<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 20, 1999
----------------------------
ODS NETWORKS, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- -------------------------------------------------------------------------------
(State of Other Jurisdiction of Incorporation)
000-20191 75-1911917
- -------------------------------------------------------------------------------
(Commission File Number) (IRS Employer
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)
N/A
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
On January 20, 1999, ODS Networks, Inc., a Delaware corporation (the
"Company"), announced results for the fourth quarter and year ended December 31,
1998, as set forth in a press release of the Company dated January 20, 1999
attached hereto as Exhibit 99.1 and incorporated herein by reference. The
financial results include the costs of the strategic restructuring announced
during the fourth quarter of 1998. In addition, the Company announced the
restatement of its results of operations for the second quarter of fiscal year
1998 to reduce the charge for in-process research and development acquired in
connection with the acquisition of Essential Communication Corporation, based on
the new methodology set forth by the Staff of the Securities and Exchange
Commission in its letter dated September 15, 1998 to the American Institute of
Certified Public Accountants.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
99.1 Text of press release of the Registrant, dated
January 20, 1999.
<PAGE>
SIGNATURES
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 hereunto duly authorized.
ODS NETWORKS, INC.
Dated: January 20, 1999 By: /s/ Timothy W. Kinnear
--------------------------------
Timothy W. Kinnear,
Chief Operating Officer
2
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
99.1 Text of press release of the Registrant, dated January 20, 1999.
<PAGE>
CONTACTS: MEDIA CONTACT:
INVESTOR CONTACT: Dru Popper-Lopez
Charleigh Shayne Director, Marketing
Director, Investor Relations (972) 664-8040
(972) 664-8061
ODS NETWORKS, INC. ANNOUNCES
FOURTH QUARTER AND ANNUAL RESULTS
Richardson, Texas - January 20, 1999 - ODS Networks, Inc. (NASDAQ: ODSI),
("ODS"), today announced its results for the fourth quarter and year ended
December 31, 1998.
Net sales for the year ended December 31, 1998 were $74.6 million, compared
with $92.3 million in the preceding year. ODS reported a net loss of $25.8
million, or a loss per share of $1.50, for the year ended December 31, 1998
compared with a net loss of $4.9 million, or a loss per share of $0.30, for
the preceding year.
Net sales for the fourth quarter of 1998 were $12.8 million, compared with
$18.1 million for the fourth quarter of 1997. ODS reported a net loss of
$17.0 million, or a loss per share of $0.92, for the fourth quarter of 1998
compared with a net loss of $3.5 million, or a loss per share of $0.21, for
the fourth quarter of 1997.
The net loss reported for the year and the quarter ended December 31, 1998
include several charges related to the company's strategic restructuring
which was announced on December 31, 1998. The strategic restructuring plans
are designed to integrate the businesses acquired by ODS in 1998 and to focus
ODS' efforts on high-performance network and data security solutions.
During the fourth quarter, the company recorded a $6.7 million charge to cost
of sales to write down the value of inventory associated with older
technologies and a $3.5 million restructuring charge to write off the value
of certain fixed assets which are to be disposed of. The company also
recorded a $0.4 million restructuring charge for severance pay related to the
fourth quarter reduction of its professional staff by approximately 45
positions and its manufacturing operations staff by approximately 72
positions. Further, during the fourth quarter, the company recorded a $1.0
million charge to write off its investment in an affiliated company.
In May of 1998, the company acquired Essential Communication Corporation
("Essential") and recorded a $5.3 million charge for acquired in-process
research and development. Although the company reported its second quarter
results, including the Essential acquisition, in accordance with established
accounting practice and the valuation provided by an independent appraisal,
the company has evaluated an adjustment of the amount originally allocated to
acquired in-process research and development to reflect the new methodology
set forth in the September 15, 1998 letter from the SEC Staff to the American
Institute of Certified Public Accountants. As a result of that evaluation,
the company restated its results of operations for the second quarter of 1998
to reduce the charge for acquired in-process research and development to $2.3
million based on the new methodology set forth by the SEC Staff, and it
reduced the loss reported in the second quarter and for the year by $3.0
million.
<PAGE>
ODS
Fourth Quarter 1998 Results
Page 2 of 5
The company's income tax benefit for the year ended December 31, 1998
primarily reflects the amount that ODS will recover as a refund of income
taxes paid by the company in prior years. The company did not record an
income tax benefit as of December 31, 1998 related to the net operating
losses which can be carried forward to offset taxable income in future years.
Ward Paxton, chairman, president and CEO of ODS, said, "Sales for 1998 and
our performance were impacted by several factors including the declining
market for modular shared media hubs, intense competition in the local area
network market, and a reduction of sales to customers located in Asia."
Paxton added, "To improve our performance, we have taken steps designed to
focus on key growth opportunities such as the high-performance network and
data security markets. The acquisitions of Essential and the CMDS Division
of Science Applications International Corporation represent key components of
ODS' strategy to provide unique, high-performance network and data security
solutions. Our recent restructuring, which was announced in December, is a
key step in our efforts to efficiently integrate these newly-acquired
businesses and maintain our leading-edge technology position in our target
market segments."
ODS completed two key acquisitions in 1998, demonstrating the company's
strategy to pursue the high performance network and data security market
segments. In May of 1998, the company acquired Essential, a leader in high
performance networking technology. In January of 1999, Essential began
shipping the ESN-10000 switch based on the world's fastest networking
technology standard, capable of moving data at more than six times the speed
of Gigabit Ethernet.
In September of 1998, ODS acquired specific assets and technologies of the
CMDS (Computer Misuse and Detection System) Division of Science Applications
International Corporation (SAIC). In January of 1999, ODS introduced CMDS
4.0, its next generation computer misuse and intrusion detection system.
CMDS 4.0 is exceptionally scalable and incorporates an adaptable expert
system to support the varying intrusion detection and computer misuse
requirements of small businesses and large corporations to ISPs and
government agencies. In addition, CMDS is highly complimentary to ODS'
SecureCom and CryptoWatch family of data security products.
"We are entering 1999 with a 15-year record of providing leading technical
solutions and customer service to notable customers, a solid balance sheet
and a reduced cost structure," stated Tim Kinnear, chief operating officer of
ODS. "With our recent completion of the industry's fastest network switch
and the introduction of our next generation security software, we are
executing our strategy to aggressively pursue the growth opportunities in the
high-performance network and data security markets," concluded Kinnear.
<PAGE>
ODS
Fourth Quarter 1998 Results
Page 3 of 5
ABOUT ODS NETWORKS, INC.
ODS Networks, Inc. is a leading provider of high-performance network and data
security solutions. ODS products are used worldwide by government agencies
and private and public companies. ODS provides leading edge software and
hardware solutions that address the network's most demanding bandwidth and
security challenges. Additional information about ODS is available at
http://www.ods.com.
This release, other than historical information, includes forward-looking
statements with respect to achieving corporate objectives, implementing
corporate strategies and restructuring programs, completing the integration
of the companies acquired during 1998, reducing costs, 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 but not limited to the
following: the difficulties and uncertainties in successfully developing and
introducing new products, the ability to manage successfully the
restructuring programs discussed above, the impact of changing economic
conditions, business conditions in the networking industry, the ability to
manage acquisitions effectively, the impact of market peers and their
products as well as risks concerning future technology and others identified
in the Company's Annual Report on Form 10-K, Quarterly Reports on Forms 10-Q
and other Securities and Exchange Commission filings. These filings can be
obtained by contacting ODS Investor Relations.
ODS is a registered trademark of ODS Networks, Inc. InfiniteSwitch,
LANBlazer, CMDS, SecureCom and CryptoWatch are trademarks of ODS Networks,
Inc. All other trademarks are the property of their respective owners.
(FINANCIAL TABLES FOLLOW)
<PAGE>
ODS
Fourth Quarter 1998 Results
Page 4 of 5
ODS NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except par value amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,791 $17,911
Short term investments 4,760 14,667
Accounts receivable, net of allowance for doubtful
accounts of $880 in 1998 and $758 in 1997 6,265 8,668
Income taxes receivable 4,749 3,159
Inventories 9,262 14,671
Deferred tax assets - 1,721
Other assets 759 1,221
------- -------
TOTAL CURRENT ASSETS 42,586 62,018
Property and equipment, net 7,627 11,836
Long term investments - 3,168
Intangibles, net 10,614 -
Equity investments 700 -
Other assets 183 156
------- -------
TOTAL ASSETS $61,710 $77,178
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,345 $ 5,381
Accrued expenses and deferred revenue 7,478 4,790
------- -------
TOTAL CURRENT LIABILITIES 10,823 10,171
Deferred tax liabilities 1,361 628
Capital lease obligations 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 18,513 in 1998
and 16,486 in 1997 185 165
Additional paid-in capital 29,551 19,488
Retained earnings 21,282 47,032
Note receivable from stockholder (1,189) -
Foreign currency translation adjustments (323) (306)
------- -------
------- -------
TOTAL STOCKHOLDERS' EQUITY 49,506 66,379
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $61,710 $77,178
------- -------
------- -------
</TABLE>
(MORE)
<PAGE>
ODS
Fourth Quarter 1998 Results
Page 5 of 5
ODS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $12,785 $18,067 $74,610 $92,327
Cost of sales 14,973 12,852 50,230 55,795
-------- ------- -------- -------
Gross profit (2,188) 5,215 24,380 36,532
Operating expenses:
Sales and marketing 5,928 7,527 29,378 30,390
Research and development 3,389 2,519 12,244 10,810
In process research and development (1) - - 3,347 -
General and administrative 1,235 1,205 4,882 4,912
Amortization 540 - 968 -
Restructuring Charge 3,932 - 3,932 -
-------- ------- -------- -------
Operating loss (17,212) (6,036) (30,371) (9,580)
Interest income, net 281 482 1,398 1,639
Other expense (986) - (1,122) -
-------- ------- -------- -------
Loss before income taxes (17,917) (5,554) (30,095) (7,941)
Income tax benefit (2) (875) (2,097) (4,345) (3,004)
------- ------- ------- -------
Net loss $(17,042) $(3,457) $(25,750) $(4,937)
-------- ------- -------- -------
-------- ------- -------- -------
Basic earnings (loss) per share $ (0.92) $ (0.21) $ (1.50) $ (0.30)
-------- ------- -------- -------
-------- ------- -------- -------
Diluted earnings (loss) per share $ (0.92) $ (0.21) $ (1.50) $ (0.30)
-------- ------- -------- -------
-------- ------- -------- -------
Weighted average common shares outstanding 18,508 16,486 17,190 16,437
-------- ------- -------- -------
-------- ------- -------- -------
Weighted average shares outstanding assuming
Dilution 18,508 16,486 17,190 16,437
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
(1) In May of 1998, the company acquired Essential Communication
Corporation (Essential) and recorded a $5.3 million charge for acquired
in-process research and development. Although the company reported its
second quarter results in accordance with established accounting practice
and the valuation provided by an independent appraisal, the company has
evaluated an adjustment of the amount originally allocated to acquired
in-process research and development to reflect the new methodology set
forth in the September 15, 1998 letter from the SEC Staff to the
American Institute of Certified Public Accountants. As a result of that
evaluation, the company restated its results of operations for the second
quarter of 1998 to reduce the charge for acquired in-process research and
development to $2.3 million, reduce the loss reported in the second quarter
from $6.2 million to $3.2 million, and increase the intangibles recorded in
the purchase price allocation by $3.0 million based on the new methodology
set forth by the SEC Staff.
(2) The company's income tax benefit for the year ended December 31,
1998 primarily reflects the amount that ODS will recover as a refund of
income taxes paid by the company in prior years. The company did not
record an income tax benefit as of December 31, 1998 related to the net
operating losses which can be carried forward to offset taxable income in
future years.
