<PAGE>
- --------------------------------------------------------------------------------
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission File Number 0-20191__
* * * * * *
ODS NETWORKS, INC.
-----------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-1911917
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1101 EAST ARAPAHO ROAD, RICHARDSON, TEXAS 75081
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(972) 234-6400
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
------------------------------------------
Former name, if changed since last report)
* * * * * *
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No ___
* * * * * *
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, on October 29, 1999 was 18,596,401.
- --------------------------------------------------------------------------------
<PAGE>
ODS NETWORKS, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and September 30, 1998 . 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998 . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 9-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 22
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ODS NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- --------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 12,727 $ 16,791
Securities available for sale 48,300 -
Short-term investments 8,152 4,760
Accounts receivable, net of allowance
for doubtful accounts and returns
of $1,064 in 1999 and $880 in 1998 6,305 6,265
Income taxes receivable - 4,749
Inventories, net 7,141 9,262
Other assets 1,252 759
------- -------
Total current assets 83,877 42,586
Property and equipment, net 6,818 7,627
Long-term investments 3,000 -
Equity investment - 700
Goodwill and intangible assets, net 9,437 10,614
Other assets 772 183
-------- -------
TOTAL ASSETS $103,904 $61,710
======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable $ 4,277 $ 3,345
Accrued expenses and deferred revenue 6,000 7,478
Deferred tax liability - current 17,456 -
------- -------
Total current liabilities 27,733 10,823
Deferred tax liability - noncurrent 2,001 1,361
Capital lease obligation 13 20
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 - 18,596
in 1999 and 18,513 in 1998 186 185
Additional paid-in capital 29,777 29,551
Net unreal. gain on securities avail. for sale 30,400 -
Retained earnings 15,322 21,282
Note receivable from stockholder (1,180) (1,189)
Foreign currency translation adjustments (348) (323)
-------- -------
Total stockholders' equity 74,157 49,506
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,904 $61,710
-------- -------
-------- -------
</TABLE>
See accompanying notes.
3
<PAGE>
ODS NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 13,184 $ 18,397 $ 45,753 $ 61,825
Cost of sales 7,426 10,670 24,468 35,257
-------- -------- -------- --------
Gross profit 5,758 7,727 21,285 26,568
Operating expenses:
Sales and marketing 5,206 7,514 14,870 23,450
Research and development 3,129 3,256 8,218 8,855
In process R&D -- 1,047 -- 3,347
General and administrative 1,198 1,172 3,773 3,647
Amortization of intangibles 414 249 1,177 428
-------- -------- -------- --------
Operating loss (4,189) (5,511) (6,753) (13,159)
Interest income, net 328 322 789 1,117
Other income (expense) 4 (64) 4 (136)
-------- -------- -------- --------
Loss before income taxes (3,857) (5,253) (5,960) (12,178)
Income tax benefit -- (1,728) -- (3,470)
-------- -------- -------- --------
Net loss $ (3,857) $ (3,525) $ (5,960) $ (8,708)
======== ======== ======== ========
Basic and diluted loss per share $ (0.21) $ (0.21) $ (0.32) $ (0.52)
======== ======== ======== ========
Weighted average shares outstanding
- basic and diluted 18,577 16,983 18,557 16,746
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
ODS NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
Sept. 30, Sept. 30,
1999 1998
---------- ----------
<S> <C> <C>
Operating Activities:
Net loss $ (5,960) $ (8,708)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
In process research and development - 3,347
Depreciation and amortization 2,662 3,082
Equity in net loss of affiliate - 136
Deferred income taxes (benefit) 897 (1,558)
Changes in operating assets and liabilities:
Accounts receivable (40) 680
Income taxes receivable 4,749 1,747
Inventories 2,121 (1,865)
Other assets (1,082) 174
Accounts payable and accrued expenses 977 (406)
Deferred revenue (1,524) 241
--------- --------
Net cash provided by (used in) operating activities 2,800 (3,130)
--------- ---------
Investing Activities:
Payments for corporate acquisition
(net of cash acquired) - (5,604)
Equity investment in affiliate - (1,250)
Purchases of short-term investments (8,142) (2,437)
Maturities of short-term investments 4,750 12,124
Purchases of long-term investments (3,000) (1,606)
Maturities of long-term investments - 6
Purchases of property and equipment (676) (1,830)
--------- ---------
Net cash used in investment activities (7,068) (597)
--------- ---------
Financing Activities:
Repayment of Essential Communications Corp.
line of credit - (400)
Exercise of warrants and employee stock options 227 1,873
Net repayment of capital leases (7) -
Note receivable secured by company's common stock - (1,260)
Payments on stockholder loan 9 -
-------- --------
Net cash provided by financing activities 229 213
-------- --------
Effect of foreign currency translation
adjustment on cash and cash equivalents (25) 35
--------- ---------
Net decrease in cash and cash equivalents (4,064) (3,479)
Cash and cash equivalents at beginning of
period 16,791 17,911
-------- --------
Cash and cash equivalents at end of period $ 12,727 $ 14,432
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
ODS NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. 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, 1998 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
three and nine month periods ending September 30, 1999 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, 1998. Certain prior year information has
been reclassified to conform with current year presentation.
2. Equity Investment
The Company holds 513,830 shares of the common stock of Alteon WebSystems,
Inc. (Nasdaq:ATON) valued at $48.3 million as of September 30, 1999. Alteon
WebSystems, previously a privately-held company, announced its initial public
offering of 4 million shares of its common stock at $19 per share on
September 24, 1999. The closing selling price per share of Alteon WebSystems
common stock as reported on the Nasdaq National Market on September 30, 1999
was $94 per share. This investment is subject to fluctuations in the trading
price of Alteon WebSystems' common stock and market volatility. The Company
entered into a lock-up agreement with the representatives of the underwriters
for Alteon WebSystems pursuant to which the Company has agreed, among other
things, not to sell shares of Alteon WebSystems held by the Company for a
period of 150 days from the date of the final prospectus related to the
offering.
The Company's accounting of this investment is in accordance with Financial
Accounting Standard No. 115 (FAS 115), "Accounting for Certain Investments in
Debt and Equity Securities". Under FAS 115, the Company's investment in
Alteon, which are securities available-for-sale, is presented at its fair
value as of September 30, 1999, which is $48.3 million. The Company's
investment in Alteon increased $47.6 million from $700 thousand as of June
30, 1999. As of September 30, 1999, the after tax unrealized gain in this
investment is $30.4 million with a current deferred tax liability of $17.2
million.
6
<PAGE>
3. Inventories (In thousands)
Inventories consist of:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
------------------------
<S> <C> <C>
Raw materials $ 1,235 $ 1,845
Work in process 857 401
Finished products 3,289 5,669
Demonstration systems 1,760 1,347
------- -------
$ 7,141 $ 9,262
======= =======
</TABLE>
4. Goodwill and Intangibles (In thousands)
Included in goodwill and intangibles are the following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
-------------------------
<S> <C> <C>
CMDS purchased software $ 4,136 $ 4,136
CMDS intangible asset 135 135
Essential goodwill 3,971 3,971
Essential purchased development 3,000 3,000
Essential intangible asset 340 340
-------- --------
11,582 11,582
Accumulated amortization (2,145) (968)
-------- --------
$ 9,437 $10,614
======= ========
</TABLE>
5. Accrued Expenses and Deferred Revenue (In thousands)
Included in accrued expenses and deferred revenue are the following:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
------------------------
<S> <C> <C>
Accrued sales commissions $ 788 $ 768
Accrued property taxes 216 494
Accrued vacation expense 792 776
Accrued incentive bonus 288 406
Accrued warranty expense 475 475
Accrued payroll expense 460 30
Deferred revenue 1,599 3,123
Other (individually less than
5% of current liabilities) 1,382 1,406
------- -------
$ 6,000 $ 7,478
======= =======
</TABLE>
6. Note Receivable from Stockholder
Note receivable from stockholder of approximately $1.2 million at September
30, 1999 and December 31, 1998 represents amounts loaned to an officer during
the third quarter of 1998 secured by the Company's common stock. These
amounts have been classified as contra-equity because in the event the
officer fails to remit payment, the Company will receive shares of the
Company's common stock.
7
<PAGE>
7. Earnings per Share (In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------------------- ----------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (3,857) $ (3,525) $ (5,960) $ (8,708)
-------- -------- --------- --------
Numerator for basic and diluted
earnings per share $ (3,857) $ (3,525) $ (5,960) $ (8,708)
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 18,577 16,983 18,557 16,746
Effect of dilutive securities:
Stock options and warrants 0 0 0 0
-------- -------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted
average common shares out-
standing 18,577 16,983 18,557 16,746
======== ======== ======== ========
Basic and diluted loss per share $ (0.21) $ (0.21) $ (0.32) $ (0.52)
======== ======== ======== ========
</TABLE>
8. Comprehensive Income (In thousands)
The following table represents a statement of changes in stockholder's equity
including comprehensive income disclosures:
<TABLE>
<CAPTION>
Note
Additional Receivable Other
Common Paid-In Retained from Comprehensive
Stock Capital Earnings Stockholder Income (Loss) Total
------ ------- -------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year
December 31, 1998 $ 185 $29,551 $21,282 $(1,189) $ (323) $49,506
Issuance of stock
under stock option
and purchase plans 1 226 227
Net loss (5,960) (5,960)
Stockholder note
Repayments 9 9
Net unrealized
gain on securities
available for sale
(net of taxes) 30,400 30,400
Foreign currency
translation
adjustment (25) (25)
------ ------- -------- ----------- ---------- -------
End of Period
Sept. 30, 1999 $ 186 $29,777 $15,322 $(1,180) $30,052 $74,157
===== ======= ======= =========== ========== =======
</TABLE>
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS CONCERNING: GROWTH AND FUTURE OPERATING RESULTS; DEVELOPMENTS IN
THE COMPANY'S MARKETS AND STRATEGIC FOCUS; NEW PRODUCTS AND PRODUCT
ENHANCEMENTS; POTENTIAL ACQUISITIONS AND THE INTEGRATION OF ACQUIRED
BUSINESSES, PRODUCTS AND TECHNOLOGIES; STRATEGIC RELATIONSHIPS; AND FUTURE
ECONOMIC, BUSINESS AND REGULATORY CONDITIONS. SUCH FORWARD-LOOKING STATEMENTS
ARE GENERALLY ACCOMPANIED BY WORDS SUCH AS "PLAN," "ESTIMATE," "EXPECT,"
"BELIEVE," "SHOULD," "WOULD," "COULD," "ANTICIPATE," "MAY" OR OTHER WORDS
THAT CONVEY UNCERTAINTY OF FUTURE EVENTS OR OUTCOMES. THESE FORWARD-LOOKING
STATEMENTS AND OTHER STATEMENTS MADE ELSEWHERE IN THIS REPORT ARE MADE IN
RELIANCE ON THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE SECTION
BELOW ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS" SETS
FORTH AND INCORPORATES BY REFERENCE CERTAIN FACTORS THAT COULD CAUSE ACTUAL
FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THESE STATEMENTS.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales. The period to period comparison of
financial results is not necessarily indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.3 58.0 53.5 57.0
------ ------ ------ ------
Gross profit 43.7 42.0 46.5 43.0
Operating expenses:
Sales and marketing expenses 39.5 40.9 32.5 37.9
Research and development expenses 23.7 17.7 18.0 14.3
In process research and development -- 5.7 -- 5.4
General and administrative expenses 9.1 6.4 8.2 5.9
Amortization of intangibles 3.1 1.3 2.6 0.7
------ ------ ------ ------
Operating loss (31.7) (30.0) (14.8) (21.2)
Interest income, net 2.5 1.8 1.8 1.8
Other expense -- (0.4) -- (0.2)
------ ------ ------ ------
Loss before income taxes (29.2) (28.6) (13.0) (19.6)
Income tax benefit -- (9.4) -- (5.6)
------ ------ ------ ------
Net loss (29.2)% (19.2)% (13.0)% (14.0)%
====== ====== ====== ======
Switching product sales 55.3% 55.3% 53.9% 49.8%
Shared bandwidth hub sales 19.7 34.1 21.0 41.4
Security, service and other sales 25.0 10.6 25.1 8.8
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Domestic sales 86.6% 86.0% 88.3% 80.2%
Export sales to: Europe 9.6 9.2 8.6 12.1
Canada 1.5 2.7 1.3 3.2
Asia 1.0 1.4 1.1 4.0
Latin America 1.3 0.7 0.7 0.5
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
9
<PAGE>
Net Sales. Net sales for the quarter and nine months ended September 30, 1999
decreased to $13.2 million and $45.8 million, respectively, compared to $18.4
million and $61.8 million, respectively, for the same periods of 1998 as
sales of the Company's network switching and data security products did not
increase quickly enough to offset the decrease in sales of its prior
generation shared bandwidth intelligent hubs. Demand for prior generation
shared bandwidth intelligent hubs may continue to decline as the market
transitions to switching products with enhanced price/performance
characteristics. The Company's goal is to transition an increasing proportion
of its net sales to data security and high performance switching solutions in
the year 2000.
Export Sales. Export sales for the quarter and nine months ended September
30, 1999 decreased to $1.8 million and $5.4 million, respectively, compared
to $2.6 million and $12.2 million, respectively, for the same periods of
1998. Adverse economic conditions in certain foreign countries may continue
to adversely affect demand for the Company's products in those countries for
the remainder of 1999.
Concentration of Sales. Sales to AT&T Corp. ("AT&T") were 8.0% and 10.0%,
respectively, of net sales during the quarter and nine months ended September
30, 1999, compared to 1.6% and 3.0%, respectively, of net sales for the same
periods of 1998. Sales to SGI, Inc. ("SGI") were 5.4% and 13.3%,
respectively, of net sales during the quarter and nine months ended September
30, 1999, compared to 4.5% and 1.8%, respectively, of net sales for the same
periods of 1998. Sales to Microage Federal were 14.2% and 9.1%, respectively,
of net sales during the quarter and nine months ended September 30, 1999,
compared to 5.9% and 5.3%, respectively, of net sales for the same periods of
1998. Direct net sales to various agencies of the U.S. Government were 11.1%
and 11.6%, respectively, of net sales for the quarter and nine months ended
September 30, 1999, compared to 14.8% and 16.1%, respectively, of net sales
during the same periods of 1998. In addition, a portion of the Company's
sales to SGI, Microage Federal and other corporations were resold by those
organizations to various agencies of the U.S. Government.
Gross Profit. Gross profit decreased to $5.8 million or 43.7% of net sales
for the quarter ended September 30, 1999 compared to $7.7 million or 42.0% of
net sales for the quarter ended September 30, 1998. Gross profit decreased to
$21.3 million or 46.5% of net sales for the nine months ended September 30,
1999 compared to $26.6 million or 43.0% of net sales for the nine months
ended September 30, 1998. 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 decreased to $5.2 million
or 39.5% of net sales for the quarter ended September 30, 1999 compared to
$7.5 million or 40.9% of net sales for the quarter ended September 30, 1998.
Sales and marketing expenses decreased to $14.9 million or 32.5% of net sales
for the nine months ended September 30, 1999 compared to $23.5 million or
37.9% of net sales for the same period of 1998. Sales and marketing expenses
decreased in the three and nine month periods ending September 30, 1999
compared to the same periods of 1998 due to the Company's restructuring and
expense reduction programs implemented in the fourth quarter of 1998. Sales
and marketing expenses may vary as a percentage of net sales in the future.
10
<PAGE>
Research and Development. Research and development expenses, excluding in
process research and development, decreased to $3.1 million or 23.7% of net
sales for the quarter ended September 30, 1999 compared to $3.3 million or
17.7% of net sales for the quarter ended September 30, 1998. Research and
development expenses, excluding in process research and development,
decreased to $8.2 million or 18.0% of net sales for the nine months ended
September 30, 1999 compared to $8.9 million or 14.3% of net sales for the
same period of 1998. The Company's research and development costs are
expensed in the period incurred. Research and development expenses decreased
in the first nine months of 1999 compared to the same period of 1998 due to
the Company's restructuring and expense reduction programs implemented in the
fourth quarter of 1998.
In Process Research and Development. During the third quarter of 1998, the
Company incurred a one-time charge associated with the acquisition of certain
assets of Science Applications International Corporation ("SAIC") of $1.0
million to expense the purchased in process research and development that had
not reached technological feasibility. During the second quarter of 1998, the
Company incurred a one-time charge associated with the acquisition of
Essential Communication Corporation ("Essential") of $2.3 million to
write-off acquired in process research and development that had not reached
technological feasibility.
On September 30, 1999, the Company entered a technology licensing agreement
with RSA Security Inc. ("RSA") under which the Company is the exclusive
licensee of RSA's Kane Security products in North America and Europe. The
Company is responsible for the future development for Kane Security software
and expects to incur incremental research and development expenses associated
with such software beginning in the fourth quarter of 1999.
General and Administrative. General and administrative expenses remained
unchanged at $1.2 million or 9.1% of net sales for the quarter ended
September 30, 1999 compared to $1.2 million or 6.4% of net sales for the
quarter ended September 30, 1998. General and administrative expenses
increased to $3.8 million or 8.2% of net sales for the nine months ended
September 30, 1999 compared to $3.6 million or 5.9% of net sales for the same
period of 1998. General and administrative expense may vary as a percentage
of net sales in the future.
Amortization. Amortization expenses increased to $0.4 million or 3.1% of net
sales for the quarter ended September 30, 1999 compared to $0.2 million or
1.4% of net sales for the quarter ended September 30, 1998. Amortization
increased to $1.2 million or 2.6% of net sales for the nine months ended
September 30, 1999 compared to $0.4 million or 0.7% of net sales for the same
period of 1998. This amortization expense is primarily associated with the
amortization of intangible assets related to the acquisition of Essential in
the quarter ending June 30, 1998 and the acquisition of certain assets of the
Computer Misuse and Detection System ("CMDS") Division from SAIC in the
quarter ending September 30, 1998.
Interest. Net interest income was $0.3 million and $0.8 million,
respectively, during the quarter and nine months ended September 30, 1999,
compared to $0.3 million and $1.1 million, respectively, for the same periods
of 1998. 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 did not record an income tax benefit for the nine
months ended September 30, 1999 related to its net operating losses which can
be carried forward to offset taxable income in future periods.
11
<PAGE>
Earnings per Share. The Company's earnings per share is calculated in
accordance with Financial Accounting Standards No. 128, "Earnings Per Share".
This method requires calculation of both earnings per share and earnings per
share, assuming dilution. Earnings per share excludes the dilutive effect of
common stock equivalents such as stock options, while earnings per share,
assuming dilution includes such dilutive effects. Future weighted-average
shares outstanding calculations will be impacted by the following factors:
(i) the ongoing issuance of common stock associated with stock options
exercises; (ii) the issuance of common stock associated with the Company's
employee stock purchase program or outstanding warrants; (iii) any
fluctuations in the Company's stock price, which could cause changes in the
number of common stock equivalents included in the earnings per share
assuming dilution computation; (iv) the issuance of common stock to effect
business combinations should the Company enter into such transactions; and
(v) the repurchase of common stock by the Company should the Company acquire
shares of its common stock under its stock repurchase program authorized in
October, 1999.
Liquidity and Capital Resources
The Company's principal sources of liquidity at September 30, 1999 were $12.7
million of cash and cash equivalents, $8.2 million of short-term investments
and $3.0 million of investments with a stated maturity beyond one year. As of
September 30, 1999, working capital was $56.1 million compared to $31.8
million as of December 31, 1998.
Cash flows provided by operations for the nine months ended September 30,
1999 were $2.8 million, primarily due to a decrease in inventories and a
decrease in income taxes receivable, partially offset by an increase in other
assets and a decrease in deferred revenue. 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 nine months ended September 30, 1999
consisted of net purchases of short-term investments of $3.4 million,
purchases of long-term investments of $3.0 million and equipment purchases of
$0.7 million.
Cash provided by financing activities in the nine months ended September 30,
1999 was $0.2 million, which primarily consisted of the issuance of common
stock upon the exercise of employee stock options.
The Company holds 513,830 shares of the common stock of Alteon WebSystems,
Inc. (Nasdaq:ATON) valued at $48.3 million as of September 30, 1999. Alteon
WebSystems, previously a privately-held company, announced its initial public
offering of 4 million shares of its common stock at $19 per share on
September 24, 1999. The closing selling price per share of Alteon WebSystems
common stock as reported on the Nasdaq National Market on September 30, 1999
was $94 per share. This investment is subject to fluctuations in the trading
price of Alteon WebSystems' common stock and market volatility. The Company
entered into a lock-up agreement with the representatives of the underwriters
for Alteon WebSystems pursuant to which the Company has agreed, among other
things, not to sell shares of Alteon WebSystems held by the Company for a
period of 150 days from the date of the final prospectus related to the
offering.
12
<PAGE>
On October 14, 1999 the Company announced a Stock Repurchase Program under
which up to 1.0 million shares of the Company's outstanding common stock may
be acquired in the open market over the next 12 months at the discretion of
management.
At September 30, 1999, the Company did not have any material commitments for
capital expenditures.
During the nine months ended September 30, 1999, the Company funded its
operations through cash flows from operations.
The Company believes that its cash, cash equivalents, investment balances and
potential cash flow from operations will provide sufficient cash resources to
finance its operations and currently projected capital expenditures through
1999 and 2000. However, there can be no assurance that the Company's cash
resources will be sufficient for the years 1999 and 2000.
The Company intends to explore possible 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 acquisitions will be made
or that the Company will be able to successfully integrate any acquired
business. Any material acquisition could result in a decrease to working
capital depending on the amount, timing and nature of the consideration to be
paid. In order to finance acquisitions, it may be necessary for the Company
to raise additional funds through public or private financings. There can be
no assurance that such financings will be available at acceptable terms, if
at all. Equity financings, if any, may result in dilution to the Company's
stockholders.
Factors That May Affect Future Results of Operations
Numerous factors may affect the Company's business and future results of
operations. These factors include, but are not limited to, technological
changes, competition and market acceptance, acquisitions, intellectual
property and licenses, product transitions, manufacturing and suppliers,
third-party products, dependence on key customers, international operations,
intellectual property and Year 2000 compliance issues. The discussion below
addresses some of these and other factors. For a more thorough discussion of
these and other factors that may affect the Company's business and future
results, see the discussion under the caption "Factors That May Affect Future
Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
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,
switches, and management and security products 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
13
<PAGE>
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 or 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 switches and data
security solutions is intensely competitive and subject to frequent product
introductions with improved price/performance characteristics. Industry
suppliers compete in areas such as conformity to existing and emerging
industry standards, interoperability with other networking products, network
management and security capabilities, performance, price, ease of use,
scalability, reliability, flexibility, product features and technical
support. The Company believes that its solutions-oriented approach to
networking (combining network design services, ODS products and third-party
products to provide superior, secure networking systems to customers)
provides the Company a competitive advantage with large organizations with
complex networking requirements.
There are numerous companies competing in various segments of the data
security and network switch markets. The Company's principal competitors
include Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. ("Cabletron"),
Lucent Technologies ("Lucent"), Nortel Networks ("Nortel"), 3Com Corporation
("3Com"), Alcatel USA, Inc. ("Alcatel"), International Business Machines
Corporation ("IBM"), Axent Technologies, Inc. ("Axent"), Internet Security
Systems, Inc. ("ISS"), and Network Associates, Inc. ("Network Associates").
Several of the Company's competitors have substantially greater financial,
technical and sales resources, better name recognition and a larger customer
base than the Company.
In addition, many of the Company's competitors offer customers a broader
product line which provides a more comprehensive networking and security
solution than the Company currently offers. 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.
Certain companies in the networking and security industry have expanded their
product lines or technologies in recent years as a result of acquisitions.
Further, more companies have developed products which conform to existing and
emerging industry standards and have sought to compete on the basis of price.
The Company anticipates increased competition from large telecommunication
equipment vendors which are expanding their capabilities in the data
networking market. For example, Lucent and Nortel have acquired several
networking companies to enhance their capabilities in data networking.
Further, the Company anticipates increased competition from private
"start-up" companies that have developed or are developing advanced network
switching and security products. Increased competition in the networking and
security 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.
14
<PAGE>
There can be no assurance that the Company will be able to compete
successfully in the future with current or new competitors.
The Company is pursuing a strategy to increase the percentage of its revenue
generated through indirect sales channels including value added resellers,
system integrators, original equipment manufacturers and network service
providers. There can be no assurance that the Company's products will gain
market acceptance in these indirect sales channels. Further, competition
among networking and security companies to sell products through these
indirect sales channels could result in significant price competition and
reduced profit margins.
The Company is also pursuing a strategy to broaden and further differentiate
its product line by introducing complementary network switching, management
and security products and incorporating new technologies into its existing
product line. There can be no assurance that the Company will successfully
introduce these products or that such products will gain market acceptance.
The Company anticipates competition from networking companies, network
security companies and others in each of its product lines. The Company
anticipates that profit margins will vary among its product lines and that
product mix fluctuations could have an adverse effect on the Company's
overall profit margins.
Acquisitions. Cisco, Cabletron, Lucent, Nortel and other competitors have
recently acquired several networking and security 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 and
security vendors to provide competitive solutions to customers. Some of the
recent and future acquisitions by the Company's competitors may have the
effect of limiting the Company's access to commercially significant
technologies. Further, the business combinations and acquisitions in the
networking and security 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.
On May 7, 1998, the Company acquired Essential, a privately held company
based in Albuquerque, New Mexico. Essential designs and manufactures
high-speed computer network equipment. In September 1998, the Company
completed an acquisition of the CMDS division from SAIC, a privately held
company in San Diego, California. On September 30, 1999, the Company entered
a technology licensing agreement with RSA Security Inc. ("RSA") under which
the Company is the exclusive licensee of RSA's Kane Security products in
North America and Europe. The Kane Security Products include the Kane
Security Analyst, a vulnerability assessment tool, and the Kane Security
Monitor, a 24-hour tool that continuously reviews and analyzes NT security
event logs for patterns of misuse and alerts the security administrator in
real-time. The Company is responsible for marketing, sales, support,
maintenance and development for Kane Security software.
The Company may, in the future, acquire or invest in additional companies,
business units, product lines, or technologies to accelerate the development
of products and sales channels complementary to the Company's existing
products and sales channels. Acquisitions involve numerous risks, including
difficulties in assimilation of operations, technologies, and products of the
acquired companies;
15
<PAGE>
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market
positions; the potential loss of key employees of the acquired company; and
the diversion of management's attention from normal daily operation of the
Company's business. There can be no assurance that any potential acquisition
or investment will be consummated or that such acquisition or investment will
be realized.
Product Transitions. Once current networking and security 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 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 market for shared bandwidth intelligent hubs,
sales of which represented the majority of the Company's net sales over the
past several years, decreased in 1998 and in the first nine months of 1999
compared to the same periods of previous years 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. Nor can there be any assurance that the Company will be able to
respond effectively to technological changes or new product announcements by
competitors, which could render portions of the Company's inventory obsolete.
The Company's sales of commodity LAN switches and hubs have declined over the
past two years as certain of the Company's large competitors gained market
share. The Company's goal is to transition an increasing proportion of its
revenues to growing markets in which the Company offers differentiated
products, such as data security solutions and high performance switches. The
Company's ability to achieve its revenue objectives over the next several
quarters will largely depend upon the extent to which growth in these
differentiated product lines compensates for the expected decline in the
commodity LAN switch and hub product lines.
Manufacturing and Suppliers. All of the materials used in the Company's
products are purchased under contracts or 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 components such as microprocessors and ASICs are available from one
or a limited number of suppliers. The lead times for delivery of components
vary significantly and 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.
The Company's operational strategy relies on outsourcing product assembly and
certain other operations. There can be no assurance that the Company will
effectively manage its third-party contractors or that these contractors will
meet the Company's future requirements for timely delivery of products of
sufficient quality or quantity. Further, the Company intends to introduce a
number of new products and product enhancements in 1999 and 2000 which will
16
<PAGE>
require that the Company rapidly achieve volume production of those new
products by coordinating its efforts with those of its suppliers and
contractors. The inability of the third-party contractors to provide ODS with
adequate supplies of high-quality products could cause a delay in the
Company's ability to fulfill orders and 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 network security products. These alliances allow ODS
to provide integrated solutions to its customers, combining ODS developed
technology with third-party products. 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 to offer fully integrated solutions to ODS
customers.
Dependence on Key Customers. A relatively small number of customers have
accounted for a significant portion of the Company's revenue. U.S. Government
agencies and strategic network integrators are expected to continue to
account for a substantial portion of the Company's net revenue. The Company
continuously faces competition from Cisco, Cabletron, Lucent, Nortel,
Alcatel, 3Com, Axent, ISS and others for U.S. Government networking and
security projects and corporate networking and security installations. Any
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. 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, regulatory approvals and other constraints upon
international trade. For example, the fluctuation in currency exchange rates
and adverse economic developments in Malaysia, South Korea and certain other
countries adversely affected demand for the Company's products in those
countries in 1998 and the first nine months of 1999 and may continue to
adversely affect demand for the Company's products in those countries in the
remainder of 1999 and 2000. The Company's sales to foreign customers are
subject to export regulations. In particular, certain sales of the Company's
high performance networking and data security products require clearance and
export licenses from the U.S. Department of Commerce. Any inability to obtain
clearances or any required foreign regulatory approvals on a timely basis
could have a material adverse effect on the Company's operating results.
Intellectual Property and Licenses. 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.
17
<PAGE>
There are many patents held by companies which relate to the design and
manufacture of data security and networking systems. Potential claims of
infringement could be asserted by the holders of those patents. 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 DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS:
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Based on assessments, the Company determined that it was necessary to
implement upgrades to financial information systems software so that these
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that the necessary upgrades and related modifications of
existing software are complete and that the Year 2000 Issue has been
mitigated. However, if such modifications and replacements are not complete,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involved the following four
phases: assessment, remediation, testing, and implementation. The Company
further classified all information technology systems as mission critical and
non-mission critical based on the potential for the Company's operations to
be significantly affected by an IT system's ability to process Year 2000
dates properly. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particularly
the general ledger, billing, payroll, and inventory systems. That assessment
also indicated that software and hardware (embedded chips) used in production
and manufacturing systems (hereafter also referred to as operating equipment)
also are at risk. Based on a review of its product line, the Company has
determined that most of the products it has sold and will continue to sell do
not require remediation to be Year 2000 compliant. Accordingly, the Company
does not believe that the Year 2000 presents a material exposure as it
relates to the Company's products. In addition, the Company has gathered and
continues to gather information about the Year 2000 compliance status of its
significant suppliers and subcontractors and continues to monitor their
compliance.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT. For its information
technology exposures, to date, the Company has met its completion criteria
for all phases with respect to all mission critical and non-mission critical
systems that could be significantly affected by the Year 2000. If the
completed modifications for mission critical and non-mission critical IT
systems, or the completion criteria utilized by the Company, are inadequate,
the Year 2000 Issue could have a material impact on the operations of the
Company.
18
<PAGE>
The assessment phase on the Company's products did not identify any
significant use of any real time clocks that would be affected by the Year
2000 Issue. Therefore, the Company's Year 2000 activities with respect to the
Company's products are 100% complete. If management's assessment with respect
to the Company's products is incorrect, the Company may not be able to
manufacture and ship products, fill customer orders or comply with
contractual obligations. Management believes, based on its assessment, that
the Company is not at significant risk with respect to Year 2000 compliance
of the Company's products.
For operating equipment, generally considered non-critical to the Company's
operations, the Company is 100% complete in the remediation, testing, and
implementation phases. If the completed and planned modifications for
operating equipment are inadequate, the Year 2000 Issue could have a material
impact on the operations of the Company.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000. The Company's payroll application is processed directly by a
third-party vendor. The Company has obtained and evaluated representations
from the third-party vendor to ensure that the Company's outsourced payroll
application is Year 2000 compliant.
There are no significant third party vendors that interface directly with the
Company's information systems. The Company has completed queries of its
significant customers, suppliers and subcontractors that do not share
information systems with the Company (external agents). To date, the Company
is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their
Year 2000 resolution process in a timely fashion could materially impact the
Company. The effect of non-compliance by external agents is not determinable.
COSTS. The costs associated with the Company's Year 2000 project have been
expensed as incurred, have not been significant and have been funded through
operating cash flows and working capital. Further costs, if any, are not
expected to be material and will be expensed as incurred.
RISKS. Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company believes it has completed all necessary phases of the Year 2000
program. In the event that the Company has not fully completed all phases
with respect to each category of Year 2000 exposure, the Company could be
unable to take customer orders, manufacture and ship products, invoice
customers or collect payments. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely
affect the Company. The Company could be subject to litigation for computer
systems product failure, equipment shutdown or failure to properly date
business records. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
The Company has contingency plans for certain critical applications and is
working on plans for others. These contingency plans involve, among other
actions, manual workarounds, increasing inventories, adjusting staffing
strategies and restoring systems with backup copies of Company software and
data and backdating operating systems until Year 2000 issues are resolved.
19
<PAGE>
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, switches, management and
security products, there can be no assurance as to the rate or extent of the
growth of such market or the potential adoption of alternative technologies.
Future declines in networking and security 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. Additionally, Year 2000 concerns
by customers may adversely affect sales of networking and security products
for the remainder of 1999.
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.
20
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange. The Company's revenue originating outside the U.S. in the
quarters ended September 30, 1999, 1998 and 1997 were 13.4%, 14.0% and 29.0%
of total revenues, respectively. Revenue originating outside the U.S. in the
nine months ended September 30, 1999, 1998 and 1997 were 11.8%, 19.8% and
28.0% of total revenues, respectively. International sales are made mostly
from the Company's foreign sales subsidiaries in the local countries and are
typically denominated in U.S. dollars. These subsidiaries incur most of their
expenses in the local currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely
affected by changes in these or other factors. The effect of foreign exchange
rate fluctuations on the Company in 1999, 1998 and 1997 was not material.
Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits, fixed rate obligations of
corporations, municipalities, and state and national governmental entities
and agencies. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances and are
invested in short-term time deposits of the local operating bank.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely affected due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer
losses of principal if forced to sell securities which have seen a decline in
market value due to changes in interest rates. The Company's investment
securities are held for purposes other than trading. Several investment
securities have a maturity in excess of one year. The weighted-average
interest rate on investment securities at September 30, 1999 was 5.0%. The
fair value of investments held at September 30, 1999 approximate amortized
cost.
The Company holds 513,830 shares of the common stock of Alteon WebSystems,
Inc. (Nasdaq:ATON) valued at $48.3 million as of September 30, 1999. Alteon
WebSystems, previously a privately-held company, announced its initial public
offering of 4 million shares of its common stock at $19 per share on
September 24, 1999. The closing selling price per share of Alteon WebSystems
common stock as reported on the Nasdaq National Market on September 30, 1999
was $94 per share. This investment is subject to fluctuations in the trading
price of Alteon WebSystems' common stock and market volatility. The Company
entered into a lock-up agreement with the representatives of the underwriters
for Alteon WebSystems pursuant to which the Company has agreed, among other
things, not to sell shares of Alteon WebSystems held by the Company for a
period of 150 days from the date of the final prospectus related to the
offering.
21
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A.) EXHIBITS. The following exhibits are included herein:
(27) Financial Data Schedule
(B.) FORM 8-K. On October 15, 1999 the Company filed a Current
Report on Form 8-K (Item 5) in order
to report the authorization of a
stock repurchase program pursuant to
which the Company may repurchase up
to 1.0 million shares of the
Company's outstanding common stock
on the open market over the 12 month
period ending October 14, 2000.
22
<PAGE>
S I G N A T U R E S
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.
ODS NETWORKS, INC.
Date: November 10, 1999 /s/ Timothy W. Kinnear
---------------------------------
Timothy W. Kinnear
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
/s/ Jay R. Widdig
---------------------------------
Jay R. Widdig
Corporate Controller
(Principal Accounting Officer)
23
<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 4 OF THE COMPANY'S 10Q FOR THE YEAR TO DATE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,727
<SECURITIES> 56,452
<RECEIVABLES> 7,369
<ALLOWANCES> 1,064
<INVENTORY> 7,141
<CURRENT-ASSETS> 83,877
<PP&E> 15,339
<DEPRECIATION> 8,521
<TOTAL-ASSETS> 103,904
<CURRENT-LIABILITIES> 27,733
<BONDS> 0
0
0
<COMMON> 186
<OTHER-SE> 73,971
<TOTAL-LIABILITY-AND-EQUITY> 74,157
<SALES> 13,184
<TOTAL-REVENUES> 13,184
<CGS> 7,426
<TOTAL-COSTS> 7,426
<OTHER-EXPENSES> 9,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,857)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,857)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
