introduce new products or product enhancements that shorten the life cycle of or obsolete the Registrant's existing product lines which could have a material adverse effect on the Registrant'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 Registrant does introduce advanced products which meet evolving customer requirements in a timely manner, there can be no assurance that the new Registrant 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 Registrant. In addition, many of the Registrant's large competitors offer customers a broader product line which provides a more comprehensive networking solution than the Registrant currently offers. Increased competition in the networking industry could result in significant price competition, -11- reduced profit margins or loss of market share, any of which could have a material adverse effect on the Registrant'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 Registrant's or a competitor's design), the Registrant 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 Registrant will therefore be required to design, develop and successfully commercialize higher performance products in a timely manner. For example, the Registrant believes that the market for shared bandwidth intelligent hubs, sales of which have represented the vast majority of the Registrant's net sales over the past several years, will decrease as switching products with enhanced price/performance characteristics gain market acceptance. Although the Registrant 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 Registrant 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 Registrant's manufacturing operations consist primarily of final assembly, testing and quality control of subassemblies and finished units. Materials used by the Registrant 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 Registrant's products are purchased under contracts and purchase orders with third parties. While the Registrant 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 Registrant fails to forecast its requirements accurately for components, then it may experience excess inventory or shortages of certain components which could have an adverse effect on the Registrant's business and operating results. Further, any interruption in the supply of any of these components, or the inability of the Registrant to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse effect on the Registrant's business and operating results. DEPENDENCE OF KEY CUSTOMERS. Although there is a large number of end-users of the Registrant's products, a relatively small number of customers have accounted for a significant portion of the Registrant's revenue. U.S. Government agencies and strategic network integrators, such as EDS, AT&T and GTE, Inc., which purchase the Registrant's products for internal use and offer the Registrant's products for resale are expected to continue to account for a substantial portion of the Registrant's net revenue. The Registrant 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 Registrant's products to these U.S. Government agencies or strategic network integrators could have a material adverse effect on the Registrant's operating results. -12- INTERNATIONAL OPERATIONS. International sales accounted for approximately 13.9% of the Registrant's revenue for the nine months ended September 30, 1996. The Registrant intends to expand its international presence and expects that international sales will represent a significant portion of its business in the future. While the Registrant'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 Registrant's operating results. Additionally, the Registrant'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 constraints upon international trade. INTELLECTUAL PROPERTY. The Registrant's success and its ability to compete is dependent, in part, upon its proprietary technology. The Registrant 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 Registrant to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Registrant's competitors will not independently develop technologies that are substantially equivalent or superior to the Registrant's technology. The Registrant is also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights of others. The Registrant 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 Registrant may be required to obtain one or more licenses from third parties. There can be no assurance that the Registrant could obtain the necessary licenses or obtain such 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 this 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 Registrant's business, operation 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 Registrant'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 Registrant's common stock in any given period. Also, the Registrant participates in a highly dynamic industry which often results in volatility of the Registrant's common stock price. -13- "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical information, the matters discussed in this quarterly 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 with the Securities and Exchange Commission. LIQUIDITY AND CAPITAL RESOURCES The Registrant's principal sources of liquidity at September 30, 1996 were $3.6 million of cash and cash equivalents, $14.5 million of short-term investments and an available line of credit. As of September 30, 1996, working capital was $58.8 million compared to $49.6 million as of December 31, 1995. Cash flows used by operations for the first nine months of 1996 were $4.4 million, primarily due to increases in accounts receivable and inventory balances partially offset by net income. The increase in accounts receivable reflects the increase in net sales to $31.3 million during the third quarter of 1996 compared to $24.5 million during the fourth quarter of 1995. The increase in inventory reflects the continued support of the Registrant's intelligent hub product line and the ramp in inventory of its switching products. Future fluctutations 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 Registrant's strategy as to building inventory in advance of receiving orders from customers, and the accuracy of the Registrant's forecasts of product demand and component requirements. Cash used in investing activities in the first nine months of 1996 consisted of purchases of property and equipment of $3.9 million partially offset by maturities of short-term investments of $0.8 million. Cash provided by financing activities in the first nine months of 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 the first nine months of 1996 the Registrant funded its operations solely through cash flow from operations. The Registrant's revolving bank credit facility provides an unsecured line of credit of up to $5.0 million, subject to certain limitations and conditions. At September 30, 1996, the Registrant 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. The Registrant believes that its cash, cash equivalent and short-term 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 the remainder of 1996. -14- Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (A.) EXHIBITS. The following exhibits are included herein: (11) Schedule of Computation of Per Share Earnings (27) Financial Data Schedule (B.) FORM 8-K. The Registrant filed no reports on Form 8-K and none were required to be filed during the three months ended September 30, 1996. -15- S I G N A T U R E Pursuant to the requirements 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. (Registrant) Date: November 14, 1996 By: /s/ TIMOTHY W. KINNEAR ----------------------------- Timothy W. Kinnear Chief Financial Officer (Principal Financial Officer) By: /s/ KANDIS TATE THOMPSON ----------------------------- Kandis Tate Thompson Controller (Principal Accounting Officer) -16- EXHIBIT INDEX EXHIBIT 11 Schedule of Computation of Per Share Earnings 27 Financial Data Schedule -17- EX-11 2 EXHIBIT 11 EXHIBIT 11 OPTICAL DATA SYSTEMS, INC. COMPUTATIONS OF PER SHARE EARNINGS (In thousands, except per share amounts) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ------------------ ----------------- 1996 1995 1996 1995 ------ ------ ------ ------ PRIMARY Weighted average common shares outstanding 16,284 16,096 16,240 15,997 Net effect of dilutive stock options and warrants based on the treasury stock method using average market price 532 922 586 872 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,816 17,018 16,826 16,869 ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 2,976 $ 4,244 $10,107 $11,074 ------- ------- ------- ------- ------- ------- ------- ------- Net income per share $ .18 $ .25 $ .60 $ .66 ------- ------- ------- ------- ------- ------- ------- ------- FULLY DILUTED* Weighted average common shares outstanding 16,284 16,096 16,240 15,997 Net effect of dilutive stock options and warrants based on the treasury stock method using the year-end market price, if higher than average market price 532 969 586 1,008 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,816 17,065 16,826 17,005 ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 2,976 $ 4,244 $10,107 $11,074 ------- ------- ------- ------- ------- ------- ------- ------- Net income per share $ .18 $ .25 $ .60 $ .65 ------- ------- ------- ------- ------- ------- ------- ------- - ----------- * Fully diluted earnings per share is not presented in the Consolidated Statements of Income as the resulting dilution is less than 3% of primary earnings per share. -18- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES 3 AND 5 OF THE COMPANY'S 10-Q FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 3,567 14,504 22,932 775 26,685 69,283 21,446 9,939 80,973 10,488 0 0 0 163 69,792 80,973 91,815 91,815 47,190 47,190 28,991 0 0 16,301 6,194 10,107 0 0 0 10,107 0.60 0.60
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