____________________________________________________________________________
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
* * * * * *
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission File Number 0-20191
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OPTICAL DATA SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 75-1911917
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(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)
(214) 234-6400
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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Former name, former address and former fiscal year, if
changed since last report
* * * * * *
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
Yes X No
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* * * * * *
The number of shares outstanding of the Registrant's Common Stock, $.01
par value, on June 30, 1996 was 16,250,114.
____________________________________________________________________________
OPTICAL DATA SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Index to Condensed Consolidated Financial Statements
PAGE
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Condensed Consolidated Balance Sheets - Unaudited - June 30,
1996 and December 31, 1995 . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Income - Unaudited
Three months ended June 30, 1996 and June 30, 1995 . . . . 2
Condensed Consolidated Statements of Income - Unaudited
Six months ended June 30, 1996 and June 30, 1995 . . . . . 3
Condensed Consolidated Statements of Cash Flows - Unaudited
Six months ended June 30, 1996 and June 30, 1995 . . . . . 4
Notes to Condensed Consolidated Financial Statements -
Unaudited . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . 6
OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, Dec. 31,
1996 1995
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(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,984 $ 10,397
Short term investments 14,320 15,328
Accounts receivable (net) 23,599 15,238
Income taxes receivable 524 -
Inventories 23,705 19,374
Deferred tax assets 975 951
Other assets 1,004 837
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Total current assets 69,111 62,125
Property and equipment (net) 11,173 9,458
Other assets 189 102
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TOTAL ASSETS $80,473 $71,685
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 13,351 $ 11,867
Income taxes payable - 612
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Total current liabilities 13,351 12,479
Deferred tax liabilities 527 508
Stockholders' Equity:
Preferred stock, $.01 par value,
Authorized shares - 5,000,000
No shares issued and outstanding
Common stock, $.01 par value,
Authorized shares - 80,000,000
Issued and outstanding shares - 16,250,114
at June 30, 1996 and 16,149,544 at
December 31, 1995 163 162
Additional paid-in capital 18,498 17,729
Foreign currency translation adjustments (116) (111)
Retained earnings 48,050 40,918
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Total stockholders' equity 66,595 58,698
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,473 $71,685
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See accompanying notes.
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OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
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June 30, June 30,
1996 1995
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Net sales $31,007 $30,873
Cost of sales 15,641 16,235
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Gross profit 15,366 14,638
Operating expenses:
Sales and marketing 6,395 5,296
Research and development 2,448 2,215
General and administrative 872 1,101
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Operating income 5,651 6,026
Interest income (net) 215 229
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Income before income taxes 5,866 6,255
Income taxes 2,229 2,407
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Net income $ 3,637 $ 3,848
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Net income per share $ .22 $ .23
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Weighted average shares outstanding 16,880 16,838
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See accompanying notes.
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OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Six Months Ended
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June 30, June 30,
1996 1995
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Net sales $60,512 $55,372
Cost of sales 30,780 28,243
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Gross profit 29,732 27,129
Operating expenses:
Sales and marketing 12,324 10,321
Research and development 4,609 4,155
General and administrative 1,759 2,020
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Operating income 11,040 10,633
Interest income (net) 462 439
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Income before income taxes 11,502 11,072
Income taxes 4,371 4,242
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Net income $ 7,131 $ 6,830
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Net income per share $ .42 $ .41
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Weighted average shares outstanding 16,874 16,804
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See accompanying notes.
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OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended
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June 30, June 30,
1996 1995
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Operating Activities:
Net income $ 7,131 $ 6,830
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 1,145 910
Provision for deferred income taxes (5) (747)
Changes in operating assets and
liabilities:
Accounts receivable (8,361) (2,570)
Inventories (4,331) (2,596)
Other current assets (167) 246
Other assets (87) (7)
Accounts payable and accrued expenses 1,484 (1,542)
Income taxes payable (710) 1,375
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Net cash (used) provided by
operating activities (3,901) 1,899
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Investing Activities:
Purchases of short-term investments (8,092) (10,814)
Sale of short-term investments - 1,499
Maturities of short-term investments 9,100 7,780
Purchases of property and equipment (2,860) (1,535)
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Net cash used in investing activities (1,852) (3,070)
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Financing Activities:
Exercise of employee stock options 344 397
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Net cash provided by financing activities 344 397
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Effect of foreign currency translation
adjustment on cash and cash equivalents (4) 7
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Net (decrease) in cash and cash
equivalents (5,413) (767)
Cash and cash equivalents at beginning of
period 10,397 6,251
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Cash and cash equivalents at end of period $ 4,984 $ 5,484
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Supplemental disclosure of income taxes paid $ 5,086 $ 3,622
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Supplemental schedule of non cash activities:
Tax benefit of stock options exercised and
sold $ 426 $ 291
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See accompanying notes.
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OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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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 accruals) considered
necessary for fair presentation have been included.
The condensed consolidated financial statements included herein should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Registrant's annual report on Form 10-K for the year
ended December 31, 1995.
Note B - Inventories (in thousands)
Inventories consist of:
June 30, Dec. 31,
1996 1995
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Raw materials $ 5,308 $ 4,080
Work in process 3,994 2,724
Finished products 14,403 12,570
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$23,705 $19,374
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Note C - Accounts Payable and Accrued Expenses (in thousands)
Included in accounts payable and accrued expenses are the following:
June 30, Dec. 31,
1996 1995
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Trade accounts payable $ 9,059 $ 5,317
Accrued sales commissions 706 934
Accrued incentive bonus - 1,178
Accrued warranty expense 500 600
Deferred maintenance revenue 1,159 1,397
Other (individually less than
5% of current liabilities) 1,927 2,441
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$13,351 $11,867
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 COMPARED WITH SECOND QUARTER OF 1995
NET SALES. Net sales for the second quarter ended June 30, 1996 remained
relatively unchanged at $31.0 million compared to $30.9 million for the
second quarter ended June 30, 1995.
Ethernet sales remained constant in dollar amount at $20.1 million for
both the second quarter of 1996 and the second quarter of 1995, but decreased
slightly as a percentage of net sales to 64.8% for the second quarter of 1996
compared to 65.1% for the second quarter of 1995. Token Ring sales increased
to $5.0 million or 16.2% of net sales for the second quarter of 1996 compared
to $3.0 million or 9.8% of net sales for the second quarter of 1995. FDDI
sales decreased to $4.4 million or 14.1% of net sales for the second quarter
of 1996 compared to $6.2 million or 20.1% of net sales for the second quarter
of 1995. ATM sales for the second quarter of 1996 decreased to $1.0 million
or 3.1% of net sales compared to $1.2 million or 4.0% of net sales for the
second quarter of 1995. Sales of other data communications products and
services increased to $0.5 million or 1.7% of net sales for the second
quarter of 1996 from $0.3 million or 1.0% of net sales for the comparable
period in 1995.
International sales increased to $3.6 million or 11.6% of net sales for
the second quarter of 1996 from $2.9 million or 9.3% of net sales for the
second quarter of 1995.
The only individual customer of the Registrant to whom sales exceeded 10%
of total sales in the second quarter of 1996 was Electronic Data Systems
Corporation("EDS") at 31% of total sales. Direct net sales to various
agencies of the U.S. Government in the aggregate amounted to 11% of the
Registrant's net sales for the second quarter 1996.
GROSS PROFIT. Gross profit increased to $15.4 million or 49.6% of net
sales for the second quarter of 1996 compared to $14.6 million or 47.4% of
net sales for the second quarter of 1995. The increase in gross profit
resulted primarily from lower sales volume of integrated third-party
products. Gross profit margins are typically lower on sales of integrated
third-party products. Gross profit margins in future periods may be affected
by several factors such as sales volume, shifts in product mix, absorption of
manufacturing costs, pricing strategies and fluctuations in sales of
integrated third-party products.
SALES AND MARKETING. Sales and marketing expenses increased in amount to
$6.4 million or 20.6% of net sales for the second quarter of 1996 from $5.3
million or 17.2% of net sales for the second quarter of 1995. The increase in
sales and marketing expense was primarily due to
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expansion of sales and marketing personnel and associated costs. The
Registrant expects sales and marketing expenses to continue to increase in
amount, but may vary as a percentage of net sales in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses increased in
amount to $2.4 million or 7.9% of net sales for the second quarter of 1996
from $2.2 million or 7.2% of net sales for the second quarter of 1995. The
Registrant expects to continue to invest in research and development
activities in the future in order to maintain a steady flow of new products. The
Registrant expects research and development expenses will continue to
increase, but that such expenses may vary as a percentage of net sales in the
future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased slightly to $0.9 million or 2.8% of net sales for the second
quarter of 1996 from $1.1 million or 3.6% of net sales for the second quarter
of 1995. The decrease in general and administrative expenses was primarily
due to lower accrual of incentive bonuses during the second quarter of 1996
compared to the second quarter of 1995.
INTEREST. Net interest income was $0.2 million for both the second
quarter of 1996 and the second quarter of 1995.
INCOME TAXES. The Registrant's effective income tax rate remained
relatively unchanged at 38.0% for the second quarter of 1996 compared to
38.5% for the second quarter of 1995.
FIRST HALF OF 1996 COMPARED WITH FIRST HALF OF 1995
NET SALES. Net sales for the first half of 1996 increased by 9.3% to
$60.5 million from $55.3 million for the first half of 1995.
Ethernet sales increased in amount to $38.7 million or 64.0% of net sales
for the first half of 1996 compared to $35.2 million or 63.5% of net sales
for the first half of 1995. Token Ring sales increased to $10.2 million or
16.8% of net sales for the first half of 1996 from $7.5 million or 13.6% of
net sales for the first half of 1995. FDDI sales decreased to $8.7 million
or 14.3% of net sales for the first half of 1996 compared to $10.1 million or
18.3% of net sales for the first half of 1995. ATM sales remained unchanged
in amount at $1.9 million for the both first half of 1996 and the first half
of 1995, but decreased slightly as a percentage of net sales to 3.2% for the
first half of 1996 compared to 3.5% for the first half of 1995. Sales of
other data communications products and services increased to $1.0 million or
1.7% of net sales for the first half of 1996 compared to $0.6 million or 1.1%
of net sales for the first half of 1995.
International sales increased to $8.2 million or 13.6% of net sales for
the first half of 1996 compared to $6.1 million or 10.9% for the first half
of 1995.
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Sales to customers exceeding 10% of total sales in the first half of 1996
were as follows: 26% to EDS and 14% to AT&T Corp.("AT&T"). Direct net sales
to various agencies of the U.S. Government in the aggregate amounted to 10%
of the Registrant's net sales for the second half of 1996.
GROSS PROFIT. Gross profit increased in amount to $29.7 million for the
first half of 1996 compared to $27.1 million for the first half of 1995, but
remained relatively unchanged as a percentage of net sales at 49.1% of net
sales for the first half of 1996 compared to 49.0% of net sales for the first
half of 1995. Gross profit margins in future periods may be affected by
several factors such as sales volume, variations in product mix, absorption
of manufacturing costs, pricing strategies 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 $12.3
million or 20.4% of net sales for the first half of 1996 from $10.3 million
or 18.6% of net sales for the first half of 1995. The increase in sales and
marketing expense primarily reflects higher levels of staffing in sales,
marketing and technical support in the first half of 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses increased in
amount to $4.6 million for the first half of 1996 from $4.2 million for the
first half of 1995, but remained relatively unchanged as a percentage of net
sales at 7.6% for the first half of 1996 compared to 7.5% for the first half
of 1995. The Registrant expects research and development expenses will
continue to increase, but that such expenses may vary as a percentage of net
sales in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased slightly to $1.8 million or 2.9% of net sales for the first half of
1996 from $2.0 million or 3.6% of net sales for the first half of 1995. The
decrease in general and administrative expenses was primarily due to lower
accrual of incentive bonuses during the first half of 1996 compared to the
second half of 1995.
INTEREST. Net interest income was $0.5 million for the first half of
1996 compared to $0.4 million for the first half of 1995.
INCOME TAXES. The Registrant's effective tax rate remained relatively
unchanged at 38.0% for the first half of 1996 compared to 38.3% for the first
half of 1995.
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Registrant's future operating results and financial condition may be
affected by various trends and factors including general economic conditions,
rapid or unexpected technological changes, product development, competition,
market acceptance of new products, manufacturing efficiencies, availability
of raw materials and critical manufacturing equipment, domestic and foreign
government regulations and budgets, fluctuations in foreign exchange rates
and rising cost for components or unavailability of components. In
addition, the Registrant's future operating results and financial condition
may be affected by timing of orders booked which may also cause fluctuations
in quarterly operating results.
Due to the factors noted above, the Registrant's future earnings and
stock price may be subject to significant volatility, particularly on a
quarterly basis. Past business trends should not be used to anticipate
future trends and historical performance should not be considered as a
reliable indicator of future performance. Any shortfall in revenue or
earnings from the levels anticipated by securities analysts could have an
immediate and significant effect on the trading price of the Registrant's
common stock in any given period. Furthermore, the Registrant's
participation in a highly dynamic industry may result in significant
volatility of the Registrant's common stock price.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's principal sources of liquidity at June 30, 1996 were
$5.0 million of cash and cash equivalents and an available line of credit.
As of June 30, 1996, the Registrant maintained a strong financial position
with $55.8 million of working capital.
Cash flows used by operations for the first half of 1996 were $3.9
million primarily due to increases in accounts receivable and inventory
balances. Cash flows provided by operations for the first half of 1995 were
$1.9 million primarily due to net income being offset by increases in
accounts receivable and inventory balances.
Cash used in investing activities in the first half of 1996 consisted of
purchases of property and equipment of $2.9 million and net maturities of
short-term investments of $1.0 million. Cash used in investing activities in
the first half of 1995 consisted of $1.5 million of purchases of property and
equipment and $9.3 million of net purchases of short-term investments.
Cash provided by financing activities in the first half of 1996 was $0.3
million, which consisted of the issuance of common stock relating to the
exercise of certain employee stock options. Cash provided by financing
activities in the first half of 1995 was
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$0.4 million, which consisted of the issuance of common stock relating to the
exercise of certain employee stock options.
During the first half of 1996 the Registrant funded its operations solely
through cash flow from operations. The Registrant's revolving bank credit
facility provides an unsecured line of credit of up to $5.0 million, subject
to certain limitations and conditions. At June 30, 1996, the Registrant had
no borrowings outstanding under its bank credit facility, and had $5.0
million available for allowable borrowings at an applicable interest rate of
8.5% per annum.
The Registrant believes that cash generated from operations and the
availability of borrowings under its bank credit facility will provide
sufficient cash resources to finance its operations and currently projected
capital expenditures through the remainder of 1996. The Registrant
anticipates that capital expenditures will continue to increase during the
remainder of 1996 to support business operations. The Registrant believes
that its financial position, future earnings, and existing sources of
liquidity will provide sufficient resources to fund the Registrant's cash
requirements for the remainder of 1996.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Not Applicable
Item 2. CHANGES IN SECURITIES.
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on April 25,1996 at the
principal offices of the Registrant. The following is a brief
description of each matter voted upon by stockholders, including
number of votes cast for, against, or withheld with regard to each
matter or nominee.
(1) Election of five (5) directors to serve until the next Annual
Meeting of Stockholders and until their respective successors are duly
elected and qualified.
FOR WITHHELD
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G. Ward Paxton 13,765,934 35,394
Robert Anderson 13,764,094 37,234
J. Fred Bucy 13,764,804 36,524
T. Joe Head 13,766,134 35,194
Donald M. Johnston 13,766,134 35,194
(2) Ratification and approval of selection by the Board of Directors
of Ernst & Young LLP as independent auditors of the Registrant for the
fiscal year ending December 31, 1996.
FOR AGAINST WITHHELD
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13,772,033 12,260 18,035
Item 5. OTHER INFORMATION.
Not Applicable
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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
June 30, 1996.
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S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL DATA SYSTEMS, INC.
(Registrant)
Date: August 14, 1996 By: /s/ G. Ward Paxton
--------------------------------
G. Ward Paxton
President,
Chief Executive Officer and
Chief Financial Officer
By: /s/ Kandis Tate Thompson
--------------------------------
Kandis Tate Thompson
Controller, Finance and
Accounting (Principal
Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
11 Schedule of Computation of Per Share Earnings
27 Financial Data Schedule
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