-----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, RTyEhetvAtT4MnXKk4bZZwBLjtwTqUn2Ik7Z6129/2rDss1SEbZvItWKGRHE+QuQ d1goxIDwQLM/Hhpyf6pdWQ== 0001047469-97-004464.txt : 19971115 0001047469-97-004464.hdr.sgml : 19971115 ACCESSION NUMBER: 0001047469-97-004464 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ODS NETWORKS INC CENTRAL INDEX KEY: 0000736012 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 751911917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20191 FILM NUMBER: 97717131 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 FORMER COMPANY: FORMER CONFORMED NAME: OPTICAL DATA SYSTEMS INC DATE OF NAME CHANGE: 19950517 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, 1997 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 ---------- * * * * * * ODS NETWORKS, 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, 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, 1997 was 16,486,276. - ------------------------------------------------------------------------------- ODS NETWORKS, INC. INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements ---- Condensed Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months ended September 30, 1997 and September 30, 1996. . . 4 Condensed Consolidated Statements of Operations for the nine months ended September 30, 1997 and September 30, 1996. . . 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and September 30, 1996. . . 6 Notes to Condensed Consolidated Financial Statements . . . . . . 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. . . . . . . . . . . 8-13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 14 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . 15 -2- PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts) Sept. 30, Dec. 31, 1997 1996 ----------- -------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 9,356 $ 6,565 Short-term investments 20,863 13,790 Accounts receivable (net) 15,118 16,573 Income taxes receivable - 85 Inventories 15,525 25,573 Deferred tax assets 3,698 1,499 Other assets 1,222 840 ------- ------- Total current assets 65,782 64,925 Property and equipment (net) 12,157 11,739 Long-term investments 4,673 5,050 Other assets 208 221 ------- ------- TOTAL ASSETS $82,820 $81,935 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,509 $ 5,440 Accrued expenses 3,578 3,242 Deferred revenue 1,202 1,714 Income taxes payable 856 - ------- ------- Total current liabilities 12,145 10,396 Deferred tax liabilities 693 601 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 - 16,486 in 1997 and 16,328 in 1996 165 163 Additional paid-in capital 19,488 18,908 Retained earnings 50,490 51,969 Foreign currency translation adjustments (161) (102) ------- ------- Total stockholders' equity 69,982 70,938 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $82,820 $81,935 ------- ------- ------- ------- See accompanying notes. -3- ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended ------------------------ Sept. 30, Sept. 30, 1997 1996 -------- --------- Net sales $26,231 $31,303 Cost of sales 15,702 16,410 ------- ------- Gross profit 10,529 14,893 Operating expenses: Sales and marketing 7,845 6,415 Research and development 2,638 2,989 General and administrative 1,187 895 ------- ------- Operating income (loss) (1,141) 4,594 Interest income, net 446 205 ------- ------- Income (loss) before income taxes (695) 4,799 Income tax (benefit) provision (264) 1,823 ------- ------- Net income (loss) $ (431) $ 2,976 ------- ------- ------- ------- Net income (loss) per share $ (0.03) $ 0.18 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,475 16,816 ------- ------- ------- ------- See accompanying notes. -4- ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Nine Months Ended ------------------------ Sept. 30, Sept. 30, 1997 1996 --------- --------- Net sales $74,260 $91,815 Cost of sales 42,943 47,190 ------- ------- Gross profit 31,317 44,625 Operating expenses: Sales and marketing 22,863 18,739 Research and development 8,291 7,598 General and administrative 3,707 2,654 ------- ------- Operating income (loss) (3,544) 15,634 Interest income, net 1,157 667 ------- ------- Income (loss) before income taxes (2,387) 16,301 Income tax (benefit) provision (907) 6,194 ------- ------- Net income (loss) $(1,480) $10,107 ------- ------- ------- ------- Net income (loss) per share $ (0.09) $ 0.60 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,420 16,826 ------- ------- ------- ------- See accompanying notes. -5- ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended ------------------------- Sept. 30, Sept. 30, 1997 1996 --------- --------- Operating Activities: Net income (loss) $ (1,480) $ 10,107 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation 2,364 1,821 Deferred income taxes (2,107) (362) Provision for doubtful accounts and returns 96 30 Changes in operating assets and liabilities: Accounts receivable 1,359 (6,949) Inventories 10,048 (7,311) Other assets (369) (74) Accounts payable and accrued expenses 1,405 (1,387) Deferred revenue (512) 8 Income taxes payable 968 (276) -------- -------- Net cash provided by (used in) operating activities 11,772 (4,393) -------- -------- Investing Activities: Purchases of short-term investments (17,967) (13,776) Maturities of short-term investments 15,911 14,600 Purchases of long-term investments (4,656) - Maturities of long-term investments 16 - Purchases of property and equipment (2,782) (3,870) -------- -------- Net cash used in investing activities (9,478) (3,046) -------- -------- Financing Activities: Exercise of warrants and employee stock options 556 600 -------- -------- Net cash provided by financing activities 556 600 -------- -------- Effect of foreign currency translation adjustment on cash and cash equivalents (59) 9 -------- -------- Net increase (decrease) in cash and cash equivalents 2,791 (6,830) Cash and cash equivalents at beginning of period 6,565 10,397 -------- -------- Cash and cash equivalents at end of period $ 9,356 $ 3,567 -------- -------- -------- -------- Supplemental disclosure of income taxes paid $ 310 $ 6,815 -------- -------- -------- -------- Supplemental schedule of non cash activities: Tax benefit of stock options exercised and sold $ 27 $ 541 -------- -------- -------- -------- See accompanying notes. -6- ODS NETWORKS, 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. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The change in method is expected to have no effect on primary earnings per share for the quarter or nine months ended September 30, 1997. The change in method is expected to have no effect on primary earnings per share for the quarter ended September 30, 1996 and an increase in primary earnings per share for the nine months ended September 30, 1996 of $0.02 per share. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be significant. The results of operations for the nine month period ending September 30, 1997 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 Company's annual report on Form 10-K for the year ended December 31, 1996. Note B - Inventories (in Thousands) Inventories consist of: Sept. 30, Dec. 31, 1997 1996 --------- -------- Raw materials $ 4,475 $ 6,138 Work in process 2,334 2,308 Finished products 5,347 13,530 Demonstration systems 3,369 3,597 ------- ------- $15,525 $25,573 ------- ------- ------- ------- Note C - Accrued Expenses (in Thousands) Included in accrued expenses are the following: Sept. 30, Dec. 31, 1997 1996 --------- -------- Accrued sales commissions $ 865 $ 681 Accrued property taxes 573 631 Accrued vacation expense 815 538 Other (individually less than 5% of current liabilities) 1,325 1,392 ------ ------ $3,578 $3,242 ------ ------ ------ ------ -7- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report, other than historical information, may include forward-looking statements, including statements with respect to financial results, product introductions, market demand, industry trends, sufficiency of cash resources and certain other matters. These statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, including those discussed in the section entitled "Factors That May Affect Future Results of Operations" and elsewhere in this filing, as well as those discussed in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales: Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 59.9 52.4 57.8 51.4 ----- ----- ----- ----- Gross profit 40.1 47.6 42.2 48.6 Sales and marketing expenses 29.9 20.5 30.8 20.4 Research and development expenses 10.0 9.5 11.2 8.3 General and administrative expenses 4.5 2.9 5.0 2.9 ----- ----- ----- ----- Operating income (loss) (4.3) 14.7 (4.8) 17.0 Interest income, net 1.7 0.6 1.6 0.7 ----- ----- ----- ----- Income (loss) before income taxes (2.6) 15.3 (3.2) 17.7 Income taxes (1.0) 5.8 (1.2) 6.7 ----- ----- ----- ----- Net income (loss) (1.6)% 9.5% (2.0)% 11.0% ----- ----- ----- ----- ----- ----- ----- ----- Switching product sales 41.3% 14.9% 37.7% 11.4% Shared bandwidth hub sales 50.2 78.2 55.4 81.9 Other sales 8.5 6.9 6.9 6.7 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- Domestic sales 71.0% 85.6% 72.0% 86.1% Export sales to: Europe 7.5 7.7 8.3 7.7 Canada 3.7 2.7 3.6 3.0 Asia 16.5 3.2 13.9 2.5 Latin America 1.3 0.8 2.2 0.7 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS NET SALES. Net sales for the quarter and nine months ended September 30, 1997 decreased to $26.2 million and $74.3 million, respectively, compared to $31.3 million and $91.8 million, respectively, for the same periods of 1996 as sales of the Company's new network switching products did not increase quickly enough to offset the decrease in sales of its prior generation shared bandwidth intelligent hubs. -8- Export sales for the quarter and nine months ended September 30, 1997 increased to $7.6 million and $20.8 million, respectively, compared to $4.5 million and $12.7 million, respectively, for the same periods of 1996 primarily due to growth in export sales to the Asian region. Sales to Electronic Data Systems Corporation ("EDS") were 17.1% and 15.4%, respectively, of net sales during the quarter and nine months ended September 30, 1997, compared to 10.5% and 20.9%, respectively, of net sales for the same periods of 1996. Sales to Sapura Holdings Sdn. Bhd. ("Sapura") were 12.3% and 9.6%, respectively, of net sales during the quarter and nine months ended September 30, 1997. Sales to AT&T Corp. ("AT&T") were 1.9% and 2.6%, respectively, of net sales during the quarter and nine months ended September 30, 1997, compared to 17.3% and 14.8%, respectively, of net sales for the same periods of 1996. Direct net sales to various agencies of the U.S. Government were 14.0% and 12.5%, respectively, of net sales during the quarter and nine months ended September 30, 1997, compared to 20.2% and 13.8%, respectively, of net sales for the same periods of 1996. In addition, a portion of the Company's sales to EDS, AT&T and other corporations were resold by those organizations to various agencies of the U.S. Government. GROSS PROFIT. Gross profit decreased to $10.5 million or 40.1% of net sales for the third quarter of 1997 compared to $14.9 million or 47.6% of net sales for the third quarter of 1996. Gross profit decreased to $31.3 million or 42.2% of net sales for nine months ended September 30, 1997 compared to $44.6 million or 48.6% of net sales for the same period of 1996. Gross profit as percentages of net sales in the quarter and nine months ended September 30, 1997 were impacted by several factors, including a decline in the net realizable value of certain prior generation products, product mix and lower sales volumes. Gross profit margins in future periods may be affected by several factors such as continued product transition, declining market demand for prior generation products, obsolescence or surplus of inventory, shifts in product mix, changes in channels of distribution, sales volume, 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 $7.8 million or 29.9% of net sales for the third quarter of 1997 from $6.4 million or 20.5% of net sales for the third quarter of 1996. Sales and marketing expenses increased to $22.9 million or 30.8% of net sales for nine months ended September 30, 1997 compared to $18.7 million or 20.4% of net sales for the same period of 1996. The increase in sales and marketing expense was primarily due to higher levels of staffing in sales, marketing and technical support and associated costs. The Company 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 decreased to $2.6 million or 10.0% of net sales for the third quarter of 1997 from $3.0 million or 9.5% of net sales for the third quarter of 1996. Research and development expenses in the third quarter of 1996 were impacted by the development and testing of new switching products introduced by the Company in September of 1996. Research and development expenses increased to $8.3 million or 11.2% of net sales for nine months ended September 30, 1997 compared to $7.6 million or 8.3% of net sales for the same period of 1996. The increase in research and development expense was primarily due to an increase in the number of development personnel and increased costs related to the development and testing of additional switching products. The Company expects to continue to invest in research and development activities in the future in an effort to broaden its family of switching products. -9- GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to $1.2 million or 4.5% of net sales for the third quarter of 1997 from $0.9 million or 2.9% of net sales for the third quarter of 1996. General and administrative expenses increased to $3.7 million or 5.0% of net sales for nine months ended September 30, 1997 compared to $2.7 million or 2.9% of net sales for the same period of 1996. As the Company continues to expand its domestic and foreign operations, general and administrative expenses are expected to increase in amount, but may vary as a percentage of net sales in the future. INTEREST. Net interest income increased to $0.4 million and $1.2 million, respectively, for the quarter and nine months ended September 30, 1997 compared to $0.2 million and $0.7 million, respectively, for the same periods of 1996. Net interest income may vary in the future based on the Company's cash flow and rate of return on investments. INCOME TAXES. The Company's effective income tax rate remained constant at 38.0% for the quarter and nine months ended September 30, 1997 compared to the same periods of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity at September 30, 1997 were $9.4 million of cash and cash equivalents, $20.9 million of short-term investments, $4.7 million of highly liquid investments with a stated maturity beyond one year and an available line of credit. As of September 30, 1997, working capital was $53.6 million compared to $54.5 million as of December 31, 1996. Cash flows provided by operations for the first nine months of 1997 were $11.8 million, primarily due to a decrease in inventory and accounts receivable balances and an increase in payables partially offset by a net loss for the period. 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 in the first nine months of 1997 consisted of net purchases of short-term and long-term investments of $6.7 million, and property and equipment purchases of $2.8 million. Cash provided by financing activities in the first nine months of 1997 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 1997 the Company funded its operations solely through cash flow from operations. In April 1997, the Company renewed its unsecured bank line of credit agreement and increased the maximum available borrowings under the credit facility to $15.0 million. Borrowings under this line are subject to certain limitations and conditions, including the maintenance of certain financial ratios such as debt-to-equity and fixed charge coverage ratios. Borrowings on this line accrue interest at prime with interest due monthly and principal due April 12, 1999. As of September 30, 1997, the Company had no borrowings outstanding under its bank credit facility. 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 -10- to finance its operations and currently projected capital expenditures through at least the next twelve months. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS As noted above, the foregoing discussions may include forward-looking statements that involve risks and uncertainties. In addition to those factors discussed elsewhere in this report and those discussed in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, the Company identifies the following factors which could affect the Company's actual results and cause actual results to differ materially from those in the forward-looking statements. 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"), FORE Systems, Inc. ("FORE Systems"), Xylan Corporation ("Xylan") 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. Cisco, Cabletron, Bay Networks, FORE Systems and other competitors have recently acquired several networking companies with complementary technologies, and the Company anticipates that such acquisitions will continue in the future. These acquisitions may permit such competitors to accelerate the development and commercialization of broader product lines and more comprehensive networking solutions than the Company currently offers. In the past, the Company has relied upon a combination of internal product development and partnerships with other networking vendors to provide competitive networking solutions to customers. Certain of the recent and future acquisitions by the Company's competitors may -11- have the effect of limiting the Company's access to commercially significant technologies. Further, the business combinations and acquisitions in the networking industry are creating companies with larger market shares, customer bases, sales forces, product offerings and technology and marketing expertise. There can be no assurance that the Company will be able to compete successfully in such an environment. 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 achieve revenue growth in the future the Company will 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 majority of the Company's net sales over the past several years, decreased over the past several quarters and may continue to decrease as switching products with enhanced price/performance characteristics gain market acceptance. There can be no assurance that the Company will be able to introduce new products and gain market acceptance 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 ("ASICs"), 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 key components are available from one or a limited number of suppliers. For example, certain ASICs designed into the Company's InfiniteSwitch products are supplied by FORE Systems (see "Factors That May Affect Future Results of Operations - Competition and Market Acceptance"). The lead times for delivery of components vary significantly and often exceed twelve 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. 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 and ATM switches from FORE Systems. 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. DEPENDENCE ON KEY CUSTOMERS. A relatively small number of customers has accounted for a significant portion of the Company's revenue. U.S. Government agencies and strategic network integrators, such as EDS, 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 -12- others for U.S. Government networking projects and corporate networking installations. Any meaningful 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 29% of the Company's revenue for the three months ended September 30, 1997. The Company intends to expand its international presence and expects that export sales will represent a significant portion of its business in the future. 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. For example, the fluctuations in currency exchange rates between January 1, 1997 and September 30, 1997 in Malaysia and certain other countries could adversely affect demand for the Company's products in those countries. Additionally, 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. INTELLECTUAL PROPERTY. The Company's success and its ability to compete are 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. There can be no assurance as to the rate or extent of the growth of the market for network intelligent hubs and switches 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. -13- PART II - OTHER INFORMATION 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, 1997. -14- S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ODS NETWORKS, INC. (Company) Date: November 13, 1997 By: /s/ TIMOTHY W. KINNEAR -------------------------- Timothy W. Kinnear Chief Financial Officer (Principal Financial Officer) By: /s/ KANDIS TATE THOMPSON ---------------------------- Kandis Tate Thompson Controller - Finance and Accounting (Principal Accounting Officer) -15- EXHIBIT INDEX EXHIBIT - ------- 11 Schedule of Computation of Per Share Earnings 27 Financial Data Schedule EX-11 2 FORM 11 EXHIBIT 11 ODS NETWORKS, INC. COMPUTATIONS OF PER SHARE EARNINGS (In thousands, except per share amounts) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ------------------- ------------------ 1997 1996 1997 1996 ------- ------- ------- ------- PRIMARY Weighted average common shares outstanding 16,475 16,284 16,420 16,240 Net effect of dilutive stock options and warrants based on the treasury stock method using average market price - 532 - 586 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,475 16,816 16,420 16,826 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) $ (431) $ 2,976 $(1,480) $10,107 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) per share $ (0.03) $ 0.18 $ (0.09) $ 0.60 ------- ------- ------- ------- ------- ------- ------- ------- FULLY DILUTED* Weighted average common shares outstanding 16,475 16,284 16,420 16,240 Net effect of dilutive stock options and warrants based on the treasury stock method using the period-end market price, if higher than average market price - 532 - 586 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 16,475 16,816 16,420 16,826 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) $ (431) $ 2,976 $(1,480) $10,107 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) per share $ (0.03) $ 0.18 $ (0.09) $ 0.60 ------- ------- ------- ------- ------- ------- ------- -------
- -------------------- * Fully diluted earnings per share is not presented in the Consolidated Statements of Operations as the resulting dilution is less than 3% of primary earnings per share. 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 3-5 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-31-1997 JAN-01-1997 SEP-30-1997 9,356 20,863 15,869 751 15,525 65,782 25,257 13,100 82,820 12,145 0 0 0 165 69,817 82,820 74,260 74,260 42,943 42,943 34,861 0 0 (2,387) (907) (1,480) 0 0 0 (1,480) (0.09) (0.09)
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