UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 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: 0-22071
OVERLAND DATA, INC.
(Exact name of registrant as specified in its charter)
California 95-3535285
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
8975 Balboa Avenue, San Diego, California 92123-1599
(Address of principal executive offices, including zip code)
(858) 571-5555
(Registrant's telephone number, including area code)
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 1999 was $30,774,000 based on the closing
price reported on such date by the Nasdaq National Market System. Shares of
Common Stock held by officers and directors and by persons who hold 5% or
more of the outstanding Common Stock have been excluded from the calculation
of this amount because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
As of June 30, 1999, the number of outstanding shares of the registrant's
Common Stock was 10,090,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed in connection with registrant's
Annual Meeting of Shareholders to be held November 8, 1999 (the "Proxy
Statement") are incorporated herein by reference into Part III of this Report.
PART I
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER VARIOUS
FACTORS IDENTIFIED IN THIS REPORT, INCLUDING THE MATTERS SET FORTH BELOW
UNDER THE CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
Overland Data, Inc. (herein "Overland Data", "Overland" or the
"Company") designs, develops, manufactures, markets and supports magnetic
tape data storage automation solutions. Businesses use these solutions for
backup, archival and data interchange functions in high-availability network
computing environments, including PC/LAN (Microsoft Windows NT and Novell
NetWare) and UNIX client/server networks and mini-computers.
Overland's products address the data storage needs of businesses from
small and home offices to large enterprises that have become increasingly
dependent upon their stored digital computer data. The management and protection
of that data has moved from a peripheral concern to the central issue in
computing, due to several factors, including:
- The shift from large mainframe computers to network server computing.
- The exponential growth in digital content made possible by new
technologies that make it easy and cost-effective to transform, move,
access and store mass amounts of digital content including graphics,
video and audio.
- The dramatic growth of the Internet and electronic commerce, which has
dramatically increased stored digital content.
Overland's storage system solutions are designed to reliably and efficiently
capture, protect, manage, back up and archive stored digital content, so that
it is recoverable after a disaster and is available 24 hours a day, seven
days a week.
The Company's primary products are automated tape libraries,
minilibraries and loaders, which combine electro-mechanical robotics,
electronic hardware and firmware developed by the Company with an emphasis on
efficiency of design, functionality and reliability. Overland also
distributes products manufactured by other original equipment manufacturers
("OEMs") and markets various other products including storage management
software supplied by third parties, spare parts and tape media. The Company
also licenses a proprietary tape encoding technology that it developed and
patented under the name Variable Rate Randomizer or "VR2"TM.
PRODUCTS
The Company is one of the leading suppliers of automated tape
storage solutions based on Digital Linear Tape, or DLTtape, a half-inch tape
technology that is the industry standard for data back-up in the mid-range
network server market. Overland integrates DLTtape drives supplied by Quantum
Corporation into its LibraryXpress family of products. The Company also
manufacturers a line of IBM compatible 36-track products called TapeXpress
that serves the large installed base of AS400 and RS6000 minicomputers.
Previously, the Company also sold a line of 9-track reel tape drives called
TapePro used for data interchange on personal computers. The Company
announced end-of-life on all of its 9-track products in the fourth quarter of
fiscal year 1999. In the future, the Company intends to develop products
based on other tape technologies.
- LibraryXpress - The DLT-based LibraryXpress family of products is designed
to satisfy the needs of customers of all sizes from the entry level to the
enterprise. Overland currently offers the following products with DLT4000
or DLT7000 tape drives:
- The LoaderXpress - a single-drive DLTtape loader which offers a 5 or
10-cartridge magazine.
- The MinilibraryXpress - a one or two drive library with a 15-cartridge
magazine.
- The Scalable LibraryXpress - a library system that consists of three
modules which can be rack-mounted and configured to meet customer's
individual needs. The LXB base module is a one or two drive library
with a 10-cartridge magazine. The LXG global control module provides
an additional 16-cartridge magazine and controls the entire library
system from a single point. The LXC capacity module consists of a
16-cartridge magazine and no drives. Users can rack mount up to
eight LXB or LXC capacity modules with the LXG. The resulting
ability to pass cartridges from module to module as one integrated
unit provides true scalability and allows end-users to expand their
storage capacity to meet their growing business needs while
protecting their original LXB investment.
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- The EnterpriseXpress - two separate expandable library systems for
larger customers based upon the LibraryXpress modules. The 4-module
system can accommodate two to six DLT drives and 26 to 58 cartridges.
The 7-module system can accommodate four to ten drives and 52 to 100
cartridges.
- - TapeXpress - The TapeXpress product line of 36-track drives and loaders
is based on IBM's 3480/3490/3490E technologies. The Company's
single-drive, single-cartridge T490E and its one drive, 10-cartridge
L490E MiniLibrary are compatible with the 36-track IBM 3490E format.
These products are used extensively on AS400 and RS6000 minicomputers,
and were the first products in the marketplace that could read and write
in both 18 and 36-track formats. Overland's products connect easily to
numerous hardware platforms and are supported by many popular backup and
hierarchical storage management ("HSM") software packages. During fiscal
year 1997, IBM selected the Company to be its supplier of 36-track
products. During fiscal year 1998, the Company announced end-of-life on
all of its 18-track products and its L60E 36-track data vault.
- - Variable Rate Randomizer - In December 1997, the Company introduced its VR2
encoding technology; an implementation based on Partial Response Maximum
Likelihood. This technology, which can be embedded in an Applications
Specific Integrated Circuit ("ASIC") chip, is capable of doubling the
native capacity and native data transfer rate performance of existing
linear tape technologies without requiring any changes in tape path design,
recording heads, and/or media. This performance is accomplished by
achieving encoding efficiency of greater than 99%. In April 1998, the
Company licensed VR2 to Tandberg Data ASA for use in its Scalable Linear
Recording ("SLR") tape drives. In March 1999, the Company licensed VR2 to
Imation Corporation for use in Travan NS tape drives. The Company plans to
license VR2 to other customers.
The Company's drives, loaders and libraries are installed on specific
computer platforms with the appropriate backup, data interchange or storage
management software. Overland actively works with a number of backup and storage
management software companies to confirm that its products are properly
supported. Currently, more than 80 different software packages support the
Company's products. For example, on the Novell NetWare and Microsoft Windows NT
platforms, the software packages include products from Cheyenne Software,
Seagate Software, Inc. (Arcada and Palindrome), Legato Systems Incorporated
("Legato Systems"), and STAC Inc. On UNIX platforms, the software packages
include products from Legato Systems, IBM, Cheyenne Software and Peripheral
Device Corporation.
SALES AND MARKETING
The Company sells its products primarily through three channels: (i)
OEMs; (ii) commercial distributors; and (iii) volume, consisting of systems
integrators, technical distributors and value added resellers ("VARs").
Overland's products are sold both domestically and internationally.
Regardless of the channel through which they are sold, all of Overland's
products are designed and manufactured to meet OEM level requirements and
reliability standards. Because the OEM qualification process can take 6 to
18 months to complete, the Company's initial sales of new products are often
made to non-OEM customers that typically evaluate, integrate and adopt new
technologies and products more quickly. After qualification and acceptance,
OEM sales generally represent an increasing proportion of a product's unit
sales and are important to the Company in terms of validating its products in
the marketplace and achieving desirable production volume.
- - OEM CHANNEL - The Company currently has supply agreements with Compaq
Computer Corporation, IBM, Siemens Nixdorf Informationssysteme AG,
Groupe Bull S.A., Intergraph Corporation, NCR Corporation and Symbios
Logic, Inc., all of which incorporate Overland's products into their
system offerings. Prior to its acquisition by Compaq, Digital Equipment
Corporation ("DEC") had been an OEM customer of the Company since 1993.
Initially, DEC purchased Overland's 9-track products. Then, in July
1997, DEC added the Company's 36-track products to its offerings and, in
September 1997, added the LibraryXpress. In June 1999, Compaq selected
Overland as an OEM supplier for DLT automated storage products,
supporting the leading Compaq ProLiant server line. Overland often works
with its OEM customers early in a new product development cycle to
design its products to meet their specifications. The OEM sales cycle is
often lengthy and typically consists of a general technology evaluation,
qualification of product specifications, verification of product
performance against these specifications, integration testing of the
product within the customers' systems, product announcement and volume
shipment. As is typical in the industry, the Company's OEM contracts
provide for annual price reviews and the customers are not required to
purchase minimum quantities. Compaq (including DEC) has been the
Company's largest customer, accounting for approximately 25%, 25% and
14% of sales in fiscal years 1999, 1998 and 1997, respectively.
Shipments to IBM, who became a customer during fiscal year 1997,
accounted for
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20%, 15% and 10% of sales in fiscal years 1999, 1998 and 1997,
respectively. No other customer accounted for more than 10% of sales in any
year during the three-year period. The Company supports this channel
through a field sales office and other field representatives.
- - COMMERCIAL DISTRIBUTION CHANNEL - In April 1998, the Company entered the
commercial distribution channel when it signed distribution agreements with
Bell Microproducts and Tech Data Corp. In July 1999, the Company signed a
distribution agreement with Ingram Micro, Inc. These distributors sell the
Company's DLT LibraryXpress products to resellers nationwide. Tech Data is
the preferred master distributor for Overland in Latin America. The
agreements include provisions for stock rotation and price protection,
common terms in the commercial distribution area. To reduce exposure for
returned product or price adjustments, the Company does not record revenue
in this channel until the distributor sells the related inventory.
- - VOLUME CHANNEL - The Company's volume channel includes systems integrators,
technical distributors and VARs, each of which sells to both resellers and
end-users. Some of the Company's volume channel customers specialize in the
insurance, banking, financial, geophysical or medical industries, and offer
a variety of value-added services relating to the Company's products.
Overland's products frequently are packaged by these customers as part of a
complete data processing system or combined with other storage devices,
such as redundant array of independent disks (RAID) systems, to deliver a
complete storage subsystem. These customers also recommend the Company's
products as replacement solutions when backup systems are upgraded, and
bundle its products with storage management software specific to the
end-user's system. The Company supports this channel through a field sales
office and other field representatives.
- - INTERNATIONAL BUSINESS - The Company has a wholly owned subsidiary located
in Wokingham, England, which provides sales, technical support, repair and
manufacturing integration for the European marketplace, and a sales office
in Paris, France. The Company assigns to its international distributors the
right to sell Overland's products in a country or group of countries. These
distributors then sell the Company's products to systems integrators, VARs
and end-users. In addition, many domestic customers ship a portion of the
Company's products to their overseas customers. Sales personnel are located
in various cities throughout Europe, while sales personnel located in the
Company's corporate offices serve the Pacific Rim, South America,
Australia, New Zealand and Mexico. Export sales by the Company, principally
in Europe, for fiscal years 1999, 1998 and 1997 were approximately $25.8
million, $20.2 million and $14.4 million, respectively.
Overland supports its sales efforts with various marketing programs
designed to build its brand name and attract new customers. Its channel
partners are provided with a full range of marketing materials, including
product specification literature, software connectivity information and
application notes. The Company's management and engineering personnel provide
support to the channel partners and, in certain instances, visit potential
customer sites to explain and demonstrate the technical advantages of the
Company's products. In addition, the Company holds two conferences each year
to inform its channel partners of new product developments and programs and
to discuss emerging trends in their markets. The Company also maintains press
relations both domestically and in Europe, advertises in computer systems
publications targeted to its channels and offers market development funds to
all of its channel partners except for OEM customers. Overland participates
in national and regional trade shows both domestically and internationally,
including displaying its products at the CeBIT show in Europe and
domestically at COMDEX, NetWorld/InterOp and AIIM. The Company also maintains
a World Wide Web site (http://www.overlanddata.com) that features marketing
information, product specifications, news releases and application, service
and technical support notes and investor relations information.
CUSTOMER SERVICE AND SUPPORT
Overland's technical support personnel, located both in its
headquarters facility and its U.K. office, are trained with respect to the
Company's products and assist customers with "plug-and-play" compatibility
between multiple hardware platforms, operating systems and backup, data
interchange and storage management software. The Company's application
engineers are available to solve more complex customer problems and visit
customer sites when necessary. Customers that need service and support can
contact the Company through its toll-free telephone lines, facsimile and
Internet e-mail.
The Company's standard warranty is a three-year (two years for
non-LibraryXpress products) return-to-factory policy that covers both parts
and labor. For products that it distributes and for drives and tapes used in
its products that are manufactured by a third party, the Company passes on to
the customer the warranty provided by the manufacturer. The Company also
offers two year on-site service for many of its scalable LibraryXpress
products, including 24-hour service,
4
seven days a week, for which it contracts with third-party service providers.
The Company offers the XchangeNOW program on its minilibraries and loaders,
enabling customers to receive a replacement unit free of charge within one to
two business days after placing a service request. Overland offers this
warranty service during the 3-year return-to-factory warranty period.
In addition, the Company has instituted the Guaranteed Up Time
Service (GUTS(TM)) program for its LibraryXpress products. The guarantee has
two features: (1) the end-user customer receives an additional year of return
to factory warranty if the customer experiences more than 1% down-time during
any one year period, and (2) a guarantee that all data written to tape using a
covered Overland product will be recoverable or the customer can return the
product for a full refund.
RESEARCH AND DEVELOPMENT
The Company currently employs 41 people in its research and
development ("R&D") department, including 26 engineers who have extensive
experience in the tape industry. Many of these engineers are former employees
of tape drive companies such as Cipher Data Products, Archive Corporation and
Conner Peripherals, Inc. They have developed significant expertise in
electrical, mechanical and firmware design. Martin D. Gray, the Company's
co-founder and Chief Technical Officer, formerly served as Manager of R&D at
Cipher, has over 25 years of experience in the tape industry, is the inventor
of numerous tape patents and leads the Company's R&D efforts to develop new
technologies.
The Company's R&D department is capable of developing both tape
drives and robotic mechanisms, including the development of various aspects
of data channels, data compression, intelligent interfaces and firmware
(embedded systems software). This department also has the ability to develop
and test a tape path, the core of any tape technology. Overland believes that
these capabilities distinguish it from its competitors by providing it with a
better understanding of tape technologies in general and enabling it to
provide higher value-added content by designing reliable products that better
utilize the advantages of specific technologies.
Current R&D efforts focus on various ways of implementing the
Company's new VR2 tape encoding technology. Other projects include the
development of automated tape libraries using other tape technologies, and
new software and hardware solutions to enhance the value of the Company's
current products. The Company's R&D expenditures amounted to $5.4 million,
$4.1 million and $4.1 million in fiscal years 1999, 1998 and 1997,
respectively, representing 5.8%, 5.5% and 7.0% of net sales, respectively.
The Company intends to spend between 5% and 6% of sales on R&D on a sustained
basis. Despite its R&D focus, the Company may not identify, develop,
manufacture, market or support new or enhanced products successfully or on a
timely basis and any new products may not gain market acceptance.
MANUFACTURING
The Company has a fully integrated factory in San Diego, California
with separate production lines for its LibraryXpress and TapeXpress products.
Major OEM customers have certified all of its production lines and
manufacturing processes. Overland performs product assembly, integration and
testing, while leaving component and piece-part manufacturing to its supplier
partners. The Company works closely with a group of regional, national and
international suppliers, which are carefully selected based on their ability
to provide quality parts and components that meet the Company's
specifications and present and future volume requirements. The Company
specifically designs a number of its parts and components that are not
available off the shelf for integration into its products. The Company
maintains a minimum number of suppliers and utilizes their specific
capabilities across several product lines. Management of this supply chain is
critical, because the average material content of the Company's products
represents approximately 82% of cost of goods sold.
In general, products are built to an intermediate stage or standard
module and are customized at the end of the manufacturing process to meet
specific customer needs or variations in product profiles. The Company
believes that this capability represents an effective way for the Company to
minimize its inventory levels while maintaining the ability to fill specific
customer orders in short lead times. The Company closely coordinates
inventory planning and management with suppliers and customers to match its
production to market demand. Product orders from its non-OEM channel
customers are confirmed and, in most cases, shipped to the customer within
two weeks. Although it receives rolling 90-day forecasts from its major OEM
customers and monitors inventory levels at those customers on a weekly basis,
the Company's largest OEM customer, Compaq, has implemented a just-in-time
program. As part of this program, the Company ships products to various
distribution hubs around the world and retains ownership of that inventory
until it is pulled by Compaq to fulfill customer orders, at which time the
Overland sale is recorded. As a result, backlog is not a significant factor
to Overland's business.
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In its current facility, the Company believes that it has the
capacity to support unit output several times greater than its current run
rate. The Company currently uses a single shift that is capable of greater
production levels, and could expand further by adding multiple shifts or
moving to a full-time factory. Staffing levels are carefully controlled and
adjusted to meet the requirements at any specific time.
PROPRIETARY RIGHTS
The Company believes that, because of the rapid pace of
technological change in the tape storage industry, patent, copyright,
trademark and trade secret protection are less significant than factors such
as the knowledge, ability and experience of the Company's personnel, new
product introductions and product enhancements. Despite these factors, the
Company still relies on a combination of patent, copyright, trademark and
trade secret protection, non-disclosure agreements and licensing arrangements
to establish and protect its proprietary rights. These rights, however, may
not prevent competitors from developing substantially equivalent or superior
products to those of the Company. In addition, there can be no assurance that
any patents held by, or that may be issued to, the Company will not be
challenged, invalidated or circumvented, or that any rights granted would
provide proprietary protection to the Company.
The Company entered into a five-year cross-license agreement with
IBM, effective January 1, 1996. Pursuant to the terms of the agreement, the
Company may use any of the patents owned by IBM within certain designated
areas of technology, and IBM may use any of the patents of the Company that
were in existence at the effective date of the agreement or which are issued
during the term of the agreement. In consideration for this agreement, the
Company is required to pay royalty fees to IBM in an amount equal to 2.7% of
worldwide revenues generated from the Company's 18 and 36-track product
sales, exclusive of those sold to IBM.
EMPLOYEES
The Company had 242 employees as of June 30, 1999, including 62 in
sales and marketing, 41 in research and development, 102 in manufacturing and
operations and 37 in finance, information systems, human resources and other
management. There are no collective bargaining contracts covering any of the
Company's employees and management believes that its relationship with its
employees is good.
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RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH IS SUBJECT TO
MANY RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE
FOLLOWING RISK FACTORS, WHICH SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
COMPANY AND ITS BUSINESS.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The market for the Company's products is generally characterized by
rapid technological change and evolving industry standards and is highly
competitive with respect to timely innovation. The future success of the Company
will depend on its ability to anticipate changes in technology, to develop new
and enhanced products on a timely and cost-effective basis and to introduce,
manufacture and achieve market acceptance of these new and enhanced products. In
particular, the Company's future success is dependent on its LibraryXpress
product line. Some products in this line are relatively new and have not yet
achieved widespread market acceptance. LibraryXpress is facing increasing
competition from automated tape library products, and likely will face
competition from other storage devices that may be developed in the future.
Development schedules for high technology products are inherently subject to
uncertainty and there can be no assurance that the Company will be able to meet
its product development schedules, including those for products based on its new
VR2 tape coding technique, or that development costs will be within budgeted
amounts. If the products or product enhancements that the Company develops are
not deliverable due to developmental problems, quality issues or component
shortage problems, or if such products or product enhancements do not achieve
market acceptance or are unreliable, the Company's business, financial condition
and results of operations may be materially and adversely affected. The
introduction (whether by the Company or its competitors) of new products
embodying new technology such as new sequential or random access mass storage
devices and the emergence of new industry standards could render existing
products obsolete or not marketable.
COMPETITION AND PRICE PRESSURE
The worldwide tape storage market is intensely competitive as a large
number of manufacturers of alternative tape technologies and library systems
compete for a limited number of customers. In addition, barriers to entry are
relatively low in the market for library systems. The Company currently
participates in two market areas: network data storage and data backup and
interchange based on IBM compatible 3480/3490 technology. In both of these
areas, many of the Company's competitors have substantially greater financial
and other resources, larger research and development staffs, and more experience
and capabilities in manufacturing, marketing and distributing products than the
Company. For network data storage, the LibraryXpress products currently compete
with products made by Advanced Digital Information Corporation, the DLT &
Storage Systems group of Quantum, Breece Hill Technologies, Inc.,
Hewlett-Packard Company, and Storage Technology Corporation ("Storage
Technology"). The Company believes that additional competitors will enter this
market. For the data backup and interchange market, which is based on IBM
compatible 3480/3490 technology, the Company offers a line of 36-track products,
which the Company believes compete primarily with products made by Fujitsu
Computer Products of America, Inc., Hitachi Data Systems Corporation, Plasmon
Laser Magnetic Storage (LMS), a division of Plasmon, Plc., and Storage
Technology. The markets for the Company's products are characterized by
significant price competition, and the Company anticipates that its products
will face increasing price pressure. This pressure could result in significant
price erosion, reduced profit margins and loss of market share, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON CERTAIN SUPPLIERS
The Company's products have a large number of components and
subassemblies produced by outside suppliers. Accordingly, Overland is highly
dependent on these suppliers for components and subassemblies, including DLTtape
drives, read-write heads, printed circuit boards and integrated circuits, which
are essential to the manufacture of the Company's products. In addition, for
certain of these items, the Company qualifies only a single source, which can
magnify the risk of shortages and decrease the Company's ability to negotiate
with its suppliers on the basis of price. If such shortages occur, or if the
Company experiences quality problems with suppliers, shipments of products could
be significantly delayed or costs significantly increased, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Specifically, the Company's LibraryXpress automated tape
libraries incorporate DLTtape drives manufactured
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by Quantum, which is also a competitor of the Company because Quantum markets
its own tape drives and tape loader products. Although Quantum in September
1998 licensed Tandberg Data to become a second source manufacturer of DLTtape
drives, Tandberg has not yet begun full production line manufacturing and
there are no other alternative sources for DLTtape drives. The Company does
not have a long-term contract with Quantum, which could cease supplying
DLTtape drives directly to the Company. From time to time in the past, the
Company has not been able to obtain as many drives as it has needed from
Quantum due to drive shortages or quality issues. Any prolonged inability to
obtain adequate deliveries could require the Company to pay more for
components, parts and other supplies, seek alternative sources of supply,
delay shipment of products and damage relationships with current and
prospective customers. Any such delay or damage could have a material adverse
effect on the Company's business, financial condition and results of
operations. During fiscal year 1997 and in the first quarter of fiscal year
1998, the Company experienced problems with the supply of DLT7000 drives and
such problems adversely affected the Company's sales and earnings. No
assurance can be given that such problems will not re-occur, or that the
Company will not experience similar or more serious disruptions in supply in
the future with current versions of DLT drives, the new DLT8000 drive or any
future DLT drive version.
FLUCTUATION IN RESULTS
The Company's results can fluctuate substantially from time to time
for various reasons. All of the markets served by the Company are volatile
and subject to market shifts, which may or may not be discernible in advance
by the Company. A slowdown in the demand for workstations, mid-range computer
systems and networks could have a significant adverse effect on the demand
for the Company's products in any given period. The Company has experienced
delays in receipt of purchase orders and, on occasion, anticipated purchase
orders have been rescheduled or have not materialized due to changes in
customer requirements. The Company's customers may cancel or delay purchase
orders for a variety of reasons, including the rescheduling of new product
introductions, changes in their inventory practices or forecasted demand,
general economic conditions affecting the computer market, focus on year 2000
issues, changes in pricing by the Company and its competitors, new product
announcements by the Company or others, quality or reliability problems
related to the Company's products or selection of competitive products as
alternate sources of supply.
In addition, because a large portion of the Company's sales are
generated by its European channel, the first fiscal quarter (July through
September) has been impacted by seasonally slow European orders, reflecting
the summer holiday period in Europe. The Company's operations may reflect
substantial fluctuations from period to period as a consequence of such
industry shifts, price erosion, general economic conditions affecting the
timing of orders from customers, the supply of DLT drives, as well as other
factors discussed herein. In particular, the Company's ability to forecast
sales to distributors, integrators and VARs is especially limited as such
customers typically provide the Company with relatively short order lead
times or are permitted to change orders on short notice.
Portions of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. The Company's gross profit has
fluctuated and will continue to fluctuate quarterly and annually based upon a
variety of factors such as:
- The level of utilization of the Company's production capacity
- Changes in product mix
- Average selling prices
- Manufacturing yields
- Increases in production and engineering costs associated with
initial production of new programs
- Changes in the cost of or limitations on availability of materials
- Labor shortages
Generally, new products have higher gross margins than more mature products.
Therefore, the Company's ability to introduce new products in a timely fashion
is an important factor to its profitability. Based upon all of the foregoing,
the Company believes that period-to-period comparisons of its revenues and
operating results will continue to fluctuate and are not necessarily meaningful
and should not be relied on as indications of future performance. Furthermore,
in some future quarter, the Company's revenues and operating results could be
below the expectations of public market analysts or investors, which could
result in a material adverse effect on the price of the Common Stock.
8
INTERNATIONAL OPERATIONS
Direct international sales accounted for 28%, 27% and 24% of sales in
fiscal years 1999, 1998 and 1997, respectively, and the Company expects that
international sales will continue to grow and represent an even greater
proportion of the Company's revenues in the future. Sales to customers outside
the U.S. are subject to various risks, including:
- The imposition of governmental controls mandating compliance
with various foreign and U.S. export laws
- Political and economic instability
- Trade restrictions
- Changes in tariffs and taxes
- Longer payment cycles (typically associated with international
sales)
- Greater difficulty of administering business overseas
Furthermore, there can be no assurance that the Company will be able to
comply with changes in foreign standards in the future, even though the Company
endeavors to meet standards established by foreign regulatory bodies. The
inability of the Company to design products that comply with foreign standards
could have a material adverse effect on the Company's business, financial
condition and results of operations. Currently, 100% of the Company's
international sales are denominated in U.S. Dollars and fluctuations in the
value of foreign currencies relative to the U.S. Dollar could, therefore, make
the Company's products less price competitive. Additionally, the expenses of the
Company's international subsidiaries are denominated in their local currencies.
The Company currently does not engage in foreign currency hedging transactions,
and is therefore exposed to some level of currency risk.
CONVERSION TO SINGLE EUROPEAN CURRENCY
On January 1, 1999, eleven European countries adopted a single
currency, commonly known as the Euro. The Company will need to ensure that its
financial and other software systems are capable of processing transactions and
properly handling the existing currencies and the Euro. Overland is still
assessing the impact that the use of the Euro will have on its internal systems.
The Company does not presently expect the use of the Euro will materially affect
the Company's business. However, the Company's business could be adversely
affected if the Company encounters unexpected difficulties.
DEPENDENCE ON KEY EMPLOYEES
The Company's future success depends in large part on its ability to
retain its key executives and other key personnel, many of who have been
instrumental in developing new technologies and setting strategic plans. The
Company does not have any employment contracts with any of its employees. The
Company's growth also will depend in large part on its continuing ability to
hire, motivate and retain highly qualified management, technical, sales and
marketing team members. Competition for such personnel is intense and there can
be no assurance that the Company will retain its existing personnel or attract
additional qualified personnel in the future.
TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company's ability to compete effectively depends in part on its
ability to develop and maintain proprietary aspects of its technology. There can
be no assurance that any future patents will be granted or that any patents will
be valid or provide meaningful protection for the Company's product innovations.
In addition, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as U.S. laws. Furthermore, competitors
may independently develop similar products, duplicate the Company's products or,
if patents are issued to the Company, design around the patents issued to the
Company. The Company also relies on a combination of copyright, trademark, trade
secret and other intellectual property laws to protect its proprietary rights.
These rights, however, may not prevent competitors from developing substantially
equivalent or superior products to those of the Company's. With the exception of
a lawsuit, which management believes is not material, related to Overland's use
of its "GUTS" and "Guaranteed Up Time Service" trademarks, the Company is not
engaged in any intellectual property litigation or proceedings. There can be no
assurance that the Company will not become involved in other such litigation in
the future or that its products or other trademarks do not infringe any
intellectual property or other proprietary right of any third party. An adverse
outcome in litigation or similar proceedings could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others or require the Company to cease marketing or using certain products,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
9
RISKS ASSOCIATED WITH POSSIBLE MERGERS AND ACQUISITIONS
In the future, the Company may pursue mergers and acquisitions of
complementary businesses, products or technologies as it seeks to expand and
increase the value-added component of its product offerings. Mergers and
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations and personnel of the acquired business, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no direct prior experience, and the potential loss of
key employees of the acquired business. In addition, future mergers and
acquisitions by the Company may result in dilutive issuances of equity
securities and the incurrence of additional debt and amortization expenses
related to goodwill and other intangible assets, which could adversely affect
the Company's business, financial condition and results of operations.
WARRANTY EXPOSURE
The Company generally provides three-year (two years for
non-LibraryXpress products), return-to-factory warranty on its products. For
certain products, it provides or offers for sale a two-year on-site warranty,
which is supplied by a third party service provider. The Company pays the
negotiated price of the contract to the service provider in advance and the
service provider is then responsible for the costs of providing warranty service
during the term of the contract. For products which the Company distributes and
for tape drives used in the Company's products but manufactured by a third
party, the Company passes on to the customer the related manufacturer's
warranty. Although the Company has established reserves for the estimated
liability associated with product warranties, there can be no assurance that
such reserves will be adequate or that the Company will not incur substantial
warranty expenses in the future with respect to new or established products.
LIMITED TRADING HISTORY; POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has experienced fluctuations since
it commenced trading in February 1997. There can be no assurance that the market
price of the Common Stock will not fluctuate significantly in the future. Many
factors could cause the market price of the Common Stock to fluctuate
substantially, including; announcements concerning the Company or its
competitors, quarterly variations in operating results, the introduction of new
technology or products, changes in product pricing policies by the Company or
its competitors, changes in earnings estimates by analysts and changes in
accounting policies. In addition, stock markets have experienced extreme price
and volume volatility in recent years. This volatility has had a substantial
effect on the market prices of securities of many smaller public companies for
reasons frequently unrelated or disproportionate to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Common Stock.
YEAR 2000
The Company believes that purchasing patterns of its customers and
potential customers may be affected by year 2000 compliance issues as
organizations expend significant resources to correct their current software
systems for year 2000 compliance. These expenditures may result in reduced
funding available to these entities for other information technology purchases,
such as those products and services offered by the Company. Furthermore,
customers and potential customers may defer information technology purchases
generally until early in the next millennium to avoid year 2000 compliance
problems. Any such deferral of purchases by the Company's customers or potential
customers could have a material adverse effect on the Company's business,
operating results and financial condition. See additional year 2000 risk factors
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company--Year 2000."
ITEM 2. PROPERTIES
The Company leases all facilities used in its business. Its
headquarters are located in San Diego, California in a 3-building light
industrial complex comprising approximately 121,000 square feet. The lease
expires in August 2002. The San Diego facility houses all of the Company's
research and development and administrative functions as well as a major portion
of manufacturing, sales, sales administration, marketing and customer support.
The Company also leases a small facility located in Wokingham, England, which
houses some light manufacturing, sales, sales administration and customer
support for the European marketplace, and a small sales office located in Paris,
France to service Southern European customers. Two other small facilities are
leased in Longmont, Colorado and in Nashua, New Hampshire for the development
10
of R&D prototypes and an OEM sales office, respectively. The Company believes
that its facilities are suitable for their uses and are adequate for the
Company's current and identified future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company, its directors and certain of its officers were named as
defendants in two class action lawsuits filed on April 21, 1997 and May 2, 1997
in the U.S. District Court for the Southern District of California. In both
cases, the plaintiffs purported to represent a class of all persons who
purchased the Company's Common Stock between February 21, 1997 and March 14,
1997. The complaints alleged that the defendants violated various federal
securities laws through material misrepresentation and omissions in connection
with the Company's initial public offering and its Registration Statement on
Form S-1, which the Securities and Exchange Commission declared effective on
February 21, 1997. The plaintiffs seek rescission of their share purchases or
rescissory damages if their shares have been sold, as well as attorneys' fees
and other costs and expenses.
On September 16, 1997, the court entered an order permitting the
voluntary dismissal of the first filed lawsuit without prejudice and
appointed the plaintiff in the second lawsuit as the lead plaintiff in this
litigation. That person then resigned as the lead plaintiff, and the
shareholder who had filed the first of the two lawsuits petitioned the court
for permission to intervene and serve as the lead plaintiff. The petition was
granted on September 29, 1998 and, on December 17, 1998, the court certified
the shareholder class, allowing the litigation to proceed as a class action.
The defendants have answered the second complaint, have denied the
material allegations and have disavowed any wrongdoing. Discovery is complete,
and the Company filed a Motion for Summary Judgment, which the court denied on
August 2, 1999. A pretrial conference has been scheduled for November 1, 1999,
but no trial date has been scheduled. Although the outcome of the lawsuit cannot
be determined, management believes that it has meritorious defenses and intends
to defend against the lawsuit vigorously. The Company maintains directors' and
officers' liability insurance to provide coverage against suits of this nature
and, other than legal fees incurred to date, no amounts have been recorded in
the financial statements for any losses which may result from this litigation.
In July 1998, a lawsuit was filed in the U.S. District Court for the
District of Massachusetts alleging infringement by Overland related to its use
of the "GUTS" and "Guaranteed Up Time Service" trademarks. The lawsuit is
currently in the course of discovery. Management believes that the disposition
of this matter will not have a materially adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National
Market under the symbol "OVRL" on February 21, 1997, the effective date of its
initial public offering. As of September 15, 1999, there were approximately 112
shareholders of record. The Company has not paid any dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
The high and low closing prices of Overland Data Common Stock from February 21,
1997 through June 30, 1999 were as follows:
PRICE RANGE OF COMMON STOCK:
HIGH LOW
------ ------
Fiscal 1999:
First quarter $ 5.38 $ 3.75
Second quarter 7.13 3.50
Third quarter 10.88 6.13
Fourth quarter 9.00 5.88
Fiscal 1998:
First quarter $ 7.88 $ 5.38
Second quarter 8.44 4.88
Third quarter 6.41 5.00
Fourth quarter 6.31 4.75
Fiscal 1997:
Third quarter 13.00 4.75
Fourth quarter 7.00 4.75
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
audited consolidated financial statements and the notes thereto. This
information should be read in conjunction with Item 7 of this Report--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and with the Company's consolidated financial statements and the
related notes thereto set forth at the pages indicated in Item 14(a)(1).
- -------------------------------------------------------------------------------------------------------------------
At or for Years Ended June 30,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- -----------
(in thousands except for per share data)
SUMMARY OF OPERATIONS
Net sales........................$ 92,227 $ 75,164 $ 59,146 $ 47,226 $ 38,156
Gross profit..................... 27,891 23,199 20,371 16,081 11,115
Income from operations........... 5,614 3,640 4,736 3,541 980
Income before income taxes....... 6,581 4,543 4,987 3,413 770
Net income ...................... 3,982 2,792 3,100 3,159(1) 501
Net income per share (2):
Basic....................... .39 .27 .44 .71 .13
Diluted..................... .37 .25 .33 .41 .07
BALANCE SHEET DATA
Cash and cash equivalents........$ 16,199 $ 15,550 $ 18,926 $ 19 $ 101
Working capital.................. 40,981 39,498 36,733 10,307 6,430
Total assets..................... 56,230 53,996 48,260 19,771 14,453
Long-term debt,
net of current portion......... - - - 1,500 1,400
Convertible redeemable
preferred stock................ - - - 5,200 5,567
Shareholders' equity............. 44,807 43,368 40,317 5,858 1,767
- -----------------
(1) The Company's effective tax rate for the year ended June 30, 1996 was
affected in the fourth quarter of the year by a one-time tax valuation
allowance adjustment, which reduced income tax expense and correspondingly
increased net income by $997,000, or $.13 per share. Without this
adjustment, for the year ended June 30, 1996 net income and net income per
share would have been $2,162,000 and $.28, respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS IDENTIFIED IN
THIS REPORT, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS,"
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS.
GENERAL
Overland Data designs, develops, manufactures, markets and supports
magnetic tape data storage systems used by businesses for backup, archival and
data interchange functions in high-availability network computing environments,
from entry level to the enterprise. The Company's primary products are automated
tape libraries, minilibraries and loaders, which combine electromechanical
robotics, electronic hardware and firmware developed by the Company. Currently,
the Company's products are based on two different half-inch magnetic tape
technologies - DLT and 36-track. Its DLT products began in March 1996 when the
Company introduced the LibraryXpress, a scalable automated tape library system
13
incorporating DLT tape drives, and began shipping the LXB base module. In the
second half of fiscal year 1997, the Company introduced two additional
modules: the LXG global control unit and the LXC capacity module. In May
1997, the Company introduced the LXS MiniLibrary, a single-drive,
15-cartridge, non-scalable version of the LibraryXpress, to serve the lower
end of the network market. In February 1998, the Company commenced shipment
of the LoaderXpress, a single-drive DLTtape loader, which offers a 5 or
10-cartridge magazine, designed for the commercial distribution channel. The
Company introduced the non-scalable, 15-cartridge, dual-drive
MinilibraryXpress in February 1999 and the EnterpriseXpress, with versions
from two drives and 26 cartridges to six drives and 100 cartridges, in May
1999 to serve the enterprise market. The Company's second product line,
TapeXpress, consists of 36-track products based on the IBM 3480/3490/3490E
technologies. These technologies are maturing and sales are expected to
decline in the upcoming fiscal year. During fiscal year 1998, the Company
announced end-of-life on all of its 18-track products and its L60E 36-track
data vault. During fiscal year 1999, the Company discontinued sales of its
TapePro line of products, which consisted of 9-track reel-to-reel tape drives
used exclusively for data interchange. The Company also distributes products
manufactured by other OEM's and markets other items supplied by third parties
including controller cards, interchange software, storage management
software, spare parts and tape media. Finally, the Company licenses its
proprietary tape encoding technology, which it developed and patented under
the name VR2. One license agreement was announced during fiscal year 1998 and
another was announced in March 1999. A small amount of developmental royalty
revenues were recognized in the last half of fiscal year 1999. Further
sales-based royalties will be dependent upon shipments by the licensees of
tape drives incorporating VR2.
RESULTS OF OPERATIONS
The following tables set forth certain data as a percentage of net
sales:
STATEMENT OF OPERATIONS
Fiscal Years Ended June 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
Net sales............................. 100.0% 100.0% 100.0%
Cost of goods sold.................... 69.8 69.2 65.6
-------- -------- --------
Gross profit.......................... 30.2 30.8 34.4
-------- -------- --------
Operating expenses:
Sales and marketing................. 12.8 12.2 12.3
Research and development............ 5.8 5.5 7.0
General and administrative.......... 5.5 8.3 7.1
-------- -------- --------
24.1 26.0 26.4
-------- -------- --------
Income from operations................ 6.1 4.8 8.0
Interest and other, net............... 1.0 1.3 .4
-------- -------- --------
Income before income taxes............ 7.1 6.1 8.4
Provision for income taxes............ 2.8 2.4 3.2
-------- -------- --------
Net income............................ 4.3% 3.7% 5.2%
-------- -------- --------
-------- -------- --------
14
PRODUCT MIX TABLE
Fiscal Years Ended June 30,
-----------------------------------------
1999 1998 1997
-------- -------- --------
Company products:
LibraryXpress...................... 57.2% 49.9% 28.6%
36-track........................... 26.3 26.1 28.1
18-track........................... 0.1 2.8 9.7
9-track............................ 4.2 7.4 18.2
Spare parts, controllers, other.... 5.5 7.2 8.4
VR2 royalties...................... 0.5 - -
Other:
DLT distributed products........... 6.2 6.6 6.9
Other distributed products........ - - 0.1
-------- -------- --------
100.0% 100.0% 100.0%
-------- -------- --------
-------- -------- --------
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
NET SALES. The Company's net sales of $92.2 million in fiscal year 1999
grew by $17.1 million or 22.7% over net sales of $75.2 million in fiscal year
1998. Sales of the Company's LibraryXpress product line grew 40.5% to $52.7
million compared to $37.5 million in fiscal year 1998. This included strong
sales of the LoaderXpress product, primarily through the commercial distribution
channel, and initial sales of the new MinilibraryXpress product. Sales of the
Company's 36-track products, which were extremely strong in the first half of
fiscal year 1999, grew by 24.0% to $24.3 million in fiscal year 1999 compared to
$19.6 million in fiscal year 1998. Sales of the Company's 9-track products fell
30.4% to $3.9 million in fiscal year 1999 compared to $5.6 million in fiscal
year 1998. The Company discontinued this product line in June 1999.
GROSS PROFIT. The Company's gross profit amounted to $27.9 million in
fiscal year 1999, an increase of $4.7 million from $23.2 million in fiscal year
1998 resulting from the higher sales volumes. The gross margin percentage
declined to 30.2% in fiscal year 1999 from 30.8% in fiscal year 1998, reflecting
a greater mix of sales to OEM and commercial distribution customers, which are
typically at lower margins compared to other channel business.
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to
$11.8 million, representing 12.8% of net sales in fiscal year 1999 compared to
$9.2 million or 12.2% of net sales in fiscal year 1998. Increased expenditures
were due primarily to additional personnel, a higher level of advertising and
promotional programs, and greater travel expenses. The Company continued to
focus in fiscal year 1999 on building its brand name and expansion of its
commercial distribution channel. Incremental expenses also were incurred in the
fourth quarter of fiscal year 1999 relating to the introduction of the Company's
LibraryXpress product into the Compaq sales channels after Compaq selected
Overland in June 1999 to be the supplier of its departmental secondary automated
storage products supporting the Compaq ProLiant server line.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses amounted to $5.4
million or 5.8% of net sales in fiscal year 1999 compared to $4.1 million or
5.5% of net sales in fiscal year 1998. The increased expenses included
additional personnel and developmental materials relating to the design and
support of the new MinilibraryXpress product, Web TLC, the EnterpriseXpress,
and SLR Loader, as well as ASIC production and design assistance provided to
licensees of VR2.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses amounted to $5.1 million or 5.5% of net sales in fiscal year 1999
compared to $6.2 million or 8.3% of net sales in fiscal year 1998. The decreased
level of expenses in 1999 reflects a reduction of recruiting and legal fees, as
well as reduced computer-related expenses. Additionally, the Company's bad debt
provision was lower than in the prior year, reflecting the higher concentration
of OEM customers with reduced credit risk.
INTEREST INCOME/EXPENSE. In fiscal year 1999, the Company generated net
interest income of $810,000, compared to net interest income of $940,000 in
fiscal year 1998. The lower income in fiscal year 1999 resulted from reduced
cash balances caused by increased working capital requirements and repurchases
of Company stock.
15
INCOME TAXES. The Company's fiscal year 1999 provision for state and
federal income taxes amounted to $2.6 million, or an effective tax rate of
39.5%. The effective rate in 1999 was higher than the fiscal year 1998 rate of
38.5% due primarily to reduced state R&D tax credits.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
NET SALES. The Company's net sales of $75.2 million in fiscal year 1998
grew by $16.1 million or 27.2% over net sales of $59.1 million in fiscal year
1997. Significant growth in sales of the Company's flagship LibraryXpress
product line, together with modest growth of 36-track product sales, more than
offset declines in other mature product lines. LibraryXpress sales grew by 122%
to $37.5 million compared to $16.9 million in fiscal year 1997, due principally
to strong demand from DEC (acquired by Compaq in 1998) for the LXB7110 model.
Although DEC had been a buyer of the Company's 9-track products since 1993, it
did not begin ordering LibraryXpress products until late in the first quarter of
fiscal year 1998. Also contributing to the LibraryXpress growth were sales of
several new products. The LXG global control unit, the LXC capacity module and
LXS MiniLibrary were all introduced late in fiscal year 1997, but contributed a
full year of revenues in 1998. Another new product, the LoaderXpress, was
introduced in February 1998, and made a small contribution to fiscal year 1998
revenues. Sales of the Company's 36-track products grew by 18.1% to $19.6
million in fiscal year 1998 compared to $16.6 million in fiscal year 1997. This
growth resulted principally from increased sales to IBM of the L490E model
pursuant to a new supply agreement entered into in the second quarter of fiscal
year 1997. Sales of 18-track products of $2.1 million in fiscal year 1998 fell
by $3.6 million or 63.2% from $5.7 million in the prior year. This decline was
the result of an upward migration by the Company's customers from 18-track
products to its 36-track products and the Company's announced end-of-life on all
18-track products at the end of fiscal year 1998. Sales of 9-track products of
$5.6 million in fiscal year 1998 fell by $5.3 million or 48.6% from $10.9
million in fiscal year 1997, reflecting the general maturity of the 9-track
technology. At the end of fiscal year 1998, the 9-track product line had been
narrowed to two products.
GROSS PROFIT. The Company's gross profit amounted to $23.2 million in
fiscal year 1998, up from $20.4 million in fiscal year 1997, as a result of the
higher sales volumes. The gross margin, however, fell from 34.4% in fiscal year
1997 to 30.8% in fiscal year 1998 due principally to a higher concentration of
OEM business, which is typically at lower margins compared to other channel
business. Sales to OEM customers rose from 23% of revenues in fiscal year 1997
to 40% of revenues in fiscal year 1998. Also contributing to lower margins was
the effect of competitive pressures, which resulted in reduced selling prices
for certain products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to
$9.2 million or 12.2% of net sales in fiscal year 1998 compared to $7.3 million
or 12.3% of net sales in fiscal year 1997. This increase in total expenditures
resulted primarily from a higher level of advertising and promotional programs,
additional personnel and greater travel expenses. The Company's marketing
efforts focused on creating awareness in the marketplace at both the reseller
and end-user level for the Overland name and the Company's new products,
including the LoaderXpress. Significant resources were expended to create
pull-through for the new commercial distribution channel and for the existing
volume sales channel.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses were flat with the
prior year and amounted to $4.1 million or 5.5% of net sales in fiscal year 1998
compared to $4.1 million or 7.0% of net sales in fiscal year 1997. In fiscal
year 1998, R&D efforts included the design and support of the new LoaderXpress
product, design of a new automated tape library based on a new tape technology,
and the joint development project with Tandberg Data announced in April 1998 to
implement the Company's VR2 technology onto Tandberg's SLR tape drives.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses amounted to $6.2 million or 8.3% of net sales in fiscal year 1998
compared to $4.2 million or 7.1% of net sales in fiscal year 1997. The higher
level of expenses in fiscal year 1998 included an increase in depreciation for
the Company's new ERP system, increased legal fees, increased MIS staffing
levels, higher facility costs and other incremental costs incidental to being a
public company for a full year.
INTEREST INCOME/EXPENSE. In fiscal year 1998, the Company generated net
interest income of $940,000, compared to net interest income of $223,000 in
fiscal year 1997. The higher income in fiscal year 1998 resulted from earnings
on investment of funds generated by the Company's initial public offering and
the elimination of interest expense on bank borrowings. Immediately following
the IPO in February 1997, the Company fully repaid the borrowings under its
revolving bank line of credit.
16
INCOME TAXES. The Company's fiscal year 1998 provision for state and
federal income taxes amounted to $1.8 million, or an effective tax rate of
38.5%. The effective rate in fiscal year 1998 was higher than the fiscal year
1997 rate of 37.8% due primarily to reduced state R&D tax credits.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1999, the Company generated $5.1 million in cash
from its operations. Capital expenditures during the year for machinery and
tooling equipment consumed $1.9 million of that amount, of which a portion was
used to purchase all of the assets related to a CD optical storage robotics
technology from a major CD robotics automation company. An additional $2.5
million was consumed to repurchase shares of the Company's Common Stock, net of
proceeds received from the sale of shares under its Employee Stock Purchase Plan
and from the exercise of stock options.
At June 30, 1999, the Company had $16.2 million of cash and cash
equivalents, $41.0 million of net working capital, an unused bank line of credit
of $5 million and no other funded debt. The Company believes that these
resources will be sufficient to fund its operations and to provide for its
growth for the foreseeable future.
INFLATION
Inflation has not had a significant negative impact on the Company's
operations during the periods presented. With the exception of its OEM
contracts, which contain fixed pricing for up to one year, the Company
historically has been able to pass on to its customers increases in raw material
prices caused by inflation. There can be no assurance, however, that the Company
will be able to continue to pass on any future increases should they occur.
Although the Company's exposure to the effects of inflation will be magnified by
the expected increase in OEM business, the Company believes that its continuous
efforts at material and labor cost reductions will minimize such effects.
YEAR 2000
THIS STATEMENT IS INTENDED AS A YEAR 2000 READINESS DISCLOSURE.
The year 2000 computer issue arises because certain computer systems
experience problems handling dates in and beyond the year 1999. Consequently,
some computer hardware and software will need to be modified prior to the year
2000 in order to remain functional. The widespread use and dependency on
computer technology in all areas of modern commerce may pose significant risks
to companies, including Overland, from year 2000 issues. These risks include
potential disruptions or failures within products and operations of Overland and
its suppliers, customers and service providers. Because a large part of the risk
is indirect through suppliers, service providers and customers, the Company
cannot accurately predict the impact of the year 2000 issue on the Company, its
financial condition and results of operations.
The Company is in the process of addressing year 2000 issues both
within and outside of Overland and has made significant progress to date. The
Company's approach has included four major phases consisting of inventory,
assessment, resolution and internal testing/certification.
The Company has completed its analysis of its own internally
manufactured products and concluded that none of the products sold by the
Company has any date functionality built into it, with the exception of certain
products that employ a display-only date/time function. This function, which is
year 2000 compliant, allows the operator to set the LCD front panel display date
and time from the front panel.
The Company then focused on the year 2000 functionality of its internal
computer systems and operating equipment. Overland completed its year 2000
preparations for its primary business systems in October 1997 when the Company
replaced its internal enterprise wide computer system, which it believes to be
year 2000 compliant. This system replacement included material forecasting,
inventory management, manufacturing management, order administration, accounts
payable, accounts receivable and financial management. The Company then
undertook a year 2000 assessment of its secondary business systems, both
information technology ("IT") and non-IT systems. This assessment is
substantially complete and no significant issues have arisen. The Company
remedied all year 2000 issues as they were revealed. The Company has
substantially completed all remediation efforts and expects to complete testing
and certification by October 18, 1999.
17
The Company's final year 2000 focus was on external elements. As
indicated above, the Company's risk assessment included understanding the year
2000 readiness of its suppliers. The Company's risk assessment process
associated with suppliers included soliciting and analyzing responses to
questionnaires distributed to these suppliers, as well as web-site and SEC
filing research, telephone surveys, and onsite interviews with certain critical
suppliers. The Company has completed interviews with all of its critical
suppliers. All of the critical suppliers surveyed have year 2000 plans in place.
No suppliers appear to present major year 2000 issues at this time. All critical
suppliers are currently certified.
The year 2000 readiness of the Company's key supplier, Quantum
Corporation, is of particular importance. Quantum has implemented a year 2000
compliance program using a resolution approach based on the U.S. General
Accounting Office Year 2000 Assessment Guide. Quantum's program included the
evaluation of all of its products and internal systems and a review of the
readiness of its suppliers and service providers. On August 11, 1999, Quantum
indicated in its Form 10-Q filing with the SEC that it expected to be year 2000
compliant and certified by August 31, 1999.
The Company also is working closely with key customers to evaluate
their readiness for year 2000 and will perform site visits if deemed necessary.
The ability of customers to deal with year 2000 issues may affect their
operations and their ability to order and pay for products. Based on the level
of risk assessed, the Company may develop contingency plans to address possible
changes in customer order patterns. The Company does not know how year 2000
programs may impact customer spending patterns. As customers focus on preparing
their business for the year 2000 in the near term, capital budgets may be spent
on remediation efforts, potentially delaying the purchase and implementation of
new systems, thereby creating less demand for the Company's products and
services. The Company does not know the resulting impact on its revenues at this
time.
Overland believes that its most likely worst case scenario would be
attributed to third party factors, rather than its internal systems and
applications. Because the Company relies heavily on third parties to manufacture
and transport products and services, a failure of third party systems could
disrupt service, which could delay shipments of Overland's products.
Although not directly related to the year 2000 issue, the cost of
installing and implementing the Company's new ERP system in October 1997 was
approximately $1.5 million. The Company has had a policy since 1995 of
purchasing year 2000 compliant products where possible. To date, the Company has
incurred less than $100,000 of other costs to address the year 2000 issue. Based
on assessment and remediation projects underway, the Company expects that the
total cost of addressing the year 2000 issue will not exceed $200,000, amounting
to less than 10% of the Company's IT budget. No significant system projects have
been deferred due to the year 2000 program.
Based on assessment and remediation completed to date, the Company does
not expect any significant disruption to its operations or operating results as
a result of year 2000 issues. The Company is taking all steps that it believes
are appropriate to identify and resolve any year 2000 issues. However, the
Company is uncertain to what extent it may be affected by such matters. Because
of the complexity and inherent uncertainty of the year 2000 issue, there can be
no assurance that the Company will be able to assess, identify and correct year
2000 issues in a timely or successful manner. In addition, there can be no
assurance that the failure to ensure year 2000 capability by suppliers, service
providers, customers, or other third parties would not have a material adverse
affect on the Company's business, financial condition and results of operations.
The foregoing statements are based on management's best estimates at
the present time, which were derived using numerous assumptions of future events
and conditions, including third party modification plans, third party assurances
of year 2000 compliance and other factors. There can be no assurance that these
assumptions will be accurate, that the estimates will be achieved, and actual
results could differ materially from those anticipated.
18
SELECTED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial information
for the periods indicated. This information has been derived from unaudited
consolidated financial statements, which in the opinion of management includes
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information. These operating results are not
necessarily indicative of results for any future period.
Quarters Ended
--------------------------------------------------------------------------------------
Fiscal Year 1998 Fiscal Year 1999
------------------------------------------ -----------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
1997 1997 1998 1998 1998 1998 1999 1999
---------- --------- --------- --------- -------- ---------- ---------- ---------
Net sales....................$ 13,998 $ 18,071 $ 18,659 $ 24,436 $ 24,372 $ 24,240 $ 22,263 $ 21,352
Gross profit.................. 4,660 5,704 5,469 7,366 7,416 7,313 6,522 6,640
Income from operations........ 76 1,014 515 2,035 1,938 1,871 969 836
Income before income taxes.... 286 1,272 808 2,177 2,209 2,169 1,213 990
Net income................ 177 789 501 1,325 1,348 1,315 736 583
Net income per share:
Basic...................... $.02 $.07 $.05 $.13 $.13 $.13 $.07 $.06
Diluted.................... .02 .07 .05 .12 .12 .12 .07 .05
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Company required by this item are set forth at the pages indicated in Item
14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is included under the captions
entitled "Election of Directors" and "Information Concerning Directors and
Executive Officers" in the Company's Proxy Statement and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
entitled "Executive Compensation" in the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN TRANSACTIONS
The information required by this item is included under the caption
entitled "Certain Relationships and Transactions" in the Company's Proxy
Statement and is incorporated herein by reference.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of Overland Data, Inc. and Report of Independent Accountants are
included in a separate section of this Report at the page numbers so indicated:
Consolidated Balance Sheet as of June 30, 1999 and 1998...F-1
Consolidated Statement of Operations for the Years
Ended June 30, 1999, 1998 and 1997....................F-2
Consolidated Statement of Shareholders' Equity and
Comprehensive Income for the Years Ended
June 30, 1999, 1998, and 1997.........................F-3
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997..........................F-4
Notes to Consolidated Financial Statements................F-5 to F-14
Report of Independent Accountants.........................F-15
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of Overland Data, Inc. for the years ended June 30, 1999, 1998 and 1997
is filed as part of this Report on the page number so indicated and should be
read in conjunction with the Consolidated Financial Statements of Overland Data,
Inc.:
Schedule II - Valuation and Qualifying Accounts...........S-1
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(a)(3) EXHIBITS
3.1 Registrant's Amended and Restated Articles of Incorporation.*
3.2 By-Laws.*
4.1 Specimen stock certificate.*
4.2 Investors' Rights Agreement, dated May 21, 1993, between the Registrant and
the parties named therein.*
10.1 Basic Order Agreement #16529, dated July 1, 1993 and as amended through
November 10, 1995, between the Registrant and Digital Equipment
Corporation.*
10.2 Production Procurement Agreement #RMSS-ODI-96-01-0, dated October 25, 1996,
between the Registrant and International Business Machines Corporation.*
10.3 Credit Agreement effective as of June 27, 1997 between the Registrant and
Imperial Bank.**
10.4 Standard Industrial Lease--Multi-Tenant, dated May 26, 1993, between the
Registrant and Mitsui/SBD America Fund 87-1.*
10.5 First Amendment to the 1995 Stock Option Plan dated January 21, 1997.*
10.6 1996 Employee Stock Purchase Plan adopted December 12, 1996.*
10.7 Agreement between Overland Data and Tandberg Data concerning MLR and VR2
Technology.***
10.8 Agreement between Overland Data and Imation Corporation concerning TravanTM
and VR2 Technology.***
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (included on Signature Page).
27.1 Financial Data Schedule (for EDGAR use only).
- -----------------
* Incorporated by reference to the Company's Registration Statement No.
333-18583 dated February 21, 1997.
** Incorporated by reference to the Company's Form 10-K dated June 30, 1997.
*** The Company has requested confidential treatment for certain portions of
this Agreement.
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K
during the fourth quarter of the year ended June 30, 1999.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OVERLAND DATA, INC.
By: /s/ SCOTT McCLENDON
-------------------------
Scott McClendon
President & Chief Executive Officer
Dated: September 27, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Scott McClendon and Vernon A. LoForti,
jointly and severally, as his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SCOTT McCLENDON President, Chief Executive September 27, 1999
- ----------------------- Officer and Director
Scott McClendon
/s/ MARTIN D. GRAY Vice President, Chief Technical September 27, 1999
- ----------------------- Officer, Asst. Secretary and
Martin D. Gray Director
/s/ VERNON A. LoFORTI Vice President, Chief September 27, 1999
- ----------------------- Financial Officer and
Vernon A. LoForti Secretary
/s/ WILLIAM W. OTTERSON Director September 27, 1999
- -----------------------
William W. Otterson
/s/ PETER PREUSS Director September 27, 1999
- -----------------------
Peter Preuss
/s/ JOHN A. SHANE Director September 27, 1999
- -----------------------
John A. Shane
22
OVERLAND DATA, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,
--------------------------------
1999 1998
---------- ----------
(in thousands except number of shares)
ASSETS
- ------
Current assets:
Cash and cash equivalents...............................................$ 16,199 $ 15,550
Accounts receivable, less allowance for doubtful accounts
and returns of $885 and $922, respectively........................... 13,885 15,683
Inventories............................................................. 17,704 16,077
Deferred income taxes................................................... 1,375 1,558
Other current assets.................................................... 2,136 873
---------- ----------
Total current assets................................................ 51,299 49,741
Property and equipment, net............................................... 4,657 4,207
Other assets.............................................................. 274 48
---------- ----------
$ 56,230 $ 53,996
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable .......................................................$ 5,615 $ 6,970
Accrued liabilities..................................................... 2,876 2,075
Accrued payroll and employee compensation............................... 1,827 1,198
---------- ----------
Total current liabilities........................................... 10,318 10,243
Deferred income taxes..................................................... 441 187
Other liabilities......................................................... 664 198
---------- ----------
Total liabilities.................................................. 11,423 10,628
---------- ----------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized; 10,089,668 and 10,549,486 shares
issued and outstanding in 1999 and 1998, respectively............... 31,030 33,496
Accumulated other comprehensive income (loss)........................... (59) 18
Retained earnings....................................................... 13,836 9,854
---------- ----------
Total shareholders' equity.......................................... 44,807 43,368
---------- ----------
$ 56,230 $ 53,996
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
F-1
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30,
---------------------------------------------------
1999 1998 1997
------------ ----------- -----------
(in thousands except per share amounts)
Net sales:
Product sales................................ $ 91,777 $ 75,164 $ 59,146
Royalties.................................... 450 - -
------------ ----------- -----------
92,227 75,164 59,146
Cost of goods sold.............................. 64,336 51,965 38,775
------------ ----------- -----------
Gross profit.................................... 27,891 23,199 20,371
Operating expenses:
Sales and marketing........................... 11,825 9,245 7,298
Research and development...................... 5,373 4,093 4,125
General and administrative.................... 5,079 6,221 4,212
------------ ----------- -----------
22,277 19,559 15,635
------------ ----------- -----------
Income from operations.......................... 5,614 3,640 4,736
Other income (expense):
Interest income, net.......................... 810 940 223
Other income (expense), net................... 157 (37) 28
------------ ----------- -----------
Income before income taxes...................... 6,581 4,543 4,987
Provision for income taxes...................... 2,599 1,751 1,887
------------ ----------- -----------
Net income ..................................... $ 3,982 $ 2,792 $ 3,100
------------ ----------- -----------
------------ ----------- -----------
Net income per share:
Basic...................................... $ 0.39 $ 0.27 $ 0.44
------------ ----------- -----------
------------ ----------- -----------
Diluted.................................... $ 0.37 $ 0.25 $ 0.33
------------ ----------- -----------
------------ ----------- -----------
Shares used in computing net income per share:
Basic...................................... 10,222 10,525 7,054
------------ ----------- -----------
------------ ----------- -----------
Diluted.................................... 10,652 11,069 9,295
------------ ----------- -----------
------------ ----------- -----------
See accompanying notes to consolidated financial statements.
F-2
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Common Stock Other
---------------------- Comprehensive Retained
Shares Amount Income (Loss) Earnings TOTAL
---------- --------- ------------- --------- ---------
(in thousands except number of shares)
Balance at June 30, 1996......................... 5,062,325 $ 1,896 $ 3,962 $ 5,858
Preferred stock conversion................... 2,336,574 5,200 5,200
Exercise of stock options.................... 168,630 142 142
Issuance of common stock in
initial public offering.................. 2,836,364 25,659 25,659
Other issuances of common stock.............. 30,700 92 92
Tax benefits from exercise of
stock options............................ 257 257
Comprehensive income:
Net income................................ 3,100 3,100
Foreign currency translation.............. $ 9 9
---------- --------- ------------- ---------- ---------
Balance at June 30, 1997......................... 10,434,593 33,246 9 7,062 40,317
Exercise of stock options.................... 135,287 152 152
Exercise of stock warrants................... 5,934 - -
Sale of stock through the Company's
Employee stock purchase plan............. 73,172 383 383
Company repurchases of stock................. (99,500) (509) (509)
Tax benefits from exercise of
stock options............................ 224 224
Comprehensive income:
Net income................................ 2,792 2,792
Foreign currency translation.............. 9 9
---------- --------- ------------- ---------- ---------
Balance at June 30, 1998......................... 10,549,486 33,496 18 9,854 43,368
Exercise of stock options.................... 55,975 98 98
Sale of stock through the Company's
Employee stock purchase plan.............. 92,155 338 338
Company repurchases of stock................. (607,948) (3,006) (3,006)
Tax benefits from exercise of
stock options............................ 104 104
Comprehensive income:
Net income................................ 3,982 3,982
Foreign currency translation.............. (77) (77)
---------- --------- ------------- ---------- ---------
Balance at June 30, 1999......................... 10,089,668 $ 31,030 $ (59) $ 13,836 $ 44,807
---------- --------- ------------- ---------- ---------
---------- --------- ------------- ---------- ---------
See accompanying notes to consolidated financial statements.
F-3
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
Operating activities:
Net income .............................................................$ 3,982 $ 2,792 $ 3,100
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Deferred tax expense (benefit)................................... 437 449 (487)
Depreciation and amortization.................................... 1,462 1,479 1,050
Loss on disposal of property and equipment....................... - 9 7
Changes in assets and liabilities:
Accounts receivable.......................................... 1,798 (4,532) (3,925)
Inventories ................................................. (1,627) (3,976) (3,676)
Other assets................................................. (1,489) (266) (243)
Accounts payable and accrued/other liabilities............... (88) 2,346 813
Accrued payroll and employee compensation.................... 629 152 (1)
----------- ----------- -----------
Net cash (used in) provided by operating activities....... 5,104 (1,547) (3,362)
----------- ----------- -----------
Investing activities:
Capital expenditures.................................................... (1,912) (2,088) (2,308)
----------- ----------- -----------
Net cash used in investing activities..................... (1,912) (2,088) (2,308)
----------- ----------- -----------
Financing activities:
Proceeds from issuance of common stock.................................. 338 383 25,751
Proceeds from exercise of stock options................................. 98 152 60
Stock repurchases....................................................... (3,006) (509) -
Net payments under bank line of credit.................................. - - (1,500)
Tax benefits from exercise of stock options............................. 104 224 257
----------- ----------- -----------
Net cash (used in) provided by financing activities....... (2,466) 250 24,568
----------- ----------- -----------
Effect of exchange rate changes on cash..................................... (77) 9 9
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................ 649 (3,376) 18,907
Cash and cash equivalents, beginning of year................................ 15,550 18,926 19
----------- ----------- -----------
Cash and cash equivalents, end of year......................................$ 16,199 $ 15,550 $ 18,926
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes .............................................$ 2,578 $ 854 $ 2,314
----------- ----------- -----------
----------- ----------- -----------
Cash paid for interest..................................................$ 5 $ 1 $ 186
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL NON-CASH ACTIVITIES:
Compensation recognized as equity upon exercise
of common stock options ................................................$ 6 $ 38 $ 82
----------- ----------- -----------
----------- ----------- -----------
Conversion of Series A preferred stock to common stock..................$ - $ - $ 367
----------- ----------- -----------
----------- ----------- -----------
Conversion of Series B preferred stock to common stock..................$ - $ - $ 1,281
----------- ----------- -----------
----------- ----------- -----------
Conversion of Series C preferred stock to common stock..................$ - $ - $ 3,552
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to consolidated financial statements
F-4
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Overland Data, Inc. (the "Company") was incorporated on September 8,
1980 under the laws of the state of California. The Company designs,
develops, manufactures, markets and supports magnetic tape data storage
systems used by businesses for high performance network backup and archival
solutions as well as data interchange. The Company's fiscal year ends on the
Sunday closest to June 30. For ease of presentation, the Company's year-end
is deemed to be June 30. Fiscal years 1999, 1998 and 1997 each included 52
weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Overland Data (Europe) Ltd.,
Overland Data SARL and Overland Data Export Limited, a foreign sales
corporation. All significant intercompany accounts and transactions have been
eliminated.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product sales to commercial distribution customers are subject to
certain rights of return, stock rotation privileges and price protection.
Revenue from shipments to these customers is not recognized until the related
products are in turn sold through by the commercial distributor. At June 30,
1999, there was approximately $594,000 of product that had been shipped to
the Company's commercial distributors, but not yet shipped to ultimate
customers. Revenue on direct product sales to other customers is recognized
upon shipment of products to such customers as they are not generally subject
to any specific right of return or price protection, except for any defective
product which may be returned under the Company's warranty policy.
WARRANTY COSTS
The Company generally provides a three-year return-to-factory
warranty on its LibraryXpress products and a two-year return-to-factory
warranty on its other products. In addition, with the exception of sales to
OEM customers, on-site warranties are provided for certain of the Company's
line of LibraryXpress products. The Company records a provision for estimated
future warranty costs at the time of shipment for both the return-to-factory
and on-site warranties. Separately priced on-site warranties are offered for
sale to customers of other product lines. The Company contracts with outside
vendors to provide service relating to all on-site warranties. Warranty
revenues and amounts paid in advance to outside service organizations are
recognized in the financial statements in sales and cost of goods sold,
respectively, over the warranty period.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
It is management's belief that the carrying amounts shown for the
Company's financial instruments are reasonable estimates of their related
fair values based on their terms or short-term nature.
F-5
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
COMPREHENSIVE INCOME
During 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income". SFAS 130 establishes
new rules for the reporting of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's
current or previously reported net income or shareholders' equity. SFAS 130
requires the display and reporting of comprehensive income, which includes
all changes in shareholders' equity with the exception of additional
investments by shareholders or distributions to shareholders. Comprehensive
income for the Company includes net income and foreign currency translation
effects, which are charged or credited to accumulated other comprehensive
income (loss) within shareholders' equity.
SEGMENT DATA
During 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 supercedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach for determining reportable segments. The
management approach designates the internal reporting that is used by
management for making operating and investment decisions and evaluating
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The Company's U.S. and foreign operations are considered a single
operating segment based upon the criteria contained in SFAS 131; as such, the
adoption of SFAS 131 did not affect the Company's disclosures of segment
information.
INFORMATION ABOUT GEOGRAPHIC AREAS
Export sales by the Company, principally in Europe, for the years
ended June 30, 1999, 1998 and 1997 were $25,769,000, $20,175,000 and
$14,391,000, respectively. Long-lived assets other than deferred tax assets
located in the Company's foreign subsidiaries, principally in Europe, at June
30, 1999, 1998 and 1997 were $113,000, $115,000 and $19,000, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company's customers include original equipment manufacturers,
integrators, distributors, and value added resellers. Financial instruments
which potentially subject the Company to concentrations of credit risk are
primarily accounts receivable. The Company performs ongoing credit
evaluations of its customers, generally requires no collateral and maintains
allowances for potential credit losses and sales returns. The Company's
largest single customer accounted for approximately 25%, 25% and 14% of sales
in fiscal years 1999, 1998 and 1997, respectively, and approximately 23%, 28%
and 12% of accounts receivable at June 30, 1999, 1998 and 1997, respectively.
The second largest customer accounted for 20%, 15% and 10% of sales in 1999,
1998 and 1997, respectively, and 18%, 17% and 11% of accounts receivable at
June 30, 1999, 1998 and 1997, respectively. No other customer accounted for
10% or more of sales in any of the three years presented.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months
or less are classified as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in-first-out
method) or market.
F-6
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the depreciable assets (generally two to five years). Leasehold improvements
are amortized on a straight-line basis over the shorter of the useful life of
the asset or the lease term. Expenditures for normal maintenance and repair
are charged to expense as incurred, and improvements are capitalized. Upon
the sale or retirement of property or equipment, the asset cost and related
accumulated depreciation are removed from the respective accounts and any
gain or loss is included in the results of operations.
INTANGIBLE ASSETS
Intangible assets, resulting from the acquisition of assets relating
to certain product lines, have been amortized using the straight-line method
over five years (the estimated life of the products). These assets were fully
amortized at June 30, 1998.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets
when there is evidence that events or changes in circumstances have made
recovery of an asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future net undiscounted cash flows is
less than the carrying amount of the asset. The Company has not recorded any
impairment losses.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries, for which the
functional currency is the local currency, are translated into U.S. dollars
using the exchange rate at the balance sheet date for assets and liabilities
and the weighted average exchange rate during the year for revenues,
expenses, gains and losses. Translation adjustments are recorded as
accumulated other comprehensive income (loss) within shareholders' equity.
Gains or losses from foreign currency transactions are recognized currently
in income. Such gains and losses were not significant in any year presented.
INCOME TAXES
The Company provides for income taxes utilizing the liability
method. Under the liability method, a deferred tax asset and/or liability is
computed for both the expected future impact of differences between the
financial statement and tax bases of assets and liabilities, and for the
expected future tax benefit to be derived from tax credits and loss
carryforwards. Current income tax expense or benefit represents the amount of
income taxes expected to be payable or refundable for the current year. A
valuation allowance is established when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based
employee compensation plans using the intrinsic value method and provides pro
forma disclosures of net income and earnings per share as if the fair
value-based method had been applied in measuring compensation expense.
Compensation changes related to non-employee stock-based compensation are
measured using fair value methods.
F-7
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NET INCOME PER SHARE
Basic earnings per share is computed based on the weighted average
number of shares of Common Stock outstanding during the period. Diluted
earnings per share is computed based on the weighted average number of shares
of Common Stock outstanding during the period increased by the weighted
average number of dilutive Common Stock equivalents outstanding during the
period, using the treasury stock method. Anti-dilutive Common Stock
equivalents excluded from the computation of diluted earnings per share
amounted to 573,000, 524,000 and 4,000 in the years ended June 30, 1999, 1998
and 1997, respectively.
A reconciliation of the calculation of basic and diluted earnings
per share is as follows:
YEAR ENDED JUNE 30,
----------------------------------------
1999 1998 1997
(in thousands except for per share data)
Net income..........................................$ 3,982 $ 2,792 $ 3,100
======= ======= =======
Basic:
Weighted average number
of common stock shares
outstanding................................... 10,222 10,525 7,054
======= ======= =======
Basic net income per share.....................$ 0.39 $ 0.27 $ 0.44
======= ======= =======
Diluted:
Weighted average number of common
stock shares outstanding...................... 10,222 10,525 7,054
Weighted average number of
preferred stock shares
outstanding................................... - - 1,478
Common stock equivalents from the
issuance of options using the
treasury stock method........................ 430 544 763
------- ------- -------
Shares used in computing net
income per share.............................. 10,652 11,069 9,295
======= ======= =======
Diluted net income per share...................$ 0.37 $ 0.25 $ 0.33
======= ======= =======
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.
The Company will adopt SFAS 133 as required in fiscal year 2000. The Company
expects that adoption will have no material impact on the Company's financial
statements.
F-8
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - COMPLETION OF INITIAL PUBLIC OFFERING
On February 21, 1997, the Company completed its initial public
offering of 3,450,000 shares of Common Stock (of which 2,836,364 shares were
sold by the Company and 613,636 shares were sold by certain shareholders) at
a price to the public of $10 per share. Net proceeds to the Company were
$25,659,000 after payment of the underwriters' commissions and deduction of
offering expenses.
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
JUNE 30,
------------------------
1999 1998
---------- ----------
(in thousands)
Inventories:
Raw materials......................................$ 9,119 $ 10,195
Work in process.................................... 3,074 3,259
Finished goods..................................... 5,511 2,623
--------- ---------
$ 17,704 $ 16,077
========= =========
Property and equipment:
Machinery and equipment............................$ 4,730 $ 3,226
Computer equipment................................. 4,126 3,792
Furniture and fixtures............................. 320 302
Leasehold improvements............................. 1,190 1,170
--------- ---------
10,366 8,490
Less accumulated depreciation
and amortization.................................. (5,709) (4,283)
--------- ---------
$ 4,657 $ 4,207
========= =========
Depreciation expense was $1,462,000, $1,371,000 and $930,000 in fiscal years
1999, 1998 and 1997, respectively.
NOTE 4 - LONG-TERM DEBT
The Company has a $5,000,000 unsecured revolving credit facility,
which expires on November 5, 1999. Borrowings under the line may be in the
form of working capital loans, which bear interest at the bank's prime rate,
or banker's acceptances ("BA") priced at the bank's BA rate plus 2.25%. The
Company is required to maintain certain covenants and financial ratios
including working capital and net worth ratios, and pays a .5% annual
commitment fee on the unused credit. The Company is in compliance with all
terms of the agreement. At June 30, 1999 and 1998, there were no borrowings
outstanding under the credit line.
F-9
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - INCOME TAXES
The provision (benefit) for income taxes includes the following:
YEAR ENDED JUNE 30,
----------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Current:
Federal....................$ 1,287 $ 757 $ 1,993
State...................... 333 171 377
Foreign.................... 542 374 4
-------- -------- --------
2,162 1,302 2,374
-------- -------- --------
Deferred:
Federal.................... 350 360 (347)
State...................... 87 89 (140)
-------- -------- --------
437 449 (487)
-------- -------- --------
$ 2,599 $ 1,751 $ 1,887
======== ======== ========
A reconciliation of income taxes computed by applying the federal statutory
income tax rate of 34% to income before income taxes to the total income tax
provision reported in the Consolidated Statement of Operations is as follows:
YEAR ENDED JUNE 30,
-----------------------------------
1999 1998 1997
--------- --------- ----------
(in thousands)
U.S. Federal income tax at statutory rate .... $ 2,238 $ 1,545 $ 1,696
State income taxes, net of federal benefit.... 377 172 156
Foreign sales corporation benefit............. (73) (37) (68)
Permanent differences......................... 25 28 32
Other......................................... 32 43 71
--------- --------- ---------
Provision for income taxes.................... $ 2,599 $ 1,751 $ 1,887
========= ========= =========
F-10
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income taxes at June 30, 1999 and 1998 comprised:
June 30,
---------------------------
1999 1998
----------- ----------
(in thousands)
Deferred tax assets:
Inventory........................................$ 586 $ 791
Reserve for doubtful accounts and returns........ 73 -
Warranty reserves................................ 209 261
Vacation and deferred compensation............... 225 228
License fee accrual.............................. 31 69
Intangible assets................................ 141 168
State income taxes............................... 117 64
-------- ---------
Gross deferred tax asset...................... 1,382 1,581
-------- ---------
Deferred tax liabilities:
Lawsuit expenses................................. (111) (18)
Property and equipment depreciation.............. (234) (192)
Other............................................ (103) -
-------- ---------
Gross deferred tax liability.................. (448) (210)
-------- ---------
Net deferred income taxes...........................$ 934 $ 1,371
-------- ---------
-------- ---------
NOTE 6 - STOCK OPTIONS
The Company has two active stock option plans, administered by the
Compensation Committee of the Board of Directors, which provide for the issuance
of options to employees, officers, directors and consultants. The exercise price
of a stock option is generally equal to the fair market value of the Company's
Common Stock on the date the option is granted. Both of the plans permit options
granted to qualify as "Incentive Stock Options" under the Internal Revenue Code.
Options issued under certain of the Company's predecessor plans call for 100%
vesting of outstanding options upon a change of control of the Company. Options
generally vest at a rate of 25 percent per year over a period of four years from
the date of grant and expire after a period not to exceed ten years, except in
the event of termination, whereupon vested shares must be exercised within 30
days, or upon death or disability, where a six month exercise period is
specified.
F-11
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Option activity for the three years ended June 30, 1999 is summarized as
follows:
Weighted-Average
Shares Exercise Price
--------- -----------------
Options outstanding at June 30, 1996................... 848,596 $ 0.85
Options granted................................... 100,000 3.45
Options exercised................................. (168,630) 0.35
Options canceled.................................. (23,775) 2.79
---------
Options outstanding at June 30, 1997................... 756,191 1.24
Options granted................................... 572,768 7.27
Options exercised................................. (135,287) 0.84
Options canceled.................................. (87,943) 5.26
---------
Options outstanding at June 30, 1998................... 1,105,729 4.09
Options granted................................... 525,500 6.03
Options exercised................................. (55,975) 1.65
Options canceled.................................. (95,625) 6.36
---------
Options outstanding at June 30, 1999................... 1,479,629 $ 4.73
---------
---------
The following table summarizes all options outstanding and exercisable by price
range as of June 30, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------------- ----------------------------------
Weighted-Average
Range of Number Remaining Number
Exercise Outstanding at Contractual Weighted-Average Exercisable at Weighted-Average
Prices June 30, 1999 Life Exercise Price June 30, 1999 Exercise Price
-------------- -------------- ----------------- ----------------- -------------- ----------------
$ .12 - .88 351,828 3.8 years $ .63 351,828 $ .63
1.20 - 3.75 172,400 6.7 2.40 108,112 2.26
4.50 - 6.63 494,000 8.9 5.35 68,750 5.59
7.00 - 11.83 461,401 8.4 8.04 123,651 7.59
--------- -------
.12 - 11.83 1,479,629 7.3 4.73 652,341 2.74
--------- -------
--------- -------
Shares available for future grant were 838,500 and 592,500 at June 30, 1999 and
1998, respectively.
F-12
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1996 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Company adopted the 1996 Employee Stock Purchase
Plan (the "ESPP") whereby 250,000 shares of Common Stock were reserved for
issuance and purchase by employees of the Company to assist them in acquiring a
stock ownership interest in the Company and to encourage them to remain
employees of the Company. In November 1998, the shareholders approved an
amendment to increase the total number of shares of Common Stock from 250,000 to
500,000 shares. The ESPP is intended to qualify under Section 423 of the
Internal Revenue Code and permits eligible employees to purchase Common Stock at
a discount through payroll deductions during specified six-month offering
periods. No employee may purchase more than $25,000 worth of stock in any
calendar year or 1,500 shares in any one offering period. The ESPP is
administered by an Administrative Committee appointed by the Board of Directors
and provides generally that the purchase price must not be less than 85% of the
fair market value of the Common Stock on the first or last day of the offering
period, whichever is lower. During fiscal year 1999, a total of 92,155 shares
were issued for combined proceeds of $338,000.
PRO FORMA INFORMATION
The Company accounts for employee stock-based compensation using the
intrinsic value method. No compensation expense has been recognized for its
employee stock option grants, as they have been granted at the fair market
value of the underlying Common Stock at the date of grant. No compensation
expense has been recognized for purchase rights under the ESPP as they have
been granted in accordance with the terms of the ESPP. Had compensation
expense for the Company's employee stock-based compensation awards issued
during 1999, 1998 and 1997 been determined based on a fair value method, the
Company's net income and net income per share would have been reduced to the
pro forma amounts indicated below:
Year Ended June 30,
----------------------------------------------------
1999 1998 1997
----------- ----------- ----------
(in thousands except per share amounts)
Net income:
As reported................... $ 3,982 $ 2,792 $ 3,100
Pro forma..................... 3,248 2,343 3,022
Diluted net income per share:
As reported................... $ .37 $ .25 $ .33
Pro forma.................... .30 .21 .33
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted average estimated
fair value of employee stock options granted during 1999 and 1998 was $2.07 and
$1.16 per share, respectively. The weighted average assumptions used for grants
during the years ended June 30, 1999 and 1998 were: no dividend yield for both
years, risk-free interest rates of 5.2% and 5.9%, respectively, expected
volatility of 60% and 33%, respectively, and expected lives of 7.0 years for
both years.
The fair value of each share purchase right under the ESPP is estimated
at the inception of each offering period also using the Black-Scholes
option-pricing model. The weighted average estimated fair value of each share
purchase right granted during 1999 and 1998 was $1.86 and $1.45 per share,
respectively. The weighted average assumptions used during fiscal years 1999 and
1998 were: no dividend yield for both years, risk-free interest rates of 5.2%
and 5.9%, respectively, expected volatility of 60% and 33%, respectively, and an
expected life of 6 months for both years.
F-13
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - 401(k) PLAN
In January 1994, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan
permits but does not require matching contributions by the Company on behalf of
all participants. In January 1998, the Company began matching employee
contributions at 50% for up to 6% of an employee's pretax income. The totals of
these employer contributions were $252,000 and $118,000 in fiscal years 1999 and
1998, respectively. No contributions were made during fiscal year 1997.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its office, production and sales facilities under
non-cancelable operating leases, which expire in various years through fiscal
year 2003. The leases provide for annual rent escalations intended to
approximate increases in cost of living indices, and certain of the leases
provide for rent abatement. At June 30, 1999, future minimum lease payments
under these arrangements are as follows:
Year Ending Minimum Lease
June 30, Payments
------------ --------------
(in thousands)
2000 $ 975
2001 1,006
2002 1,047
2003 179
---------
$ 3,207
---------
---------
Rental expense is recognized ratably over the respective lease terms
and aggregated $983,000, $1,001,000 and $703,000 for fiscal years 1999, 1998
and 1997, respectively.
CONTINGENCIES
The Company, its directors and certain of its officers were named as
defendants in two class action lawsuits filed on April 21, 1997 and May 2, 1997
in the U.S. District Court for the Southern District of California. In both
cases, the plaintiffs purported to represent a class of all persons who
purchased the Company's Common Stock between February 21, 1997 and March 14,
1997. The complaints alleged that the defendants violated various federal
securities laws through material misrepresentation and omissions in connection
with the Company's initial public offering and its Registration Statement on
Form S-1, which the Securities and Exchange Commission declared effective on
February 21, 1997. The plaintiffs seek rescission of their share purchases or
rescissory damages if their shares have been sold, as well as attorneys' fees
and other costs and expenses.
On September 16, 1997, the court entered an order permitting the
voluntary dismissal of the first filed lawsuit without prejudice and
appointed the plaintiff in the second lawsuit as the lead plaintiff in this
litigation. That person then resigned as the lead plaintiff, and the
shareholder who had filed the first of the two lawsuits petitioned the court
for permission to intervene and serve as the lead plaintiff. The petition was
granted on September 29, 1998 and, on December 17, 1998, the court certified
the shareholder class, allowing the litigation to proceed as a class action.
The defendants have answered the second complaint, have denied the
material allegations and have disavowed any wrongdoing. Discovery is complete,
and the Company filed a Motion for Summary Judgment, which the court denied on
August 2, 1999. A pretrial conference has been scheduled for November 1, 1999,
but no trial date has been scheduled. Although the outcome of the lawsuit cannot
be determined, management believes that it has meritorious defenses and intends
to defend against the lawsuit vigorously. The Company maintains directors' and
officers' liability insurance to provide coverage against suits of this nature
and, other than legal fees incurred to date, no amounts have been recorded in
the financial statements for any losses which may result from this litigation.
F-14
OVERLAND DATA, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Overland Data, Inc.:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) of this Form 10-K present fairly, in all
material respects, the financial position of Overland Data, Inc. and its
subsidiaries at June 30, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Diego, California
August 3, 1999
F-15
OVERLAND DATA, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Balance at Additions
Beginning Charged to Balance at
Of Year Income Deductions* End Of Year
----------- ------------ ----------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
- ------------------------------------------
1999 $ 922 $ 7 $ 44 $ 885
1998 774 243 95 922
1997 624 280 130 774
RESERVE FOR INVENTORY OBSOLESCENCE
- ----------------------------------
1999 $1,848 $315 $988 $1,175
1998 1,879 300 331 1,848
1997 1,318 968 407 1,879
- -----------------
* Deductions represent amounts written off against the allowance, net of
recoveries.
S-1
EXHIBIT INDEX
3.1 Registrant's Amended and Restated Articles of Incorporation.*
3.2 By-Laws.*
4.1 Specimen stock certificate.*
4.2 Investors' Rights Agreement, dated May 21, 1993, between the Registrant
and the parties named therein.*
10.1 Basic Order Agreement #16529, dated July 1, 1993 and as amended through
November 10, 1995, between the Registrant and Digital Equipment
Corporation.*
10.2 Production Procurement Agreement #RMSS-ODI-96-01-0, dated October 25,
1996, between the Registrant and International Business Machines
Corporation.*
10.3 Credit Agreement effective as of June 27, 1997 between the Registrant
and Imperial Bank.**
10.4 Standard Industrial Lease--Multi-Tenant, dated May 26, 1993, between
the Registrant and Mitsui/SBD America Fund 87-1.*
10.5 First Amendment to the 1995 Stock Option Plan dated January 21, 1997.*
10.6 1996 Employee Stock Purchase Plan adopted December 12, 1996.*
10.7 Agreement between Overland Data and Tandberg Data concerning MLR and
VR2 Technology.***
10.8 Agreement between Overland Data and Imation Corporation concerning
TravanTM and VR2 Technology.***
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (included on Signature Page).
27.1 Financial Data Schedule (for EDGAR use only).
- -----------------
* Incorporated by reference to the Company's Registration Statement, No.
333-18583, dated February 21, 1997.
** Incorporated by reference to the Company's Form 10-K dated June 30, 1997.
*** The Company has requested confidential treatment for certain portions of
this Agreement.