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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, 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
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* * * * * *
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
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(Address of principal executive offices)
(Zip Code)
(972) 234-6400
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(Registrant's telephone number, including area code)
Not Applicable
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(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.
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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
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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
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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
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TOTAL ASSETS $82,820 $81,935
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------- -------
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
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $82,820 $81,935
------- -------
------- -------
See accompanying notes.
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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
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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
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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
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Net income (loss) $ (431) $ 2,976
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------- -------
Net income (loss) per share $ (0.03) $ 0.18
------- -------
------- -------
Weighted average common and common
equivalent shares outstanding 16,475 16,816
------- -------
------- -------
See accompanying notes.
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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
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Net sales $74,260 $91,815
Cost of sales 42,943 47,190
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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
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Operating income (loss) (3,544) 15,634
Interest income, net 1,157 667
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Income (loss) before income taxes (2,387) 16,301
Income tax (benefit) provision (907) 6,194
------- -------
Net income (loss) $(1,480) $10,107
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------- -------
Net income (loss) per share $ (0.09) $ 0.60
------- -------
------- -------
Weighted average common and common
equivalent shares outstanding 16,420 16,826
------- -------
------- -------
See accompanying notes.
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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.
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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
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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
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$15,525 $25,573
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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
------ ------
------ ------
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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%
----- ----- ----- -----
----- ----- ----- -----
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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.
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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.
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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
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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
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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
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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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
11 Schedule of Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
ODS NETWORKS, INC.
COMPUTATIONS OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------- ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
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
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- --------------------
* 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.
<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
3-5 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,356
<SECURITIES> 20,863
<RECEIVABLES> 15,869
<ALLOWANCES> 751
<INVENTORY> 15,525
<CURRENT-ASSETS> 65,782
<PP&E> 25,257
<DEPRECIATION> 13,100
<TOTAL-ASSETS> 82,820
<CURRENT-LIABILITIES> 12,145
<BONDS> 0
0
0
<COMMON> 165
<OTHER-SE> 69,817
<TOTAL-LIABILITY-AND-EQUITY> 82,820
<SALES> 74,260
<TOTAL-REVENUES> 74,260
<CGS> 42,943
<TOTAL-COSTS> 42,943
<OTHER-EXPENSES> 34,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,387)
<INCOME-TAX> (907)
<INCOME-CONTINUING> (1,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,480)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
