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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.
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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
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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.
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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.
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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.
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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.
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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
------- -------
------- -------
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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%
----- ----- ----- -----
----- ----- ----- -----
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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.
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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.
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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
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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,
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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.
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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.
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"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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
EXHIBIT INDEX
EXHIBIT
11 Schedule of Computation of Per Share Earnings
27 Financial Data Schedule
-17-
<PAGE>
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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,567
<SECURITIES> 14,504
<RECEIVABLES> 22,932
<ALLOWANCES> 775
<INVENTORY> 26,685
<CURRENT-ASSETS> 69,283
<PP&E> 21,446
<DEPRECIATION> 9,939
<TOTAL-ASSETS> 80,973
<CURRENT-LIABILITIES> 10,488
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 69,792
<TOTAL-LIABILITY-AND-EQUITY> 80,973
<SALES> 91,815
<TOTAL-REVENUES> 91,815
<CGS> 47,190
<TOTAL-COSTS> 47,190
<OTHER-EXPENSES> 28,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,301
<INCOME-TAX> 6,194
<INCOME-CONTINUING> 10,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,107
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
