-----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, JZBrsWlqdDID20p1YfCMprfzaSDnGahsBLFImUdVGMnHULPIpHM2ZGggEZjrD2wJ ty0BIc3WizYEyq2w6o43Kg== 0001047469-99-012410.txt : 19990331 0001047469-99-012410.hdr.sgml : 19990331 ACCESSION NUMBER: 0001047469-99-012410 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990330 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/A SEC ACT: SEC FILE NUMBER: 000-20191 FILM NUMBER: 99578501 BUSINESS ADDRESS: STREET 1: 1101 E ARAPAHO ROAD CITY: RICHARDSON STATE: TX ZIP: 75081 BUSINESS PHONE: 9722346400 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/A 1 10-Q/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 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 July 31, 1998 was 16,887,233. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ODS NETWORKS, INC. ------------------ INDEX PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 1998 and June 30, 1997. . . . . . . . 4 Condensed Consolidated Statements of Operations for the six months ended June 30, 1998 and June 30, 1997. . . . . . . . 5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and June 30, 1997. . . . . . . . 6 Notes to Condensed Consolidated Financial Statements . . . . . . 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. . . . . . . . . . . 10 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders . . 18 Item 5. Other Information . . . . . . . . . . . . . . . . . . . 18 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . 20 -2- PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts)
June 30, Dec. 31, 1998 1997 ---------- ----------- (Unaudited) As Restated ASSETS Current Assets: Cash and cash equivalents $12,343 $17,911 Short-term investments 8,960 14,667 Accounts receivable (net) 14,876 8,668 Income taxes receivable 527 3,159 Inventories 16,217 14,671 Deferred tax assets 2,524 1,721 Other assets 1,181 1,221 ------- ------- Total current assets 56,628 62,018 Property and equipment (net) 11,912 11,836 Long-term investments 2,756 3,168 Intangibles, net 7,173 - Equity investments 1,835 - Other assets 164 156 ------- ------- TOTAL ASSETS $80,468 $77,178 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,875 $ 5,381 Accrued expenses 3,896 3,328 Deferred revenue 1,990 1,462 ------ ------ Total current liabilities 13,761 10,171 Deferred tax liabilities 2,282 628 Capital lease obligations 12 - 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 - 16,887 in 1998 and 16,486 in 1997 169 165 Additional paid-in capital 22,698 19,488 Retained earnings 41,849 47,032 Foreign currency translation adjustments (303) (306) ------- ------- Total stockholders' equity 64,413 66,379 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,468 $77,178 ------- ------- ------- -------
See accompanying notes. -3- ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended --------------------------- June 30, June 30, 1998 1997 ----------- ------------ As Restated Net sales $25,215 $27,868 Cost of sales 14,389 16,076 ------- ------- Gross profit 10,826 11,792 Operating expenses: Sales and marketing 8,134 7,877 Research and development 2,932 2,823 In-process research and development 2,300 - General and administrative 1,491 1,258 ------- ------- Operating loss (4,031) (166) Interest income, net 356 374 ------- ------- Income (loss) before income taxes (3,675) 208 Income tax (benefit) provision (538) 79 -------- ------- Income (loss) before equity in affiliate (3,137) 129 Equity in net income (loss) of affiliate (72) - -------- -------- Net income (loss) $(3,209) $ 129 ------- ------- ------- ------- Basic and Diluted income (loss) per share $ (0.19) $ .01 ------- ------- ------- ------- Weighted average common shares outstanding 16,739 16,423 ------- ------- ------- ------- Weighted averages shares outstanding assuming dilution 16,739 16,753 ------- ------- ------- -------
See accompanying notes. -4- ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Six Months Ended --------------------------- June 30, June 30, 1998 1997 ----------- ------------ As Restated Net sales $43,428 $48,029 Cost of sales 24,587 27,241 ------- ------- Gross profit 18,841 20,788 Operating expenses: Sales and marketing 15,936 15,018 Research and development 5,599 5,653 In-process research and development 2,300 -- General and administrative 2,654 2,520 ------- ------- Operating loss (7,648) (2,403) Interest income, net 795 711 ------- ------- Loss before income taxes (6,853) (1,692) Income tax (benefit) provision (1,742) (643) -------- -------- Loss before equity in affiliate (5,111) (1,049) Equity in net income (loss) of affiliate (72) -- -------- -------- Net loss $(5,183) $(1,049) -------- -------- -------- -------- Basic and Diluted loss per share $ (0.31) $ (0.06) -------- -------- -------- -------- Weighted average common shares outstanding 16,625 16,392 -------- -------- -------- -------- Weighted averages shares outstanding assuming dilution 16,625 16,392 -------- -------- -------- --------
See accompanying notes. -5- ODS NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended -------------------------- June 30, June 30, 1998 1997 ----------- ------------ Operating Activities: As Restated Net loss ($ 5,183) ($ 1,049) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: In-process research and development 2,300 -- Depreciation 1,692 1,530 Amortization 182 -- Equity in net loss of affiliate 72 -- Deferred income taxes (680) (1,265) Provision for doubtful accounts and returns -- 35 Changes in operating assets and liabilities: Accounts receivable (5,349) 2,571 Inventories (1,200) 6,631 Other assets 9 (39) Accounts payable and accrued expenses 2,170 (403) Deferred revenue (12) (337) Income taxes 2,632 460 -------- -------- Net cash provided by (used in) operating activities (3,367) 8,134 -------- -------- Investing Activities: Payments for corporate acquisition (net of cash acquired) (5,604) -- Equity Investment in Blue Ridge Networks (1,250) -- Purchases of short-term investments (2,437) (10,849) Maturities of short-term investments 9,151 10,932 Purchases of long-term investments (600) (2,495) Maturities of long-term investments 5 13 Purchases of property and equipment (1,340) (1,943) -------- -------- Net cash used in investing activities (2,075) (4,342) -------- -------- Financing Activities: Repayment of Essential Communication Corp. line of credit (400) -- Exercise of warrants and employee stock options 271 465 -------- -------- Net cash provided by (used in) financing activities (129) 465 -------- -------- Effect of foreign currency translation adjustment on cash and cash equivalents 3 (8) -------- -------- Net increase (decrease) in cash and cash equivalents (5,568) 4,249 Cash and cash equivalents at beginning of period 17,911 6,565 -------- -------- Cash and cash equivalents at end of period $ 12,343 $ 10,814 -------- -------- -------- -------- Supplemental disclosure of income taxes paid $ -- $ 239 -------- -------- -------- -------- Supplemental schedule of non cash activities: Tax benefit of stock options exercised and sold $ -- $ 27 -------- -------- -------- --------
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. The December 31, 1997 balance sheet was derived from audited financial statements, but does not include all the disclosures required by generally accepted accounting principles. However, the Company believes that the disclosures are adequate to make the information presented not misleading. 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 six month period ended June 30, 1998 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, 1997. Computation of Net Income Per Share The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 on December 31, 1997 and has restated all EPS data presented. Under SFAS No. 128 the Company is required to report two separate earnings per share numbers, basic EPS and diluted EPS. Diluted EPS is essentially the same number the Company has previously reported as primary earnings per share and includes the dilutive impact of employee stock options and warrants. Equity Investment In March 1998, the Company invested $1.25 million in Blue Ridge Networks, Inc., a privately-held company which provides secure remote access products for local and wide area virtual private networks. This investment was accounted for using the equity method of accounting. The Company's share of earnings or losses of Blue Ridge Networks, Inc. is reported in the income statement of the Company. Business Combinations/Restatement On May 7, 1998, the Company acquired Essential Communication Corporation ("Essential"), a privately-held company based in Albuquerque, New Mexico. Essential designs and manufactures high-speed computer network equipment. The Company exchanged a combination of $5.8 million of cash and approximately 305,000 shares of the Company's common stock for all outstanding shares of Essential capital stock, and the Company issued 104,000 stock options in exchange for all unexpired and unexercised options to acquire Essential capital stock. In the second quarter of 1998 in connection with the acquisition, the Company recognized a one-time charge of $2.3 million, or $0.14 per share, for the write-off of acquired in-process research and development as restated for adjustment to the initial Essential acquisition purchase price allocation wherein originally $5.3 million was allocated to in-process research and development and was subsequently reduced by $3.0 million. The Company adjusted the amount originally allocated to acquired in-process research and development to reflect the new methodology set forth in the September 1998 letter from the SEC staff to the American Institute of Certified Public Accountants. Essential's operations have been included in the Company's condensed consolidated financial statements since May 7, 1998, and the acquisition was accounted for using the purchase method of accounting. The total purchase price of $9.0 million was allocated to the net assets acquired based on their estimated fair market value, which included approximately $7.1 million of intangible assets to be amortized over five years on a straight-line basis; and approximately $2.3 million of in-process research and development. The in-process research and development was expensed at the date of the acquisition. Pro forma -7- financial information has not been presented. The acquisition of Essential does not meet the reporting requirements for a significant subsidiary. Exchange of Stock Options in First Quarter 1998 On January 21, 1998, the Compensation Committee of the Board of Directors approved a stock option exchange program (the Exchange Program), pursuant to which certain employees and officers holding incentive stock options (i) awarded under the Company's 1987 Incentive Stock Option Plan in 1997 and (ii) awarded prior to December 31, 1997, under the Company's 1995 Stock Option Plan (the 1995 Plan), were given the opportunity to exchange such options (Existing Options) for new options (New Options), based on the fair market value of the Company's Common Stock at the close of business on January 30, 1998. All directors of the Company, including the President and Chief Executive Officer and the Senior Vice President, were ineligible to participate in the Exchange Program. As a result of significant declines in the market value of the Company's Common Stock since issuance of the Existing Options, the Existing Options were exercisable at prices which substantially exceeded the market value of the Common Stock. In approving the Exchange Program and in keeping with the Company's philosophy of utilizing equity incentives to motivate and retain qualified employees, the Compensation Committee acknowledged that retention and attraction of qualified employees are critical to the Company's success and its ability to continue to meet its performance objectives. Additionally, recognizing that stock options constitute a significant component of the Company's compensation structure, the Compensation Committee deemed it important to regain the incentive intended to be provided by the New Options to purchase shares of the Company's Common Stock and therefore serve as a significant factor in the Company's ability to continue to attract and retain the services of superior quality personnel. Pursuant to the Exchange Program, holders of the Existing Options were offered the opportunity to exchange, on a share-for-share basis, such options for New Options having an exercise price of $7.50 per share, the fair market value of the Company's Common Stock on the exchange date of January 30, 1998. Each New Option was awarded under the 1995 Plan and vests and is exercisable with respect to 20% of the shares covered thereby on each anniversary date thereof. Eligible employees holding Existing Options for an aggregate of 646,800 shares of Common Stock with an average per share exercise price of approximately $15.87 elected to participate in the Exchange Program and were issued New Options covering the same aggregate number of underlying shares as they had held pursuant to their respective Existing Options. Other than the new exercise price and the commencement of a new vesting schedule, the option agreements relating to the New Options are substantially identical to the option agreements of the Existing Options they replaced. -8- Note B - Inventories (in Thousands) Inventories consist of:
June 30, Dec. 31, 1998 1997 -------- --------- Raw materials $ 5,846 $ 4,077 Work in process 1,884 2,004 Finished products 6,007 6,593 Demonstration systems 2,480 1,997 ------- -------- $16,217 $14,671 ------- -------- ------- --------
Note C - Accrued Expenses (in Thousands) Included in accrued expenses are the following:
June 30, Dec. 31, 1998 1997 ------------ ------------ Accrued sales commissions $ 897 $ 563 Accrued property taxes 365 689 Accrued vacation expense 881 724 Accrued warranty expense 475 475 Other (individually less than 5% of current liabilities) 1,278 877 ------ ------ $3,896 $3,328 ======= =======
Note D - Earnings per Share (in Thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1998 1997 1998 1997 ------- ------- ------ ----- Numerator: Net income (loss) $(3,209) $ 129 $(5,183) $ (1,049) ------- ------- ------- -------- Numerator for basic and diluted earnings per share $(3,209) $ 129 $(5,183) $ (1,049) Denominator: Denominator for basic earnings per share - weighted average common shares outstanding 16,739 16,423 16,625 16,392 Effect of dilutive securities: Stock options and warrants 0 330 0 0 Denominator for diluted earnings per share - adjusted weighted average common shares out- standing 16,739 16,753 16,625 16,392 ------- ------- ------- -------- ------- ------- ------- -------- Basic income (loss) per share $ (0.19) $ .01 $ (0.31) $ (0.06) ------- ------- ------- -------- ------- ------- ------- -------- Diluted income (loss) per share . $ (0.19) $ .01 $ (0.31) $ (0.06) ------- ------- ------- -------- ------- ------- ------- --------
-9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This amended quarterly report, other than historical information, may include forward-looking 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 elsewhere in this filing, as well as those discussed under the heading "Factors That May Affect Future Results of Operations" and elsewhere 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 June 30, Six Months Ended June 30, --------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- As Restated As Restated Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 57.1 57.7 56.6 56.7 ----- ----- ----- ----- Gross profit 42.9 42.3 43.4 43.3 Sales and marketing expenses 32.2 28.3 36.7 31.3 Research and development expenses 11.5 10.1 12.9 11.8 In-process research and development 9.1 -- 5.3 -- General and administrative expenses 5.9 4.5 6.1 5.2 ----- ----- ----- ----- Operating income (loss) (15.8) (0.6) (17.6) (5.0) Interest income, net 1.4 1.3 1.8 1.5 ----- ----- ----- ----- Income (loss) before income taxes (14.4) 0.7 (15.8) (3.5) Income tax (benefit) provision (2.1) 0.3 (4.0) (1.3) ----- ----- ----- ----- Income (loss) before equity in affiliate (12.3) 0.4 (11.8) (2.2) ----- ----- ----- ----- Equity in net income (loss) of affiliate (0.3) -- (0.1) -- ----- ----- ----- ----- Net income (loss) (12.6)% 0.4% (11.9)% (2.2)% ----- ----- ----- ----- ----- ----- ----- ----- Switching product sales 52.1% 42.3% 47.5% 35.7% Shared bandwidth hub sales 40.7 52.3 44.5 58.3 Other sales 7.2 5.4 8.0 6.0 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- Domestic sales 75.8% 68.3% 77.7% 72.5 Export sales to: Europe 14.1 7.7 13.3 8.7 Canada 2.7 2.3 3.5 3.6 Asia 7.2 18.6 5.1 12.5 Latin America .2 3.1 .4 2.7 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- -----
-10- RESULTS OF OPERATIONS NET SALES. Net sales for the quarter and six months ended June 30, 1998 decreased to $25.2 million and $43.4 million, respectively, compared to $27.9 million and $48.0 million, respectively, for the same periods of 1997 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. Export sales for the quarter and six months ended June 30, 1998 decreased to $6.1 million and $9.7 million, respectively, compared to $8.8 million and $13.2 million, respectively, for the same periods of 1997 primarily due to adverse economic developments in Malaysia and South Korea. Sales to FORE Systems, Inc. ("FORE Systems") were 15.4% and 10.8%, respectively, of net sales during the quarter and six months ended June 30, 1998. Direct net sales to various agencies of the U.S. Government were 15.0% and 14.5%, respectively, of net sales during the quarter and six months ended June 30, 1998, compared to 13.2% and 11.6%, respectively, of net sales for the same periods of 1997. Sales to Electronic Data Systems Corporation ("EDS") were 2.2% and 7.0%, respectively, of net sales during the quarter and six months ended June 30, 1998, compared to 14.6% and 14.5%, respectively, of net sales for the same periods of 1997. Sales to Sapura Holdings Sdn. Bhd. ("Sapura") were 5.0% and 3.1%, respectively, of net sales during the quarter and six months ended June 30, 1998, compared to 13.9% and 8.1%, respectively, of net sales for the same periods of 1997. GROSS PROFIT. Gross profit decreased to $10.8 million or 42.9% of net sales for the second quarter of 1998 compared to $11.8 million or 42.3% of net sales for the second quarter of 1997. Gross profit decreased to $18.8 million or 43.4% of net sales for six months ended June 30, 1998 compared to $20.8 million or 43.3% of net sales for the same period of 1997. 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 $8.1 million or 32.2% of net sales for the second quarter of 1998 from $7.9 million or 28.3% of net sales for the second quarter of 1997. Sales and marketing expenses increased to $15.9 million or 36.7% of net sales for six months ended June 30, 1998 compared to $15.0 million or 31.3% of net sales for the same period of 1997. The increase in sales and marketing expense was primarily due to the acquisition of Essential on May 7, 1998 and increased marketing efforts. Sales and marketing expenses may vary as a percentage of net sales in the future. RESEARCH AND DEVELOPMENT. Research and development expenses, excluding the one-time charge for in-process research and development, increased to $2.9 million or 11.5% of net sales for the second quarter of 1998 from $2.8 million or 10.1% of net sales for the second quarter of 1997. Research and development expenses, excluding the one-time charge for in-process research and development, decreased to $5.6 million or 12.9% of net sales for six months ended June 30, 1998 compared to $5.7 million or 11.8% of net sales for the same period of 1997. The Company expects to continue to invest in research and development activities in the future in order to broaden its family of network switching, management and security products. -11- IN-PROCESS RESEARCH AND DEVELOPMENT. During the second quarter of 1998, the Company incurred a one-time charge associated with the acquisition of Essential of $2.3 million to write-off acquired in-process research and development that had not reached technological feasibility, as restated for adjustment to the initial Essential acquisition purchase price allocation wherein originally $5.3 million was allocated to in-process research and development and was subsequently reduced by $3.0 million. The Company adjusted the amount originally allocated to acquired in-process research and development to reflect the new methodology set forth in the September 1998 letter from the SEC staff to the American Institute of Certified Public Accountants. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to $1.5 million or 5.9% of net sales for the second quarter of 1998 from $1.3 million or 4.5% of net sales for the second quarter of 1997. General and administrative expenses increased to $2.7 million or 6.1% of net sales for six months ended June 30, 1998 compared to $2.5 million or 5.2% of net sales for the same period of 1997. The increase in general and administrative expenses for the second quarter of 1998 was primarily due to the amortization of intangibles related to the acquisition of Essential on May 7, 1998. General and administrative expenses may vary as a percentage of net sales in the future. INTEREST. Net interest income remained relatively constant at $0.4 million and $0.8 million, respectively, for the quarter and six months ended June 30, 1998 compared to $0.4 million and $0.7 million, respectively, for the same periods of 1997. 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 was 8% and 17.7%, respectively, for the quarter and six months ended June 30, 1998 compared to the 38.0% for the same periods of 1997. The effective tax rate represented by the Company's provision for income taxes in the second quarter ended June 30, 1998 would have been approximately 37.1%, disregarding the expenses associated with the Company's write-off of purchased research and development costs which were not deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity at June 30, 1998 were $12.3 million of cash and cash equivalents, $9.0 million of short-term investments, $2.8 million of highly liquid investments with a stated maturity beyond one year and an available line of credit. As of June 30, 1998, working capital was $42.9 million compared to $51.8 million as of December 31, 1997. Cash flows used in operations for the first six months of 1998 were $3.4 million, primarily due to an increase in inventory and accounts receivable balances and a net loss for the period partially offset by an increase in accounts payable. 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 six months of 1998 was $2.1 million, primarily due to property and equipment purchases of $1.3 million, an equity investment in Blue Ridge Networks, Inc. of $1.25 million and cash used in the acquisition of Essential Communications Corporation of $5.6 million offset by net maturities of short-term and long-term investments of $6.1 million. -12- Cash used in financing activities in the first six months of 1998 was $0.1 million, due to the repayment of Essential's line of credit in the amount of $0.4 million offset by the issuance of Common Stock relating to the exercise of certain employee stock options in the amount of $0.3 million. During the first six months of 1998, the Company funded its operations solely through cash flows from operations. The Company has a bank line of credit agreement with $15.0 million of maximum available borrowings. Borrowings under this line are secured by the Company's accounts receivable and inventory and are subject to certain limitations and conditions, including the maintenance of certain financial ratios and minimum net tangible worth amounts. Borrowings on this line accrue interest at prime with interest due monthly and principal due April 12, 1999. As of June 30, 1998, the Company had no borrowings outstanding under its bank credit facility and had $15.0 million available for allowable borrowings at an applicable interest rate of 8.5% per annum. The Company intends to seek acquisitions of businesses, products and technologies that are complementary to those of the Company. The Company is continuing to identify and prioritize additional networking and security technologies which it may wish to develop, either internally or through the licensing or acquisition of products from third parties. While the Company engages from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that the Company will be able to successfully integrate any acquired business. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to the Company and , in the case of equity financings, may result in dilution to the Company's stockholders. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS As noted above, this report, includes the foregoing discussions and includes forward-looking statements that involve risks and uncertainties. The factors discussed elsewhere in this amended quarterly report and those discussed in the Company's annual report on Form 10-K and other filings with the Securities and Exchange Commission, identify factors which could affect the Company's actual results and cause actual results to differ materially from those in the forward-looking statements. -13- PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Stockholders was held on April 21, 1998 at the Holiday Inn Richardson Select in Richardson, Texas. The following is a brief description of each matter voted upon by stockholders, including number of votes cast for, against, or withheld with regard to each matter of nominee. (1) Election of five (5) directors to serve until the next Annual Meeting of Stockholders and until their respective successors are duly elected and qualified.
FOR WITHHELD ---------- -------- G. Ward Paxton 14,979,571 140,512 Robert Anderson 14,979,121 140,962 J. Fred Bucy 14,982,825 137,258 T. Joe Head 14,985,320 134,763 Donald M. Johnston 14,986,070 134,013
(2) Ratification and approval of selection by the Board of Directors of Ernst & Young LLP as independent auditors of the Registrant for the fiscal year ending December 31, 1998.
FOR AGAINST WITHHELD ---------- ------- -------- 15,062,577 19,969 37,537
Item 5. OTHER INFORMATION. Stockholder Proposals Stockholders may submit proposals on matters appropriate for stockholder action at subsequent annual meetings of the stockholders consistent with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be considered for inclusion in the Proxy Statement and Proxy relating to the 1999 Annual Meeting of Stockholders, such proposals must be received by the Company not later than November 21, 1998. Such proposals should be directed to ODS Networks, Inc., 1101 East Arapaho Road, Richardson, Texas 75081, Attention: Secretary (telephone: (972) 234-6400; telecopy: (972) 234-1467. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 1934, as amended, if a stockholder who intends to present a proposal at the 1999 annual meeting of stockholders does not notify the Company of such proposal on or prior to February 3, 1999, then management proxies would be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the annual meeting, even though there is no discussion of the proposal in the 1999 proxy statement. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (A.) Exhibits. The following exhibits are included herein: (10.13) First Amendment Agreement to Third Amended and Restated Revolving Credit Loan Agreement, dated April 30, 1998, -14- between NationsBank of Texas, N.A. (formerly, NCNB Texas National Bank) and the Company. (10.14) Amendment to the ODS 401(K) Savings Plan, Effective May 29, 1998 (27) Financial Data Schedule (B.) Form 8-K. On May 21, 1998, the Company filed a report on Form 8-K to nnounce the acquisition of Essential Communications Corporation. -15- 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: March 29, 1999 By: /s/ Timothy W. Kinnnear ----------------------------------- Timothy W. Kinnear Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -16- EXHIBIT INDEX EXHIBIT 10.13* First Amendment Agreement to Third Amended and Restated Revolving Credit Loan Agreement, dated April 30, 1998, between NationsBank of Texas, N.A. (formerly NCNB Texas National Bank) and the Company. 10.14* Amendment to the ODS 401(K) Savings Plan, Effective May 29, 1998. 27** Financial Data Schedule ----------------- * Filed as an Exhibit in the Registrant's Quarterly Report on Form 10Q, dated August 14, 1998 (File No. 0-20191), which Exhibit is incorporated herein by reference. ** Filed herewith -17- EX-27 2 EXHIBIT 27
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/A FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 12,343 8,960 15,765 889 16,217 56,628 27,625 15,713 80,468 13,761 0 0 0 169 64,244 80,468 43,428 43,428 24,587 24,587 26,489 0 0 (6,853) (1,742) 0 0 0 0 (5,111) (.31) (.31)
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