<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997
REGISTRATION STATEMENT NO. 333-18583
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OVERLAND DATA, INC.
(Exact name of registrant as specified in Its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 7389 95-3535285
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>
8975 BALBOA AVENUE
SAN DIEGO, CALIFORNIA 92123-1599
(619) 571-5555
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
SCOTT MCCLENDON
PRESIDENT
8975 BALBOA AVENUE
SAN DIEGO, CALIFORNIA 92123-1599
(619) 571-5555
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN J. HENTRICH, ESQ. GEORGE D. TUTTLE, ESQ.
CARLOS D. HEREDIA, ESQ. WILLIAM L. HUDSON, ESQ.
Baker & McKenzie Brobeck, Phleger & Harrison LLP
101 West Broadway, Twelfth Floor One Market Plaza
San Diego, California 92101 San Francisco, California 94105
(619) 236-1441 (415) 442-0900
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 24, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
2,700,000 SHARES
(LOGO)
COMMON STOCK
--------------
OF THE 2,700,000 SHARES OF COMMON STOCK, NO PAR VALUE (THE "COMMON STOCK"),
OFFERED HEREBY (THE "OFFERING"), 2,200,000 SHARES ARE BEING SOLD BY OVERLAND
DATA, INC., A CALIFORNIA CORPORATION ("OVERLAND" OR THE "COMPANY"), AND 500,000
SHARES ARE BEING SOLD BY CERTAIN SHAREHOLDERS OF THE COMPANY (THE "SELLING
SHAREHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE
OF SHARES BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK. IT
IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$8.00 AND $10.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS
TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION
HAS BEEN MADE FOR QUOTATION OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "OVRL."
-------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 6 HEREIN FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total(3)............................. $ $ $ $
</TABLE>
- -------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
several underwriters identified elsewhere herein (the "Underwriters")
against certain liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $550,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
405,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If all such
shares are purchased from the Company, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS, SUBJECT TO PRIOR
SALE, WHEN, AS AND IF ISSUED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO
APPROVAL OF CERTAIN LEGAL MATTERS BY COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE COMMON STOCK WILL BE MADE
AGAINST PAYMENT THEREFOR ON OR ABOUT , 1997, IN NEW YORK, NEW YORK.
-------------------
JEFFERIES & COMPANY, INC. CRUTTENDEN ROTH
INCORPORATED
, 1997
<PAGE>
INSIDE FRONT COVER -- PHOTOGRAPHS
PHOTOGRAPH DESCRIPTIONS AND CAPTIONS
1. Background: Black and blue Company logos serpentine upward from bottom left
corner to top right corner.
2. Top center: Company logo and name.
3. Middle center: Color photo of three units of the LibraryXpress product line
in rack mount cabinet with an LXG unit on top, one LXB unit pulled out and a
second LXB unit on the bottom. Caption: DLT LibraryXpress, Top Unit: LXG (to
commence shipment first quarter calendar year 1997), Middle and Bottom
Units: LXB.
4. Bottom left: Color photos of TapeXpress T490E and TapeXpress L490E side by
side. Caption: TapeXpress L490E, TapeXpress T490E.
5. Bottom right: Color photo of TapeXpress L60E cabinet. Caption: TapeXpress
L60E.
Overland Data, ODI, TapeXpress, MCT Mainframe Class Tape and TapePro are
federally registered trademarks of the Company. The Company has applied for
federal registration of the trademarks LibraryXpress and SmartScale Storage.
This Prospectus also contains the registered trademarks of other companies.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY, SEE "RISK FACTORS."
THE COMPANY
Overland designs, develops, manufactures, markets and supports magnetic tape
data storage systems used by businesses for backup, archival and data
interchange functions. The Company primarily offers three product lines --
LibraryXpress, TapeXpress and TapePro -- which are designed to meet the data
storage needs of client/server networks, workstations, minicomputers and
personal computers. Overland believes that it is well positioned to take
advantage of the rapidly increasing demand for storage capacity, particularly
that created by the growth in client/server networks. To address this growing
network storage demand, Overland introduced the LXB in March 1996, the first
product of its LibraryXpress line of automated tape libraries. In August 1996,
BYTE Magazine selected the LXB as the "Best Overall DLT Tape Library." The
Company believes that, with the anticipated delivery of the related LXG control
unit during the first quarter of calendar year 1997, LibraryXpress will
constitute the first automated tape library in its capacity class that is truly
"scalable" in that it is designed to allow end-users to reconfigure combinations
of drives and cartridges as their storage requirements change without having to
replace their existing Overland equipment. Management believes that
LibraryXpress has significant market potential because it is designed to enable
companies to increase their storage capacity in a cost effective manner as their
businesses grow.
The Company's TapeXpress product line consists of 18/36-track tape drives
and loaders based on an IBM standard and, in October 1996, IBM selected the
Company to be a supplier of 36-track products. With its TapePro product line,
Overland is a leading supplier of 9-track reel-to-reel products used in data
interchange. In addition, the Company distributes a line of DLT-based products
manufactured by Quantum and markets various other products, including controller
cards which connect its tape drives to personal computers, interchange software,
storage management software supplied by third parties, spare parts and tape
media. With the exception of the tape drives in its LibraryXpress product line,
all of the Company's products are designed and manufactured in-house. The
Company's products combine electro-mechanical robotics, electronic hardware and
firmware, which are developed by the Company with an emphasis on efficiency of
design, functionality and reliability.
INDUSTRY OVERVIEW
The data storage industry has experienced rapid growth in recent years in
response to the significant increase in the amount of electronically stored
data. Overland believes that this growth will continue due to (i) the
introduction of increasingly powerful computing platforms, (ii) the spreading
use of computers for tasks that previously were performed manually, (iii) the
increasing number, size, bandwidth and complexity of computer networks,
particularly client/server networks, (iv) the rapid growth of data-intensive
applications and (v) the growth of intranet and Internet based computing. In
addition, emerging data intensive applications, such as still image, motion
video, check imaging and other multimedia and character recognition uses, are
accelerating the demand for data storage solutions.
Current data storage solutions provide secure, high capacity data
repositories based primarily on three technologies -- magnetic tape, magnetic
disk and optical disk. Magnetic tape remains the most cost effective storage
medium (at approximately one-fifth of the cost per megabyte stored as compared
to magnetic or optical disk), and is used most often for backup and archival
functions. The development of automated tape libraries, which address the
historically high degree of costly human intervention involved in using tape
storage, is helping to drive the expanded use of magnetic tape. Automated tape
libraries also provide improved throughput, increased data capacity and
unattended operation through the use of multiple drives and cartridges. In
addition, business managers are increasingly perceiving data to be critical at a
company-wide level as opposed to only being important at the individual
workstation level. As a result, central management of data has been increasing.
3
<PAGE>
The Company believes that the factors noted above will greatly increase the
number of sites worldwide requiring large amounts of backup and, therefore, the
need for advanced storage solutions. According to Strategic Research Corp., a
storage management industry consultant, the number of centralized storage sites
worldwide requiring more than 200GB of backup is projected to grow from
approximately 116,000 sites in 1996 to 660,000 sites by the year 2000. The
Company believes that it is in a strong position to capitalize on the
opportunities created by this projected growth.
COMPANY STRATEGY
Overland intends to continue building a leadership position in the magnetic
tape segment of the data storage industry. The Company believes that it
possesses certain core competencies which will help it attain this leadership
position, including: (i) advanced knowledge of hardware/software integration and
connectivity, due to its experience in designing and developing both tape drives
and libraries; (ii) experience in the magnetic tape industry, particularly with
respect to innovative mechanical, electrical and firmware designs; (iii)
comprehensive understanding of, and close contact with, end-user needs; and (iv)
experienced management and developed management processes in each functional
area of its business operations. The Company intends to leverage these core
competencies in the execution of its business strategy, which includes the
following elements:
- EMPHASIZE DEVELOPMENT OF ADVANCED STORAGE SOLUTIONS. Overland invests
extensively in research and development in order to deliver technologies
for the "next generation" of magnetic tape drives and automated tape
libraries. The Company intends to continue its research and development
efforts in areas that build upon its manufacturing, engineering and
operational strengths in order to offer products which serve emerging data
storage needs.
- MAINTAIN LEADERSHIP IN PRODUCT RELIABILITY. The Company believes that
product dependability is crucial for its customers. Overland believes that
it has achieved a reputation for reliability and intends to continue to
develop and offer high quality and reliable products and augment this
reliability with comprehensive technical support.
- LEVERAGE CLOSE RELATIONSHIPS WITH END-USERS. The Company believes that
its interaction with end-users enables it to better understand the
evolving product and application needs of its customers. Overland intends
to continue its close contact with end-users by selling its products
directly to them, by involving them in ongoing market research activities
regarding future products, and by responding to their technical support
requirements.
- FURTHER DEVELOP WORLDWIDE DISTRIBUTION. Overland intends to increase the
number of distributors in its existing international markets, develop
additional distribution channels in these markets for new product
introductions and establish appropriate distribution channels for its
current and future products in new international markets.
- HARVEST LEGACY MARKETS. The markets served by the Company's 9-track and
18-track product lines are characterized by mature technologies and large
installed customer bases. Overland intends to capitalize on its position
in these markets in order to capture additional market share and expects
to realize improved operating margins as such products require limited
research and development support as compared to newer technology.
- PURSUE ALLIANCES OR ACQUISITIONS. Overland believes that it may be able
to expand and increase the value-added component of its product offerings
through alliances with, or acquisitions of, complementary businesses. The
Company intends to evaluate strategic product and technology acquisitions
and may pursue second source manufacturing arrangements to further
capitalize upon its engineering, manufacturing and quality process
capabilities.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company......................... 2,200,000 shares
Common Stock offered by the
Selling Shareholders............ 500,000 shares
Common Stock to be outstanding
after the Offering.............. 9,746,498 shares (1)
Use of proceeds................... Repayment of outstanding indebtedness,
working capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.......................... OVRL
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 34,044 $ 38,156 $ 47,226 $ 23,319 $ 27,233
Gross profit.............................................. 11,154 11,115 16,081 7,940 9,812
Income from operations.................................... 587 980 3,541 1,763 2,410
Net income................................................ 137 501 3,159 1,112 1,368
Net income per share(2)................................... $ 0.02 $ 0.07 $ 0.41 $ 0.14 $ 0.17
Shares used in computing net income per share(2).......... 7,137 7,405 7,731 8,131 8,196
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 28 $ 14,792
Working capital...................................................................... 13,066 27,830
Total assets......................................................................... 23,004 37,768
Long-term debt, net of current portion............................................... 3,100 --
Convertible redeemable preferred stock............................................... 5,200 --
Shareholders' equity................................................................. 7,415 30,479
</TABLE>
- ------------------------
(1) Excludes (i) 805,921 shares of Common Stock issuable pursuant to stock
options outstanding at December 31, 1996 (of which options to purchase
472,431 shares are exercisable) with a weighted average exercise price of
$1.18 per share and (ii) 17,046 shares of Common Stock issuable upon
exercise of an outstanding warrant at a price of $4.40 per share. See
"Management-- Stock and Employee Benefit Plans" and "Description of Capital
Stock--Warrant" and Note 7 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning calculation of net income per share.
(3) Adjusted to give effect to (i) the conversion of all shares of Preferred
Stock into Common Stock upon completion of this Offering and (ii) the
application of the estimated net proceeds of this Offering based upon an
assumed initial public offering price of $9.00 per share. See "Use of
Proceeds."
------------------------------
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN
THIS PROSPECTUS TO "OVERLAND" AND THE "COMPANY" REFER TO OVERLAND DATA, INC., A
CALIFORNIA CORPORATION, AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE NOTED, ALL
INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL INFORMATION, ASSUMES (I) NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) THE AUTOMATIC
CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK UPON
THE COMPLETION OF THIS OFFERING.
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH
BELOW, AS WELL AS OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS,
BEFORE MAKING A DECISION TO PURCHASE THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
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 such new and enhanced products. In particular, the
Company's future success is dependent on its LibraryXpress product line, the
initial product of which, the LXB, commenced shipment in March 1996. During the
first quarter of calendar year 1997, the Company intends to commence shipment of
the LXG global control unit of the LibraryXpress product line, which will create
what the Company believes will be the first automated tape library in its
capacity class which is truly "scalable." Prototypes of the LXG were shipped in
November 1996. The LXB and the other planned units of the LibraryXpress product
line have not yet achieved widespread market acceptance and are anticipated to
confront increasing competition both from competitive automated tape library
products, as well as other storage devices that may be developed in the future.
The DLT tape drives used by the Company in its LibraryXpress products are
obtained from a sole supplier, Quantum Corporation ("Quantum"), which from time
to time has placed customers such as the Company (and its competitors) on
allocation due to shortages of its components. See "--Dependence on Certain
Suppliers." 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 the
LibraryXpress product line, 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 can render existing products
obsolete or not marketable. For example, the Company believes that its sales of
Quantum products which it distributes declined from $6.0 million in the first
half of fiscal year 1996 to $1.8 million in the first half of fiscal year 1997,
largely as a result of a decline in sales of the Quantum DLT 2500/2700/4500/4700
loaders which have been replaced by the Company's sales of the LXB, which
amounted to approximately $5.4 million in revenues during the first half of
fiscal year 1997. Similarly, the Company anticipates a continued migration by
users of its 18-track products to its 36-track products. In addition, 9-track
product sales of $5.8 million in the first half of fiscal year 1997 declined
30.1% from the first half of fiscal year 1996, reflecting the general maturity
of the 9-track tape technology and a movement by the Company's customers to more
technologically advanced products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Products" and
"--Research and Development."
COMPETITION AND PRICE PRESSURE
The worldwide tape storage market is intensely competitive as a large number
of manufacturers of alternative tape technologies compete for a limited number
of customers and barriers to entry are relatively low in the library category.
The Company currently participates in three market areas which are defined by
different tape technologies: (i) network data storage; (ii) data backup and
interchange based on
6
<PAGE>
IBM compatible 3480/3490 technology; and (iii) data interchange based on 9-track
reel-to-reel technology. In each 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 LXB product currently competes with products
made by Advanced Digital Information Corporation ("ADIC"), ATL Products, Inc.
("ATL/Odetics"), Breece Hill Technologies, Inc. ("Breece Hill"), Hewlett-Packard
Company ("Hewlett-Packard"), Quantum and Storage Technology Corporation
("Storage Technology"), and the Company believes that additional competitors can
be expected to enter the market. For the data backup and interchange market,
which is based on IBM compatible 3480/3490 technology, the Company offers a
product line of 18 and 36-track products, which the Company believes compete
primarily with products made by Fujitsu Computer Products of America, Inc.
("Fujitsu"), Hitachi Data Systems Corporation ("Hitachi"), Laser Magnetic
Storage and Storage Technology. For the 9-track data interchange market, the
Company believes it competes with Anritsu American Incorporated, Hewlett-Packard
and M4 Data, Inc. Except for the 9-track data interchange market, 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.
See "Business--Competition."
DEPENDENCE ON CERTAIN SUPPLIERS
The Company's products have a large number of components and subassemblies
produced by outside suppliers and it is highly dependent on such suppliers for
components and subassemblies, including DLT tape 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 new LibraryXpress automated tape libraries
incorporate DLT tape drives manufactured by Quantum, which is also a competitor
of the Company in that Quantum markets its own tape drives and tape loader
products. Currently, there are no alternative sources for the DLT tape drives
supplied by Quantum. The Company does not have a long-term contract with
Quantum, which could cease supplying DLT tape 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 the past 12 months, the Company has experienced problems with the quality
and timeliness of the supply of DLT drives and read-write heads, each of which
is a sole source component. Such problems have adversely affected the Company's
sales during this period. While the Company believes that the problems relating
to these components have been resolved, 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. See "Business--Products" and
"--Manufacturing."
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
The Company markets its products to original equipment manufacturers
("OEMs"), value-added resellers ("VARs"), systems integrators, distributors,
resellers and end-user customers. The Company's sales to its top five customers
accounted for 34% of the Company's total sales in fiscal year 1996, with Digital
Equipment Corporation ("DEC"), a major customer since 1993, accounting for 23%
of such sales. During the first half of fiscal year 1997, the Company's sales to
its top five customers and to DEC
7
<PAGE>
accounted for 34% and 21% of total sales, respectively. In October 1996, the
Company signed a five-year agreement with IBM to supply its 36-track products.
The Company anticipates that the percentage of its sales to these top two
customers will increase significantly during fiscal year 1997 and could account
for as much as 30% of the Company's sales. 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. Orders may be rescheduled or
canceled outside 30 days of shipment without penalty. The loss of one or more of
these customers due to competition from other vendors, consolidation,
substantial cancellations by them, or the receipt of orders below anticipated
amounts would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Sales and
Marketing."
FLUCTUATIONS 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, 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 distributor
channel (20% in fiscal year 1996), the first fiscal quarter (July through
September) is 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, as well as other factors discussed herein. In particular, the
Company's ability to forecast sales to distributors and VARs and, increasingly
to OEMs, 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, respectively. A portion 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,
demand or 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 and labor shortages. During the first
half of fiscal year 1997, the Company reported a gross margin of 36% which was
higher than its average quarterly gross margin during fiscal years 1994, 1995
and 1996. Management does not believe that this gross margin level, which was
positively affected by an increase in the sales of the LibraryXpress and a
decrease in sales of distributed product, will be maintained. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
8
<PAGE>
REPLACEMENT OF INFORMATION SYSTEMS
In July 1996, the Company began a project to replace its enterprise-wide
information and business systems by the end of fiscal year 1997 to more
effectively address the complexities of the Company's business and to support
its growth in the next five years. Although the Company has not experienced any
delays in this effort to date, there can be no assurance that future delays in
the implementation process will not occur. The failure to successfully
accomplish the replacement of these systems in a timely manner, or any failure
otherwise to achieve the necessary levels of information and business system
support, could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS RELATED TO FOREIGN SOURCING AND FOREIGN SALES
Because a number of the Company's key components are currently manufactured
in Singapore and Malaysia, its results of operations can be affected by
fluctuations in currency exchange rates. The Company's international procurement
is also subject to certain other risks common to foreign operations in general,
including government regulation and import restrictions. During fiscal year
1996, approximately 10% of the Company's cost of goods sold consisted of
materials purchased from suppliers in Singapore and Malaysia. An adverse foreign
exchange movement of the U.S. dollar versus the Singapore dollar or other
currency, or the imposition of import restrictions or tariffs by the U.S.
government on products or components shipped from Singapore, Malaysia or another
country could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, because of the
Company's use of components produced overseas, the sale of the Company's
products to domestic federal or state agencies may be restricted by limitations
imposed by the Buy American Act or the Trade Agreement Act. See "Business--
Manufacturing."
Direct international sales accounted for 27% of sales in fiscal year 1996
and the Company expects that international sales will continue to grow and
represent an even greater proportion of the Company's revenue. Sales to
customers outside the U.S. are subject to various risks, including the
imposition of governmental controls, the need to comply with a wide variety of
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, the greater difficulty of administering
business overseas. Furthermore, although the Company endeavors to meet standards
established by foreign regulatory bodies, there can be no assurance that the
Company will be able to comply with changes in foreign standards in the future.
The inability of the Company to design products that comply with foreign
standards could have a material adverse effect on the Company. Currently, all of
the Company's sales are U.S. dollar denominated and fluctuations in the value of
foreign currencies relative to the U.S. dollar could therefore make the
Company's products less price competitive. However, the Company has plans to
expand its presence in Europe through its operation in the United Kingdom in the
last half of fiscal year 1997 and to bill customers for product shipped from
England in other foreign currencies. When this occurs, a decrease in the value
of the other foreign currencies in relation to the U.S. dollar after
establishing prices and before receipt of payment by the Company would have an
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Sales and Marketing."
DEPENDENCE ON KEY EMPLOYEES
The Company's future success depends in large part on its ability to retain
certain key executives and other key personnel, many of whom have been
instrumental in developing new technologies and setting strategic plans. The
Company's growth and future success 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 be able to retain its existing
personnel or attract additional qualified personnel in the future. See
"Management."
9
<PAGE>
TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company believes that, because of the rapid pace of technological change
in the tape storage industry, patent 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.
Nonetheless, 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, there can be
no assurance that others will not 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. Such rights, however, may not
preclude competitors from developing substantially equivalent or superior
products to those of the Company's. In addition, many aspects of the Company's
products are not subject to significant intellectual property protection. While
the Company is not currently engaged in any intellectual property litigation or
proceedings, there can be no assurance that it will not become so involved in
the future or that its products 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. See "Business--Proprietary Rights."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company may in the future pursue acquisitions of complementary
businesses, products or technologies as it seeks to expand and increase the
value-added component of its product offerings. 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 acquisitions by the Company may result in
potentially 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 a two-year, return-to-factory warranty on its
products. For certain products, it provides a two-year on-site warranty which is
supplied by a third party service provider. The Company pays the service
provider in advance the negotiated price of the contract 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. See
"Business--Customer Service and Support."
MANAGEMENT DISCRETION OVER PROCEEDS OF THE OFFERING
The Company intends to use approximately $3.1 million of the net proceeds
from this Offering to repay outstanding indebtedness and approximately $14.8
million for general corporate purposes, including working capital and possible
acquisitions of complementary businesses, products and technologies, although
the Company currently has no agreements or commitments with respect to any such
transactions. Accordingly, the Company will have broad discretion as to the
application of such proceeds. An investor
10
<PAGE>
will not have an opportunity to evaluate the economic, financial and other
relevant information which will be utilized by the Company in determining the
application of such proceeds. See "Use of Proceeds."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to this Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this Offering. The stock market has from time to
time experienced extreme price and volume fluctuations which often have been
unrelated to the operating performance of particular companies. Announcements of
new products or accounts by the Company or its competitors, changes in earnings
estimated by analysts and economic and other external factors, as well as
period-to-period fluctuations in financial results of the Company, may have a
significant impact on the market price and marketability of the Common Stock.
Fluctuations or decreases in the trading price of the Common Stock may adversely
affect the liquidity of the trading market for the Common Stock and the
Company's ability to raise capital through future equity financing.
See--"Fluctuations in Results." The initial public offering price of the Common
Stock in this Offering will be determined by negotiations among the Company, the
Selling Shareholders and the Representatives of the Underwriters based on
several factors and may not be indicative of prices that will prevail in the
trading market. See "Principal and Selling Shareholders," "Shares Eligible for
Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the net tangible book value per share of the Common Stock. Accordingly, the
purchasers of shares of Common Stock in this Offering will experience immediate
and substantial dilution of net tangible book value per share of $5.89. The
Company has not paid any dividends on its Common Stock and does not anticipate
paying any dividends on such stock in the foreseeable future. In addition, the
Company's current bank credit line prohibits the payment of dividends. See
"Dilution" and "Dividend Policy."
EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the 2,700,000 shares offered hereby
(3,105,000 shares if the over-allotment option is exercised in full) will be
eligible for immediate sale in the public market without restriction unless they
are held by affiliates of the Company. After the completion of this Offering,
7,046,498 of the outstanding shares will be "restricted securities" within the
meaning of Rule 144 ("Rule 144") promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available. However, substantially all of these shares will be eligible for sale
pursuant to Rule 144 beginning 90 days after the completion of this Offering. Of
this total, approximately 6,383,146 shares will be subject to the volume and
manner of sale limitations of Rule 144 and approximately 663,352 shares will be
eligible for resale without such restrictions pursuant to Rule 144(k) after the
completion of this Offering. In addition, under Rule 701 of the Securities Act
("Rule 701"), any employee, consultant or advisor of the Company who purchased
shares from the Company in connection with a compensatory stock or option plan
or other written compensatory agreement is entitled to resell such shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144 and affiliates are entitled to sell
their Rule 701 shares without having to comply with holding-period restrictions
under Rule 144, in each case commencing 90 days after the Company becomes
subject to the reporting requirements of Section 13 of the Exchange Act. During
the two-year period ended December 31, 1996, approximately 435,820 shares of
Common Stock were issued pursuant to the exercise of stock options and, at
December 31, 1996, stock options for 805,921 shares of Common Stock were
outstanding. The directors, officers and current shareholders of the Company,
beneficially holding (upon completion of this Offering) an aggregate of
6,098,921 shares, have agreed not to sell or otherwise dispose of any such
shares for at least 180 days from the date of this Prospectus without the prior
written consent of Jefferies & Company, Inc. Thereafter, these shares will
generally be eligible for immediate sale in the public market without
restriction. Furthermore, certain of the Company's current shareholders and the
holder of the Company's outstanding warrant have been granted certain
"piggy-back" registration rights with respect to the shares
11
<PAGE>
of Common Stock owned by them or to be issued to them. The Company intends to
file a registration statement under the Securities Act concurrent with this
Offering covering the sale of shares of Common Stock previously issued or to be
issued under its 1996 Employee Stock Purchase Plan and its various stock option
plans. No predictions can be made as to the effect, if any, that public sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market, particularly by directors and officers of the
Company, or the perception that such sales could occur, could have an adverse
impact on the market price of the Common Stock. See "Principal and Selling
Shareholders," "Shares Eligible for Future Sale" and "Underwriting."
FAIR PRICE PROVISION
The Company anticipates amending its Articles of Incorporation prior to the
completion of this Offering to include a "fair price" provision that may have
the effect of discouraging persons from pursuing a non-negotiated takeover of
the Company and preventing certain changes of control. See "Description of
Capital Stock."
BENEFITS OF THE OFFERING TO EXISTING SHAREHOLDERS
The Company's existing shareholders will receive substantial proceeds from
this Offering and certain other benefits in connection with this Offering. Since
the Company's inception, the equivalent of 7,546,498 shares of Common Stock were
purchased by the existing shareholders for total consideration of approximately
$7.3 million, representing an average price per share of approximately $0.97.
Upon completion of this Offering these shares will have a market value of $67.9
million based upon an assumed initial public offering price of $9.00 per share.
In this Offering, the Selling Shareholders will sell an aggregate of 500,000
shares of Common Stock (18.5% of the total number of shares offered hereby or
16.1% if the Underwriters' over-allotment option is exercised in full), and will
receive proceeds of $4.5 million from such sale based upon the assumed initial
public offering price of $9.00 per share. The Selling Shareholders will realize
a gain on such sale of approximately $4.0 million based upon the difference
between the assumed initial public offering price of $9.00 per share and the
average purchase price per share of $0.97. Upon the completion of this Offering,
the existing shareholders will own an aggregate of 7,046,498 shares of Common
Stock (72.3% of the total number of shares of Common Stock to be outstanding
after this Offering or 69.4% if the Underwriters' over-allotment option is
exercised in full). Upon the completion of this Offering, these shares will have
a market value of $63.4 million based upon the assumed initial public offering
price of $9.00 per share. The unrealized gain with respect to such shares would
amount to $56.6 million based upon the difference between the assumed initial
public offering price per share of $9.00 and the average purchase price per
share of $0.97. In addition, this Offering will establish a public market for
the Common Stock and provide substantially increased liquidity to the existing
shareholders for the shares of Common Stock that they will own after the
completion of this Offering. See "Use of Proceeds," "Principal and Selling
Shareholders" and "Dilution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $17,864,000, based upon an assumed initial offering price of $9.00
per share and after deducting underwriting discounts and estimated offering
expenses ($21,253,850 if the Underwriters' over-allotment option is exercised in
full and such shares are purchased from the Company). All shares purchased
pursuant to the exercise of the Underwriters' over-allotment option, if any,
will be sold by the Company. The Company will not receive any proceeds from the
sale of Common Stock by the Selling Shareholders.
The Company intends to use a portion of the net proceeds from this Offering
to repay approximately $3.1 million of outstanding indebtedness (as of December
31, 1996) under its revolving line of credit, which bears interest at the bank's
prime rate plus 0.50%. The remaining net proceeds will be used by the Company
for general corporate purposes including working capital, development of new
technologies and possible acquisitions of complementary businesses, products or
technology, although no such acquisitions are being negotiated by the Company at
the present time and there can be no assurance that such acquisitions will be
made. Pending the use of the net proceeds for the above purposes, the Company
intends to invest the net proceeds from this Offering in investment-grade,
short-term, interest-bearing securities.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock to date and does
not anticipate doing so in the foreseeable future. The Company currently intends
to retain its earnings to provide funds for the operation and expansion of its
business. In addition, the Company's current bank line of credit prohibits the
payment of cash dividends on its capital stock without the bank's prior written
consent. See Note 4 of the Notes to Consolidated Financial Statements.
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of December 31, 1996 (i) on a historical basis and (ii) as adjusted to give
effect to the conversion of all of the Company's Preferred Stock into Common
Stock and the application of the net proceeds from the sale of 2,200,000 shares
of Common Stock offered by the Company hereby at an assumed initial offering
price of $9.00 per share and after deducting the underwriting discount and
estimated offering expenses payable by the Company. See "Use of Proceeds." This
table should be read in conjunction with the Company's Consolidated Financial
Statements, and the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 28 $ 14,792
--------- -------
--------- -------
Long-term debt, net of current portion................................................ $ 3,100 $ --
Convertible redeemable preferred stock
Series A............................................................................ 367 --
Series B............................................................................ 1,281 --
Series C............................................................................ 3,552 --
Shareholders' equity (1):
Common stock, no par value, 25,000,000 shares authorized, 5,209,925 shares issued,
9,746,498 shares issued as adjusted............................................... 2,085 25,149
Retained earnings................................................................... 5,330 5,330
--------- -------
Total shareholders' equity........................................................ 7,415 30,479
--------- -------
Total capitalization.............................................................. $ 15,715 $ 30,479
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Excludes (i) 805,921 shares of Common Stock issuable pursuant to stock
options outstanding at December 31, 1996 (of which options to purchase
472,431 shares are exercisable) with a weighted average exercise price of
$1.18 per share and (ii) 17,046 shares of Common Stock issuable upon
exercise of an outstanding warrant at a price of $4.40 per share. See
"Management--Stock and Employee Benefit Plans," "Description of Capital
Stock--Warrant" and Note 7 of Notes to Consolidated Financial Statements.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31, 1996
was $12,446,000, or $1.65 per share. Pro forma net tangible book value per share
is determined by dividing the tangible net worth of the Company (total assets
less intangible assets and total liabilities) by the number of outstanding
shares of Common Stock after giving effect to the conversion of all outstanding
shares of the Company's Preferred Stock into Common Stock upon the completion of
this Offering. Without taking into account any changes in such net tangible book
value after December 31, 1996, other than to give effect to the sale of the
2,200,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $9.00 per share, pro forma net tangible book value of
the Company as of December 31, 1996 would have been approximately $30,310,000 or
$3.11 per share (after deducting the estimated underwriting discount and
offering expenses payable by the Company). This represents an immediate increase
in net tangible book value of $1.46 per share to existing shareholders and an
immediate dilution of $5.89 per share to new investors. Dilution to new
investors is determined by subtracting the net pro forma tangible book value per
share after this Offering from the initial public offering price per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................... $ 9.00
Pro forma net tangible book value per share before this Offering............ $ 1.65
Increase per share attributable to sale of Common Stock in this Offering.... 1.46
---------
Pro forma net tangible book value per share after this Offering............... 3.11
---------
Dilution per share to new investors........................................... $ 5.89
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1996, the number of shares of Common Stock sold by the Company, the total
consideration paid to the Company and the average price per share paid by the
existing shareholders and by the new investors purchasing shares of Common Stock
in this Offering at an assumed initial public offering price of $9.00 per share,
before deducting the estimated underwriting discount and offering expenses
payable by the Company.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED(1)(2) CONSIDERATION AVERAGE
------------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ 7,546,498 77.4% $ 7,285,000 26.9% $ 0.97
New investors.................................... 2,200,000 22.6 19,800,000 73.1 9.00
----------- ----- ----------- -----
Total........................................ 9,746,498 100.0% $27,085,000 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Excludes (i) 805,921 shares of Common Stock issuable pursuant to stock
options outstanding at December 31, 1996 (of which options to purchase
472,431 shares are exercisable) with a weighted average exercise price of
$1.18 per share and (ii) 17,046 shares of Common Stock issuable upon
exercise of an outstanding warrant at a price of $4.40 per share. See
"Management--Stock and Employee Benefit Plans," "Description of Capital
Stock--Warrant" and Note 7 of Notes to Consolidated Financial Statements.
(2) Sales by the Selling Shareholders in this Offering will reduce the number of
shares of Common Stock held by existing shareholders to 7,046,498 shares or
72.3% of the total number of shares of Common Stock to be outstanding after
this Offering, and will increase the number of shares held by new investors
to 2,700,000 shares, or approximately 27.7% of the total number of shares of
Common Stock to be outstanding after this Offering. See "Principal and
Selling Shareholders."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The consolidated statement
of operations data for each of the three years in the period ended June 30, 1996
and the consolidated balance sheet data at June 30, 1995 and 1996 are derived
from consolidated financial statements of the Company that have been audited by
Price Waterhouse LLP, independent accountants, and included elsewhere in this
Prospectus. The consolidated statement of operations data for each of the two
years in the period ended August 31, 1992 and the ten months ended June 30, 1993
and the consolidated balance sheet data at August 31, 1991 and 1992 and June 30,
1993 and 1994 are derived from audited consolidated financial statements not
included in this Prospectus. The consolidated statement of operations data for
the six months ended December 31, 1995 and 1996 and the consolidated balance
sheet data at December 31, 1996 are derived from unaudited consolidated
financial statements included elsewhere in this Prospectus that have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
consolidated operating results and financial position for such periods. The
consolidated operating results for the six months ended December 31, 1996 are
not necessarily indicative of the results that may be expected for any other
interim period or the fiscal year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Selected Financial Data."
<TABLE>
<CAPTION>
TEN
YEAR ENDED MONTHS YEAR ENDED SIX MONTHS ENDED
AUGUST 31, ENDED JUNE 30, DECEMBER 31,
------------------- JUNE 30, ------------------------------ -------------------
1991 1992 1993(3) 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 8,004 $ 9,855 $ 11,892 $ 34,044 $ 38,156 $ 47,226 $ 23,319 $ 27,233
Cost of goods sold........................ 4,344 5,535 7,044 22,890 27,041 31,145 15,379 17,421
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit.............................. 3,660 4,320 4,848 11,154 11,115 16,081 7,940 9,812
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing..................... 1,715 1,674 1,842 4,730 4,891 5,935 2,868 3,558
Research and development................ 852 1,982 1,660 3,402 3,076 3,697 1,908 2,095
General and administrative.............. 1,080 1,328 1,802 2,435 2,168 2,908 1,401 1,749
-------- -------- -------- -------- -------- -------- -------- --------
3,647 4,984 5,304 10,567 10,135 12,540 6,177 7,402
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations............. 13 (664) (456) 587 980 3,541 1,763 2,410
Interest income........................... 36 11 24 34 10 1 -- 1
Interest expense.......................... (2) (3) (11) (248) (214) (155) (63) (135)
Other income (expense), net............... 60 110 31 (17) (6) 26 26 5
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes......... 107 (546) (412) 356 770 3,413 1,726 2,281
Provision for income taxes(1)............. -- (60) 72 219 269 254 614 913
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)......................... $ 107 $ (486) $ (484) $ 137 $ 501 $ 3,159 $ 1,112 $ 1,368
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) per share............... $ 0.02 $ (0.10) $ (0.09) $ 0.02 $ 0.07 $ 0.41 $ 0.14 $ 0.17
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Shares used in computing net income (loss)
per share(2)............................ 4,641 4,726 5,695 7,137 7,405 7,731 8,131 8,196
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31, JUNE 30,
-------------------- ------------------------------------------ DECEMBER 31,
1991 1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 436 $ 1,170 $ 79 $ 1,332 $ 101 $ 19 $ 28
Working capital............................... 1,884 2,649 4,063 5,097 6,430 10,307 13,066
Total assets.................................. 3,186 4,280 8,950 14,329 14,453 19,771 23,004
Long-term debt, net of current portion........ -- -- 1,255 747 1,400 1,500 3,100
Convertible redeemable preferred stock........ 1,079 2,327 4,315 5,879 5,567 5,200 5,200
Shareholders' equity.......................... 1,395 1,100 682 900 1,767 5,858 7,415
</TABLE>
- ------------------------
(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 $0.13 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 $0.28, respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income (loss) per share.
(3) In 1993, the Board of Directors approved a change in the Company's fiscal
year to June 30 from August 31. Consequently, the consolidated financial
statements for the period ended June 30, 1993 reflect ten months of actual
results.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, "RISK FACTORS"
AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE
FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, AND NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS.
GENERAL
Overland designs, develops, manufactures, markets and supports magnetic tape
data storage systems used by businesses for backup, archival and data
interchange functions. The Company's products are based on three different
half-inch magnetic tape technologies. In March 1996, the Company commenced
shipment of the LXB, an automated tape library base unit and the first product
in its LibraryXpress product line. The LXB is an expandable automated tape
library based on DLT tape drive technology. The Company's second product line,
TapeXpress, consists of 18 and 36-track products based on the IBM
3480/3490/3490E technologies. In addition, under its TapePro product line, the
Company produces 9-track reel-to-reel tape drives which are used exclusively for
data interchange. The Company also distributes a line of DLT products
manufactured by Quantum and markets other items, including controller cards
which connect its TapePro and TapeXpress products to personal computers,
interchange software, storage management software supplied by third parties,
spare parts and tape media.
The Company was formed in 1980 and thereafter, through a series of
financings and two acquisitions, the Company built its equity base and expanded
its manufacturing and engineering capabilities. Initially, the Company marketed
a controller card and software which enabled data interchange between personal
computers and 9-track tape drives. In 1986, the Company became a VAR and bundled
its products with 9-track tape drives manufactured by third parties. Through a
private offering of Series A Preferred Stock in May 1989, the Company raised
$1.1 million, which it used to develop and manufacture its own 9-track tape
drives. In May 1992, to expand into the 18/36-track business, the Company
acquired Mountain Engineering, Inc., an independent design team of 18-track
products, for stock valued at $133,000. In July 1992, the Company raised an
additional $1.3 million in a private offering of Series B Preferred Stock in
order to fund product development. In May 1993, the Company acquired from
Archive Corporation, a wholly owned subsidiary of Conner Peripherals, Inc.
("Conner"), in a transaction accounted for as a purchase (the "Cipher
Acquisition"), all of the engineering, manufacturing and marketing rights of
Cipher Data Products, Inc. ("Cipher") to the half-inch tape drive product lines
(the 9-track "995" product and the 18-track "T480" product) with annual revenues
of approximately $20 million. Total consideration for the Cipher Acquisition,
which was completed in October 1993 of the next fiscal year, amounted to $8.3
million, consisting of $1 million of cash borrowed under the Company's revolving
line of credit, $3.7 million under the subordinated installment note payable to
Archive Corporation (the "Archive Note"), and $3.6 million of Series C Preferred
Stock.
18
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth items in the statements of operations as a
percentage of net sales for the periods presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------------------- ------------------------
STATEMENTS OF OPERATIONS 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................................... 67.2 70.9 65.9 66.0 64.0
----- ----- ----- ----- -----
Gross profit............................................ 32.8 29.1 34.1 34.0 36.0
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing..................................... 13.9 12.8 12.6 12.3 13.1
Research and development................................ 10.0 8.1 7.8 8.2 7.7
General and administrative.............................. 7.1 5.7 6.2 6.0 6.4
----- ----- ----- ----- -----
31.0 26.6 26.6 26.5 27.2
----- ----- ----- ----- -----
Income from operations.................................. 1.8 2.5 7.5 7.5 8.8
Interest and other, net................................. (0.7) (0.5) (0.3) (0.1) (0.4)
----- ----- ----- ----- -----
Income before income taxes.............................. 1.1 2.0 7.2 7.4 8.4
Provision for income taxes.............................. 0.7 0.7 0.5 2.6 3.4
----- ----- ----- ----- -----
Net income.............................................. 0.4% 1.3% 6.7% 4.8% 5.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------------------- ------------------------
PRODUCT MIX TABLE 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Company products:
LibraryXpress........................................... --% --% 2.6% --% 19.6%
36-track................................................ -- 6.1 19.6 14.9 30.6
18-track................................................ 15.6 20.3 15.3 15.0 14.4
9-track................................................. 70.0 48.0 29.4 33.7 21.2
Spare parts, controllers, other......................... 7.8 7.0 10.3 8.6 7.5
Other parts:
DLT distributed products................................ 2.1 17.8 21.5 25.6 6.5
Hewlett-Packard distributed products.................... 4.5 0.8 1.3 2.2 0.2
----- ----- ----- ----- -----
Total..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO 1995
NET SALES. The Company's net sales of $27.2 million in the first six months
of fiscal year 1997 (the "1997 First Half") grew by $3.9 million or 16.8% over
net sales of $23.3 million in the first six months of fiscal year 1996 (the
"1996 First Half"). This sales growth was attributable primarily to new product
introductions, partially offset by declines in the dollar amount of Quantum DLT
products distributed by the Company as well as declines in 9-track sales. In
March 1996, the Company began shipments of the LXB, the first product in its new
LibraryXpress product line, which contributed sales of $5.4 million in the 1997
First Half. The Company expects this product and follow-on LibraryXpress
products to generate a significant portion of its revenues in fiscal year 1997.
Offsetting this increase, however, there was a $4.2 million decline in sales of
DLT distributed products from $6.0 million in the 1996 First Half to $1.8
million in the 1997 First Half. This decline resulted from the Quantum DLT
products becoming
19
<PAGE>
commodities in the marketplace and the availability of these products from other
suppliers at prices below those offered by the Company. In addition, a majority
of the sales of the Quantum DLT 4500/4700 loaders have been replaced by sales of
the Company's own LibraryXpress products. The Company expects these trends to
continue. Sales of the Company's 36-track products of $8.3 million in the 1997
First Half grew by $4.8 million or 137.1% from $3.5 million in the 1996 First
Half. This growth resulted principally from increased sales of the L490E, mainly
to DEC and IBM, and sales attributable to the introduction of two new 36-track
products, the L60E in November 1995 and the T490E in March 1996. The Company
expects that revenues from its 36-track products will increase as shipments to
IBM are expected to grow in the second half of fiscal year 1997. Sales of
18-track products of $3.9 million in the 1997 First Half grew by 11.4% over $3.5
million in the 1996 First Half. Shipments of 18-track products were constrained
in the fourth quarter of fiscal year 1996 due to a shortage of read-write head
components, which shortage was substantially resolved during the first quarter
of fiscal year 1997. Without the realization of the delayed sales related to
this shortage, 18-track sales in the 1997 First Half would have remained level
in comparison to the prior year. However, the Company expects an upward
migration by its customers during the remainder of fiscal year 1997 from
18-track products to 36-track products which are 18-track compatible. Sales of
9-track products of $5.8 million in the 1997 First Half fell by $2.5 million or
30.1% from $8.3 million in the 1996 First Half. The decline across most of the
9-track products reflected the general maturity of the 9-track technology, a
trend which the Company expects to continue in the foreseeable future. The
Company made end-of-life announcements during the 1997 First Half on certain
9-track products which will reduce 9-track product offerings to four by the end
of the third quarter of fiscal year 1997.
GROSS PROFIT. The Company's gross profit amounted to $9.8 million in the
1997 First Half, compared to $7.9 million in the 1996 First Half, representing
gross margins of 36.0% and 34.0%, respectively. The increased profitability
resulted from higher margins on newly introduced products, principally the LXB
and the reduction in sales of DLT distributed products at substantially lower
margins than the Company's other products. The Company does not believe that
this higher gross margin level will be maintained because of the expected growth
in sales of 36-track products to IBM, generally at lower margins.
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to $3.6
million or 13.1% of net sales in the 1997 First Half compared to $2.9 million or
12.3% of sales in the 1996 First Half. The increased level of expenditures is
principally related to the Company's introduction of its new LibraryXpress
product line.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
amounted to $2.1 million or 7.7% of net sales in the 1997 First Half, compared
to $1.9 million or 8.2% of net sales in the 1996 First Half. During fiscal year
1996, development efforts focused on the LXB. In the 1997 First Half, the focus
shifted to the follow-on products in the LibraryXpress product line and to
refinements of the 36-track products which the Company began shipping to IBM in
the second quarter of fiscal year 1997. Expenses were also incurred in the 1996
First Half and the 1997 First Half relating to the development of a completely
new tape recording technology which the Company expects will be the basis for a
new product line. The Company intends to continue this development during the
remainder of fiscal year 1997 and anticipates spending 7% to 8% of net sales on
research and development during such year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
amounted to $1.7 million or 6.4% of net sales in the 1997 First Half, up from
$1.4 million or 6.0% of sales in the 1996 First Half. This higher level of
expenses in the 1997 First Half resulted from an increase in support personnel,
including an expansion of the Company's data processing department, as well as
higher levels of consulting fees and computer related expenses.
INTEREST EXPENSE. Net interest expense amounted to $134,000 in the 1997
First Half and was comprised principally of interest related to borrowings under
the Company's revolving bank line of credit. Average borrowings during the 1997
First Half amounted to $2.9 million. In the 1996 First Half, net
20
<PAGE>
interest expense amounted to $63,000 consisting of $38,000 of interest expense
related to average bank borrowings of $1.0 million and $25,000 related to the
final installment of the Archive Note. The Archive Note was repaid in full in
November 1995.
INCOME TAXES. The Company's provision for state and federal income taxes in
the 1997 First Half amounted to $913,000 for an effective tax rate of 40%, which
the Company believes to be representative of its normalized effective tax rate.
In the 1996 First Half, the tax provision amounted to $614,000 for an effective
tax rate of 36%.
FISCAL YEAR 1996 COMPARED TO 1995
NET SALES. The Company's net sales of $47.2 million in fiscal year 1996
grew by $9.0 million or 23.6% over net sales of $38.2 million in fiscal year
1995. This sales growth was driven by new product introductions which more than
offset declines in both 18-track and 9-track sales. In particular, the first
shipments of the LXB, the base unit product in the Company's new LibraryXpress
product line, were made in March 1996. Shipments of the LXB during the last four
months of fiscal year 1996 generated $1.2 million in sales. An additional $3.4
million in fiscal year 1996 growth was generated from a 50.0% increase in sales
of DLT distributed products, including the DLT 4500/4700 loaders which were
introduced during the year by Quantum. The largest portion of sales growth, $7.0
million, was reported in the Company's 36-track products, with fiscal year 1996
sales of $9.3 million growing to four times its fiscal year 1995 level of $2.3
million. This growth was the result of (i) strong sales of the inaugural
36-track product, the L490E, which was introduced midway through fiscal year
1995, and (ii) two new 36-track product introductions, the 60-cartridge L60E,
which began shipping in November 1995, and the single cartridge T490E, which
began shipping in March 1996. In the 18-track product line, sales declined by
6.8% in fiscal year 1996, reflecting the market's general migration to 36-track
products. Sales of 9-track products of $14.4 million in fiscal year 1996
declined by $4.2 million or 22.6% from $18.6 million in fiscal year 1995,
reflecting the general maturity of the 9-track technology. Finally, fiscal year
1996 sales of controllers, spare parts, software and other products amounted to
$4.9 million, an increase of 81.5% over the fiscal year 1995 level of $2.7
million. This growth was attributable to increased sales of spare parts and tape
media, mainly DLT tape.
GROSS PROFIT. The Company's gross profit amounted to $16.1 million in
fiscal year 1996, up from $11.1 million in fiscal year 1995, and represented
gross margins of 34.1% and 29.1%, respectively. The increased profitability
resulted from higher margins on newly introduced products, and improved margins
on DLT distributed product because more product was sold through the VAR and
European channels compared to a concentration in the distributor channel in the
prior year. In addition, fiscal year 1996 gross margins were significantly
improved on 18-track products as material cost savings were realized from an
investment in re-engineering certain electrical components.
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to $5.9
million or 12.6% of net sales in fiscal year 1996 compared to $4.9 million or
12.8% of sales in 1995. This increase in total expenditures resulted from costs
needed to support the higher sales level, including salaries and benefits, sales
commissions, advertising and promotion and travel and related costs. In
addition, higher costs were incurred for prototype units, advertising and
promotions related to new product introductions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
amounted to $3.7 million or 7.8% of net sales in fiscal year 1996 compared to
$3.1 million or 8.1% of net sales in 1995. The increased expenses related to the
development of the Company's two new 36-track products, the T490E and the L60E,
and to a greater extent, the development of the new LibraryXpress products. The
development of the two 36-track products required a lower level of expense than
the LibraryXpress products because they were derivative products using common
electrical components and robotics. The Company also incurred expenses in fiscal
year 1996 related to the development of a new tape recording technology and
coding scheme using the partial response maximum likelihood concept.
21
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
amounted to $2.9 million or 6.2% of net sales in fiscal year 1996 compared to
$2.2 million or 5.7% of net sales in 1995. The higher level of expenses in 1996
included legal fees related to the filing of a number of patent applications,
increased bad debt reserves related to the higher level of sales and increased
facility costs and computer related expenses.
INTEREST EXPENSE. Net interest expense amounted to $154,000 in fiscal year
1996 and included $124,000 of interest expense related to borrowings under the
Company's revolving bank line of credit and $30,000 of interest expense related
to the final installment of the Archive Note which was repaid in full in
November 1995. Average borrowings under the Company's bank line of credit in
fiscal year 1996 amounted to $1.4 million. In fiscal year 1995, net interest
expense amounted to $204,000 consisting of $214,000 of interest expense and
$10,000 of interest income. The portion of the interest expense relating to the
Archive Note amounted to $145,000 and the remaining $69,000 of interest expense
related to borrowings under the Company's revolving bank line of credit, which
borrowings averaged $725,000 in fiscal year 1995.
INCOME TAXES. The Company's fiscal year 1996 provision for state and
federal income taxes amounted to $254,000 or an effective tax rate of 7.4%. In
fiscal year 1995, the tax provision amounted to $269,000 resulting in a more
normalized effective tax rate of 35%. The low tax rate in 1996 was the result of
the release of a deferred tax valuation allowance of $997,000 in the fourth
fiscal quarter. As discussed in Note 5 to the Consolidated Financial Statements,
in prior years the Company established the reserve in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires that a valuation allowance be
recorded "when it is more likely than not" that any portion of a deferred tax
asset will not be realized. The reserve had been established to reduce the net
deferred tax asset to a minimal amount, because of the Company's past history of
operating losses and marginal profitability and due to the inherent uncertainty
in forecasts of future events and operating results. However, in the fourth
quarter of fiscal year 1996, due to the significant profitability in that
quarter and based on management's expectations of future results, the Company
determined that it was more likely than not that deferred tax assets would be
realized through future taxable earnings or alternative tax strategies. As a
result, the valuation allowance was reduced to zero in that quarter.
FISCAL YEAR 1995 COMPARED TO 1994
NET SALES. The Company's net sales of $38.2 million in fiscal year 1995
grew by $4.2 million or 12.4% over net sales of $34.0 million in fiscal year
1994. Sales growth in DLT distributed products and in 36 and 18-track products
more than offset a decline in 9-track sales. The Company began distributing DLT
products in December 1993, midway through fiscal year 1994. Sales of DLT
products grew rapidly in the succeeding year and rose from $723,000 in fiscal
year 1994 to $6.8 million in fiscal year 1995. In December 1994, the Company
introduced the L490E, its first 36-track product. Shipments of this new product
during the remainder of fiscal year 1995 amounted to $2.3 million. In the
18-track product line, sales of $7.7 million in fiscal year 1995 grew by $2.4
million or 45.3% over net sales of $5.3 million in fiscal year 1994. This growth
was also the result of new product introductions, including the T490 single
cartridge 18-track product developed for DEC, which began shipping in April
1994, and the L490, the Company's 10-cartridge 18-track product which began
shipping in December 1994. Sales of 9-track products of $18.6 million in fiscal
year 1995 fell by $6.8 million or 26.8% from $25.4 million in fiscal year 1994,
despite the addition of $13.8 million in 9-track sales in fiscal year 1994 from
the acquisition of the 995 product.
GROSS PROFIT. The Company's gross profit amounted to $11.1 million in both
fiscal year 1995 and 1994, while the gross margin declined to 29.1% in 1995
compared to 32.8% in 1994. The largest factor contributing to the decline was
the increase in sales of DLT distributed product through distributor and VAR
channels at relatively low margins. Typical of distributor margins, sales of DLT
products through the distributor and VAR channels were made at 23% margins in
1994 and 21% margins in 1995. The application of these lower margins to DLT
revenues which grew from $723,000 in fiscal year 1994 to
22
<PAGE>
$6.8 million in fiscal year 1995 caused the reduction in overall gross margins.
The reduction in the concentration of OEM sales and the increase in
international sales partially offset this decline.
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to $4.9
million or 12.8% of net sales in fiscal year 1995 compared to $4.7 million or
13.9% of net sales in 1994. Such expenses did not grow proportionately to sales
in fiscal year 1995, because fiscal year 1994 included a relatively higher level
of spending for advertising and promotions pertaining to new product
introductions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
amounted to $3.1 million or 8.1% of net sales in fiscal year 1995, down from
$3.4 million or 10.0% of net sales in 1994. The higher level of spending in 1994
related to the concurrent development of three new products (T490, L490 and
L490E), and the merging of the Overland and Cipher technologies, which included
the development of a common electrical and firmware set and investment in
tooling, ASIC development and other non-recurring expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
amounted to $2.2 million or 5.7% of net sales in fiscal year 1995, down from
$2.4 million or 7.1% of net sales in 1994. The level of expenses in fiscal year
1994 were higher because they included certain costs relating to the relocation
of the Company's headquarters and manufacturing facilities.
INTEREST EXPENSE. Net interest expense amounted to $204,000 in fiscal year
1995 and consisted of $145,000 of interest expense relating to the Archive Note,
$69,000 of interest expense related to borrowings under the Company's revolving
bank line of credit and $10,000 of interest income. In fiscal year 1994, net
interest expense of $214,000 consisted of $248,000 of interest expense related
principally to the Archive Note and $34,000 of interest income.
INCOME TAXES. The Company's fiscal year 1995 provision for state and
federal income taxes amounted to $269,000 or an effective tax rate of 35%. In
fiscal year 1994, the tax provision amounted to $219,000 resulting in an
effective tax rate of 62%. The higher tax rate in 1994 resulted from the
increase in the deferred tax valuation allowance, offset partially by research
and development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1996, the Company generated $841,000 of cash from
operating activities, received $565,000 from the sale and issuance of Common
Stock to the Company's employees and borrowed an additional $100,000 against the
Company's bank line of credit. The Company also spent $841,000 on capital
expenditures and made the final installment payment on the Archive Note. These
activities caused a decrease in the Company's cash balance of $82,000 to a
balance of $19,000 at June 30, 1996.
The Company's working capital increased to $10.3 million at June 30, 1996,
up from $6.4 million at June 30, 1995. The increased working capital was needed
to support the growth in revenues and consisted of higher receivable balances,
which grew from $6.3 million at June 30, 1995 to $7.2 million at June 30, 1996,
and higher inventory balances, which grew from $5.4 million to $8.4 million at
such dates, respectively. Deferred tax assets also rose by $1.2 million during
fiscal year 1996. Offsetting these increases in current assets, there was an
increase in accounts payable and accrued liabilities/compensation totaling $2.3
million. The Company's working capital increased further to $13.1 million at
December 31, 1996. This increase included growth of $1.5 million in both
accounts receivable and inventories to support the higher rate of revenues
experienced during the 1997 First Half. As a result of this growth, a total of
$841,000 in cash was used in operating activities during the 1997 First Half.
The Company has a bank line of credit of up to $5 million based upon
eligible accounts receivable, with interest on borrowed funds at the bank's
prime rate plus 0.5%. See Note 4 of Notes to the Consolidated Financial
Statements. The bank line of credit is collateralized by substantially all of
the Company's assets and expires in November 1998. The related credit agreement
prohibits the payment of dividends without prior approval of the lender and
requires the Company to maintain certain financial ratios including working
capital and net worth ratios, all of which the Company has satisfied for the
periods
23
<PAGE>
presented. As of December 31, 1996, the Company had outstanding borrowings
thereunder of $3.1 million and had additional borrowing capacity of $1.9
million. The Company is currently negotiating additional bank financing of up to
$2 million in the form of a term loan which would be available to finance
capital expenditures.
The Company currently expects to make capital expenditures of approximately
$2 million during the remainder of fiscal year 1997. As of December 31, 1996,
the Company had outstanding capital commitments of approximately $500,000. The
Company believes that the net proceeds from this Offering, the funds expected to
be generated from operations, its bank line of credit and the pending capital
expenditure line will provide sufficient cash to fund its working capital needs
and planned capital expenditures for the foreseeable future. See "Use of
Proceeds."
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 has
historically 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.
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, include
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.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
FISCAL YEAR 1995 FISCAL YEAR 1996 FISCAL YEAR 1997
-------------------------------------- -------------------------------------- ------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1994 1994 1994 1995 1995 1995 1996 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 8,854 $ 9,169 $ 9,657 $10,476 $11,023 $ 12,296 $10,889 $13,018 $12,013 $ 15,220
Cost of goods sold...... 6,261 6,628 6,947 7,205 7,098 8,281 7,254 8,512 7,573 9,848
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 2,593 2,541 2,710 3,271 3,925 4,015 3,635 4,506 4,440 5,372
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Other expenses:
Sales and marketing... 1,205 1,407 1,112 1,167 1,439 1,429 1,542 1,525 1,780 1,778
Research and
development......... 776 779 671 850 977 931 858 931 1,116 979
General and
administrative...... 518 573 484 593 750 651 742 765 951 798
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
2,499 2,759 2,267 2,610 3,166 3,011 3,142 3,221 3,847 3,555
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............ 94 (218) 443 661 759 1,004 493 1,285 593 1,817
Interest, net........... (54) (60) (49) (41) (29) (32) (38) (55) (57) (77)
Other income (expense),
net................... (20) 1 21 (8) 14 10 (6) 8 5 --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... 20 (277) 415 612 744 982 449 1,238 541 1,740
Provision for income
taxes................. 12 (94) 141 210 272 342 165 (525) 217 696
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 8 $ (183) $ 274 $ 402 $ 472 $ 640 $ 284 $ 1,763 $ 324 $ 1,044
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
24
<PAGE>
Revenues in the Company's third quarter ended March 31, 1996 of $10.9
million declined by $1.4 million or 11.4% from the sales in the previous quarter
of $12.3 million. During this quarter, the Company, as well as many of its
competitors, experienced a general slow-down in the marketplace. In addition,
the Company's sales of Quantum DLT drives which the Company distributes were
limited by a supply shortage of these drives which also delayed introduction of
the Company's new LXB product.
Revenues in the Company's 1997 First Quarter of $12.0 million declined by
$1.0 million or 7.7% from the sales in the previous quarter of $13.0 million.
The reduction in sales was caused by a supply constraint with the read-write
heads for its 18-track products and a decrease in sales of distributed Quantum
DLT products in light of increased price competition. Income from operations was
also reduced in the 1997 First Quarter because of higher advertising and
promotional spending related to new product introductions and a higher level of
research and development spending for product enhancements. An alternate
supplier was subsequently qualified for the 18-track heads.
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, 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 distributor
channel (20% in fiscal year 1996), the first fiscal quarter (July through
September) is 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, as well as other factors discussed herein. In particular, the
Company's ability to forecast sales to distributors and VARs and, increasingly
to OEMs, 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, respectively. A portion 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,
demand or 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 and labor shortages. Gross margin also
is affected by fluctuations in the cost of components. During fiscal year 1996,
approximately 10% of cost of goods sold consisted of components purchased from
suppliers in Singapore and Malaysia. An adverse foreign exchange movement of the
U.S. dollar versus the Singapore dollar or other currency, or the imposition of
import restrictions or tariffs by the U.S. government on products or components,
could have a material adverse effect on the Company's business, financial
condition and results of operations. During the first half of fiscal year 1997,
the Company reported a gross margin of 36% which was higher than its average
quarterly gross margin during fiscal years 1994, 1995 and 1996. Management does
not believe that this gross margin level, which was positively affected by an
increase in the sales of the LibraryXpress and a decrease in sales of
distributed product, will be maintained. 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.
25
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION,
"RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
COMPANY
Overland designs, develops, manufactures, markets and supports magnetic tape
data storage systems used by businesses for backup, archival and data
interchange functions. The Company primarily offers three product
lines--LibraryXpress, TapeXpress and TapePro--which are designed to meet the
data storage needs of client/server networks, workstations, minicomputers and
personal computers. Overland believes that it is well positioned to take
advantage of the rapidly increasing demand for storage capacity, particularly
that created by the growth in client/server networks. To address this growing
network storage demand, Overland introduced the LXB in March 1996, the first
product of its LibraryXpress line of automated tape libraries. In August 1996,
BYTE Magazine selected the LXB as the "Best Overall DLT Tape Library." The
Company believes that, with the anticipated delivery of the LXG control unit
during the first quarter of calendar year 1997, LibraryXpress will constitute
the first automated tape library in its capacity class that is truly "scalable"
in that it is designed to allow end-users to reconfigure specific combinations
of drives and cartridges as their storage requirements change without having to
replace their existing Overland equipment. Management believes that
LibraryXpress has significant market potential because it is designed to enable
companies to increase their storage capacity in a cost effective manner as their
businesses grow.
The Company's TapeXpress product line consists of 18/36-track tape drives
and loaders based on an IBM standard and, in October 1996, IBM selected the
Company to be a supplier of 36-track products. With its TapePro product line,
Overland is a leading supplier of 9-track reel-to-reel products used in data
interchange. In addition, the Company distributes a line of DLT-based products
manufactured by Quantum and markets various other products, including controller
cards which connect its tape drives to personal computers, interchange software
developed by the Company, storage management software supplied by third parties,
spare parts and tape media. With the exception of the tape drives in its
LibraryXpress product line, all of the Company's products are designed and
manufactured in-house. The Company's products combine electro-mechanical
robotics, electronic hardware and firmware, which are developed by the Company
with an emphasis on efficiency of design, functionality and reliability.
Overland's principal executive offices are located at 8975 Balboa Avenue,
San Diego, California, 92123-1599. Its telephone number is (619) 571-5555.
HISTORY
Overland was formed in 1980 and became a VAR in 1986, when it began
providing customers with a total data storage solution by bundling its
controller cards and software with third-party 9-track tape drives. In 1991, the
Company recruited professional senior management and expanded its manufacturing
and development operations. Since that time, Overland has experienced rapid
growth, with revenue and operating income increasing at compound annual growth
rates (for the five-year period ended June 30, 1996) of 43% and 207%,
respectively. The Company's most significant source of growth occurred in 1993
when it acquired certain Cipher 9-track and 18-track product lines from Archive
Corporation, a wholly owned subsidiary of Conner, which increased the Company's
annual revenues by approximately $20 million.
Throughout its history, the Company has designed and developed innovative
product offerings beginning with (i) the first controller card to allow personal
computers to connect to 9-track tape drives,
26
<PAGE>
thereby facilitating data interchange between personal computers and mainframes
or minicomputers, and (ii) DataTools, a specialized software package which
facilitates data interchange. In 1989, the Company began developing TapePro, the
first truly desktop-based 9-track tape drive. Overland's internal development
efforts and its acquisition of the Cipher product lines led to the introduction
of its 18 and 36-track product lines. In March 1996, the Company commenced
shipment of the LXB, the first product in the LibraryXpress product line.
INDUSTRY OVERVIEW
The data storage industry has experienced rapid growth in recent years in
response to the significant increase in the amount of electronically stored
data. Overland believes that this growth will continue due to (i) the
introduction of increasingly powerful computing platforms, (ii) the spreading
use of computers for tasks that previously were performed manually, (iii) the
increasing number, size, bandwidth and complexity of computer networks,
particularly client/server networks, (iv) the rapid growth of data-intensive
applications and (v) the growth of intranet and Internet based computing. In
addition, emerging data-intensive applications, such as still image, motion
video, check imaging, and other multimedia and character recognition uses, are
accelerating the demand for data storage solutions.
Corporations, governments and other large enterprises increasingly are
recognizing the critical nature and strategic importance of stored data and the
need to safely backup and efficiently manage that data. These enterprises are
demanding data storage solutions which provide fast and reliable storage and
retrieval capabilities for rapidly increasing amounts of data. In addition,
business managers are increasingly perceiving data to be critical at a
company-wide level as opposed to only being important at the individual
workstation level. As a result, central management of data has increased both in
distributed and centralized client/server environments. Centralization of
storage has also become more desirable because of cost factors.
The Company believes that the factors noted above will greatly increase the
number of sites worldwide requiring large amounts of backup and, therefore, the
need for advanced storage solutions. According to Strategic Research Corp., a
storage management industry consultant, the number of centralized storage sites
worldwide requiring more than 200GB backup is projected to grow from
approximately 116,000 sites in 1996 to 660,000 sites by the year 2000.
Current data storage solutions provide secure, high capacity data
repositories based primarily on three technologies--magnetic tape, magnetic disk
and optical disk. Magnetic tape remains the most cost-effective storage medium
(at approximately one-fifth of the cost per megabyte stored as compared to
magnetic and optical disk), and is used most often for backup and archival
functions. Magnetic disk and optical disk provide relatively quick access to
stored data and are generally used for online and immediately offline storage
functions. Utilization of magnetic tape for backup, archive and data interchange
historically has required a high degree of human intervention, the cost of which
is reduced in a centralized storage environment, particularly those that utilize
automated tape storage systems. In addition, as the amount of data has grown,
the backup "window," or amount of time allocated to backup, has continued to
decrease, which has heightened demand for greater backup performance as
companies require less downtime from their computer systems. Consequently, tape
libraries have been developed which provide multiple drives in order to increase
throughput, multiple cartridges in order to increase data capacity and the
capability to function unattended in both backup and restore modes. According to
Strategic Research Corp., the quantity of tape libraries sold worldwide will
grow from an estimated 32,000 units in 1996 to 94,700 units in the year 2000.
The Company believes that market demand is growing especially for expandable
or "scalable" tape libraries because managers increasingly face difficulties in
predicting their needs for data storage and backup. Scalability allows the
end-user to satisfy its current data storage requirements and protect its
original investment when faced with handling future growth, because scalability
permits the end-user to
27
<PAGE>
buy only the storage equipment that is presently needed. Scalability then allows
the end-user to add to this configuration in a manner that incorporates and
fully utilizes the previously purchased equipment.
COMPANY STRATEGY
Overland intends to continue building a leadership position in the magnetic
tape segment of the data storage industry. The Company believes that it
possesses certain core competencies which will help it attain this leadership
position, including: (i) advanced knowledge of hardware/software integration and
connectivity, due to its experience in designing and developing both tape drives
and libraries; (ii) experience in the magnetic tape industry, particularly with
respect to innovative mechanical, electrical and firmware designs; (iii)
comprehensive understanding of, and close contact with, end-user needs; and (iv)
experienced management and developed management processes in each functional
area of its business operations. The Company intends to leverage these core
competencies in the execution of its business strategy, which includes the
following elements:
- EMPHASIZE DEVELOPMENT OF ADVANCED STORAGE SOLUTIONS. Overland invests
extensively in research and development in order to deliver technologies
for the "next generation" of magnetic tape drives and automated tape
libraries. The Company intends to continue its research and development
efforts in areas that build upon its manufacturing, engineering and
operational strengths in order to offer products which serve emerging data
storage needs.
- MAINTAIN LEADERSHIP IN PRODUCT RELIABILITY. The Company believes that
product dependability is crucial, given the critical nature of its
customers' information and the frequent operation of backup systems during
hours when few personnel are available to address problems. Overland
believes that it has achieved a reputation for reliability and intends to
continue to develop and offer high quality and reliable products. The
Company augments this product reliability by providing comprehensive
technical support to its customers, including online technical assistance
and engineering support for more complex applications.
- LEVERAGE CLOSE RELATIONSHIPS WITH END-USERS. The Company believes that
its interaction with end-users enables it to better understand the
evolving product and application needs of its customers. Overland intends
to continue its close contact with end-users by selling its products
directly to them, by involving them in ongoing market research activities
regarding future products, and by responding to their technical support
requirements.
- FURTHER DEVELOP WORLDWIDE DISTRIBUTION. The Company believes that the
range of data storage solutions provided by its three primary product
lines offers significant international sales opportunities. Overland
intends to increase the number of distributors in its existing
international markets, develop additional distribution channels in these
markets for new product introductions and establish appropriate
distribution channels for its current and future products in new
international markets.
- HARVEST LEGACY MARKETS. The markets served by the Company's 9-track and
18-track product lines are characterized by mature technologies and large
installed customer bases. Overland intends to capitalize on its position
in these markets in order to capture additional market share and expects
to realize improved operating margins as such products require limited
research and development support as compared to newer technology.
- PURSUE ALLIANCES OR ACQUISITIONS. Overland believes that it may be able
to expand and increase the value-added component of its product offerings
through alliances with, or acquisitions of, complementary businesses. The
Company intends to evaluate strategic product and technology acquisitions
and may pursue second source manufacturing arrangements to further
capitalize upon its engineering, manufacturing and quality process
capabilities.
28
<PAGE>
PRODUCTS
The Company produces tape drives, tape loaders and automated tape libraries
based on removable tape technologies. A tape drive is a device used to read or
write data to a single magnetic tape cartridge or reel on multiple tracks of the
tape. A tape loader includes a single tape drive and contains multiple tape
cartridges which can be randomly accessed, thus permitting unattended backup of
larger data sets. The backup and restore process of a tape loader can also be
handled randomly in order to write or read a specific data file to or from a
given cartridge. A tape library is a tape loader with multiple drives. Both tape
loaders and tape libraries house tape cartridges and utilize an
electro-mechanical robotic mechanism to manipulate the tape cartridges, loading
and unloading specific tape cartridges into and out of the tape drive or drives
as directed by the storage management software.
The Company currently provides turnkey data storage solutions to its
customers in distinct markets through three product lines that utilize three
generations of half-inch magnetic tape technologies. The network backup market
is served by LibraryXpress, the Company's DLT-based automated tape library
product line, which provides automated backup as companies migrate to
enterprise-wide client/server networks. The mid-range data interchange and
backup market is served by TapeXpress, the Company's 18/36-track product line.
The desktop data interchange market is served by TapePro, the Company's 9-track
product line, which targets personal computer and workstation users who need
access to data created on legacy systems.
The LibraryXpress product line combines electro-mechanical robotics,
electronic hardware and firmware developed by the Company, with industry
standard tape drives supplied by Quantum, into a desktop or rack-mount
configuration. Overland's standalone tape drives and loaders also incorporate
designs of electro-mechanical robotics, electronic hardware and firmware
developed by the Company. When operated in conjunction with storage management
and interchange software, the Company's products provide a wide range of data
storage solutions for client/server networks, personal computers, workstations
and mid-range computers.
Each of the Company's products is 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 40 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.
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<PAGE>
The following table summarizes the performance and configuration
specifications of the products in the Company's three product lines:
<TABLE>
<CAPTION>
NUMBER NUMBER
TAPE OF TAPE OF TAPE DATA DATA
PRODUCT TECHNOLOGY DRIVES CARTRIDGES RATE(1) CAPACITY(1) PLATFORMS(2)
- ------------------- ----------- ----------- --------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
LIBRARYXPRESS(3):
LXB-2110/2210 DLT 1 to 2 10 4.5/9.0 GB/hr 150 GB N,W,M
LXB-4110/4210 DLT 1 to 2 10 5.4/10.8 GB/hr 200 GB N,W,M
18.0/36.0
LXB-7110/7210 DLT 1 to 2 10 GB/hr 350 GB N,W,M
LXG-16(4) DLT N/A 16 N/A 240-560 GB N,W,M
LXC-16(4) DLT N/A 16 N/A 240-560 GB N,W,M
TAPEXPRESS(5):
T490-3 18-track 1 1 10.8 GB/hr 0.2 GB P,W,M,AS
T490E 36-track 1 1 10.8 GB/hr 0.8 GB P,W,M,AS
L490 18-track 1 10 10.8 GB/hr 2.0 GB P,W,M,AS
L490E 36-track 1 10 10.8 GB/hr 8.0 GB P,W,M,AS
L60E 36-track 1 60 10.8 GB/hr 50.0 GB M,AS
TAPEPRO(6):
3210 9-track 1 1 0.3 GB/hr 0.046 GB P,W
3610 9-track 1 1 1.3 GB/hr 0.18 GB P,W
5622 9-track 1 1 1.3 GB/hr 0.18 GB P,W,M
995 9-track 1 1 2.2 GB/hr 0.18 GB P,W,M
</TABLE>
- ------------------------------
(1) Assumes no data compression.
(2) Platform legend: N = network; W = workstation; M = mid-range computer; AS =
AS/400; P = personal computer.
(3) One or two drives, fast or fast/wide SCSI, expandable modular library based
on DLT technology.
(4) The Company intends to commence shipment of this product during the first
quarter of calendar year 1997.
(5) Single drive, fast or fast/wide SCSI, 10-cartridge mini-library and
60-cartridge systems based on the IBM compatible 3480, 3490 and 3490E
technologies.
(6) Pertec or SCSI 9-track products for personal computers, workstations and
mid-range computers.
The end-user list prices for the Company's products range from $4,400 for a
TapePro 3210 to $29,950 for the TapeXpress L60E. The LibraryXpress products can
be purchased in lower cost configurations based on the desired type and number
of DLT drives, and can also be modularly stacked in higher cost configurations
based on a customer's growing needs. Overland's three product lines are
described below in more detail.
LIBRARYXPRESS PRODUCTS. The LibraryXpress product line of automated tape
libraries is based on DLT technology, which was developed in the 1980s as a DEC
system component. In 1994, Quantum purchased the DLT technology and marketed it
as a multi-platform network backup solution. Today, DLT is becoming a common
tape backup technology for computer network systems, due to its high tape
cartridge capacity, high performance and low cost of storage. In addition, DLT
cartridges are well suited for robotic movement, which facilitates the
development of loaders and libraries.
In March 1996, the Company commenced shipment of the LXB automated tape
library base unit, which consists of one or two DLT drives and a ten-cartridge
removable magazine. The Company currently offers the LXB with Quantum's 2000XT
and 4000 DLT tape drives and it expects to offer the LXB with Quantum's new 7000
DLT tape drive in January 1997. During the first quarter of calendar year 1997,
the Company intends to commence shipment of (i) the LXG control unit which will
provide library control from a single point and the ability to modularly stack
up to eight LXB or LXC capacity modules, and (ii) the LXC capacity module which
will consist of 16 cartridges and no drives. The LXG will allow users to
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<PAGE>
pass cartridges from module to module as one integrated unit, providing true
scalability and allowing end-users to expand their storage capacity to meet
their growing business needs while protecting their original investment in the
LXB. The Company shipped prototype units of the LXG in November 1996.
In August 1996, BYTE Magazine selected the LXB as the "Best Overall DLT Tape
Library." The Company believes that, with the anticipated delivery of the
related LXG control unit during the first quarter of calendar year 1997,
LibraryXpress will constitute the first automated tape library in its capacity
class that is truly "scalable," in that it is designed to allow end-users to
configure combinations of drives and cartridges as their storage requirements
change without having to replace their existing Overland units. Management
believes that LibraryXpress has significant market potential because it is
designed to enable companies to increase their storage capacity in a cost
effective manner as their businesses grow.
TAPEXPRESS (18/36-TRACK) PRODUCTS. The TapeXpress product line of
18/36-track drives and loaders is based on IBM's 3480/3490/3490E technologies.
The 3480 technology was introduced in 1984 to replace 9-track tape for backup,
archival and data interchange functions. In response to the need for more
capacity per cartridge, the 3490 and 3490E technologies subsequently were
introduced. The installed base of 3480 and 3490 drives and cartridges is very
large and their primary function currently is for data interchange. Based on the
size of this installed base and the mature nature of this technology, the
Company considers its 18-track products to be legacy products. The Company's
T490E, L490E and L60E products are compatible with the 36-track IBM 3490E format
and are the only products in the marketplace that are capable of reading and
writing 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. IBM recently selected
the Company to be a supplier of 36-track products.
TAPEPRO (9-TRACK) PRODUCTS. The TapePro product line consists of compact,
lightweight and low-cost desktop tape drives, and a legacy tape drive sold
primarily to DEC for replacement purposes. Nine-track tape once was the only
tape technology used for archive, backup and data interchange functions. Today,
9-track tape is used only for data interchange, a limited function used to
access data that generally was stored when 9-track was the only tape technology.
Data interchange continues to be important for end-users who need to access data
on the estimated 250 million 9-track reels worldwide. Although new information
currently is not stored on 9-track tape, end-users need to access information
stored on these tapes periodically and it generally is not cost-efficient to
transfer this information to another storage medium. The Company has not
recently, and will not in the future, invest additional research and development
resources in the 9-track product line.
SALES AND MARKETING
SALES
The Company sells its products domestically through four channels: (i) OEM,
(ii) volume, consisting of system integrators, technical distributors and VARs,
(iii) resellers, and (iv) end-users. Overland also sells its products
internationally, and is experiencing strong growth in the European market. The
Company believes that, in fiscal year 1997, its new LibraryXpress products will
be sold principally through its volume and international channels. In fiscal
year 1997, the Company expects that a significant portion of its 9-track,
18-track and 36-track products will be sold through the OEM channel principally
to IBM and DEC. 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 six to
18 months to complete, the Company's initial sales of new products are often
made to other volume and reseller customers and end-users, which 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. The table below sets
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<PAGE>
forth the distribution of the Company's net sales by channel on a percentage
basis for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS
JUNE 30, ENDED
---------------------------------- DEC. 31,
CHANNEL 1994 1995 1996 1996
- ------------------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
OEM.................................................. 36.5% 25.6% 26.1% 26.7%
Volume............................................... 18.6 26.2 19.1 18.2
Resellers............................................ 15.5 17.7 18.9 15.6
End-Users............................................ 12.5 10.2 8.9 10.4
International........................................ 16.9 20.3 27.0 29.1
----- ----- ----- -----
Total.............................................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
OEM CHANNEL. The Company currently has supply agreements with Bull S.A.,
DEC, IBM, Intergraph Corporation, NCR Corporation and Symbios Logic, Inc., each
of which incorporates Overland's products into their system offerings. Overland
often works with its OEM customers early in a new product development cycle in
order 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. DEC has been the
Company's largest customer, accounting for approximately 36%, 21% and 23% of
sales in fiscal years 1994, 1995 and 1996, respectively, and 21% of sales in the
first half of fiscal year 1997. Although no other customer accounted for ten
percent (10%) or more of sales for any year during the three-year period ended
June 30, 1996, the Company anticipates that IBM will account for over 10% of
sales in fiscal year 1997. The Company supports this channel through a field
sales office and other field representatives.
VOLUME CHANNEL. The Company's volume channel includes systems integrators,
technical distributors and VARs, each of which sells to both resellers and
end-users. Certain of the Company's volume channel customers specialize in the
insurance, banking, financial, geophysical and medical industries, and offer a
variety of value-added services relating to the Company's products. For example,
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 are bundled 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.
RESELLER AND END-USER CHANNELS. The Company regards sales to the reseller
and end-user channels as an important part of its strategy. The Company believes
that direct sales and contact with end-users and the resellers which sell to
them, provide the Company with important information about the performance of
its products on various platforms and with various software applications.
Consequently, the Company intends to maintain internal capabilities to serve
end-user customers when its other channel partners are unable to do so, even
though the end-user channel as a percentage of sales is decreasing. The Company
supports this channel through its in-house sales force.
INTERNATIONAL CHANNELS. The Company's international sales have shown strong
growth during the last three years, and the Company believes that its three
product lines offer additional international sales
32
<PAGE>
opportunities. Accordingly, Overland intends to increase the number of
distributors in its existing international markets, develop additional
distribution channels in these markets for new product introductions and
establish appropriate distribution channels for its current and future products
in new international markets. Overland currently sells its products overseas
primarily to technical distributors and VARs, and has recently developed a new
OEM relationship in Europe. Although all sales are currently denominated in U.S.
dollars, the Company may bill its international customers in other currencies in
the near future. 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. The Company has established a wholly owned
subsidiary in the United Kingdom to provide sales and technical support to the
European market and intends to provide product repair and manufacturing
integration services for certain products at the same site. 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.
MARKETING
Overland supports its sales efforts with various marketing programs designed
to build the Company's 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 work with
the channel partners to provide support 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 and end-users.
The Company participates in national and regional trade shows both
domestically and internationally and displays 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), which features
comprehensive marketing information, includes news releases and product
specifications, and has a computer BBS from which customers can download
application, service and technical support notes. In the future, the Company
intends to expand its Web site to incorporate its BBS information, provide
information on and links to its channel partners and to develop Internet
commerce capabilities which will be linked to the Company's other
enterprise-wide systems. Information contained in the Company's World Wide Web
site shall not be deemed to be a part of this Prospectus.
CUSTOMER SERVICE AND SUPPORT
The Company believes that strong customer service and support is essential
to maintain its leadership in product reliability. Sales support personnel
ensure that customer orders are filled on a timely basis, delivery problems are
resolved quickly and warranty returns are promptly authorized. 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 two-year return-to-factory policy which
covers both parts and labor. For products that it distributes and for drives and
tapes used in the Company's products that are manufactured by a third party, the
Company passes on to the customer the warranty provided by the
33
<PAGE>
manufacturer. The Company also offers on-site service for certain of its
products, including 24-hour service, seven days a week, for which it contracts
with third-party service providers.
COMPETITION
The worldwide tape storage market is intensely competitive as a large number
of manufacturers of alternative tape technologies compete for a limited number
of customers and barriers to entry are relatively low in the library product
category. The Company believes that the significant competitive factors
affecting its business are price, performance, reliability, support and
reputation, and that it competes favorably with regard to each of these factors.
Overland currently participates in three market areas which are defined by
different tape technologies: (i) network data storage; (ii) data backup and
interchange based on IBM compatible 3480/3490/3490E technology; and (iii) data
interchange based on 9-track reel-to-reel technology. In each 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 Company's LibraryXpress LXB product currently
competes with products made by ADIC, ATL/Odetics, Breece Hill, Hewlett-Packard,
Quantum and Storage Technology and the Company believes that additional
competitors will enter the market. The Company, and all of its current
competitors with the exception of Quantum, design and manufacturer only the
robotic portion of the library and purchase the DLT tape drives from Quantum.
Quantum purchases the robotic portion of its product from a third party.
For the data backup and interchange market, which is based on IBM compatible
3480/3490/3490E technology, the Company offers a product line of 18 and 36-track
products, which the Company believes compete primarily with products made by
Fujitsu, Hitachi, Laser Magnetic Storage and Storage Technology. Unlike the
automated tape library market, there is a relatively high barrier to entry in
the IBM compatible backup and interchange market because each of the companies
has developed the entire product, both the drive and any robotic mechanisms. For
the 9-track data interchange market, the Company is currently a market leader.
The Company believes it competes with Anritsu American Incorporated,
Hewlett-Packard and M4 Data, Inc. This mature market is steadily declining, and,
similar to the 18 and 36-track market, there is a relatively high barrier to
entry.
RESEARCH AND DEVELOPMENT
The Company believes that its ongoing success will depend upon its ability
to develop new technologies or adapt existing technologies to produce removable
storage automation products that meet the backup, archival and HSM needs of
large network users. Consequently, the Company dedicates significant resources
to its research and development ("R&D") efforts and currently employs 35 people
in its R&D department, including 22 engineers who have extensive experience in
the tape industry. Many of these engineers are former employees of tape drive
companies such as Cipher, Archive Corporation and Conner, and have developed
significant expertise in electrical, mechanical and firmware design. Martin D.
Gray, the Company's co-founder, formerly served as Manager of R&D at Cipher, has
25 years of experience in the tape industry, is the inventor of several tape
patents and leads the Company's R&D efforts to develop new technologies.
The Company's R&D focus allows it to develop both tape drives and robotics.
Overland believes that this capability provides the following advantages: (i)
the Company is not dependent on purchasing tape drives manufactured by third
parties other than Quantum's DLT drive; (ii) it has a better understanding of
tape technologies; and (iii) it can provide higher value-added content by
designing reliable products that better utilize the advantages of a specific
technology. The Company estimates that approximately two-thirds of its R&D
efforts relate to various aspects of data channels, data compression,
intelligent interfaces and firmware (embedded systems software) for the
management of electronic hardware and mechanical
34
<PAGE>
systems. The remaining one-third of its R&D efforts relate to the development of
reliable mechanisms for robotics. In addition, Overland's work on tape drive
architecture and implementation includes the ability to develop and test a tape
path, which is the core of any tape technology.
The Company's current robotic R&D efforts are focused on the LXG and the
LXC, added modules for the LibraryXpress product line. The Company shipped
prototype units of the LXG in November 1996 and expects to commence commercial
shipment of the LXG and the LXC before the end of the first quarter of calendar
year 1997. In addition, the Company has developed a new tape coding technique
utilizing the concept of "partial response maximum likelihood," which has the
capability of significantly expanding the capacity and throughput of any linear
tape technology. The Company has filed patent applications related to aspects of
this technique and expects to commence shipment of products utilizing this
technique by the end of the fourth quarter of calendar year 1997. No prototypes
currently exist for these products and there can be no assurance that the
Company will succeed in its efforts to commence shipment of these products
within its expected time frame or at all. In addition, enhancements to certain
of the Company's 36-track products are being made to increase their speed and
performance. R&D expenditures amounted to $3.4 million, $3.1 million and $3.7
million in fiscal years 1994, 1995 and 1996, respectively, representing 10.0%,
8.1% and 7.8% of net sales, respectively. The Company spent 7.7% of net sales on
research and development in the first half of fiscal year 1997 and intends to
spend 7.0% to 8.0% of net sales in the remainder of fiscal year 1997.
In addition, Overland believes that it benefits from its close relationship
with the University of California at San Diego ("UCSD"). For example, as a
member of the UCSD Center for Magnetic Recording Research ("CMRR"), the Company
has access to all of the published research of CMRR and uses the CMRR staff in
an advisory capacity regarding Overland's new concepts and technologies.
Despite its R&D focus, there can be no assurance that the Company will be
able to identify, develop, manufacture, market or support new or enhanced
products successfully or on a timely basis or that new products will gain market
acceptance. See "Risk Factors--Rapid Technological Change and Dependence on New
Product Development."
MANUFACTURING
The Company has a fully integrated factory in San Diego, California with
three separate production lines. Its newest line, set up in January 1996, was
established for the production of the LibraryXpress products. A second line is
used for the production of both 18-track and 36-track products and a third line
is used for 9-track products. All of the Company's production lines and
manufacturing processes have been certified by major OEM customers.
Overland's manufacturing strategy is to perform 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 consistently meet the
Company's specifications and present and future volume requirements. A number of
the Company's parts and components are not available off the shelf, and are
specifically designed by the Company for integration into its products. The
number of suppliers is kept to a minimum to utilize 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 80% of cost of goods sold.
Another important element of the Company's manufacturing strategy is related
to product design. 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. Inventory planning and management is
coordinated closely with suppliers and customers to match the Company's
production to
35
<PAGE>
market demand. Product orders are confirmed and, in most cases, shipped to the
customer within one week. The Company fills orders as they are received and
therefore believes that its backlog levels are not indicative of future sales.
The backlog of firm orders deliverable within three months, amounted to $2.2
million and $3.8 million at December 31, 1995 and 1996, respectively.
In its current facility, the Company has the capacity to support unit output
several times greater than its current run rate. All of its manufacturing lines
are capable of producing on a single shift double the capacity of the current
fiscal year forecast. The Company carefully controls and adjusts the staffing of
this capacity to meet the requirements at any specific time. Further capacity
increases could be achieved by adding multiple shifts or moving to a full-time
factory.
The Company's products have a large number of components and subassemblies
produced by outside suppliers and it is highly dependent on such suppliers for
components and subassemblies, including 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 of supply, which can magnify the risk of
shortages and decrease the Company's ability to negotiate with its suppliers on
the basis of price. Specifically, the Company's new LibraryXpress automated tape
libraries incorporate tape drives manufactured by Quantum, which is also a
competitor of the Company in that Quantum markets its own tape drives and tape
loader products. Currently, there are no alternative sources for the DLT tape
drives supplied by Quantum. The Company does not have a long-term contract with
Quantum, which could cease supplying DLT tape drives directly to the Company, in
which case the Company would be forced to obtain these drives from distributors,
if available, and at prices that would probably be higher. From time to time in
the past, the Company (and its competitors) have not been able to obtain as many
drives as they needed from Quantum due to drive shortages or quality issues. Any
prolonged inability to obtain adequate deliveries of DLT drives or other
critical component parts or supplies could have a material adverse effect on the
Company's business, financial condition and results of operations. During the
last 12 months, the Company has experienced problems with the quality and
timeliness of the supply of DLT drives and read-write heads, each of which is a
sole source component. Such problems have adversely affected the Company's sales
during this period. While the Company believes that the problems relating to
these components have been resolved, 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. See "Risk Factors--Dependence
on Certain Suppliers."
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. Notwithstanding, the Company 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. Such
rights, however, may not preclude competitors from developing substantially
equivalent or superior products to those of the Company. As of January 1997, the
Company owns one United States patent and has seven patent applications pending
in the United States and one internationally under the provisions of the Patent
Cooperation Treaty. There can be no assurance that patents will issue from any
of these pending applications or, if patents do issue, that any claims allowed
will be sufficiently broad to protect the Company's technology. In addition,
there can be no assurance that any patents that may be issued to the Company
will not be challenged, invalidated or circumvented, or that any rights granted
thereunder would provide proprietary protection to the Company. Although the
Company continues to implement protective measures and intends to defend its
proprietary rights, policing unauthorized use of the Company's technology or
products is difficult and there can be no assurance that these measures will be
successful. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.
36
<PAGE>
The Company has 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 world-wide
revenues generated from the Company's 18 and 36-track product sales, exclusive
of those sold to IBM.
EMPLOYEES
The Company had 197 employees (full-time equivalent) as of December 31,
1996, including 44 in sales and marketing, 35 in research and development, 93 in
manufacturing and operations and 25 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.
PROPERTIES
The Company leases all facilities used in its business. The Company's
headquarters are located in San Diego, California in a 3-building light
industrial complex, of which it currently occupies two buildings comprising
approximately 93,500 square feet. The Company also has a right of first refusal
on the third building which comprises an additional 27,000 square feet. The San
Diego facility houses all of the Company's manufacturing, research and
development and administrative functions as well as a major portion of sales,
sales administration, marketing and customer support. The Company also leases a
facility located in Wokingham, England which houses sales, sales administration
and customer support for the European marketplace. Two other small facilities
are leased in Longmont, Colorado and in Nashua, New Hampshire for the
development of R&D prototypes and an OEM sales office, respectively. The Company
believes that its facilities are suitable for their uses and are, in general,
adequate for the Company's current and identified future needs.
LEGAL PROCEEDINGS
There are no legal proceedings pending, or, to the knowledge of management,
threatened against the Company.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ------------------------ --- --------------------------------------------------
<S> <C> <C>
Scott McClendon 57 President, Chief Executive Officer and Director
Martin D. Gray 48 Vice President, Secretary and Director
Frank R. Kirchhoff 53 Vice President of Sales
Charles R. Earnhart 50 Vice President of Operations
Robert J. Scroop 48 Vice President of Engineering
Vernon A. LoForti 43 Vice President and Chief Financial Officer and
Assistant Secretary
William W. Otterson(1) 66 Director
Joseph D. Rizzi(1) 54 Director
John A. Shane(1) 63 Director
</TABLE>
- ------------------------
(1) Member of the Compensation and Audit Committees.
SCOTT MCCLENDON. Mr. McClendon has served as President, Chief Executive
Officer and a director since joining the Company in October 1991. Prior thereto,
he was employed by Hewlett-Packard, a global manufacturer of computing,
communications and measurement products and services, for over 32 years in
various positions in engineering, manufacturing, sales and marketing, and last
served as the General Manager of the San Diego Technical Graphics Division and
Site Manager of Hewlett-Packard in San Diego, California. Mr. McClendon holds
B.S. and M.S. degrees in Electrical Engineering from Stanford University.
MARTIN D. GRAY. Mr. Gray, one of the co-founders of the Company, has served
as Secretary and a director since the Company's inception in September 1980. He
has served as staff engineer at the Company since January 1986. From January
1977 to July 1985, Mr. Gray was Manager of Research and Development at Cipher, a
tape drive manufacturer. From August 1971 to December 1976, he was Chief
Electrical Engineer at Kennedy Corporation, a tape drive manufacturer. Mr. Gray
has several patents in the tape drive industry and holds a B.S. degree in
Electrical Engineering from the California Institute of Technology.
FRANK R. KIRCHHOFF. Mr. Kirchhoff has served as Vice President of Sales
since joining the Company in July 1993. From June 1987 to June 1993, he served
in various sales and marketing capacities at Western Digital Corporation, an
information storage products and services provider including Vice President of
International Marketing from June 1987 to June 1988, Vice President of Domestic
Sales from July 1988 to August 1990 and Vice President of European Operations
for Western Digital Corporation from September 1990 to June 1993. From October
1983 to June 1987, Mr. Kirchhoff was Vice President of Sales for Cipher. He
holds a B.S. degree in Marketing from Hofstra University, New York and an M.B.A.
from Pepperdine University.
CHARLES R. EARNHART. Mr. Earnhart joined the Company as a consultant in
July 1995 and has served as Vice President of Operations since December 1995.
From August 1993 to June 1995, he was Vice President of Operations at the Conner
Tape Group, a division of Conner, a provider of information storage solutions
products. From December 1988 to August 1993, Mr. Earnhart was Director of
Operations, Services and Cost Improvement Programs for Archive Corporation, a
tape drive manufacturer. He holds a
38
<PAGE>
B.S. degree in Mathematics and Physics from the University of Texas at Arlington
and an M.B.A. from the University of Dallas.
ROBERT J. SCROOP. Mr. Scroop has served as Vice President of Engineering
since joining the Company in February 1993. From April 1990 to February 1993, he
was Vice President of Engineering of the Cipher Division of Archive Corporation.
From April 1985 to April 1990, he was Director of Engineering for Cipher. Mr.
Scroop holds a First Class Honours degree in Electrical Engineering from Brunel
University, England.
VERNON A. LOFORTI. Mr. LoForti has served as Vice President, Chief
Financial Officer and Assistant Secretary since joining the Company in December
1995. From August 1992 to December 1995, he was the Chief Financial Officer for
Priority Pharmacy, a privately held pharmacy company. From 1981 to 1992, Mr.
LoForti was Vice President of Finance for Intermark, Inc., a publicly held
conglomerate. He holds a B.S. degree in Accounting from Brigham Young
University.
WILLIAM W. OTTERSON. Mr. Otterson has served as a director of the Company
since 1982. Since March 1986, he has been the Director of the UCSD CONNECT
program. From August 1980 to November 1985, he was president of Lexacorp
Corporation, a computer peripheral manufacturer. From June 1971 to June 1979, he
was President of Cipher. From June 1970 to June 1971, Mr. Otterson was Vice
President of Marketing for Standard Computer and prior thereto, he spent 13
years in sales and marketing with IBM. He holds a B.S. degree in Engineering and
an M.B.A. from the Stanford Graduate School of Business.
JOSEPH D. RIZZI. Mr. Rizzi has served as a director of the Company since
May 1989. Since March 1986, he has been a general partner of Matrix Partners, a
venture capital firm. From January 1980 to March 1986, Mr. Rizzi was a founder
of ELXSI, Inc., a parallel processor computer company, where he served as Chief
Executive Officer. From February 1970 to September 1978, he was a founder and
Vice President of Intersil, Inc., a merchant market semiconductor company.
Currently, he is a director of Veritas Software Corporation and Sandisk
Corporation. Mr. Rizzi holds B.S. and M.S. degrees in Electrical Engineering
from the University of New Hampshire.
JOHN A. SHANE. Mr. Shane has served as a director of the Company since July
1992. He is the founder and has served as President of Palmer Service
Corporation since 1972. Concurrently, Mr. Shane has been a General Partner of
the Palmer Organization, a venture capital firm, since 1973 and a General
Partner of Palmer Partners L.P. since 1981. He is a director of Arch
Communications Group, Inc., Gensym Corporation, Summa Four, Inc. and United
Asset Management Corporation, each of which is a public corporation. Mr. Shane
holds a B.A. degree in Economics from Princeton University and an M.B.A. from
Harvard Business School.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
The Board of Directors has appointed two committees, the Audit Committee and
the Compensation Committee. The Audit Committee, composed of Messrs. Otterson,
Rizzi and Shane, is responsible for reviewing financial statements, accounting
and financial policies and internal controls and reviewing the scope of the
independent auditor's activities and fees. The Compensation Committee, composed
of Messrs. Otterson, Rizzi and Shane, is responsible for reviewing and
approving, within its authority, compensation, benefits, training and other
human resource policies.
Each non-employee director receives cash compensation of $3,000 per quarter
and the Company reimburses such directors' expenses relating to their activities
as directors. Non-employee directors are also eligible to participate in the
Company's stock option plans. No grants have been made, however, to such
directors to date.
39
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1996, the Compensation Committee of the Board of
Directors (the "Compensation Committee") consisted of Messrs. Otterson, Rizzi
and Shane. Since the Company's inception, shareholders affiliated with, or
related to, Messrs. Otterson (Otterson Family Trust, Eric Otterson, John
Otterson and Helen Ann Otterson), Rizzi (Matrix Partners II, L.P.) and Shane
(The Palmer Organization III L.P.) have purchased 698,360, 1,154,074 and 428,571
shares of Common Stock, respectively. No executive officer of the Company served
on the compensation committee of another entity or on any other committee of the
board of directors of another entity performing similar functions during the
last fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended June 30, 1995 and
1996, the cash compensation for services in all capacities to the Company of
those persons who were, as of June 30, 1996, the Company's Chief Executive
Officer and the four other most highly compensated executive officers of the
Company whose total annual salary and bonus exceeded $100,000 during the fiscal
year (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------ COMPENSATION
OTHER AWARDS ALL OTHER
SALARY BONUS COMPENSATION(1) # OF OPTIONS COMPENSATION(2)
---------- --------- ------------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Scott McClendon......................... $ 210,000 $ 63,000 -- -- $ 44
President and Chief
Executive Officer
Frank R. Kirchhoff...................... 165,000 24,750 -- -- 44
Vice President of Sales
Robert J. Scroop........................ 125,000 12,500 -- -- 44
Vice President of Engineering
Martin D. Gray.......................... 125,000 18,750 -- -- 44
Vice President and Secretary
Charles R. Earnhart(3).................. 78,077 10,500 -- 52,150 26
Vice President of Operations
Vernon A. LoForti(4).................... 56,058 8,625 -- 52,150 26
Vice President, Chief Financial
Officer and Asst. Secretary
</TABLE>
- ------------------------
(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus reported in the table above.
(2) Consists of premiums for term life insurance with no cash surrender value.
(3) Charles R. Earnhart became Vice President of Operations effective December
14, 1995. His annual base salary was $140,000 at June 30, 1996.
(4) Vernon A. LoForti became Vice President and Chief Financial Officer
effective December 14, 1995. His annual base salary was $115,000 at June 30,
1996.
40
<PAGE>
The following table sets forth information for the Named Executive Officers
with respect to grants of options to purchase Common Stock of the Company made
during the fiscal year ended June 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NO. OF OPTIONS FAIR STOCK PRICE
SECURITIES GRANTED TO MARKET APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE VALUE ON OPTION TERM(3)
OPTIONS FISCAL PRICE DATE OF EXPIRATION ---------------------
GRANTED(1) 1996(2) PER SHARE GRANT DATE 5% 10%
----------- ------------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott McClendon -- -- -- -- -- -- --
Frank R. Kirchhoff -- -- -- -- -- -- --
Robert J. Scroop -- -- -- -- -- -- --
Martin D. Gray -- -- -- -- -- -- --
Charles R. Earnhart 52,150 28.2% $ 2.00 $ 2.00 7/1/05 $ 65,709 $ 166,359
Vernon A. LoForti 52,150 28.2% 2.00 2.00 12/14/05 65,709 166,359
</TABLE>
- ------------------------
(1) The options granted to Mr. Earnhart and Mr. LoForti vest over four years at
the rate of 25% per year. See "Stock and Employee Benefit Plans" for a
description of the material terms of the options.
(2) Based on a total of 184,800 options granted to all employees during fiscal
year 1996.
(3) In accordance with the rules of the Securities and Exchange Commission, the
potential realizable values for the options are based on assumed rates of
stock price appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration dates. The gains shown
are net of the option exercise price and do not include deductions for taxes
or other expenses associated with their exercise. These assumed rates of
appreciation do not represent the Company's estimate or projection of the
appreciation of shares of the Common Stock and actual gains, if any, on
stock option exercises will depend on the future performance of the Common
Stock.
The following table sets forth information for the Named Executive Officers
with respect to exercises of options to purchase Common Stock of the Company
during fiscal year 1996 and the number and value of unexercised stock options
held at June 30, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT JUNE 30,
SHARES OPTIONS AT JUNE 30, 1996 1996(1)
ACQUIRED ON VALUE -------------------------- --------------------------
EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott McClendon 196,011 $ 1,764,099 -- 21,369 $ -- $ 192,321
Frank R. Kirchhoff 59,222 532,998 -- 64,221 -- 577,989
Robert J. Scroop -- -- 23,750 11,250 213,750 101,250
Martin D. Gray -- -- 21,550 3,750 193,950 33,750
Charles R. Earnhart -- -- -- 52,150 -- 469,350
Vernon A. LoForti -- -- -- 52,150 -- 469,350
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock as of June 30, 1996.
Accordingly, these values have been calculated on the basis of an assumed
initial public offering price of $9.00 per share, minus the applicable per
share exercise price.
41
<PAGE>
STOCK AND EMPLOYEE BENEFIT PLANS
1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors in October 1995 to attract, retain
and provide additional incentive to directors, employees and consultants of the
Company. Options granted under the 1995 Plan may be either incentive stock
options as defined in Section 422A of the Internal Revenue Code of 1986, as
amended (the "IRC"), or non-statutory stock options. A total of 372,500 shares
of Common Stock have been reserved for issuance under the 1995 Plan.
The 1995 Plan is administered by the Compensation Committee which has the
authority to determine the terms of the options granted. In the event of option
grants or stock purchase rights awarded to directors of the Company, the
administration of such grants or awards must comply with Rule 16 promulgated
under the Securities Exchange Act of 1934, as amended. Each option has a term
specified in its option agreement; provided, however, that no term can exceed
ten years from the date of grant and options must be exercisable at the rate of
at least 20% per year over five years from the date of grant. In the case of an
incentive stock option granted to an optionee who, at the time the option is
granted, owns stock representing more than 10% of the voting power of all
outstanding classes of stock of the Company or any of its subsidiaries (a "10%
Optionee"), the term of the option cannot exceed five years from the grant date.
No option granted under the 1995 Plan may be transferred by the optionee other
than by will or the laws of descent or distribution and each option may be
exercised, during the lifetime of the optionee, only by such optionee. In the
event an optionee's service terminates for any reason other than death or total
disability, any options held which have not yet vested will expire and become
unexercisable. All of the optionee's options which have vested shall expire and
become unexercisable on the earliest of the expiration date stated in the
agreement or the date 30 days (or six months after total disability) after the
termination of the optionee's service. The number of shares under each option
and the price of any shares under such option may be adjusted in a manner
consistent with any capital adjustment resulting from a stock dividend, stock
split, recapitalization, reorganization, merger, consolidation, liquidation, or
a combination or exchange of shares.
The exercise price of all incentive stock options granted under the 1995
Plan must be no less than 100% of the fair market value per share on the date of
grant. In the case of non-statutory stock options, the per share exercise price
may be no less than 85% of the fair market value per share on the date of grant.
With respect to a 10% Optionee, the exercise price of any option granted must be
no less than 110% of the fair market value per share on the date of grant. Each
option is designated in the written option agreement as either an incentive
stock option or a non-statutory stock option. However, to the extent that the
aggregate fair market value of shares subject to an optionee's incentive stock
options, which become exercisable for the first time during any year, exceeds
$100,000, the excess options shall be treated as non-statutory stock options.
At December 31, 1996, there were outstanding options under the 1995 Plan to
purchase an aggregate of 25,000 shares of Common Stock at an exercise price of
$3.66. The 1995 Plan will expire in 2005 unless terminated at an earlier date by
action of the Board of Directors. At December 31, 1996, there were outstanding
options under other stock option plans, which were previously terminated by the
Company, to purchase an aggregate of 780,921 shares of Common Stock at a
weighted average exercise price of $1.10.
1996 EMPLOYEE STOCK PURCHASE PLAN. In December 1996, the Board of Directors
adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan"), the purpose
of which is to provide an opportunity for the Company's employees to purchase
shares of the Company's Common Stock and thereby have an additional incentive to
contribute to the prosperity of the Company. After the completion of this
Offering, the Purchase Plan will allow employees to purchase shares of Common
Stock through payroll deductions. An administrative committee appointed by the
Board of Directors (the "Administrative Committee") will determine periods of up
to 27 months (each an "Option Period"), during which each participant in the
Purchase Plan will be granted an option to purchase that number of shares of
Common Stock which may
42
<PAGE>
be purchased with the payroll deductions accumulated on behalf of such
participant during each six-month period within a particular Option Period, as
approved by the Board of Directors. The Purchase Plan provides that (i) no
employee shall be entitled to accrue rights to purchase shares under the
Purchase Plan at a rate which exceeds $25,000 of the fair market value of such
stock (determined at the time the option is granted) for any calendar year in
which such option is outstanding at any time, and (ii) the maximum number of
shares subject to any option shall not exceed 1,500. Employees participating in
the Purchase Plan may purchase shares of Common Stock under each option at a
price per share equal to the lower of (x) 85% of the fair market value of the
Common Stock on the date of commencement of participation in the Purchase Plan
offering period or (y) 85% of the fair market value of a share of Common Stock
on the date of purchase. Generally, any employee, including executive officers,
regularly employed on a full-time basis by the Company or by Overland Data
(Europe) Limited, a wholly owned subsidiary of the Company ("Overland Data
Europe"), on the first day of each Option Period is eligible to participate in
the Purchase Plan, subject to minimum eligibility periods, if any, as
established by the Administrative Committee. Participants may authorize payroll
deductions of up to 15% of their compensation, including base, overtime and
commissions, for the purchase of shares of Common Stock under the Purchase Plan.
The Purchase Plan authorizes the Company to issue up to 250,000 shares of Common
Stock pursuant to the Purchase Plan. As of the date hereof, no shares of Common
Stock have been purchased under the Purchase Plan. The Purchase Plan will
terminate in January 2007.
401(K) PLAN. In February 1994, the Company adopted the Overland Data, Inc.
On-Track 401(k) Savings Plan (the "401(k) Plan"), that covers all eligible
employees of the Company who complete six months of service and are at least 21
years old. Employees may elect to defer up to 15% of their eligible compensation
(not to exceed the statutorially prescribed annual limit) in the form of
elective deferral contributions to the 401(k) Plan. The elective deferral
contributions are fully vested and nonforfeitable at all times and are invested
in accordance with the directions of the participants. The 401(k) Plan is
intended to qualify under Section 401 of the IRC, so that employee contributions
and income earned on such contributions are not taxable to employees until
withdrawn. The Company currently does not make matching contributions under the
401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation (the "Articles") include a provision
that eliminates the personal liability of its directors for monetary damages to
the fullest extent permissible under California law. This limitation has no
effect on a director's liability (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (ii) for acts
or omissions that a director believes to be contrary to the best interests of
the Company or its shareholders or that involve the absence of good faith on the
part of the director, (iii) for any transaction from which a director derived an
improper personal benefit, (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of a serious injury
to the Company or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders, (vi) under Section 310 of the
California Corporations Code (the "California Code"), concerning contracts or
transactions in which the director has material financial interest or (vii)
under Section 316 of the California Code concerning directors' liability for
approval of certain corporate actions. The provision does not extend to acts or
omissions of a director in his capacity as an officer.
The Articles also include an authorization for the Company to indemnify its
agents (as defined in Section 317 of the California Code), through bylaw
provisions, by agreement or otherwise, to the fullest extent permitted by law.
Pursuant to this provision, the Company's Bylaws (the "Bylaws") provide for
indemnification of the Company's directors, officers and agents. In addition,
the Company intends to enter into indemnification agreements with all directors
and executive officers that provide for the maximum
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<PAGE>
indemnification permitted by law. These agreements, together with the Articles
and the Bylaws, may require the Company, among other things, to indemnify these
directors or executive officers (other than liability resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' and officers' insurance if available on reasonable
terms. Section 317 of the California Code and the Bylaws make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances, for
liabilities (including reimbursement of expense incurred) arising under the
Securities Act.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
Offering.
CERTAIN TRANSACTIONS
Seagate is the owner of 17.1% of the outstanding shares of Common Stock
immediately prior to this Offering and is a Selling Shareholder in the Offering.
Seagate has been a supplier to the Company of certain components used in the
production of its 18-track products. During the fiscal year ended June 30, 1996,
the Company purchased approximately $1.3 million of products from Seagate under
standard purchase orders at prices and terms which the Company believes are no
less favorable than could be obtained from an independent third party.
In addition, Overland Data Europe entered into a lease agreement in June
1996 with Seagate Distribution (UK) Limited, a subsidiary of Seagate. The lease
pertains to a facility located in Wokingham, England, which houses sales, sales
administration and customer support for the Company's European operations. The
lease has a three-year term and a monthly rent of approximately $5,100. The
Company believes that the lease was obtained at rental rates and terms which are
no less favorable than could be obtained from an independent third party.
During the six months ended December 31, 1996, the Company sold shares of
Common Stock to three of its executive officers at the then fair market value as
set by the Board of Directors of $3.00 per share. Scott McClendon, the Company's
President and Chief Executive Officer, purchased 21,000 shares for total
consideration of $63,000; Martin D. Gray, the Company's Vice President and
Secretary, purchased 6,250 shares for total consideration of $18,750; and
Charles R. Earnhart, the Company's Vice President of Operations, purchased 1,500
shares for total consideration of $4,500.
During fiscal year 1996, the Company sold shares of Common Stock to three of
its executive officers pursuant to purchase transactions or the exercise of
stock options. Scott McClendon purchased a total of 271,011 shares at an average
price of $1.13 per share for total consideration of $306,809. Frank R.
Kirchhoff, the Company's Vice President of Sales, purchased 79,222 shares at an
average price of $1.10 per share for total consideration of $87,378. Charles
Earnhart, the Company's Vice President of Operations, purchased 22,350 shares at
$2.00 per share for total consideration of $44,700.
During fiscal year 1994, the Company sold shares of Common Stock to three of
its executive officers at the then fair market value as set by the Board of
Directors of $0.80 per share. Scott McClendon purchased 56,250 shares for total
consideration of $45,000; Martin D. Gray purchased 12,700 shares for total
consideration of $10,160; and Robert J. Scroop, the Company's Vice President of
Engineering, purchased 6,600 shares for total consideration of $5,280.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of December 31, 1996 (i) by each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each of the Company's directors, (iii) by each of the Named
Executive Officers, (iv) by all directors and executive officers as a group and
(v) by each Selling Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
------------------------ SHARES BEING ------------------------
NAME AND ADDRESS NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
- -------------------------------------------------- ---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Martin Gray(2).................................... 1,756,840 23.21% -- 1,756,840 17.98%
3236 Caminito Ameca
La Jolla, CA 92037
Seagate Technology, Inc........................... 1,286,747 17.05% 150,000 1,136,747 11.66%
920 Disc Drive
Scotts Valley, CA 95066
Matrix Partners II, L.P........................... 1,154,074 15.29% 100,000 1,054,074 10.81%
1000 Winter Street, Suite 4500
Waltham, MA 02154
William W. Otterson(3)............................ 698,360 9.25% 134,100 564,260 5.79%
6119 Vista de la Mesa
La Jolla, CA 92037
Scott McClendon(4)................................ 460,880 6.10% -- 460,880 4.72%
1 East Roseland Drive
La Jolla, CA 92037
Robert M. and Barsha M. Long...................... 437,510 5.80% -- 437,510 4.49%
615 Paseo Rio
Vista, CA 92083
The Palmer Organization III L.P................... 428,571 5.68% 100,000 328,571 3.37%
300 Unicorn Park Drive
Woburn, MA 01801
Frank R. Kirchhoff(5)............................. 137,669 1.82% -- 137,669 1.41%
Charles R. Earnhart(6)............................ 69,887 * -- 69,887 *
Robert J. Scroop(7)............................... 69,100 * -- 69,100 *
Vernon A. LoForti(8).............................. 13,037 * -- 13,037 *
All current directors and officers as a group (10
persons)(9)..................................... 6,075,165 79.18% 484,100 5,591,065 56.63%
Other Selling Shareholders:
Barbara Bry(10)................................. 19,610 * 5,000 14,610 *
Thomas W. Turney................................ 14,405 * 5,000 9,405 *
Robert L. Shaver................................ 28,670 * 4,900 23,770 *
Timothy R. & Susan B. Dowty..................... 24,315 * 1,000 23,315 *
</TABLE>
- ------------------------
* Indicates ownership of less than one percent.
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<PAGE>
(1) Except as otherwise indicated, each beneficial owner has the sole power to
vote and, as applicable, dispose of all shares of Common Stock owned by such
beneficial owner, subject to community property laws where applicable.
Amounts shown for each shareholder include all shares of Common Stock
issuable upon the exercise of options which are exercisable as of, or will
become exercisable within 60 days of December 31, 1996.
(2) Includes 22,800 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of December 31, 1996.
(3) Consists of 666,600 shares of Common Stock held by Anne S. Otterson, spouse
of Mr. Otterson, Trustee, Otterson Family Trust u/t/d February 8, 1980, over
which Mrs. Otterson holds voting and dispositive power, and 36,760, 30,000
and 25,000 shares held by Eric Otterson, John Otterson and Helen Ann
Otterson, respectively, children of Mr. Otterson.
(4) Includes 223,261 shares of Common Stock held by Scott McClendon, Trustee,
McClendon Trust u/t/d December 31, 1991, over which Mr. McClendon holds
voting and dispositive power and 20,615 shares issuable pursuant to stock
options exercisable within 60 days of December 31, 1996.
(5) Includes 27,586 shares of Common Stock held by Frank and JoAnne Kirchhoff
and 30,861 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of December 31, 1996.
(6) Includes 16,200 shares of Common Stock held by Smith Barney, Inc. Custodian
FBO Charles R. Earnhart, IRA, of which Mr. Earnhart is the beneficial owner,
and 13,037 shares issuable pursuant to stock options exercisable within 60
days of December 31, 1996.
(7) Includes 4,000, 3,000 and 3,000 shares of Common Stock held by Amanda L.
Scroop, Catherine E. Scroop and Christopher D. Scroop, respectively, and
25,000 shares issuable pursuant to stock options exercisable within 60 days
of December 31, 1996.
(8) Includes 13,037 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of December 31, 1996.
(9) Includes 126,104 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of December 31, 1996.
(10) Includes 13,074 shares of Common Stock held by Barbara Bry, Trustee, Bry
Family Trust u/t/d April 7, 1986, over which Ms. Bry holds voting and
dispositive power.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, no par value ("Common Stock"). As of December 31, 1996, 5,209,925
shares of Common Stock were issued and outstanding and were held of record by 95
shareholders. Each holder of Common Stock is entitled to one vote for each share
held of record on each matter submitted to a vote of shareholders. Subject to
preferences that may be granted to the holders of Preferred Stock, each holder
of Common Stock is entitled to share ratably in distributions to shareholders
and to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor and, in the event of the
liquidation or dissolution of the Company, is entitled to share ratably in all
assets of the Company remaining after payment of liabilities. Holders of Common
Stock have no conversion, preemptive or other subscription rights, and there are
no redemption rights or sinking fund provisions with respect to the Common
Stock. The outstanding Common Stock is validly issued, fully paid and
non-assessable.
Additional shares of Common Stock may be issued from time to time by the
Company. The Articles provide that the Board of Directors has no power to alter
the rights of any outstanding shares of Common Stock. Certain other provisions
of the Articles affect the rights of holders of Common Stock and may have the
effect of delaying, deferring or preventing a change in control of the Company.
PREFERRED STOCK
As of December 31, 1996, 318,397 shares of Series A Preferred Stock, 731,429
shares of Series B Preferred Stock and 1,286,747 shares of Series C Preferred
Stock were issued and outstanding and held of record by 12, six and one
shareholders, respectively. All outstanding shares of Series A, B and C
Preferred Stock will be converted into an aggregate of 2,336,573 shares of
Common Stock upon the closing of this Offering and such shares of Preferred
Stock will no longer be authorized, issued or outstanding.
WARRANT
In connection with the establishment of its bank line of credit in May 1995,
the Company issued to Imperial Bank (the "Bank") a warrant (the "Warrant")
exercisable to purchase 17,046 shares of Common Stock at $4.40 per share.
Pursuant to its terms, the Warrant is exercisable at any time on or after May
15, 1995 and unless exercised, the Warrant will automatically expire on May 15,
2000.
CALIFORNIA LAW AND CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION
The Board of Directors has authorized, subject to shareholder approval, an
amendment to the Articles which provides for fair price provisions (the "Fair
Price Provisions"), that require the approval of the holders of two-thirds of
the Voting Stock (as defined therein) and satisfaction of certain minimum price
criteria and procedural conditions as a condition to specified business
combinations (each a "Business Combination") with any beneficial owner of shares
possessing 10% or more of the Voting Stock (a "Major Shareholder").
A Business Combination includes, among other transactions, the following:
(i) any merger or consolidation of the Company with or into a Major Shareholder;
(ii) any sale, lease, exchange, transfer or distribution to Shareholders or
other disposition of a substantial part of the assets of the Company; (iii) the
purchase, exchange, lease or other acquisition by the Company of substantially
all of the assets of a Major Shareholder; (iv) the issuance of any securities of
the Company, 80% or more of which are issued to a Major Shareholder, and (v) any
reclassification of the Voting Stock which has the effect of increasing the
proportionate amount of Voting Stock which is owned by a Major Shareholder.
47
<PAGE>
The Fair Price Provisions require, among other things, that the
consideration to be paid to the Company's Shareholders in a Business Combination
be not less than the higher of (i) the highest price per share paid by the Major
Shareholder in acquiring any of the Voting Stock or (ii) an amount which bears
the same or greater percentage relationship to the market price of the Voting
Stock as the highest price per share determined in item (i) bears to the market
price of the Voting Stock prior to the acquisition of the Voting Stock by such
Major Shareholder.
Under Section 710 of the General Corporation Law of California, the Fair
Price Provisions constitute a supermajority vote requirement. Section 710
provides that amendments to the articles of incorporation of a California
corporation that include a supermajority vote requirement cease to be effective
two years after the filing of the most recent filing of the amendment to adopt
or readopt the supermajority vote requirement. However, at any time within one
year before the expiration date, a supermajority vote requirement may be renewed
unless: (i) the Business Combination was approved by the Board of Directors of
the corporation prior to the Major Shareholder involved in the Business
Combination becoming such; (ii) the Major Shareholder involved in the Business
Combination sought and obtained the unanimous prior approval of the Board of
Directors to become a Major Shareholder and the Business Combination was
approved by not less than eighty percent (80%) of the directors of the
corporation; or (iii) the Business Combination was approved by not less than
ninety percent (90%) of the directors of the corporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N.A. Its telephone number is (800) 767-3330.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of such shares for sales will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the common Stock
and the ability of the Company to raise capital through a sale of its
securities.
Upon completion of this Offering, the Company will have 9,746,498 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option to purchase up to an additional 405,000 shares). The
2,700,000 shares sold in this Offering (3,105,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction under the Securities Act, except for any such shares held at any
time by an "affiliate" of the Company, as such term is defined under Rule 144
promulgated under the Securities Act.
The remaining 7,046,498 shares were issued and sold by the Company in
private transactions and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under Rule 144, as currently in
effect, a person who has beneficially owned shares for at least two years,
including an "affiliate," as that term is defined in Rule 144, is entitled to
sell, within any three-month period, a number of "restricted" shares that does
not exceed the greater of one percent (1%) of the then outstanding shares of
Common Stock (97,465 shares immediately after this Offering) or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least three years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above. Substantially all of the above mentioned 7,046,498 shares will
be eligible for resale pursuant to Rule 144 beginning 90 days after the
completion of this Offering. Of this total, approximately 6,383,146 shares will
be subject to the volume and manner of sale limitations of Rule 144 and
approximately 663,352 shares will be eligible for resale without such
restrictions pursuant to Rule 144(k). Under Rule 701 of the Securities Act
("Rule 701"), any employee, consultant or advisor of the Company who purchased
shares from the Company in connection with a compensatory stock or option plan
or other written compensatory agreement is entitled to resell such shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144 and affiliates are entitled to sell
their Rule 701 shares without having to comply with holding-period restrictions
under Rule 144, in each case commencing 90 days after the Company becomes
subject to the reporting requirements of Section 13 of the Exchange Act. Rule
701 is available for stockholders of the Company who own shares issued pursuant
to exercise of options granted prior to this Offering. In addition, the Company
intends to file a registration statement under the Securities Act concurrent
with this Offering covering the sale of shares of Common Stock previously issued
or to be issued under its 1996 Employee Stock Purchase Plan and its various
stock option plans. During the two-year period ended December 31, 1996,
approximately 435,820 shares of Common Stock were issued pursuant to the
exercise of stock options and, at December 31, 1996, stock options for 805,921
shares of Common Stock were outstanding.
The parties to the Investors' Rights Agreement, who in the aggregate will
hold 2,605,726 shares of Common Stock after the completion of this Offering,
have been granted certain demand and "piggy-back" registration rights if the
Company proposes to register any of its equity securities under the Securities
Act (other than registration of employee benefit plans or in connection with an
acquisition), subject to customary underwriting cut-back and hold-back
provisions. The registration rights granted under the Investors' Rights
Agreement will terminate upon the closing of this Offering; provided, however,
that the parties to the Investors' Rights Agreement which continue to own more
than two percent (2%) of the outstanding shares of Common Stock will have such
registration rights until the fifth anniversary of the
49
<PAGE>
closing of this Offering. The Company will pay all expenses relating to any such
registration other than underwriting discounts and commissions.
The holder of the Warrant will be entitled to publicly resell the 17,046
shares of Common Stock issuable upon exercise thereof, subject to the provisions
of Rule 144. Pursuant to the terms of the Warrant, the holder of the Warrant has
been granted the same registration rights as those granted to the parties to the
Investors' Rights Agreement. Upon the closing of this Offering, the holder will
enter into a new registration rights agreement with the Company, which will, at
a minimum, grant to the holder certain "piggyback" registration rights.
The Company has agreed with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days from the date of
this Prospectus without the prior written consent of Jefferies & Company, Inc.
In addition, the directors, officers and current shareholders of the Company,
beneficially holding (upon completion of this Offering) an aggregate of
6,098,921 shares, have agreed not to sell or otherwise dispose of any such
shares for a period of 180 days from the date of this Prospectus without the
prior written consent of Jefferies & Company, Inc.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing shareholders could adversely affect prevailing market prices.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Shareholders have agreed to sell to the Underwriters
named below, for whom Jefferies & Company, Inc. and Cruttenden Roth Incorporated
are acting as representatives (the "Representatives"), and the Underwriters have
severally agreed to purchase from the Company and the Selling Shareholders the
number of shares of Common Stock set forth opposite their respective names in
the table below at the initial public offering price less the underwriting
discount set forth on the cover page of the Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Jefferies & Company, Inc..................................
Cruttenden Roth Incorporated..............................
----------
Total................................................... 2,700,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
is subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinion and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of the Common Stock offered hereby (other than those covered by the
over-allotment option described below), if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a discount not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the Common Stock, the public offering price
and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period from the date of the Prospectus, to purchase up to
405,000 additional shares of the Common Stock at the public offering price set
forth on the cover page of this Prospectus, less the underwriting discount. Such
shares will be sold, in whole or in part, either by the Company or the Selling
Shareholders, at the option of the Company. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase additional shares of Common Stock proportionate to such
Underwriter's initial commitment as indicated in the preceding table. The
Underwriters may exercise such right of purchase only for the purpose of
covering over-allotments, if any, made in connection with the sale of the shares
of Common Stock. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the 2,700,000 shares are being
offered hereby.
The Company, executive officers, directors and certain other shareholders
have agreed that they will not, without the prior written consent of Jefferies &
Company, Inc., offer, sell or otherwise dispose of any
51
<PAGE>
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 180 days after the date of this Prospectus.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiations
among the Company, the Selling Shareholders and the Representatives. Among the
factors considered in such negotiations were the history of, and the prospects
for, the Company and the industries in which it competes, an assessment of the
Company's management, the Company's past and present operations, its past and
present earnings and the trend of such earnings, the general condition of the
securities market at the time of its offering and the market prices of publicly
traded common stock of comparable companies in recent periods.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
this Offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company has been advised by the Representatives that the Representatives
presently intend to make a market in the Common Stock offered hereby; however,
the Representatives are not obligated to do so, and any market making activity
may be discontinued at any time without notice. There can be no assurance that
an active public market for the Common Stock will develop and continue after
this Offering.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Baker & McKenzie, San Diego, California.
Brobeck, Phleger & Harrison LLP, San Francisco, California, will pass upon
certain legal matters for the Underwriters. Two partners of Baker & McKenzie own
an aggregate of 10,715 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements as of June 30, 1995 and 1996 and for
each of the three years in the period ended June 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under the
Securities Act of 1933, as amended, and the rules promulgated thereunder, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement, certain items of which are omitted as
permitted by the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any agreement or other document referred
to herein are not necessarily complete, and reference is made to the copy of
such agreement or other document filed as an exhibit or schedule to the
Registration Statement and each such statement shall be deemed qualified in its
entirety by such reference. For further information, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the material containing this information
may be obtained from the Commission upon payment of the prescribed fees. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
This Web site can be accessed at http://www.sec.gov. After this Offering, the
52
<PAGE>
Company will be subject to the periodic reporting and other information
requirements of the Securities Exchange Act of 1934, as amended. Such reports
may also be inspected and obtained from the Commission as noted above.
The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm accompanied by an opinion expressed by such independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information in each case prepared in
accordance with generally accepted accounting principles.
53
<PAGE>
OVERLAND DATA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
AND SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet as of June 30, 1995 and 1996 and December 31,
1996.................................................................... F-3
Consolidated Statement of Operations for the Fiscal Years Ended June 30,
1994, 1995 and 1996 and the Six Months Ended December 31, 1995 and
1996.................................................................... F-4
Consolidated Statement of Shareholders' Equity for the Fiscal Years Ended
June 30, 1994, 1995 and 1996 and the Six Months Ended December 31,
1996.................................................................... F-5
Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30,
1994, 1995 and 1996 and the Six Months Ended December 31, 1995 and
1996.................................................................... F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Overland Data, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Overland
Data, Inc. and its subsidiaries at June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements 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.
PRICE WATERHOUSE LLP
San Diego, California
September 30, 1996
F-2
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
------------------------ DECEMBER 31, SHAREHOLDERS'
1995 1996 1996 EQUITY
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 101,000 $ 19,000 $ 28,000
Accounts receivable, less allowance for doubtful
accounts and returns of $446,000, $624,000 and
$719,000, respectively............................... 6,300,000 7,226,000 8,706,000
Inventories............................................ 5,356,000 8,425,000 9,971,000
Deferred income taxes.................................. 135,000 1,328,000 1,328,000
Other current assets................................... 86,000 364,000 182,000
----------- ----------- -------------
Total current assets............................... 11,978,000 17,362,000 20,215,000
Property and equipment, net.............................. 2,062,000 2,128,000 2,569,000
Deferred income taxes.................................... -- 5,000 5,000
Intangible and other assets.............................. 413,000 276,000 215,000
----------- ----------- -------------
$14,453,000 $19,771,000 $23,004,000
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 2,983,000 $ 4,433,000 $ 4,488,000
Accrued liabilities.................................... 1,038,000 1,493,000 1,934,000
Accrued payroll and employee compensation.............. 780,000 1,129,000 727,000
Current portion of long-term debt...................... 747,000 -- --
----------- ----------- -------------
Total current liabilities.......................... 5,548,000 7,055,000 7,149,000
Long-term debt, net of current portion................... 1,400,000 1,500,000 3,100,000
Deferred income taxes.................................... 39,000 -- --
Other liabilities........................................ 132,000 158,000 140,000
----------- ----------- -------------
Total liabilities.................................. 7,119,000 8,713,000 10,389,000
----------- ----------- -------------
Convertible redeemable preferred stock, at liquidation
value:
Series A preferred stock, no par value, 955,190 shares
authorized; 636,794, 318,397, and 318,397 shares
issued and outstanding actual, respectively, no
shares outstanding pro forma (unaudited)............. 734,000 367,000 367,000
Series B preferred stock, no par value, 731,429 shares
authorized; 731,429 shares issued and outstanding
actual, no shares outstanding pro forma
(unaudited).......................................... 1,281,000 1,281,000 1,281,000
Series C preferred stock, no par value, 1,286,747
shares authorized; 1,286,747 shares issued and
outstanding actual, no shares outstanding pro forma
(unaudited).......................................... 3,552,000 3,552,000 3,552,000
Commitments (Note 8)
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized; 4,291,097, 5,062,325, and 5,209,925
shares issued and outstanding actual, respectively;
7,546,498 shares outstanding pro forma (unaudited)... 964,000 1,896,000 2,085,000 $ 7,285,000
Retained earnings...................................... 803,000 3,962,000 5,330,000 5,330,000
----------- ----------- ------------- -------------
Total shareholders' equity......................... 1,767,000 5,858,000 7,415,000 $12,615,000
----------- ----------- ------------- -------------
-------------
$14,453,000 $19,771,000 $23,004,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------------------------------- DECEMBER 31,
1994 1995 1996 -----------------------------
------------- ------------- ------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 34,044,000 $ 38,156,000 $ 47,226,000 $ 23,319,000 $ 27,233,000
Cost of goods sold..................... 22,890,000 27,041,000 31,145,000 15,379,000 17,421,000
------------- ------------- ------------- ------------- -------------
Gross profit......................... 11,154,000 11,115,000 16,081,000 7,940,000 9,812,000
Operating expenses:
Sales and marketing.................. 4,730,000 4,891,000 5,935,000 2,868,000 3,558,000
Research and development............. 3,402,000 3,076,000 3,697,000 1,908,000 2,095,000
General and administrative........... 2,435,000 2,168,000 2,908,000 1,401,000 1,749,000
------------- ------------- ------------- ------------- -------------
10,567,000 10,135,000 12,540,000 6,177,000 7,402,000
------------- ------------- ------------- ------------- -------------
Income from operations............... 587,000 980,000 3,541,000 1,763,000 2,410,000
Other income (expense):
Interest income...................... 34,000 10,000 1,000 -- 1,000
Interest expense..................... (248,000) (214,000) (155,000) (63,000) (135,000)
Other income (expense), net.......... (17,000) (6,000) 26,000 26,000 5,000
------------- ------------- ------------- ------------- -------------
Income before income taxes............. 356,000 770,000 3,413,000 1,726,000 2,281,000
Provision for income taxes............. 219,000 269,000 254,000 614,000 913,000
------------- ------------- ------------- ------------- -------------
Net income............................. $ 137,000 $ 501,000 $ 3,159,000 $ 1,112,000 $ 1,368,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share................... $ 0.02 $ 0.07 $ 0.41 $ 0.14 $ 0.17
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing net income per
share................................ 7,137,000 7,405,000 7,731,000 8,131,000 8,196,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993....................... 3,784,095 $ 462,000 $ 165,000 $ 627,000
Exercise of stock options.................... 26,216 6,000 6,000
Issuance of common stock..................... 93,350 75,000 75,000
Net income................................... 137,000 137,000
------------- ------------- ------------- -------------
Balance at June 30, 1994....................... 3,903,661 543,000 302,000 845,000
Preferred stock conversion................... 318,396 367,000 367,000
Exercise of stock options.................... 39,040 30,000 30,000
Issuance of common stock..................... 30,000 24,000 24,000
Net income................................... 501,000 501,000
------------- ------------- ------------- -------------
Balance at June 30, 1995....................... 4,291,097 964,000 803,000 1,767,000
Preferred stock conversion................... 318,397 367,000 367,000
Exercise of stock options.................... 280,481 220,000 220,000
Issuance of common stock..................... 172,350 345,000 345,000
Net income................................... 3,159,000 3,159,000
------------- ------------- ------------- -------------
Balance at June 30, 1996....................... 5,062,325 1,896,000 3,962,000 5,858,000
Exercise of stock options (unaudited)........ 116,900 97,000 97,000
Issuance of common stock (unaudited)......... 30,700 92,000 92,000
Net income (unaudited)....................... 1,368,000 1,368,000
------------- ------------- ------------- -------------
Balance at December 31, 1996 (unaudited)....... 5,209,925 $ 2,085,000 $ 5,330,000 $ 7,415,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------------------------------- DECEMBER 31,
1994 1995 1996 -----------------------------
------------- ------------- ------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income........................... $ 137,000 $ 501,000 $ 3,159,000 $ 1,112,000 $ 1,368,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Deferred tax benefit............. -- (66,000) (1,237,000) -- --
Depreciation and amortization.... 607,000 725,000 862,000 389,000 491,000
Loss on disposal of property and
equipment...................... 87,000 10,000 50,000 -- --
Non-cash compensation charge..... 132,000 8,000 -- -- --
Changes in assets and
liabilities, net of Cipher
acquisition:
Accounts receivable.......... (1,885,000) (1,701,000) (926,000) 8,000 (1,480,000)
Inventories.................. 1,108,000 309,000 (3,069,000) (778,000) (1,546,000)
Other assets................. (33,000) 77,000 (278,000) (436,000) 182,000
Accounts payable and accrued
liabilities................ 2,519,000 296,000 1,931,000 626,000 546,000
Accrued payroll and employee
compensation............... 171,000 28,000 349,000 81,000 (402,000)
------------- ------------- ------------- ------------- -------------
Net cash provided by
(used in) operating
activities............. 2,843,000 187,000 841,000 1,002,000 (841,000)
------------- ------------- ------------- ------------- -------------
Investing activities:
Capital expenditures................. (809,000) (670,000) (841,000) (339,000) (871,000)
Proceeds from sale of property and
equipment.......................... 7,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net cash used in investing
activities................... (802,000) (670,000) (841,000) (339,000) (871,000)
------------- ------------- ------------- ------------- -------------
Financing activities:
Principal payments on notes
payable............................ (1,494,000) (1,494,000) (747,000) -- --
Proceeds from issuance of common
stock.............................. -- 16,000 345,000 344,000 92,000
Proceeds from exercise of stock
options............................ 6,000 30,000 220,000 9,000 29,000
Net proceeds (payments) under bank
line of credit..................... 700,000 700,000 100,000 (947,000) 1,600,000
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided by
financing activities......... (788,000) (748,000) (82,000) (594,000) 1,721,000
------------- ------------- ------------- ------------- -------------
Net (decrease) increase in cash and
cash equivalents..................... 1,253,000 (1,231,000) (82,000) 69,000 9,000
Cash and cash equivalents, beginning of
period............................... 79,000 1,332,000 101,000 101,000 19,000
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of
period............................... $ 1,332,000 $ 101,000 $ 19,000 $ 170,000 $ 28,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-6
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------------------------------- DECEMBER 31,
1994 1995 1996 -----------------------------
------------- ------------- ------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes......... $ 53,000 $ 411,000 $ 1,150,000 $ 648,000 $ 736,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Cash paid for interest............. $ 237,000 $ 215,000 $ 155,000 $ 63,000 $ 138,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Non-cash common stock issuance..... $ 75,000 $ 8,000 -- -- --
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Reclassification of deferred
compensation to equity upon
exercise of common stock
options.......................... -- -- -- -- $ 68,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Conversion of Series A preferred
stock to common stock............ -- $ 367,000 $ 367,000 -- --
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Issuance of Series C preferred
stock for Cipher assets.......... $ 1,564,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Issuance of notes payable in
exchange for Cipher assets....... $ 1,651,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--OPERATIONS AND SUMMARY OF ITS 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 backup, archival and data interchange functions. 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. Each of fiscal years 1994, 1995 and
1996 included 52 weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Overland Data (Europe) Limited 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
Sales are recognized upon shipment of products to customers and are not 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 offers a two-year return-to-factory warranty on its
products and records a provision for estimated future warranty costs at the time
of shipment. It also contracts with outside vendors to provide service relating
to various on-site and extended warranties which are offered for sale to
customers. Warranty revenues and amounts paid in advance to outside service
organizations for the entire warranty period are included in the financial
statements in sales and cost of goods sold, respectively.
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 value based
on their terms or short-term nature.
F-8
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--OPERATIONS AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EXPORT SALES
Export sales by the Company, principally in Europe, for the fiscal years ended
June 30, 1994, 1995 and 1996 were approximately $5,753,000, $7,737,000 and
$12,775,000, respectively. Substantially all export sales are denominated in
U.S. dollars.
CONCENTRATION OF CREDIT RISK
The Company's customers include original equipment manufacturers, integrators,
distributors, value added resellers and end users. 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 36%, 21% and 23% of sales in fiscal years 1994, 1995
and 1996, respectively, and approximately 18% and 33% of accounts receivable at
June 30, 1995 and 1996, 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.
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 (Note 2), are amortized using the straight-line method over five
years (the estimated life of the products). Accumulated amortization was
$432,000 in 1995 and $570,000 in 1996. The Company periodically considers
whether the sum of the estimated future net cash flows generated from the sale
of related products is in excess of the carrying amount of the intangible asset
(net realizable value). The carrying amount would be reported as the lower of
cost (net of amortization) or net realizable value. No such impairment losses
have been recorded by the Company.
F-9
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--OPERATIONS AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 the
asset's carrying value unlikely. An impairment loss would be recognized when the
sum of the expected future net cash flows is less than the carrying amount of
the asset. No such impairment losses have been identified by the Company.
FOREIGN CURRENCY REMEASUREMENT
The assets and liabilities of the foreign subsidiaries have been remeasured into
U.S. dollars at year-end exchange rates. Revenues and expenses have been
remeasured at average exchange rates during the year. Gains or losses resulting
from remeasurement and from foreign currency transactions are recognized
currently in operating results and were not significant in any year presented.
INCOME TAXES
The Company provides for income taxes utilizing the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109). Under the asset and liability
method of SFAS 109, 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. SFAS 109 also requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company does not
intend to adopt the measurement provisions of SFAS 123 with regard to
employee-based stock compensation, but will adopt the required disclosure
provisions during the year ending June 30, 1997.
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of shares
of Common Stock and common stock equivalents, using the treasury stock method,
outstanding during the respective periods. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all issuances of Common Stock and
all stock options granted within one year prior to the filing of the Company's
registration statement for its planned initial public offering and through the
effective date thereof have been included as outstanding for all periods
presented using the treasury stock method.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet at December 31, 1996 and the related statements
of operations and of cash flows for the six months ended December 31, 1995 and
1996, and the statement of shareholders' equity for the six months ended
December 31, 1996 are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of results of the interim periods. The data
disclosed in these notes to the financial statements at such date and for such
periods are also unaudited.
F-10
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--OPERATIONS AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED)
The unaudited pro forma information presented in the accompanying balance sheet
as of December 31, 1996 reflects the conversion of all outstanding shares of
Preferred Stock into 2,336,573 shares of Common Stock, which will occur upon
completion of the Company's planned initial public offering.
NOTE 2--ACQUISITIONS
CIPHER ACQUISITION
In May 1993 and October 1993, the Company acquired certain assets from Archive
Corporation, a wholly owned subsidiary of Conner Peripherals, Inc., relating to
the half-inch tape drive product lines of Cipher Data Products, Inc., for total
consideration of $8,294,000 comprised of cash ($1,000,000), notes payable
($3,742,000) and a total of 1,286,747 shares of Series C Preferred Stock
($3,552,000). Under the terms of the agreement, machinery and equipment,
intangible assets (patent and trademark rights) and inventory aggregating
$5,079,000 were purchased in fiscal year 1993 and additional inventory of
approximately $3,215,000 was acquired during fiscal year 1994. The acquisition
has been accounted for as a purchase transaction and, accordingly, the purchase
price has been allocated to the fair market value of the assets acquired.
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------- DEC. 31,
1995 1996 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials....................................... $ 2,970,000 $ 5,167,000 $ 5,825,000
Work in process..................................... 692,000 1,816,000 2,185,000
Finished goods...................................... 1,694,000 1,442,000 1,961,000
------------- ------------- -------------
$ 5,356,000 $ 8,425,000 $ 9,971,000
------------- ------------- -------------
------------- ------------- -------------
Property and equipment:
Machinery and equipment............................. $ 2,076,000 $ 2,433,000 $ 2,549,000
Computer equipment.................................. 1,039,000 1,141,000 1,585,000
Furniture and fixtures.............................. 115,000 165,000 210,000
Leasehold improvements.............................. 202,000 429,000 695,000
------------- ------------- -------------
3,432,000 4,168,000 5,039,000
Less accumulated depreciation and amortization........ (1,370,000) (2,040,000) (2,470,000)
------------- ------------- -------------
$ 2,062,000 $ 2,128,000 $ 2,569,000
------------- ------------- -------------
------------- ------------- -------------
Depreciation expense was $456,000, $574,000, and $724,000 in fiscal years 1994, 1995 and 1996,
respectively.
</TABLE>
F-11
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------- DEC. 31,
1995 1996 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Bank line of credit......................................... $ 1,400,000 $ 1,500,000 $ 3,100,000
Subordinated installment note payable to Archive Corporation
(Note 2).................................................. 747,000 -- --
------------- ------------- -------------
2,147,000 1,500,000 3,100,000
Less current portion........................................ (747,000) -- --
------------- ------------- -------------
$ 1,400,000 $ 1,500,000 $ 3,100,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company has a $5,000,000 revolving credit facility which is collateralized
by substantially all of the Company's assets and expires on November 5, 1998.
Under terms of the agreement, the Company may borrow the lesser of (1)
$5,000,000 or (2) 80% of eligible accounts receivable plus an overadvance at
June 30, 1996 of $1,200,000. The overadvance amount is reduced semi-annually by
$150,000 on November 1 and May 1. Borrowings under the line may be in the form
of working capital loans, which bear interest at the bank's prime rate plus 0.5%
(8.75% at June 30, 1996), or banker's acceptances priced at the banker's
acceptance rate plus 2.5%. The Company is required to maintain certain covenants
and financial ratios including working capital and net worth ratios, and pays a
0.5% annual commitment fee on the unused credit if the average amount borrowed
for any quarter is less than $2,500,000. The agreement also prohibits the
payment of dividends without prior bank approval. The Company is in compliance
with the terms of the agreement. As of June 30, 1996, $3,200,000 was available
for borrowing under this credit facility.
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes includes the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal................................................... $ 218,000 $ 306,000 $ 1,246,000
State..................................................... 1,000 17,000 236,000
Foreign................................................... -- 12,000 9,000
Deferred:
Federal................................................... -- (66,000) (1,053,000)
State..................................................... -- -- (184,000)
------------- ------------- -------------
$ 219,000 $ 269,000 $ 254,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-12
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
The total income tax provision differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income taxes as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate................... $ 121,000 $ 262,000 $ 1,160,000
Increase in (release of) valuation allowance................ 249,000 48,000 (997,000)
Research and development credits............................ (147,000) (39,000) --
State income taxes, net of federal benefit.................. -- 11,000 165,000
Foreign sales corporation benefit........................... -- (8,000) (65,000)
Other....................................................... (4,000) (5,000) (9,000)
------------- ------------- -------------
Provision for income taxes.................................. $ 219,000 $ 269,000 $ 254,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
During the fiscal year ended June 30, 1996, the Company reduced the deferred tax
valuation allowance by $997,000 to recognize deferred tax assets. Based on
management's assessment and the Company's current profitability, management
believes it is more likely than not that the deferred tax asset will be realized
through future taxable earnings or alternative tax strategies. The 1996
provision does not reflect a research and development credit due to a federally
imposed one year suspension.
Deferred income taxes at June 30, 1995 and 1996 comprised:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Inventory.......................................................... $ 253,000 $ 570,000
Research and development credit carryforwards...................... 291,000 --
Warranty reserves.................................................. 142,000 141,000
Reserve for doubtful accounts and returns.......................... 179,000 195,000
Vacation and deferred compensation................................. 147,000 170,000
License fee accrual................................................ 120,000 101,000
Intangible assets.................................................. 65,000 97,000
State income taxes................................................. -- 80,000
Other.............................................................. -- 71,000
------------- -------------
Gross deferred tax asset........................................... 1,197,000 1,425,000
------------- -------------
Deferred tax liabilities:
Fixed asset depreciation........................................... (104,000) (92,000)
------------- -------------
Gross deferred tax liability....................................... (104,000) (92,000)
------------- -------------
Valuation allowance.................................................. (997,000) --
------------- -------------
Net deferred income taxes............................................ $ 96,000 $ 1,333,000
------------- -------------
------------- -------------
</TABLE>
F-13
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company has outstanding three series of Preferred Stock which have no par
value and are stated in the balance sheet at their original issue price, which
is equivalent to their redemption value. Each share of Series A, B and C
Preferred Stock (i) is voting, (ii) is convertible at any time at the option of
the holder into one share of Common Stock subject to certain anti-dilution and
automatic conversion provisions, (iii) participates equally with Common Stock
with respect to dividends, (iv) is redeemable at the option of the holder at a
price of $1.15, $1.75 and $2.76 per share, respectively, (v) upon liquidation of
the Company is entitled to receive $1.15, $1.75 and $2.76, per share,
respectively, in preference to any distributions to common shareholders, and
(vi) in the event of a sale of the Company's Common Stock in an initial public
offering, each unredeemed share will be automatically converted to one share of
Common Stock.
The Preferred Stock is redeemable in three equal annual installments and any
unredeemed shares automatically convert to Common Stock. Scheduled redemption
dates are as follows: Series A--May 1995, 1996 and 1997; Series B--December
1996, 1997 and 1998 and Series C--May 1997, 1998 and 1999. None of the holders
of Series A Preferred Stock elected to redeem their shares at the first two
installment dates and, therefore, the shares were converted into Common Stock. A
total of 318,396 and 318,397 shares with a value of $367,000 and $367,000 were
converted at each installment date in 1995 and 1996, respectively. The combined
aggregate amount of future redemption requirements for the Preferred Stock is
$1,978,000 (991,123 shares) in 1997, $1,611,000 (672,726 shares) in 1998 and
$1,611,000 (672,724 shares) in 1999.
NOTE 7--STOCK OPTIONS AND WARRANT
The Company has a number of stock option plans which provide for the issuance of
options to employees, officers and directors. The exercise price of a stock
option is generally equal to the fair market value of the Company's Common Stock
as determined by its Board of Directors on the date the option is granted.
Certain of the plans permit options granted to qualify as "Incentive Stock
Options" under the Internal Revenue Code while other plans are specified as
non-qualified. In addition, certain of the non-qualified 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-14
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTIONS AND WARRANT (CONTINUED)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES SHARE PRICE
------------- -------------
<S> <C> <C>
Options outstanding at June 30, 1993................................. 800,660 $ .12 - .80
Options granted.................................................... 347,943 .80
Options exercised.................................................. (26,216) .24 - .80
Options canceled................................................... (206,139) .20 - .80
------------- -------------
Options outstanding at June 30, 1994................................. 916,248 .12 - .80
Options granted.................................................... 285,950 .80 - .88
Options exercised.................................................. (39,040) .42 - .80
Options canceled................................................... (124,799) .12 - .80
------------- -------------
Options outstanding at June 30, 1995................................. 1,038,359 .12 - .88
Options granted.................................................... 184,810 2.00
Options exercised.................................................. (280,481) .12 - .80
Options canceled................................................... (94,092) .80 - 2.00
------------- -------------
Options outstanding at June 30, 1996................................. 848,596 .12 - 2.00
Options granted (unaudited)........................................ 91,000 3.00 - 4.50
Options exercised (unaudited)...................................... (116,900) .20 - 2.00
Options canceled (unaudited)....................................... (16,775) 1.20 - 2.00
------------- -------------
Options outstanding at December 31, 1996 (unaudited)................. 805,921 $ .12 - 4.50
------------- -------------
------------- -------------
</TABLE>
Options on 461,458 shares were exercisable at prices ranging from $.12-$2.00 at
June 30, 1996. Shares available for future grant were 284,667 and 566,382 at
June 30, 1995 and 1996, respectively.
In connection with the bank line of credit, the Company issued a common stock
warrant to the bank. The warrant will allow the bank to purchase 17,046 shares
of the Company's common stock over a five-year period through May 15, 2000 at an
exercise price of $4.40 per share. The Company has determined that the value of
the warrant is not significant.
NOTE 8--COMMITMENTS
The Company leases its office, production and sales facilities under
non-cancelable operating leases which expire in various years through fiscal
year 2001. 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, 1996, future minimum lease payments
under these arrangements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM LEASE
JUNE 30, PAYMENTS
- ------------------------- -------------
<S> <C>
1997................. $ 656,000
1998................. 709,000
1999................. 737,000
2000................. 766,000
2001................. 78,000
-------------
Total................ $ 2,946,000
-------------
-------------
</TABLE>
Rental expense is recognized ratably over the respective lease terms, and
aggregated $508,000, $562,000 and $554,000 for fiscal years 1994, 1995 and 1996,
respectively.
F-15
<PAGE>
INSIDE REAR COVER -- PHOTOGRAPHS
PHOTOGRAPH DESCRIPTIONS AND CAPTIONS
1. Background: Black and blue Company logos serpentine upward from bottom left
corner to top right corner.
2. Top center: Company logo and name.
3. Middle left: Color photo of management team. No caption.
4. Middle right: Color photo of quality assurance person at test station. No
caption.
5. Center: Color photo of end-user performing network backup. No caption.
6. Bottom left: Color photo of manufacturing employee on production line. No
caption.
7. Bottom right: Color photo of engineering personnel performing design work.
No caption.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 26
Management................................................................ 38
Certain Transactions...................................................... 44
Principal and Selling Shareholders........................................ 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 49
Underwriting.............................................................. 51
Legal Matters............................................................. 52
Experts................................................................... 52
Additional Information.................................................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED
HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,700,000 SHARES
(LOGO)
COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
CRUTTENDEN ROTH
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, in connection with the sale of Common
Stock being registered. All amounts are estimated except the SEC registration
fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
SEC Registration Fee........................................ $ 9,409.10
NASD Filing Fee............................................. 3,605.00
Nasdaq Listing Fee.......................................... 41,857.25
Printing and Engraving Expenses............................. 100,000.00
Legal Fees and Expenses..................................... 250,000.00
Blue Sky Fees and Expenses.................................. 10,000.00
Accounting Fees and Expenses................................ 125,000.00
Transfer Agent and Registrar Fees and Expenses.............. 5,000.00
Miscellaneous Expenses...................................... 5,128.65
-------------
Total................................................... $ 550,000.00
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code permits a corporation to
indemnify its directors, officers, employees and other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Articles of Incorporation (the "Articles") and Bylaws (the
"Bylaws") provide for the indemnification of directors and officers to the
maximum permitted by the California Corporations Code and authorize the
indemnification by the Registrant of other officers, employees and other agents
as set forth in the California Corporations Code. The Registrant has entered
into indemnification agreements with its directors and executive officers, in
addition to the indemnification provided for in the Articles and Bylaws.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1994, the Registrant has sold and issued the following
securities without registration under the Securities Act:
During the period from January 1994 to January 1997, the Company granted to
its employees, officers, directors and consultants under its various stock
option plans incentive and non-statutory stock options which were exercisable
into an aggregate of 579,250 shares of Common Stock. During the same period, the
Company also sold 690,622 shares of Common Stock to its employees, former
employees, officers and directors for total cash consideration of $745,177.
The sales and issuances of the securities in the transactions described in
the above paragraph were deemed to be exempt from registration under the
Securities Act in reliance upon (i) Rule 701 promulgated thereunder as
transactions pursuant to a compensatory benefit plan or a written contract
relating to
II-1
<PAGE>
compensation, or (ii) Section 4(2) thereof and Regulation D promulgated
thereunder as transactions by an issuer not involving a public offering.
The recipients represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends are affixed to the stock certificates issued in such transactions.
Similar legends were imposed in connection with any subsequent sales of such
securities. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Registrant's Amended and Restated Articles of Incorporation.
3.2** -- Registrant's Bylaws.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2* -- Specimen stock certificate.
4.3** -- Investors' Rights Agreement, dated May 21, 1993, between the Registrant and
the parties named therein.
4.4** -- Warrant to Purchase Stock, dated May 15, 1995, between the Registrant and
Imperial Bancorp.
5.1 -- Opinion of Baker & McKenzie.
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** -- Security and Loan Agreement and Addendum thereto, dated May 2, 1995 and May
8, 1995, respectively, 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** -- 1995 Stock Option Plan adopted October 10, 1995.
10.6** -- 1996 Employee Stock Purchase Plan adopted December 12, 1996.
10.7 -- Form of Indemnification Agreement.
11.1 -- Statement regarding computation of per share earnings.
21.1** -- Subsidiaries of the Registrant.
23.1 -- Consent of Price Waterhouse LLP, independent accountants.
23.2 -- Consent of Baker & McKenzie--Included in Exhibit 5.1.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
24.1** -- Power of Attorney--Reference is made to page II-4.
27.1** -- Financial Data Schedule for the fiscal year ended June 30, 1996.
27.2 -- Financial Data Schedule for the six months ended December 31, 1996.
</TABLE>
- ------------------------
* To be filed by amendment.
+ The Registrant has applied for confidential treatment of portions of this
exhibit.
** Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared effective,
and (2) for the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California on the 24th of January, 1997.
OVERLAND DATA, INC.
By: /s/ SCOTT MCCLENDON
------------------------------------------
Scott McClendon,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities indicated on January 24, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------------- ------------------------------
<C> <S> <C>
/s/ SCOTT MCCLENDON President, Chief Executive
---------------------------------------- Officer and Director
Scott McClendon
* Vice President, Secretary and
---------------------------------------- Director
Martin D. Gray
/s/ VERNON A. LOFORTI Vice President, Chief
---------------------------------------- Financial Officer and
Vernon A. LoForti Assistant Secretary
*
---------------------------------------- Director
William W. Otterson
*
---------------------------------------- Director
Joseph D. Rizzi
*
---------------------------------------- Director
John A. Shane
*By /S/ SCOTT MCCLENDON
------------------------------------
Scott McClendon, Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGES
- ------------- ------------------------------------------------------------------------------------- -----------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Registrant's Amended and Restated Articles of Incorporation.
3.2** -- Registrant's Bylaws.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2* -- Specimen stock certificate.
4.3** -- Investors' Rights Agreement, dated May 21, 1993, between the Registrant and the
parties named therein.
4.4** -- Warrant to Purchase Stock, dated May 15, 1995, between the Registrant and Imperial
Bancorp.
5.1 -- Opinion of Baker & McKenzie.
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** -- Security and Loan Agreement and Addendum thereto, dated May 2, 1995 and May 8, 1995,
respectively, 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** -- 1995 Stock Option Plan adopted October 10, 1995.
10.6** -- 1996 Employee Stock Purchase Plan adopted December 12, 1996.
10.7 -- Form of Indemnification Agreement.
11.1 -- Statement regarding computation of per share earnings.
21.1** -- Subsidiaries of the Registrant.
23.1 -- Consent of Price Waterhouse LLP, independent accountants.
23.2 -- Consent of Baker & McKenzie--Included in Exhibit 5.1.
24.1** -- Power of Attorney--Reference is made to page II-4 of the Registration Statement.
27.1** -- Financial Data Schedule for the fiscal year ended June 30, 1996.
27.2 -- Financial Data Schedule for the six months ended December 31, 1996.
</TABLE>
- ------------------------
* To be filed by amendment.
+ The Registrant has applied for confidential treatment of portions of this
exhibit.
** Previously filed.
<PAGE>
OVERLAND DATA, INC.
3,105,000 SHARES
COMMON STOCK ($0.001 PAR VALUE)
UNDERWRITING AGREEMENT
___________, 1997
JEFFERIES & COMPANY, INC.
CRUTTENDEN ROTH INCORPORATED
c/o Jefferies & Company, Inc.
580 California Street
San Francisco, California 94104
As Representatives of the Several Underwriters
Ladies and Gentlemen:
Overland Data, Inc., a California corporation (the "Company"), and the
shareholders of the Company named in SCHEDULE I hereto (collectively called the
"Selling Shareholders"), hereby confirm their agreement with both of you and
each of the other Underwriters named in SCHEDULE II hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 2(b) hereof), for whom both of you are acting as
representatives (in such capacity, the "Representatives") with respect to the
purchase by the Underwriters, acting severally and not jointly, of 3,105,000
shares of Common Stock of the Company, no par value per share (the "Common
Stock") from the Company (said 3,105,000 shares of Common Stock are herein
called the "Underwritten Stock"). The Company proposes to sell to the
Underwriters, acting severally and not jointly, up to 405,000 additional shares
of Common Stock (said 405,000 shares of Common Stock being herein called the
"Option Stock" and the Option Stock with the Underwritten Stock is herein
collectively called the "Stock"). The Common Stock is more fully described in
the Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Shareholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
Underwriters. You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on their behalf and to
act for them in the manner herein provided.
<PAGE>
The terms which follow, when used in this Agreement, shall have the
meanings indicated. "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a)(i) below and any preliminary prospectus
included in the Registration Statement on the date that the Registration
Statement becomes effective (the "Effective Date") that omits Rule 430A
Information (as defined below). "Registration Statement" shall mean the
registration statement referred to in Section 1(a)(i) below, including financial
statements, schedules and exhibits, as amended at the Representation Date (as
defined below) or, if not effective at the Representation Date, in the form in
which it shall become effective, or any term sheet filed with the United States
Securities and Exchange Commission (the "Commission") pursuant to Rule 434 of
the rules and regulations (the "Act Regulations") promulgated under the
Securities Act of 1933, as amended (the "Act"), the information deemed to be a
part of the Registration Statement at the time it became effective pursuant to
Rule 430A(b) or Rule 434(d) of the Act Regulations, and, in the event of any
amendment thereto or the filing of any abbreviated registration statement,
pursuant to Rule 462(b) of the Act Regulations relating thereto after the
effective date of such registration statement, shall also mean (from and after
the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together with
any such abbreviated registration statement and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date (as defined in
Section 2 hereof), shall also mean such registration statement as so amended.
Such term shall include Rule 430A Information deemed to be included therein at
the Effective Date as provided by Rule 430A (as defined below). The prospectus
constituting a part of the Registration Statement (including the Rule 430A
Information), as from time to time amended or supplemented, is hereinafter
referred to as the "Prospectus," except that if any revised prospectus shall be
provided to the Underwriters by the Company which differs from the prospectus on
file at the Commission at the Effective Date, whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 424 of the
Act Regulations, the term "Prospectus" shall refer to each such revised
prospectus from and after the time it is first provided to the Underwriters for
such use; PROVIDED, HOWEVER, that if in reliance on Rule 434 of the Act
Regulations and with the consent of Jefferies & Company, Inc., the Company shall
have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c),
as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the term Prospectus shall mean the
"prospectus subject to completion" (as defined in Rule 434(g) of the Act
Regulations) last provided to the Underwriters by the Company and circulated by
the Underwriters to all prospective purchasers of the Stock (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Act Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Stock that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Act Regulations), the term
Prospectus shall refer to such revised prospectus from and after the time it is
first provided to the Underwriters for such use. If, in reliance on Rule 434 of
the Act Regulations and with the consent of Jefferies & Company,
2.
<PAGE>
Inc., the Company shall have provided to the Underwriters a term sheet pursuant
to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is
sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and
the term sheet, together, will not be materially different from the prospectus
in the Registration Statement. "Rule 158," "Rule 424," "Rule 430A" and "Rule
434" refer to such rules under the Act Regulations. "Rule 430A Information"
means information with respect to the Stock and the offering thereof permitted
to be omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to each of the Underwriters as of
the date hereof (such date being referred to as the "Representation Date"), as
follows:
(i) A Registration Statement on Form S-1 (File
No. 333-18583) with respect to the Stock, including a prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Act, and the Act Regulations and has been filed with
the Commission; such amendments to such registration statement, such
amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Act Regulations as
may have been required prior to the date hereof, have been similarly
prepared and filed with the Commission; and the Company will file such
additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration
statements as may hereafter be required. Copies of such registration
statement and amendments, of each related Preliminary Prospectus and of any
Rule 434 term sheet and of any abbreviated registration statement pursuant
to Rule 462(b) of the Act Regulations have been delivered to you.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings
for that purpose, and each such Preliminary Prospectus has conformed in all
material respects to the requirements of the Act and the Act Regulations
and, as of its date, has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and at the time the Registration Statement became or becomes,
as the case may be, effective and at all times subsequent thereto up to and
on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (a) the Registration Statement and the
Prospectus, and any amendments and supplements thereto and any abbreviated
registration statements, contained and will contain all material
information required to be included therein by the Act and the Act
Regulations and will in all material respects conform to the requirements
of the Act and the Act Regulations; (b) the Registration Statement, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the
3.
<PAGE>
statements therein not misleading; and (c) the Prospectus, and any
amendments and supplements thereto and any abbreviated registration
statements, did not and will not include any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; that the Company makes no representations, or warranties or
agreements as to the information provided in writing to the Company by or
on behalf of the Underwriters expressly for use in the Registration
Statement or the Prospectus, and the Company agrees that the only
information provided in writing by or on behalf of the Underwriters to the
Company expressly for use in the Registration Statement or the Prospectus
is that information contained in the section of the Prospectus entitled
"Underwriting" and the last paragraph of text on the cover page of the
Prospectus.
(iii) (a) Each of the Company, Overland Data (Europe) Limited,
a private company formed under the Companies Act of 1985 in the United
Kingdom, and Overland Data Export Limited, a company formed under the
Companies Act of Barbados (collectively referred to herein as the
"Subsidiaries") is a corporation duly incorporated and validly existing in
good standing under the laws of its state or jurisdiction of incorporation,
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus; (b) each of the Company and the Subsidiaries
is duly qualified to transact business and is in good standing in each
jurisdiction or place where it owns or leases property or conducts business
so as to require qualification; (c) the Company does not own or control,
directly or indirectly, any corporation, association, partnership, limited
liability company, joint venture or other entity other than the
Subsidiaries; and (d) each of the Subsidiaries does not own or control,
directly or indirectly, any corporation, association, partnership, limited
liability, joint venture or other entity.
(iv) Each of the Company and the Subsidiaries has all
necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all regulatory or governmental
officials, bodies and tribunals ("Permits") to own or lease its respective
properties and to conduct its businesses as described in the Registration
Statement and Prospectus, and none of the Company nor any of the
Subsidiaries has received any notice or threat of proceedings relating to
the revocation or modification of any such Permits; each of the Company and
the Subsidiaries has fulfilled and performed all of its respective current
obligations with respect to such Permits, and no event has occurred which
allows, or after notice or lapse of time, or both, would allow, revocation
or termination thereof or results in any other material impairment of the
rights of the holder of any such Permit, subject in each case to such
qualification as may be set forth in the Registration Statement and
Prospectus; and, except as described therein, such Permits contain no
restrictions that are materially burdensome to the Company nor the
Subsidiaries; and each of the Company and the Subsidiaries is in compliance
with all applicable laws, rules, regulations, orders and
4.
<PAGE>
consents. The property and businesses of the Company and the Subsidiaries
conform in all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus.
(v) Except as set forth in the Registration Statement and
Prospectus, (a) each of the Company and the Subsidiaries has good and
marketable title to all properties and assets described in the Registration
Statement and Prospectus as owned by it, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest, other
than such as would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and the Subsidiaries considered as one enterprise,
whether or not occurring in the ordinary course of business (a "Material
Adverse Event"); (b) the agreements to which the Company or any of the
Subsidiaries is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable against (and, to the best of
the Company's knowledge enforceable by) the Company and the Subsidiaries
(as applicable), except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge,
the other contracting party or parties thereto are not in material breach
or material default under any of such agreements; and (c) each of the
Company and the Subsidiaries has valid and enforceable leases for all
properties described in the Registration Statement and Prospectus as leased
by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles. Except as otherwise disclosed in the Registration
Statement and Prospectus, each of the Company and the Subsidiaries own or
lease all such properties as are necessary to its operations as now
conducted or as proposed in the Registration Statement and Prospectus to be
conducted.
(vi) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the
performance of this Agreement, the issue and sale of the Stock and the
consummation of any other matters herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (a) any bond, debenture, note or other evidence
of indebtedness, or under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to
which the Company or any of the Subsidiaries is a party or by which it or
any of the Subsidiaries
5.
<PAGE>
or their respective properties may be bound; (b) the charter or bylaws of
the Company or any of the Subsidiaries; or (c) any law, statute, order,
rule, regulation, writ, injunction, judgment or decree applicable to the
Company or any of the Subsidiaries or their respective properties of any
court, government or governmental agency or body, domestic or foreign. No
consent, approval, authorization or order of or qualification with any
court, government or governmental agency or body, domestic or foreign, with
the ability to bind or restrict the Company or any of the Subsidiaries or
their respective properties, is required for the execution and delivery of
this Agreement and the consummation by the Company or any of the
Subsidiaries of the transactions herein contemplated, except such as may be
required under the Act and state securities laws, all of which requirements
have been satisfied in all material respects.
(vii) Each of the Company and the Subsidiaries owns or
possesses adequate rights to use all patents, patent applications, patent
rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names and copyrights which are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the expiration of
any patents, patent rights, trade secrets, trademarks, service marks, trade
names or copyrights might not result in a Material Adverse Event; each of
the Company and the Subsidiaries have not received any notice of, and have
no knowledge of, any infringement of or conflict with asserted rights of
the Company by others with respect to any patent, patent applications,
patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights; and each of the Company and the
Subsidiaries have not received any notice of, and have no knowledge of, any
infringement of or conflict with asserted rights of others with respect to
any patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, might result
in a Material Adverse Event.
(viii) All outstanding shares of capital stock of the
Company (including the shares to be sold by the Selling Shareholders)
(a) have been duly authorized and validly issued and are fully paid
and nonassessable; (b) have been issued in compliance with all federal
and state securities laws; and (c) no further approval or
authorization of any shareholder, the Board of Directors of the
Company or others is required for the issuance and sale or transfer of
the Stock hereunder;
(ix) (a) There are no outstanding securities convertible
into or exchangeable for, and no outstanding options, warrants or
other rights to purchase, any shares of the capital stock of the
Company or the Subsidiaries, nor any agreements or commitments to
issue any of the same; (b) there are no registration rights,
preemptive rights or other rights to subscribe for or to purchase the
securities of the Company or the Subsidiaries that have not been
complied with or expressly waived prior to the date hereof, or any
contracts or
6.
<PAGE>
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations; (c) there are no
restrictions upon the voting or transfer of, any capital stock pursuant to
the Company's or the Subsidiaries' certificates or articles of
incorporation or by-laws or any agreement or other instrument to which the
Company or the Subsidiaries is a party; and (d) the Stock when issued and
delivered against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued, fully paid and nonassessable,
and will be sold free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest.
(x) The authorized and outstanding capital stock of the
Company is as set forth in the Registration Statement and the
Prospectus under the caption "Capitalization" and conforms to the
statements relating thereto contained in the Registration Statement
and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); and
the description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted
and exercised thereunder, set forth in the Registration Statement and
the Prospectus accurately and fairly presents the information required
to be shown with respect to such plans, arrangements, options and
rights.
(xi) All issued and outstanding shares of capital stock
of the Subsidiaries have been duly authorized and validly issued and
are fully paid and nonassessable, and were not issued in violation of
or subject to any preemptive right, or other rights to subscribe for
or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable
interest.
(xii) Price Waterhouse LLP (a) has examined the consolidated
financial statements of the Company, together with the related schedules
and notes for each of the years in the three (3) year period ended
March 31, 1996; and (b) has performed the procedures set out in Statement
on Accounting Standards No. 71 ("SAS 71") for a review of the interim
financial information for each of the three (3) month periods ended
September 30, 1995 and 1996 and December 31, 1995 and 1996, filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, (except for the interim financial information for the periods
ended September 30, 1995 and 1996, which are not included in the final
Prospectus), are independent accountants within the meaning of the Act and
the Act Regulations; the audited consolidated financial statements of the
Company, together with the related schedules and notes, and the unaudited
consolidated financial information, forming part of the Registration
Statement and Prospectus, fairly present the financial position and the
results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements
7.
<PAGE>
of the Company, together with the related schedules and notes, and the
unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the
Registration Statement and the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(xiii) Each of the Company and the Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (a) transactions are executed in accordance with
management's general or specific authorizations; (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (c) access to assets is permitted only in accordance
with management's general or specific authorization; and (d) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xiv) The statistical, industry and market-related data
included in the Registration Statement and the Prospectus is reliable and
accurate in all material respects.
(xv) Each of the Company and the Subsidiaries maintains
insurance covering its properties, operations, personnel and businesses.
Such insurance insures against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company, the
Subsidiaries and their businesses. Neither the Company nor the
Subsidiaries has received written notice from any insurer or agent of such
insurer that substantial capital improvements or other expenditures will
have to be made in order to continue such insurance. All such insurance is
outstanding and duly in force on the date hereof.
(xvi) The Company, nor any of the Subsidiaries, are not, and
after application of the proceeds from the sale of the Company Shares will
not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.
(xvii) Neither of the Company nor any of the Subsidiaries is
(a) in violation of its respective charter or by-laws, or of any law,
ordinance, administrative or governmental rule or regulation applicable to
the Company or the Subsidiaries or of any franchise, license, permit,
judgment or any decree of any court or governmental
8.
<PAGE>
agency or body having jurisdiction over the Company or the Subsidiaries; or
(b) in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease, bond, debenture, bank loan, credit
agreement or other agreement, instrument or evidence of indebtedness to
which the Company or the Subsidiaries is a party or by which any of them
may be bound, or to which any of the property or assets of the Company or
the Subsidiaries is subject.
(xviii) There is not any pending or, to the best of the
Company's knowledge, any threatened action, suit, claim or proceeding
against the Company, any of the Subsidiaries or any of their respective
officers or directors (and which are related to the Company or such
Subsidiaries) or any of the respective properties, assets or rights of the
Company or any of the Subsidiaries before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of the Subsidiaries or over their respective officers or
properties or otherwise which (a) might result in a Material Adverse Event,
except as disclosed in the Registration Statement; (b) might prevent
consummation of the transactions contemplated hereby; or (c) is required to
be disclosed in the Registration Statement or Prospectus and is not so
disclosed; and there are no agreements, contracts, leases or documents of
the Company or any of the Subsidiaries of a character required to be
described or referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement by the Act or the
Rules and Regulations which have not been accurately described in the
Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(xix) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there
has not been (a) a Material Adverse Event; (b) any transaction that is
material to the Company and the Subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business;
(c) any obligation, direct or contingent, that is material to the Company
and the Subsidiaries considered as one enterprise, incurred by the Company
or the Subsidiaries, except obligations incurred in the ordinary course of
business; (d) any change in the capital stock or outstanding indebtedness
of the Company or any of the Subsidiaries that is material to the Company
and the Subsidiaries considered as one enterprise; (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or any of the Subsidiaries; or (f) any loss or damage (whether or
not insured) to the property of the Company or any of the Subsidiaries
which has been sustained or will have been sustained which would result in
a Material Adverse Event.
(xx) Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto or in any
abbreviated Registration Statement), subsequent to the respective dates as
of which such information is given in
9.
<PAGE>
the Registration Statement and the Prospectus (or any amendment or
supplement thereto or in any abbreviated Registration Statement), neither
the Company nor any of the Subsidiaries has issued any securities, or
incurred any material liability or obligations, direct or contingent, or
entered into any transaction not in the ordinary course of business, or
entered into any transaction with an affiliate (as the term "affiliate" is
defined in Rule 405 promulgated by the Commission pursuant to the Act) of
the Company or the Subsidiaries which would otherwise be required to be
disclosed in the Registration Statement or the Prospectus, declared or paid
any dividend on its stock, or made any other distribution to any of its
shareholders except as disclosed in the Registration Statement or the
Prospectus, and there has not been any material change in the capital stock
or other equity, or material increase in the short-term debt or long-term
debt, of the Company or the Subsidiaries or any development involving or
which may reasonably be expected to result in a Material Adverse Event.
(xxi) None of the Company, the Subsidiaries nor any of the
Company's officers, directors, employees or agents nor any of the Selling
Shareholders has distributed and, prior to the later to occur of (a) the
Closing Date; or (b) completion of the distribution of the Stock, will not
distribute without your prior written consent any offering material in
connection with the offering and sale of the Stock other than the
Registration Statement, the Prospectus or other materials, if any,
permitted by the Act and the Act Regulations.
(xxii) To the Company's knowledge, neither the Company nor any
of the Subsidiaries nor any Selling Shareholder, director, officer,
employee or agent of the Company or any of the Subsidiaries has made any
payment of funds of the Company or the Subsidiaries in violation of any law
or rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Registration Statement or the
Prospectus.
(xxiii) There is (a) no unfair labor practice complaint pending
or, to the best knowledge of the Company, threatened against the Company or
any of the Subsidiaries before the National Labor Relations Board or any
state or local labor relations board, and no significant grievance or
significant arbitration proceeding arising out of or under any collective
bargaining agreement is so pending against the Company or the Subsidiaries,
or, to the best knowledge of the Company, threatened against any of them;
(b) no strike, labor dispute, slowdown or stoppage pending against the
Company or the Subsidiaries, or, to the best knowledge of the Company,
threatened against the Company; and (c) to the best knowledge of the
Company, no union representation question existing with respect to the
employees of the Company or the Subsidiaries and, to the best knowledge of
the Company, no union organizing activities are taking place, except (with
respect to any matter specified in clause (a), (b) or (c) above, singly or
in the aggregate) such as could not reasonably be expected to result in a
Material Adverse Event.
10.
<PAGE>
(xxiv) The Company and the Subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown thereon as due, and there is no tax deficiency
that has been or, to the best of the Company's knowledge, might be asserted
against the Company or any of the Subsidiaries that might result in a
Material Adverse Event; and all tax liabilities are adequately provided for
on the books of the Company and the Subsidiaries.
(xxv) Neither the Company nor any of the Subsidiaries is in
Violation of any federal, state, local or foreign laws or regulations
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, ground water,
land surface or subsurface strata), including, without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products ("Materials of
Environmental Concern"), or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern (collectively,
"Environmental Laws"), which Violation could be reasonably expected to
result in a Material Adverse Event. As used herein, "Violation" includes,
but is not limited to, noncompliance with any permit or other governmental
authorization required under applicable Environmental Laws and
noncompliance with the terms and conditions of any such permit or
authorization. In addition, (a) neither the Company nor any of the
Subsidiaries has received any communication, whether from a governmental
authority, citizens' group, employee or otherwise, alleging that the
Company or any of the Subsidiaries is not in full compliance with any
Environmental Laws or permit or authorization required under applicable
Environmental Laws where such failure to comply may be reasonably expected
to result in a Material Adverse Event; and (b) there are no circumstances
that may be reasonably anticipated to prevent or interfere with such full
compliance in the future.
(xxvi) There is no claim, action, cause of action,
investigation or written notice by any person or entity alleging potential
liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries or penalties)
arising out of, based on or resulting from (a) the presence, or release
into the environment, of any Material of Environmental Concern at any
location owned or operated by the Company or any of the Subsidiaries; or
(b) circumstances forming the basis of any Violation, or alleged violation,
of any Environmental Law (collectively, "Environmental Claims") pending or
threatened against the Company or any of the Subsidiaries or against any
person or entity whose liability for any Environmental Claim the Company or
any of the Subsidiaries has retained or assumed either contractually or by
operation of law which liability or violation could be reasonably expected
to result in a Material Adverse Event.
11.
<PAGE>
(xxvii) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could form the basis of any
Environmental Claim against the Company or the Subsidiaries, or against any
person or entity whose liability for any Environmental Claim the Company or
any of the Subsidiaries has retained or assumed, either contractually or by
operation of law, which claim could be reasonably expected to result in a
Material Adverse Event.
(xxviii) The Company and the Subsidiaries have complied with and
will be in compliance with the provisions of that certain Florida act
relating to doing business with Cuba, codified as Section 517.075 of the
Florida statutes, and the rules and regulations promulgated thereunder or
is exempt therefrom.
(xxix) The Company, its Subsidiaries, its directors and its
officers, have not taken and will not take, directly or indirectly, any
action designed to, or that might be reasonably expected to, cause or
result in stabilization or manipulation of the price of the Stock.
Additionally, the Company, its Subsidiaries, its directors and its officers
have not distributed and will not distribute prior to the later of (a) the
Closing Date, or any date on which Option Stock are to be purchased, as the
case may be, and (b) completion of the distribution of the Stock, any
offering material in connection with the offering and sale of the Stock
other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(xxx) Neither the Company, any of its subsidiaries, nor any
director or officer has, at any time during the last five (5) years,
(a) made any unlawful contribution to any candidate for foreign office or
failed to disclose fully any contribution in violation of law; or (b) made
any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United Kingdom, Barbados
and the United States or any jurisdiction thereof.
(xxxi) The Stock is duly authorized for listing, subject to
official notice of issuance, on the Nasdaq National Stock Market (herein
called "Nasdaq").
(xxxii) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of
the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement
and the Prospectus.
12.
<PAGE>
(xxxiii) The Company will use its best efforts to cause all
directors, officers, and certain other beneficial owners of shares of
Common Stock or securities convertible or exchangeable into Common Stock
(listed on SCHEDULE III attached hereto) to agree that, without the prior
written consent of Jefferies & Company, Inc., he, she or it will not,
without the prior written consent of Jefferies & Company, Inc., during the
period ending 180 days after the date of the Prospectus, (1) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase
any option to contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of
ownership of the Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or
such other securities, in cash or otherwise. The foregoing provisions
shall not apply to (A) the Common Stock to be sold to the Underwriters
pursuant to this agreement; (B) options granted by the Company to purchase
Common Stock granted under its option plans described in the Registration
Statement; and (C) transfers, without consideration, of the Common Stock or
any securities convertible into, or exercisable or exchangeable for Common
Stock to family members or to one or more trusts established for the
benefit of one or more family members are permitted at any time, provided
that the transferee execute and deliver to Jefferies & Company, Inc., an
agreement whereby the transferee agrees to be bound by all of the foregoing
terms and provisions.
In addition, such holder will agree that, without the prior
written consent of Jefferies & Company, Inc. on behalf of the Underwriters,
it will not, from the date hereof through the period ending 180 days after
the date of the Prospectus, make any demand for or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable for Common Stock. For purposes of this
Section 3 and subparagraph (a)(ii) of Section 5, a holder shall be deemed
to beneficially own shares of Common Stock that are issuable upon the
exercise of options, warrants or other rights to acquire Common Stock on or
before 180 days following the Closing Date.
(b) Each of the Selling Shareholders, severally and not jointly,
hereby represents and warrants as follows:
(i) Such Selling Shareholder has, and on the Closing Date will
have, good and marketable title to all the shares of Stock proposed to be
sold by such Selling Shareholder hereunder, with full right, power and
authority to enter into this Agreement and to sell, assign, transfer and
deliver the same hereunder, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever, subject, in the case of
each Selling Shareholder, to the rights of Norwest Bank Minnesota, N.A., as
Custodian (herein called the "Custodian"), and that upon the delivery of
and
13.
<PAGE>
payment for such shares of the Underwritten Stock hereunder, the several
Underwriters will acquire good and marketable title thereto, free and clear
of all liens, encumbrances, equities, security interests and claims or
other defects of title whatsoever.
(ii) Such Selling Shareholder has executed and delivered an
irrevocable power of attorney (the "Power of Attorney") and caused to be
executed and delivered on his behalf a Custody Agreement (hereinafter
collectively referred to as the "Shareholders Agreement") and in connection
herewith such Selling Shareholder further represents, warrants and agrees
that such Selling Shareholder has deposited in custody, under the
Shareholders Agreement, with the Custodian, certificates in negotiable form
for the Underwritten Stock to be sold hereunder by such Selling
Shareholder, for the purpose of further delivery pursuant to this
Agreement. Such Selling Shareholder agrees that the Underwritten Stock to
be sold by such Selling Shareholder on deposit with the Custodian is
subject to the interests of the Underwriters, that the arrangements made
for such custody are to that extent irrevocable, and that the obligations
of such Selling Shareholder hereunder shall not be terminated, except as
provided in this Agreement or in the Shareholders Agreement, by any act of
such Selling Shareholder, by operation of law, by the death or incapacity
of such Selling Shareholder or by the occurrence of any other event. If
the Selling Shareholder should die or become incapacitated, or if any other
event should occur, before the delivery of the Underwritten Stock
hereunder, the certificates evidencing Common Stock then on deposit with
the Agent shall be delivered by the Agent in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event
had not occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Shareholders Agreement
have been duly executed and delivered by or on behalf of such Selling
Shareholder and the form of such Shareholders Agreement has been delivered
to you.
(iii) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Shareholder of the
Power of Attorney and the Custodian Agreement, the execution and delivery
by or on behalf of such Selling Shareholder of this Agreement and the sale
and delivery of the Selling Shareholder Shares under this Agreement (other
than, at the time of the execution hereof (if the Registration Statement
has not yet been declared effective by the Commission), the issuance of the
order of the Commission declaring the Registration Statement effective and
such consents, approvals, authorizations or orders as may be necessary
under state securities laws) have been obtained and are in full force and
effect; such Selling Shareholder, if other than a natural person, has been
duly organized and is validly existing in good standing under the laws of
the jurisdiction of its organization as the type of entity that it purports
to be; and such Selling Shareholder has full legal right, power and
authority to enter into and perform its obligations under this Agreement
and such Power of Attorney and Custodian Agreement, and to sell, assign,
transfer and
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deliver the Underwritten Stock to be sold by such Selling Shareholder under
this Agreement.
(iv) Each Selling Shareholder will deliver to the
Representatives on or prior to the Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable
form or statement provided by the Treasury Department regulations in lieu
thereof).
(v) The consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms and provisions
of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement
or instrument to which such Selling Shareholder is a party or by which such
Selling Shareholder, or any shares to be sold by such hereunder, may be
bound or, to the best of such Selling Shareholders' knowledge, result in
any violation of any law, order, rule, regulation, writ, injunction,
judgement or decree of any court, government or governmental agency or
body, domestic or foreign, having jurisdiction over such Selling
Shareholder or over the properties of such Selling Shareholder, or, if such
Selling Shareholder is other than a natural person, result in any violation
of any provisions of the charter, bylaws or other organizational documents
of such Selling Shareholder.
(vi) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of any Stock.
(vii) To the best of such Selling Shareholder's knowledge
(without having conducted any independent investigation or inquiry), the
Preliminary Prospectus and the Prospectus do not as of the date hereof
include any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading in
light of the circumstances under which they are made; and neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, do not include as of the date hereof, any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(viii) Such Selling Shareholder does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Stock that is
to be sold by the Company or any of the other Selling Shareholders to the
Underwriters pursuant to this Agreement; such Selling Shareholder does not
have, or has waived prior to the date hereof, any registration right or
other similar right to participate in the offering made by the Prospectus,
other than
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such rights of participation as have been satisfied by the participation of
such Selling Shareholder in the transactions to which this Agreement
relates in accordance with the terms of this Agreement; and such Selling
Shareholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company,
other than those described in the Registration Statement and the
Prospectus.
(ix) Such Selling Shareholder is not aware (without having
conducted any independent investigation or inquiry) that any of the
representations and warranties of the Company set forth in Section 1(a)
above is untrue or inaccurate in any material respect.
SECTION 2. SALE AND DELIVERY TO THE UNDERWRITERS; CLOSING.
(a) Subject to the terms and conditions set forth herein, the Company and
each of the Selling Shareholders agree to sell to each Underwriter, severally
and not jointly, and, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, each
Underwriter, severally and not jointly, agrees to purchase from the Company at
$___ per share the number of shares of Underwritten Stock set forth opposite its
name in SCHEDULE II plus any additional number of shares of Underwritten Stock
that such Underwriter may be obligated to purchase pursuant to Section 9 below.
The initial public offering price per share for the Underwritten Stock shall be
$____.
(b) In addition, subject to the terms and conditions set forth herein, the
Company hereby grants an option to the Underwriters, severally and not jointly,
to purchase from them up to 405,000 shares of Option Stock at the purchase price
per share paid by the Underwriters set forth in Section 2(a) hereof. The
Company and the Underwriters hereby agree that in the event that the
Underwriters propose to purchase any shares of Option Stock, the Company will be
entitled to elect by written notice to the Representatives and the Custodian, to
sell any portion of such number of Option Stock to the Underwriters as it shall
specify in such notice, and the Company shall sell such portion, if any, of the
Option Stock as is so specified by the Company. The option granted by the
Company both pursuant to this Section 2(b) (collectively, the "Over-Allotment
Option") will expire automatically at the close of business on the 30th calendar
day after (i) the Effective Date, if the Company has elected not to rely upon
Rule 430A under the Act Regulations; or (ii) the Representation Date, if the
Company has elected to rely upon Rule 430A under the Act Regulations, and may be
exercised in whole or in part at the Closing Date and at one date subsequent to
the Closing Date but prior to the expiration of such option only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Underwritten Stock upon notice by the Representatives to
the Company setting forth the number of shares of Option Stock as to which the
several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Stock. Any such date (the "Option Closing
Date") shall be determined by the Representatives and may be the same date as
(but not earlier than) the Closing Date, but in no
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event shall such Option Closing Date be earlier than two full business days nor
later than seven full business days after the giving of notice of the exercise
of such option to the Company, unless otherwise agreed upon by the
Representatives and the Company. If the Over-Allotment Option is exercised as
to all or any portion of the Option Stock, each of the Underwriters, acting
severally and not jointly, will purchase that proportion of the total number of
shares of Option Stock as to which the Over-Allotment Option is being exercised
which the number of shares of Underwritten Stock set forth opposite its name in
SCHEDULE II bears to the total number of shares of Underwritten Stock, except as
otherwise agreed upon between the Representatives and the Company, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) Payment of the purchase price for, and delivery of, the
Underwritten Stock to be purchased by the several Underwriters shall be made at
such place as shall be agreed upon by the Representatives and, the Company at
10:00 A.M., New York City time, (a) on the third (3rd) full business day
following the first (1st) day that Shares are traded; (b) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered; or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company and the Selling Shareholders may determine (or
at such time and date to which payment and delivery shall have been postponed
pursuant to Section ___ hereof), such time and date of payment and delivery
being herein called the "Closing Date;" PROVIDED, HOWEVER, that if the Company
has not made available to the Representatives copies of the Prospectus within
the time provided in Section ___ hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. In
addition, if the Underwriters purchase any or all of the Option Stock, payment
of the purchase price and delivery of certificates for such Option Stock shall
be made at such place as shall be agreed upon by the Representatives and the
Company on the Option Closing Date as specified in the relevant notice from the
Representatives to the Company.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of same-day federal funds payable to the Company and the Selling
Shareholders, respectively, against delivery to the Representatives for the
respective accounts of the Underwriters of certificates for the Stock to be
purchased by them. Certificates for the Stock shall be in such denominations
and registered in such names as the Representatives may request in writing at
least two (2) business days before the Closing Date or the Option Closing Date,
as the case may be. The certificates for the Stock will be made available for
examination and packaging by the Representatives not later than 1:00 P.M. New
York City time on the last business day prior to the Closing Date or the Option
Closing Date, as the case may be, at the offices of the transfer agent for the
Common Stock in New York, New York.
SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
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(a) The Company covenants with each Underwriter as follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Representation Date, and
any amendment thereof, to become effective as promptly as possible after
the filing thereof. The Company will not file any amendment to the
Registration Statement or amendment or supplement to the Prospectus, any
Rule 434 Act Regulation term sheet or any 462(b) Act Regulation abbreviated
Registration Statement, to which the Representatives shall reasonably
object in writing after a reasonable opportunity to review such amendment
or supplement. Subject to the foregoing sentences in this clause (i), if
the Registration Statement has become or becomes effective pursuant to
Rule 430A, or filing of the Prospectus or supplement to the Prospectus is
otherwise required under Rule 424(b), the Company will cause the Prospectus
to be completed, or such supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence reasonably satisfactory to the
Representatives of such timely filing. The Company promptly will advise
the Representatives (a) when the Registration Statement, if not effective
at the Representation Date, and any amendment thereto, shall have become
effective; (b) when the Prospectus, and any supplement thereto, shall have
been filed (if required) with the Commission pursuant to Rule 424(b);
(c) when any amendment to the Registration Statement shall have been filed
or become effective; (d) of any request by the Commission for any amendment
of or supplement to the Registration Statement or any Prospectus or for any
additional information; (e) of the receipt by the Company of any
notification of, or if the Company otherwise has knowledge of, the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding
for that purpose; and (f) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Stock for sale
in any jurisdiction or the initiation or threatening of any proceeding for
such purpose. The Company will use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Stock
is required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be necessary to
amend the Registration Statement or amend or supplement the Prospectus to
comply with the Act or the Act Regulations, the Company promptly will
prepare and file with the Commission, subject to the second sentence of
Section 3(i), an amendment or supplement which will correct such statement
or omission or effect such compliance.
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(iii) The Company consents to the use of the Prospectus in
accordance with the provisions of the Act and with the securities or Blue
Sky laws of the jurisdictions in which Stock is offered by the Underwriters
and by all dealers to whom Stock may be sold, both in connection with the
offering and sale of the Stock and for such period of time thereafter as
the Prospectus is required by the Act to be delivered in connection with
the sales by any Underwriters or dealer. The Company will comply with all
requirements imposed upon it by the Act, as now and hereafter amended, so
far as necessary to permit the continuance of sales of or dealing in the
Stock in accordance with the provisions hereof and of the Prospectus.
(iv) Not later than the 45th day following the end of the
fourth fiscal quarter first occurring after the "effective date" (as
defined in Rule 158 under the Act) of the Registration Statement (the
"Effective Date"), the Company will mail and make generally available to
its security holders a consolidated earning statement covering a period of
at least twelve (12) months beginning with the first full calendar quarter
following the Effective Date which shall satisfy the provisions of
Section 11(a) of the Act and Rule 158 thereunder and shall advise you in
writing when such statement has been made so available.
(v) The Company will furnish to the Representatives, without
charge, one signed copy of the Registration Statement (including exhibits
thereto) and, so long as delivery of a prospectus by the Underwriters or a
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and all amendments and supplements thereto as
the Representatives may reasonably request.
(vi) The Company will apply the net proceeds from the sale of
the Stock to be sold hereunder in accordance with the description set forth
in the "Use of Proceeds" section of the Prospectus.
(vii) The Company will cooperate with the Representatives and
their counsel in connection with endeavoring to obtain and maintain the
qualification or registration, or exemption from qualification, of the
Stock for offer and sale under the applicable securities or Blue Sky laws
of such states and other jurisdictions of the United States as the
Representatives may designate; provided, that in no event shall the Company
be obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action which would subject it to taxation
or general service of process in any jurisdiction where it is not now so
subject.
(viii) During a period of five (5) years commencing with the
date hereof, the Company will furnish to the Representatives, and to each
Underwriter who may so request in writing, copies of all periodic and
special reports furnished to shareholders of the Company and of all
information, documents and reports filed with
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Commission pursuant to the Act or the Securities Exchange Act of 1934, as
amended (herein called the "Exchange Act").
(ix) The Company agrees that it will not, without the prior
written consent of Jefferies & Company, Inc., during the period ending 180
days after the date of the Prospectus, (a) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option to
contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock; (b) enter into any swap or similar agreement
that transfers, in whole or in part, the economic risk of ownership of the
Common Stock; or (c) release any security holder (or his, her or its
transferee), from any "lock-up" provision or agreement contained in that
Investor Rights Agreement dated as of May 21, 1993, whether any such
transaction described in clause (a), (b) or (c) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing provisions shall not apply to (A) the Common Stock to be sold
to the Underwriters pursuant to this agreement; and (B) options granted by
the Company to purchase Common Stock granted under its option plans
described in the Registration Statement. For purposes of this paragraph a
sale, offer, or other disposition shall be deemed to include any sale to an
institution which can, following such sale, sell Common Stock in reliance
on Rule 144A.
(x) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in
your opinion the market price for the Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, consult with you regarding the need to disseminate a press
release or other public statement responding to or commenting on such
rumor, publication or event.
(b) The Selling Shareholders covenant with each Underwriter as follows:
(i) No Selling Shareholder will distribute during the
applicable statutory period, any offering material in connection with the
offering and sale of the Stock other than the Registration Statement, the
Preliminary Prospectus, the Prospectus or other materials, if any,
permitted by the Act.
(ii) Each Selling Shareholder will immediately notify the
Representatives if there is any change in the representations and
warranties set forth in Section 1(b).
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(iii) Without the prior written consent of Jefferies &
Company, Inc., he, she or it will not, during the period ending 180 days
after the date of the Prospectus, (a) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option to
contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock; or (b) enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of
ownership of the Common Stock, whether any such transaction described in
clause (a) or (b) above is to be settled by delivery of Common Stock or
such other securities, in cash or otherwise. The foregoing provisions
shall not apply to (A) the Common Stock to be sold to the Underwriters
pursuant to this Agreement; (B) options granted by the Company to purchase
Common Stock granted under its option plans described in the Registration
Statement; and (C) transfers, without consideration, of the Common Stock or
any securities convertible into, or exercisable or exchangeable for Common
Stock to family members or to one or more trusts established for the
benefit of one or more family members are permitted at any time, provided
that the transferee execute and deliver to Jefferies & Company, Inc., an
agreement whereby the transferee agrees to be bound by all of the foregoing
terms and provisions.
In addition, such Selling Shareholder agrees that, without the
prior written consent of Jefferies & Company, Inc. on behalf of the
Underwriters, he, she or it will not, from the date hereof through the
period ending 180 days after the date of the Prospectus, make any demand
for or exercise any right with respect to, the registration of any shares
of Common Stock or any security convertible into or exercisable for Common
Stock.
SECTION 4. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated, the Company
will pay (directly or by reimbursement), and will be responsible for, all costs
and expenses incident to the performance of the obligations of the Company and
the Selling Shareholders under this Agreement, including but not limited to
expenses related to the following, if incurred, (a) the printing and filing of
the Registration Statement as originally filed and of each amendment thereto;
(b) the printing and/or copying of this Agreement; (c) the preparation, issuance
and delivery of the Stock to the Underwriters, including capital duties, stamp
duties and transfer taxes, if any, payable upon issuance of any of the Stock or
the sale of the Stock to the Underwriters; (d) the fees and disbursements of the
Company's counsel and accountants; (e) the qualification of the Stock under
state securities laws, including filing fees and the reasonable fees and
disbursements of counsel for the Representatives in connection therewith and in
connection with the preparation of any Blue Sky survey and any supplemental Blue
Sky survey; (f) the printing and delivery to the Underwriters of copies of the
Registration Statement as originally
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filed and of each amendment thereto, of the Preliminary Prospectus and of the
Prospectus and any amendments or supplements thereto; (g) the printing and/or
copying and delivery to the Underwriters of copies of the Blue Sky survey and
any supplemental Blue Sky survey; (h) the fees and expenses incurred in
connection with the listing of the stock on any national securities exchange or
Nasdaq; and (i) the fees payable to the National Association of Securities
Dealers, Inc.
If this Agreement is terminated by the Representatives in accordance
with the provisions of Sections 5 or 8 hereof, the Company shall reimburse the
Representatives and the other Underwriters for all of their reasonable out-of-
pocket expenses, including the reasonable fees and disbursements their
attorneys.
SECTION 5. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS.
(a) The obligation of the Underwriters to purchase the Stock hereunder is
subject to the continued accuracy of the representations and warranties of the
Company and each of the Selling Shareholders contained herein as of the date
hereof and as of the Closing Date (and, if applicable, as of the Option Closing
Date), to the accuracy of the statements of the Company and the Selling
Shareholders made in any certificate or certificates pursuant to the provisions
hereof as of the date hereof and as of the Closing Date (and, if applicable, as
of the Option Closing Date), to the performance by the Company of its
obligations hereunder, and to the following further conditions:
(i) The Registration Statement shall have become effective
not later than 5:30 P.M. New York City time on the date hereof, or at such
later date as may be approved by the Representatives, the Company and the
Selling Shareholders and shall remain effective at the Closing Date and at
the Option Closing Date. No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Act or proceedings
therefor initiated or, to the knowledge of the Company or the
Representatives, threatened by the Commission and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to
the satisfaction of Underwriters' Counsel.
(ii) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery
of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass
upon the matters referred to in this Section.
(iii) Subsequent to the execution and delivery of this
Agreement, and prior to the Closing Date, there shall not have been a
Material Adverse Event, which, in your sole judgment,
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is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus.
(iv) The Company shall have furnished to the Representatives
the opinion of Baker & McKenzie, counsel to the Company, addressed to the
Underwriters and dated as of the Closing Date, substantially in the form
attached hereto as SCHEDULE IV, with such changes as may be reasonably
requested by the Representatives, and if Option Stock is purchased at any
date after the Closing Date, an additional opinion from Baker & McKenzie,
addressed to the Underwriters and dated the Option Closing Date, confirming
that the statements expressed as of the Closing Date in such opinion remain
valid as of the Option Closing Date.
(v) The Selling Shareholders shall have furnished to the
Representatives the opinion of Hale & Dorr, counsel to the Selling
Shareholders, addressed to the Underwriters and dated as of the Closing
Date, and substantially in the form attached hereto as SCHEDULE V, with
such changes as may be reasonably requested by the Representatives.
(vi) The Company shall have furnished to the Representatives,
intellectual property counsel for the Company, the opinion of Knobbe,
Martens, Olson & Bear, substantially in the form attached hereto as
SCHEDULE VI dated as of the Closing Date, and if Option Stock is purchased
at any date after the Closing Date, an additional opinion from Knobbe,
Martens, Olson & Bear addressed to the Underwriters and dated the Option
Closing Date confirming that the Statements expressed as of the Closing
Date in such opinion remain valid as of the Option Closing Date.
(vii) Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, shall have furnished to the Underwriters an opinion with
respect to such matters as may be reasonably requested by the
Representatives, dated as of the Closing Date, and if Option Stock is
purchased at any date after the Closing Date, an additional opinion
addressed to the Underwriters and dated the Option Closing Date confirming
that the statements expressed as of the Closing Date in such opinion remain
valid as of the Option Closing Date.
(viii) The Company shall furnish the Representatives a
certificate, signed by the President and the Chief Financial Officer of the
Company, dated the Closing Date (and, if applicable, the Option Closing
Date), to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplement or
amendment to the Prospectus and this Agreement and that, to their
knowledge:
(A) the representations and warranties of the Company
contained in this Agreement are true and correct on and as of the
Closing Date,
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and, if applicable, on and as of the Option Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions under this Agreement on its part to be performed or
satisfied at or prior to the Closing Date (and, if applicable, at or
prior to the Option Closing Date);
(B) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the knowledge of the Company,
threatened; and
(C) since the date of the most recent financial statements
included in the Prospectus, there has been no Material Adverse Event.
(ix) The Selling Shareholders will furnish to the
Representatives a certificate, dated the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, from the
Attorneys for each Selling Shareholder to the effect that, as of the
Closing Date, or any later date on which Option Shares are to be purchased,
as the case may be, they have not been informed that:
(A) The representations and warranties made by such
Selling Shareholder herein are not true or correct in any material
respect on the Closing Date or on any later date on which Option
Shares are to be purchased, as the case may be; or
(B) Such Selling Shareholder has not complied with any
obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Shareholder at or
prior to the Closing Date or any later date on which Option Shares are
to be purchased, as the case may be.
(x) At the Effective Date, the Representation Date and at the
Closing Date (and, if applicable, at the Option Closing Date), Price
Waterhouse LLP shall have furnished to the Underwriters a letter or
letters, dated respectively as of the Effective Date, the Representation
Date and the Closing Date (and, if applicable, the Option Closing Date), in
form and substance reasonably satisfactory to the Underwriters, covering
the time periods and relating to the procedures referred to in Section
2(ix) hereof and containing statements and information of the type
customarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain other information contained
in the Registration Statement and the Prospectus.
(xi) Prior to the Closing Date, the Stock shall have been duly
authorized for listing on the Nasdaq upon official notice of issuance.
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(xii) On or prior to the Closing Date, you shall have received
from all of the persons and entities set forth on SCHEDULE III attached
hereto, executed lock-up agreements.
(xiii) If any condition specified in this Section 5 shall not
have been fulfilled in all material respects when and as required to be
fulfilled, this Agreement may be terminated by the Representatives by
written notice to the Company at or prior to the Closing Date.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
SECTION 6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and its affiliates and their respective officers, shareholders,
counsel, agents, employees, directors and any person who controls each
Underwriter or any of their respective affiliates within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and the respective
officers, shareholders, counsel, agents, employees and directors of such persons
(each Underwriter and each such other person or entity being referred to herein
as an "Indemnified Person"), to the fullest extent lawful from and against any
loss, expense, liability or claim (including the reasonable cost of
investigating such claim) which, jointly or severally, the Indemnified Persons
may incur under the Act, the Exchange Act or otherwise, as such expenses are
incurred, insofar as such loss, expense, liability or claim (i) arises out of or
is based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or in the Registration Statement
as amended by any post-effective amendment thereof) or in a Prospectus
(including any Preliminary Prospectus); (ii) arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated in
either such Registration Statement or the Prospectus or necessary to make the
statements made therein not misleading in light of the circumstances under which
they were made, except insofar as any such loss, expense, liability or claim
arises out of or is based upon any untrue statement or omission or alleged
untrue statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information provided in writing to the
Company by or on behalf of the Underwriters, expressly for use in the
Registration Statement or the Prospectus, and the Company agrees that the only
such information provided in writing by or on behalf of the Underwriters,
expressly for use in the Registration Statement or the Prospectus, is that
information contained in the section of the Prospectus entitled "Underwriting,"
the last paragraph of text on the cover page of the Prospectus and the paragraph
regarding stabilization appearing on the inside front cover page of the
Prospectus; provided, that the indemnity agreement contained in this
Section 6(a) with respect to any Preliminary Prospectus or amended Preliminary
Prospectus shall not inure to the
25.
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benefit of the Indemnified Person from whom the person asserting any such loss,
expense, liability or claim purchased the Stock which is the subject thereof, if
the Prospectus corrected any such alleged untrue statement or omission and if
such Underwriter failed to send or give a copy of the Prospectus to such person
at or prior to the written confirmation of the sale of Stock to such person,
provided that the Company has delivered the Prospectus to the Underwriters in
sufficient quantity not less than one full business day prior to the sale to the
person asserting such claim; or (iii) any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with, or relating in any
manner to, the Stock or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) or (ii) above
(PROVIDED that the Company shall not be liable under this clause (iii) to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful misconduct). The
foregoing indemnity agreement shall be in addition to any liability which the
Company may otherwise have.
Subject to the provisions of Section 6(f) hereof with respect to the
Selling Shareholders, the Selling Shareholders severally (but not jointly) agree
to indemnify, defend and hold harmless each Indemnified Person, to the fullest
extent lawful from and against any loss, expense, liability or claim (including
the reasonable cost of investigating such claim) which, jointly or severally,
the Indemnified Persons may incur under the Act, the Exchange Act or otherwise,
as such expenses are incurred, insofar as such loss, expense, liability or claim
(i) arises out of or is based upon any untrue statement of a material fact
contained in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof) or in a Prospectus (including
any Preliminary Prospectus); (ii) arises out of or is based upon any omission or
alleged omission to state a material fact required to be stated in either such
Registration Statement or the Prospectus or necessary to make the statements
made therein not misleading in light of the circumstances under which they were
made, except insofar as any such loss, expense, liability or claim arises out of
or is based upon any untrue statement or omission or alleged untrue statement or
omission which has been made therein or omitted therefrom in reliance upon and
in conformity with the information provided in writing to the Company by or on
behalf of the Underwriters, expressly for use in the Registration Statement or
the Prospectus, and the Selling Shareholders agree that the only such
information provided in writing by or on behalf of the Underwriters, expressly
for use in the Registration Statement or the Prospectus, is that information
contained in the section of the Prospectus entitled "Underwriting," the last
paragraph of text on the cover page of the Prospectus and the paragraph
regarding stabilization appearing on the inside front cover page of the
Prospectus; or (iii) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to, the
Stock or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon matters covered by clause (i) or (ii) above (PROVIDED that the
Company shall not be liable under this clause (iii) to the extent that it
26.
<PAGE>
is determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct). Provided, however, that (i) the
indemnity agreement contained in this Section 6(a) with respect to any
Preliminary Prospectus or amended Preliminary Prospectus shall not inure to the
benefit of the Indemnified Person from whom the person asserting any such loss,
expense, liability or claim purchased the Stock which is the subject thereof, if
the Prospectus corrected any such alleged untrue statement or omission and if
such Underwriter failed to send or give a copy of the Prospectus, excluding any
documents incorporated by reference, to such person at or prior to the written
confirmation of the sale of Stock to such person, provided that the Company has
delivered the Prospectus to the Underwriters in quantity not less than one full
business day prior to the sale to the person asserting such claim and (ii) each
Selling Shareholder shall only be liable under this Section 6(a) with respect to
(A) information pertaining to such Selling Shareholder furnished by or behalf of
such Selling Shareholder expressly for use in the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto, or (B) facts that
would constitute a breach of any representation or warranty of such Selling
Shareholder set forth in Section 1(b) hereof.
If any action or proceeding (including any government investigation)
is brought or asserted against any Underwriter or their respective officers,
shareholders, employees, directors or any person who controls any of the
Underwriters (as described above) in respect of which indemnity may be sought
against the Company or the Selling Shareholders pursuant to this Section 6(a),
such Underwriter shall promptly notify the Company or the Selling Shareholder in
writing of the institution of such action (provided, that the failure to give
such notice shall not relieve the Company or the Selling Shareholder of any
liability which it may have pursuant to this Agreement, unless it shall have
been determined by a court of competent jurisdiction by final judgment that such
failure has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the Company or the Selling Shareholder shall assume the
defense of such action, including the employment of counsel and payment of
reasonable expenses. Such Underwriter or such officer, shareholder, employee,
director or person who controls the Underwriter (as described) shall have the
right to employ its or their own counsel in any such case and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or of such persons unless: (i) the Company shall
have failed to assume the defense of such action or proceeding or the Company or
the Selling Shareholder shall have failed to employ counsel reasonably
satisfactory to the Underwriter in any such action; or (ii) such Indemnified
Party or parties shall have been advised by counsel that there may be one or
more defenses available to it or them that are different from or additional to
those available to the Company or the Selling
27.
<PAGE>
Shareholder (in which case, if such indemnified party or parties notifies the
Company or the Selling Shareholder in writing that it elects to employ separate
counsel at the expense of the Company or the Selling Shareholder, the Company or
the Selling Shareholder shall not have the right to assume the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the Company or the Selling Shareholder
and paid as incurred; provided, that the Company or the Selling Shareholder
shall be responsible for the fees and expenses of only one counsel for all
Indemnified Parties hereunder. Anything in this paragraph to the contrary
notwithstanding, the Company or the Selling Shareholder shall not be liable for
any settlement of any such claim or action effected without its prior written
consent, which consent shall not be unreasonably withheld.
(b) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company and its directors, officers, shareholders, counsel, agents
and employees and any person who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and the Selling
Shareholders from and against any loss, expense, liability or claim (including
the reasonable cost of investigation) which, jointly or severally, the Company
or any such person may incur under the Act, the Exchange Act or otherwise, as
such expenses are incurred insofar as such loss, expense, liability or claim
arises out of or is based upon any untrue statement or omission or alleged
untrue statement or omission which has been made in or omitted from the
Registration Statement (or in the Registration Statement as amended by any post-
effective amendment thereof) or in the Prospectus (including any Preliminary
Prospectus) in reliance upon and in conformity with the information relating to
the Underwriters furnished in writing by or on behalf of the Underwriters to the
Company. The Company agrees that the only information provided in writing by or
on behalf of the Underwriters to the Company, expressly for use in the
Registration Statement or the Prospectus, is that information contained in the
section of the Prospectus entitled "Underwriting," the statements appearing as
the last paragraph of text on the cover page of the Prospectus and the paragraph
regarding stabilization appearing on the inside front cover page of the
Prospectus.
If any action is brought against the Company or any Selling
Shareholder or any person in respect of which indemnity may be sought against
any Underwriter pursuant to the foregoing paragraph, the Company or such person
shall promptly notify such Underwriter in writing of the institution of such
action (provided, that the failure to give such notice shall not relieve such
Underwriter of any liability which it may have pursuant to this Agreement,
unless it shall have been determined by a court of competent jurisdiction by
final judgment that such failure has resulted in the forfeiture of substantive
rights or defenses by the indemnifying party) and the Underwriters shall assume
the defense of such action, including the employment of counsel and payment of
reasonable expenses. The Company or such person shall have the right to employ
its or their own counsel in any such case and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Company or such person unless: (i) such Underwriters shall have failed to
assume the defense of the action or shall have failed to employ counsel
reasonably satisfactory to the Company or such person in any such action; or
(ii) such indemnified party or parties shall have been advised by counsel that
there may be one or more defenses available to it or them that are different
from or additional to those available to such Underwriters (in which case, if
such indemnified party or parties notifies the Underwriters in writing that it
elects to employ separate counsel at the expense of the Underwriters, such
Underwriters shall not have the right to assume the defense of such action on
behalf of the indemnified party or parties), in any of which events such fees
28.
<PAGE>
and expenses shall be borne by the Underwriters and paid as incurred; provided,
that the Underwriters shall be responsible for the fees and expenses of only one
counsel for all indemnified parties. Anything in this paragraph to the contrary
notwithstanding, the Underwriters shall not be liable for any settlement of any
such claim or action effected without the written consent of such Underwriter,
which consent shall not be unreasonably withheld.
(c) If the indemnification provided for in this Section 6 is unavailable
to an indemnified party under subsection (a) or (b) of this Section 6 in respect
of any losses, damages, expenses, liabilities or claims referred to therein,
then the indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, expenses, liabilities or
claims (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders, on the one hand, and each
Underwriter, on the other hand, from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Shareholders, on the one hand, and each Underwriter, on the other
hand, in connection with the statements or omissions which resulted in such
losses, expenses, liabilities or claims, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders, on the one hand, and each Underwriter, on the other hand, shall be
deemed to be in the same proportion as the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received under the Agreement by each
Underwriter. The relative fault of the Company and the Selling Shareholders, on
the one hand, and of each Underwriter, on the other hand, shall be determined by
reference to, among other things, whether the untrue statement or alleged untrue
statement of a material fact or omission or alleged omission relates to
information supplied by the Company and the Selling Shareholders or by such
Underwriter and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, expenses, liabilities and
claims referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any claim or action.
(d) The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 6
were determined by PRO RATA allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in
Section 6(c) above. Notwithstanding the provisions of this Section 6, each
Underwriter shall not be required to contribute any amount in excess of the
underwriting discounts and commissions received by it. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
29.
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(e) The indemnity and contribution agreements contained in this Section 6
shall remain in full force and effect irrespective of any investigation made by
or on behalf of the Underwriters, or any of their officers, employees,
directors, shareholders, counsel, agents or any person who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, by or on behalf of the Company, its directors, officers, counsel,
agents, employees or any person who controls the Company, within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act or by or on behalf of
the Selling Shareholders, and shall survive any termination of this Agreement or
the issuance and delivery of the Stock. The Company, the Selling Shareholders
and each Underwriter agree promptly to notify the others of the commencement of
any litigation or proceeding against it and, in the case of the Company, against
any of its respective officers and directors in connection with the issuance and
sale of the Stock, or in connection with the Registration Statement or
Prospectus.
(f) The liability of each Selling Shareholder under such Selling
Shareholder's representations and warranties in Section 1(b) hereof, and under
the indemnity, contribution and reimbursement agreements contained in Section 6
hereof shall be limited to an amount equal to the net proceeds received by such
Selling Shareholder from the public offering price of any Stock actually sold by
such Selling Shareholder hereunder. The Company and the Selling Shareholders
may agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible, including, without
limitation, allocating between the Company and the Selling Shareholders the
liability resulting in a breach of the representations and warranties of the
Company and the Selling Shareholders hereunder.
SECTION 7. SURVIVAL. All representations, warranties and agreements
contained in this Agreement, or contained in certificates of officers of the
Company submitted pursuant hereto, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of the several
Underwriters or any of their respective officers, employees, directors,
shareholders or person who controls any Underwriter, or by or on behalf of the
Company and shall survive delivery of the Stock to and payment for the Stock by
the several Underwriters.
SECTION 8. TERMINATION OF AGREEMENT.
30.
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(a) The Representatives shall have the right to terminate this Agreement
by giving notice as hereinafter specified in Section 10 hereof at any time at or
prior to the Closing Date or on or prior to any later date(s) on which Option
Stock may be purchased, as the case may be, (i) if the Company or any Selling
Shareholder shall have failed, refused or been unable to perform any agreement
on its part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled is not fulfilled, including,
without limitation, any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and the
Subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company or one of
the Subsidiaries shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as to interfere materially with the
conduct of the business and operations of the Company regardless of whether or
not such loss shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets as in your reasonable judgment makes it inadvisable or
impracticable to proceed with the offering, sale and delivery of the Shares, or
(v) if there shall have been an outbreak or escalation of hostilities or of any
other insurrection or armed conflict or the declaration by the United States of
a national emergency which, in the reasonable opinion of the Representatives,
makes it impracticable or inadvisable to proceed with the public offering of the
Stock as contemplated by the Prospectus.
(b) If this Agreement is terminated pursuant to this Section or any other
provision of this Agreement, such termination shall be without liability of any
party to any other party except as provided in Sections 4 and 6.
SECTION 9. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or
more of the Underwriters shall fail at the Closing Date (or the Option Closing
Date) to purchase the shares of Underwritten Stock which it or they are
obligated to purchase under this Agreement (the "Defaulted Stock"), the
Representatives shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted Stock in
such amounts as may be agreed upon and upon the terms herein set forth. If,
however, the Representatives shall not have completed such arrangements within
such 24-hour period, then:
(a) If the number of shares of Defaulted Stock does not exceed 10% of the
total number of shares of Underwritten Stock, the non-defaulting Underwriters
shall be obligated to purchase the full amount thereof in the proportions that
their respective underwriting
31.
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obligations hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) If the number of shares of Defaulted Stock exceeds 10% of the
Underwritten Stock, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter or the Company.
No action taken pursuant to this Section 9 shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, the Representatives and the Company shall have
the right to postpone the Closing Date for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or Prospectus
or in any other documents or arrangements.
SECTION 10. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Representatives shall be directed to Jefferies & Company, Inc., 580 California
Street, Suite 2080, San Francisco, California 94104, attention of John G.
Chiles, with a copy to Brobeck, Phleger & Harrison LLP, One Market, Spear Street
Tower, San Francisco, California 94105, attention of George D. Tuttle, Esq.
Notices to the Company shall be directed to Vernon A. LoForti, Overland Data,
Inc., 8975 Balboa Avenue, San Diego, California 92122; with a copy to Baker &
McKenzie, 101 West Broadway, Twelfth Floor, San Diego, California 92101,
attention of John J. Hentrich, Esq. Notices to the Selling Shareholders shall
be directed to John Correy, Esq., Hale & Dorr.
SECTION 11. PARTIES. This Agreement shall inure to the benefit of
and be binding upon the Underwriters, the Company, the Selling Shareholders and
their respective executors, administrators, assigns, successors and legal
representatives. Nothing expressed or mentioned in this Agreement is intended
or shall be construed to provide any person, firm or corporation, other than the
Underwriters, the Company, the Selling Shareholders and their respective
successors and legal representatives and the controlling persons and officers,
employees, directors and shareholders referred to in Sections 6 and 7 and their
respective heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriters, the
Company, the Selling Shareholders and their respective successors and legal
representatives, and said controlling persons, shareholders, officers and
directors and their respective heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Stock from the
Underwriters shall be deemed to be a successor or assign by reason merely of
such purchase.
32.
<PAGE>
SECTION 12. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State.
33.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
OVERLAND DATA, INC.
By:
------------------------------------------
Name: Scott McClendon
------------------------------------------
Title: Chief Executive Officer
------------------------------------------
SELLING SHAREHOLDERS
By:
------------------------------------------
Name:
------------------------------------------
Title: Attorney-in-fact
CONFIRMED AND ACCEPTED, as of the date first above written:
JEFFERIES & COMPANY, INC.
CRUTTENDEN ROTH INCORPORATED
By:
-----------------------------
Name:
-----------------------------
For themselves and as Representatives of the other Underwriters named in this
Agreement
<PAGE>
SCHEDULE I
Schedule of Selling Shareholders
Selling Shareholder Number of
------------------- Shares of
Firm Stock
----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . 500,000
1.
<PAGE>
SCHEDULE II
Schedule of Underwriters and
Number of Shares To Be Purchased
Underwriter Number of
----------- Firm Shares
To Be Purchased
---------------
Jefferies & Company, Inc. . . . . . . . . . . . . . . . .
Cruttenden Roth Incorporated. . . . . . . . . . . . . . .
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . 3,105,000
1.
<PAGE>
Underwriter Number of
----------- Option Shares
To Be Purchased
---------------
Jefferies & Company, Inc. . . . . . . . . . . . . . . . .
Cruttenden Roth Incorporated. . . . . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . . . . . . 405,000
2.
<PAGE>
SCHEDULE III
Schedule of Lock-up Agreement Signatories
Barbara Bry
Timothy R. & Susan B. Dowty
Charles R. Earnhart
Martin Gray
Frank R. Kirchhoff
Vernon A. LoForti
Robert M. and Barsha M. Long
Matrix Partners II, L.P.
Scott McClendon
William W. Otterson
The Palmer Organization III L.P.
Robert J. Scroop
Seagate Technologies, Inc.
Robert L. Shaver
Thomas W. Turney
1.
<PAGE>
SCHEDULE IV
Form of Opinion to be Rendered by
Baker & McKenzie, Counsel to the Company
(i) Each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation;
(ii) Each of the Company and the Subsidiaries has the corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus;
(iii) Each of the Company and the Subsidiaries is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its properties or the
conduct of its business requires such qualification. The Company does not own
or control, directly or indirectly, any corporation, association, partnership,
limited liability company, joint venture or other entity other than Overland
Data (Europe) Limited and Overland Data Export Limited (the "Subsidiaries") and
the Subsidiaries do not own or control, directly or indirectly, any corporation,
association, partnership, limited liability company, joint venture or other
entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Registration Statement and the Prospectus under
the caption "Capitalization" as of the dates stated therein;
(v) The issued and outstanding shares of capital stock of the
Company (including the Selling Shareholder shares) have been duly and validly
issued and are fully paid and nonassessable and have not been issued in
violation of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right, and the Underwritten Stock
or the Option Stock, as the case may be, to be issued by the Company pursuant to
the terms of the Underwriting Agreement has been duly authorized and, upon
issuance and delivery against payment therefor in accordance with the terms of
the Underwriting Agreement, will be duly and validly issued and fully paid and
nonassessable and will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or
other similar right;
(vi) Except as set forth in the Registration Statement and
Prospectus, no holders of Common Stock or any other securities of the Company
have registration rights with respect to any securities of the Company and,
except as set forth in the
1.
<PAGE>
Registration Statement and Prospectus, all holders of securities of the Company
having registration rights because of the filing of the Registration Statement
by the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or have
included securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights;
(vii) All issued and outstanding shares of capital stock of the
Subsidiaries of the Company have been duly authorized and validly issued and are
fully paid and nonassessable, and have not been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right and are owned by the Company free and clear
of any pledge, lien, security interest, encumbrance, claim or equitable
interest;
(viii) The Company has the corporate power and authority to enter
into the Underwriting Agreement and to issue, sell and deliver to the
Underwriters the Stock to be issued and sold by it thereunder;
(ix) The Underwriting Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(x) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(xi) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations;
(xii) The information in the Registration Statement and the
Prospectus, to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms
2.
<PAGE>
of certificates evidencing the Common Stock and filed as exhibits to the
Registration Statement comply with California law;
(xiii) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xiv) There are no agreements, contracts, leases or documents to
which the Company is a party of a character required to be described or referred
to in the Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which are not described or referred to therein or
filed as required;
(xv) The performance of the Underwriting Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification obligations hereunder, concerning which no opinion
need be expressed) will not (a) result in any violation of the Company's or any
of its Subsidiaries' charter or bylaws or (b) to such counsel's knowledge,
result in a material breach or violation of any of the terms and provisions of,
or constitute a default under, any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument known to such
counsel to which the Company or any of its Subsidiaries is a party or by which
its properties are bound, or any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ or decree of any
court, government or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries, or over any of their properties or
operations;
(xvi) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the transactions contemplated with the Underwriting Agreement, except
such as have been obtained under the Act or such as may be required under state
or other securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters;
(xvii) There are no legal or governmental proceedings pending or
threatened against the Company or any of the Subsidiaries of a character
required to be disclosed in the Registration Statement or the Prospectus by the
Act or the Rules and Regulations, other than those described therein; and
3.
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(xviii) Neither the Company nor any of the Subsidiaries is presently
(a) in violation of its respective charter or bylaws, or (b) in breach of any
applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court or governmental
agency or body having jurisdiction over the Company or any of the Subsidiaries,
or over any of their properties or operations.
Nothing has come to the attention of such counsel which leads them to
believe that, at the time the Registration Statement became effective and at all
times subsequent thereto up to and on the Closing Date and on any later date on
which Option Shares are to be purchased, the Registration Statement and any
amendment or supplement thereto (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or at the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
4.
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SCHEDULE V
Form of Opinion to be Rendered by Hale & Dorr,
Selling Shareholders' Counsel
1. Each of the Selling Shareholders has full right, power and
authority to enter into and to perform his, her or its obligations under the
Underwriting Agreement and to sell, transfer, assign and deliver the Shares to
be sold by such Selling Shareholder;
2. The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders, and, with respect
to any Selling Shareholder which is not a natural person, all necessary
corporate action on the part of the Selling Shareholder has been taken. The
sale and delivery of the Shares by the Selling Shareholders, the consummation of
the transactions contemplated by the Underwriting Agreement and the performance
by each of the Selling Shareholders which is not a natural person of its
obligations under the Underwriting Agreement have been duly authorized by all
necessary corporate action on the part of each of such Selling Shareholders;
3. Each Selling Shareholder which is not a natural person has full
right, power and authority to enter into and to perform its obligations under
the Power of Attorney and Custody Agreement to be executed and delivered by it
in connection with the transactions contemplated by the Underwriting Agreement;
the Power of Attorney and Custody Agreement of each Selling Shareholder that is
not a natural person has been duly authorized by such Selling Shareholder;
4. The Power of Attorney and Custody Agreement of each Selling
Shareholder that is a natural person has been duly executed and delivered by or
on behalf of such Selling Shareholder; and the Power of Attorney and Custody
Agreement of each Selling Shareholder that is a natural person constitutes the
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
5. No filling with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency (other than the issuance of the order of the Commission
declaring the Registration Statement effective and such authorizations,
approvals, or consents as may be necessary under state securities laws or
similar securities laws of any foreign jurisdiction, as to which we express no
opinion), is necessary or required to be obtained by the Selling Shareholders
for the performance by the Selling Shareholders of their obligations under the
Underwriting Agreement or in connection with the offer, sale or delivery of the
Shares by the Selling Shareholders;
1.
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6. Neither the execution and delivery of the Underwriting Agreement
by the Selling Shareholders, the sale and delivery of the Shares by the Selling
Shareholders, the consummation of the transactions contemplated by the
Underwriting Agreement nor the performance by the Selling Shareholders of their
obligations thereunder, will, whether with or without the giving of notice or
passage of time or both, (i) conflict with, constitute a breach of or default
under, or result in the creation or imposition of any tax, lien, charge or
encumbrance upon the Shares pursuant to, the terms of any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, license, lease or other
instrument or agreement known to us and to which any of the Selling Shareholders
is a party or by which it may be bound, or to which any of the property or
assets of any of the Selling Shareholders may be subject, or (ii) violate any
provision of the charter documents of any of the Selling Shareholders which is
not a natural person, or any law, regulation, judgment, order or decree known to
us to be applicable to the Selling Shareholders, of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction over
the Selling Shareholders or any of their respective properties;
7. Each of the Selling Shareholders has valid and marketable title
to the Shares to be sold by it pursuant to the Underwriting Agreement, free and
clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind, and has full right, power and authority to sell,
transfer and deliver the Shares pursuant to the Underwriting Agreement. Upon
delivery of a certificate or certificates for the Shares pursuant to the
Underwriting Agreement, the Selling Shareholders will transfer to the
Underwriters who have purchased the Shares pursuant to the Underwriting
Agreement (without notice of any defect in the title of the Selling Shareholders
and who are otherwise bona fide purchasers for purposes of the Uniform
Commercial Code) valid and marketable title to the Shares, free and clear of any
pledge, lien, security interest, charge, claim, equity or encumbrance of any
kind; and
8. Each of the Selling Shareholders does not have, or has waived
prior to the date hereof, any registration right, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or any of the other Selling
Shareholders to the Underwriters pursuant to the Underwriting Agreement; each of
the Selling Shareholders does not have, or has waived prior to the date hereof,
any registration right or other similar right to participate in the offering
made by the Prospectus, other than such rights of participation as have been
satisfied by the participation of such Selling Shareholder in the transactions
to which the Underwriting Agreement relates in accordance with the terms of the
Underwriting Agreement; and such Selling Shareholder does not own any warrants,
options or similar rights to acquire, and does not have any right or arrangement
to acquire, any capital stock, rights, warrants, options or other securities
from the Company, other than those described in the Registration Statement and
the Prospectus.
2.
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SCHEDULE VI
Form of Opinion to be Rendered
by Knobbe, Martens, Olson & Bear,
Patent Counsel to the Company
I have served as Patent Counsel of Overland Data, Inc., a company
organized under the laws of California (the ``Company''), and have had
responsibility for certain matters involving the preparation and prosecution of
patent applications in the United States. I have also assisted the Company in
connection with certain patent matters in foreign countries. This opinion is
rendered to you pursuant to Section 5 of the Underwriting Agreement, dated as of
_____________, 1997, among the Company, the Selling Shareholders and the
Underwriters named in Schedule II thereto.
In acting in my position as Patent Counsel of the Company, I have
examined such documents of the Company and such certificates of the Company and
have considered such questions of law as I deemed relevant. In rendering this
opinion, I have assumed the genuineness of all signatures on all documents and
certificates submitted to me, the conformity to the original documents of all
documents and certificates submitted to me as certified, reproduced, conformed
or photostatic copies of valid, existing documents and the authenticity of all
documents and certificates submitted to me as originals.
Based upon the foregoing but subject to the matters set forth in the
last paragraph hereof, I am of the opinion that:
(1) The statements in the Registration Statement on Form S-1, as
amended (File No. 333-18583), filed by the Company with the Securities and
Exchange Commission (the "Commission") on December 24, 1996, and the final
Prospectus in the form filed with the Commission on _______________, 1997,
pursuant to Rule 424(b)(__) under the Act under the captions "Risk Factors -
Technology and Intellectual Property," "Business -- Proprietary Rights" and
"Business - Research and Development," to the extent that they constitute
summaries of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal matters,
documents or proceedings and fairly summarize the matters referred to therein.
(2) To the best of my knowledge and other than as set forth in the
Prospectus, there are no pending or threatened (i) claims relating to patents,
patent rights, inventions, trade secrets, know-how and proprietary techniques,
including processes and substances, trademarks, service marks, trade names and
copyrights described or referred to in the Prospectus as owned or used by it or
which are necessary for the conduct of its business (the "Intellectual
Property") or (ii) legal or governmental proceedings alleging that the
1.
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Company is not in compliance with any applicable laws, regulations, governmental
licenses, permits, consents, orders or approval relating to the Intellectual
Property, to which the Company is or may become a party or to which any of the
properties of the Company is or may become subject which, if adversely decided,
would have a material adverse effect on the Company.
(3) To the best of my knowledge and except as otherwise stated in the
Prospectus, the use, in connection with the business and operations of the
Company, of such Intellectual Property does not infringe or conflict with actual
or asserted rights of any third party with respect to such Intellectual
Property, except where such infringement or conflict would not have a material
adverse effect on the Company.
(4) Except as otherwise stated in the Prospectus, the Company owns or
is licensed, or otherwise has the right to use, all of the Intellectual
Property, except where the failure to so own, to be so licensed or to so have
the right would not have a material adverse effect on the Company.
(5) To the best of my knowledge, the Company has disclosed to the
United States Patent and Trademark Office ("PTO") all prior art references
considered by the Company to be pertinent to the Company's pending patent
applications; to the best of my knowledge, all information submitted to the PTO
in the relevant applications, and in connection with the prosecution of the
relevant applications, was accurate; to the best of my knowledge, the Company
has not made any misrepresentation or concealed any material fact from the PTO
in any of such applications, or in connection with the prosecution of such
applications.
In the above opinions, the expression "best of my knowledge" means,
with reference to matters of fact, that after an examination of documents in my
files and considering my actual knowledge, but not including any constructive or
imputed notice of any information, I find no reason to believe that the opinions
expressed herein are factually incorrect. Beyond that I have made no
independent investigation for the purpose of rendering an opinion with respect
to such matters.
I am not called upon to express, and do not express, any view, opinion
or belief as to non-patent related information, the financial statements,
schedules, statistical data and other financial data contained in the
Registration Statement or the Prospectus.
This opinion is furnished by me, as Patent Counsel of the Company to
you, the Underwriters, and is solely for your benefit.
2.
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AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
OVERLAND DATA, INC.
Scott McClendon and Vernon A. LoForti certify that:
1. They are the President and Assistant Secretary, respectively, of
Overland Data, Inc. (the "Corporation").
2. The Articles of Incorporation of the Corporation, as amended to the date
of the filing of this certificate, including the alphabetical and numerical
designations and the amendments set forth herein in full, with the omissions
required by Section 910 of the California Corporations Code, are amended and
restated as follows:
ARTICLE I
The name of this corporation is Overland Data, Inc. (the "Corporation").
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. The Corporation is authorized to issue two classes of shares to be
designated, respectively, Preferred Stock ("Preferred Stock") and Common Stock
("Common Stock").
The total number of shares of capital stock that the Corporation is
authorized to issue is twenty-seven million nine hundred seventy-three thousand
three hundred sixty-six (27,973,366). The total number of shares of Common Stock
the Corporation shall have the authority to issue is twenty-five million
(25,000,000) and the total number of shares of Preferred Stock the Corporation
shall have the authority to issue is two million nine hundred seventy-three
thousand three hundred sixty-six (2,973,366). The Preferred Stock may be issued
in series designated Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock. The total number of shares of Series A Preferred Stock
the Corporation shall have the authority to issue is nine hundred fifty-five
thousand one hundred ninety (955,190). The total number of shares of Series B
Preferred Stock the Corporation shall have the authority to issue is seven
hundred thirty-one thousand four hundred twenty-nine (731,429). The total number
of shares of Series C Preferred Stock the Corporation shall have the authority
to issue is one million two hundred eighty-six thousand seven hundred
forty-seven (1,286,747).
B. The powers, preference, rights, restrictions and other matters
relating to the Preferred Stock are as follows:
1. Dividends. No dividend shall be paid on or declared and set
apart for the shares of Common Stock for any dividend period unless at the same
time a like proportionate dividend for the same dividend period, ratably in
proportion to the respective annual dividend rates fixed therefor, shall be paid
on or declared and set apart for the shares of Preferred Stock.
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2. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of each share
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, before any payment
or declaration and setting apart for payment of any amount shall be made in
respect of the Common Stock, an amount equal to (i) $1.1516 per share of Series
A Preferred Stock, plus all declared and unpaid dividends on each share of
Series A Preferred Stock, and no more, (ii) $1.75 per share of Series B
Preferred Stock, plus all declared and unpaid dividends on each share of Series
B Preferred Stock, and no more, and (iii) $2.7611 per share of Series C
Preferred Stock, plus all declared and unpaid dividends on each share of Series
C Preferred Stock, and no more. If upon liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the assets to be
distributed to the holders of the Preferred Stock shall be insufficient to
permit the payment to such shareholders of the full preferential amount
aforesaid, then all of the assets of the Corporation to be distributed shall be
distributed ratably to the holders of the Preferred Stock (so that each holder
receives the same percentage of the applicable preferential amount). For the
purposes of this Section B.2(a), any acquisition of the Corporation by means of
merger or other form of corporate reorganization in which outstanding shares of
the Corporation are exchanged for securities or other consideration issued, or
caused to be issued, by the acquiring corporation or its subsidiary (a
"Corporate Reorganization") other than a transaction with a subsidiary of the
Corporation or an entity under common control with the Corporation (and other
than a transaction set forth in Section B.5(b)(ii)) shall be deemed to be a
liquidation, dissolution or winding up of the Corporation.
(b) After the payment or distribution to the holders of the
Preferred Stock of the full preferential amounts aforesaid, the holders of the
Common Stock then outstanding shall be entitled to receive ratably all the
remaining assets of the Corporation.
3. Redemption.
(a) At the individual option of each holder of shares of
Series A Preferred Stock, the Corporation shall redeem on the sixth (the "First
Series A Redemption Date"), seventh (the "Second Series A Redemption Date") and
eighth (the "Third Series A Redemption Date") anniversary dates from the date of
the first issuance of Series A Preferred Stock, at a price per share equal to
$1.1516 (as adjusted for any stock dividends, combinations or splits with
respect to such shares) plus declared but unpaid dividends on such shares (the
"Series A Redemption Price"), at the rate of 33 1/3% of such holders' then
outstanding shares of Series A Preferred Stock at the First Series A Redemption
Date, 50% of such holders' then outstanding shares of Series A Preferred Stock
at the Second Series A Redemption Date, and 100% of such holders' then
outstanding shares of Series A Preferred Stock at the Third Series A Redemption
Date. At the individual option of each holder of shares of Series B Preferred
Stock, the Corporation shall redeem on December 31, 1996 (the "First Series B
Redemption Date"), December 31, 1997 (the "Second Series B Redemption Date") and
December 31, 1998 (the "Third Series B Redemption Date"), at a price per share
equal to $1.75 (as adjusted for any stock dividends, combinations or splits with
respect to such shares) plus declared but unpaid dividends on such shares (the
"Series B Redemption Price"), at the rate of 33 1/3% of such holders' then
outstanding shares of Series B Preferred Stock at the First Series B Redemption
Date, 50% of such holders' then outstanding shares of Series B Preferred Stock
at the Second Series B
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Redemption Date and 100% of such holders' then outstanding shares of Series B
Preferred Stock at the Third Series B Redemption Date. At the individual option
of each holder of shares of Series C Preferred Stock, the Corporation shall
redeem on May 31, 1997 (the "First Series C Redemption Date"), May 31, 1998 (the
"Second Series C Redemption Date") and May 31, 1999 (the "Third Series C
Redemption Date"), at a price per share equal to $2.7611 (as adjusted for any
stock dividends, combinations or splits with respect to such shares) plus
declared but unpaid dividends on such shares, (the "Series C Redemption Price"),
at the rate of 33 1/3% of such holders' then outstanding shares of Series C
Preferred Stock at the First Series C Redemption Date, 50% of such holders' then
outstanding shares of Series C Preferred Stock at the Second Series C Redemption
Date, and 100% of such holders' then outstanding shares at the Third Series C
Redemption Date. The holders of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock will give written notice of their election to
be redeemed not less than ninety (90) days prior to a Redemption Date applicable
to such series of Preferred Stock (the "Redemption Notice"). If any holder of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock,
as applicable, does not timely elect to be redeemed on any of the applicable
three Redemption Dates, the number of such holder's shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, as applicable,
which would otherwise be redeemed on the applicable Redemption Date will
automatically be converted into Common Stock in accordance with the provisions
set forth in Section B.5, below, to effect the result that following the last
applicable Redemption Date all outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, as applicable, shall
either be redeemed or converted into Common Stock.
(b) Except as provided in Section B.3(c), on or after each
applicable Redemption Date, each holder of Preferred Stock shall surrender to
the Corporation the certificate or certificates representing the applicable
shares to be redeemed or converted, and thereupon each surrendered certificate
will be canceled and either (i) the appropriate Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof, or (ii) the appropriate number
of shares of Common Stock shall be issued for such shares to the owner thereof.
In the event less than all the shares represented by any such certificate are
redeemed or converted into Common Stock, a new certificate shall be issued
representing the unredeemed or unconverted shares.
(c) From and after each Redemption Date, unless there shall
have been a default in payment of the requested Redemption Price, all rights of
the holders of Preferred Stock (except the right to receive the applicable
Redemption Price without interest or shares of Common Stock upon surrender of
their certificate or certificates) shall cease with respect to such shares, and
such shares shall not thereafter be transferred on the books of the Corporation
or be deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation legally available for redemption of shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock on any Redemption
Date are insufficient to redeem the total number of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock to be redeemed on
such date, those funds which are legally available will be used to redeem the
maximum possible number of such shares ratably among the holders of such shares
electing to be redeemed based upon their holdings of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, as applicable. The shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock not redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein. At any time thereafter when additional
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funds of the Corporation are legally available for the redemption of shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
as applicable, such funds will immediately be used to redeem ratably the balance
of the shares which the Corporation has become obliged to redeem on any
Redemption Date, but which it has not redeemed.
(d) On or prior to each Redemption Date, the Corporation shall
deposit the Redemption Price of all shares of the applicable series of Preferred
Stock held by shareholders who elect to be redeemed by giving the Redemption
Notice and not yet redeemed with a bank or trust corporation having aggregate
capital and surplus in excess of $100,000,000 as a trust fund for the benefit of
the respective holders of the shares electing redemption and not yet redeemed,
with irrevocable instructions and authority to the bank or trust corporation to
pay the applicable Redemption Price for such shares to their respective holders
on or after such Redemption Date upon receipt of notification from the
Corporation that such holder has surrendered his share certificate to the
Corporation pursuant to Section B.3(b) above. As of such Redemption Date, the
deposit shall constitute full payment for the shares to their holders, and from
and after such Redemption Date the shares so called for redemption shall be
redeemed and shall be deemed to be no longer outstanding, and the holders
thereof shall cease to be shareholders with respect to such shares and shall
have no rights with respect thereto except the rights to receive from the bank
or trust corporation payment of the applicable Redemption Price for the shares,
without interest, upon surrender of their certificates therefor. Such
instructions shall also provide that any moneys deposited by the Corporation
pursuant to this Section B.3(d) for the redemption of shares thereafter
converted into shares of the Corporation's Common Stock pursuant to Section B.5
hereof prior to the applicable Redemption Date shall be returned to the
Corporation forthwith upon such conversion. The balance of any moneys deposited
by the Corporation pursuant to this Section B.3(d) remaining unclaimed at the
expiration of two (2) years following the applicable Redemption Date shall
thereafter be returned to the Corporation upon its request expressed in a
resolution of its Board of Directors.
4. Voting Rights.
(a) General. Except as otherwise expressly provided herein or
as required by law, each holder of shares of Preferred Stock shall be entitled
to vote on all matters and shall be entitled to the number of votes equal to the
largest number of full shares of Common Stock into which such shares of
Preferred Stock could be converted, pursuant to the provisions of Section B.5
hereof, at the record date for the determination of shareholders entitled to
vote on such matters or, if no such record date is established, at the date such
vote is taken or any written consent of shareholders is solicited. Except as
otherwise expressly provided herein or as required by law, the holders of shares
of Preferred Stock and holders of Common Stock shall vote together and not as
separate classes. Each holder of Common Stock shall be entitled to one (1) vote
for each share of Common Stock held.
(b) Directors. The holders of the Series A Preferred Stock,
voting separately as a class, shall be entitled to elect one (1) member of the
Board of Directors of the Corporation. The holders of the Series B Preferred
Stock, voting separately as a class, shall be entitled to elect one (1) member
of the Board of Directors of the Corporation. The holders of the Series C
Preferred Stock, voting separately as a class, shall be entitled to elect one
(1) member of the Board of Directors of the Corporation. The holders of the
Common Stock, voting separately from all other classes and series, shall be
entitled to elect the remaining members of the Board of Directors of the
Corporation. In the case of any vacancy in the office of
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a director elected by the holders of a particular class or series of stock, such
vacancy may be filled only by the vote of the holders of such class or series of
stock. Any director who shall have been elected by the holders of a particular
class or series of stock may be removed without cause by, and only by, the
applicable vote of the holders of such class or series of stock.
5. Conversion. The holders of the Preferred Stock shall have the
following conversion rights (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share, at the office of the Corporation or any transfer agent for such stock,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1.1516, $1.75 and $2.7611, respectively, by the
Conversion Price applicable to the shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, respectively, determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion. The price at which shares of Common Stock shall be deliverable upon
conversion of shares of the Series A Preferred Stock (the "Series A Conversion
Price"), the Series B Preferred Stock (the "Series B Conversion Price") and
Series C Preferred Stock (the "Series C Conversion Price") shall initially be
$1.1516, $1.75 and $2.7611 per share of Common Stock, respectively. Such initial
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price (collectively, the "Conversion Prices") shall be adjusted as hereinafter
provided.
(b) Automatic Conversion. Each share of the Preferred Stock
shall automatically be converted into shares of Common Stock at the
then-effective applicable Conversion Price upon the earliest of (i) immediately
upon the closing of the sale of the Corporation's Common Stock in a firm
commitment, underwritten public offering by an underwriter of nationally
recognized standing registered under the Securities Act of 1933, as amended (
the "Securities Act"), other than a registration relating solely to a
transaction under Rule 145 under such Act (or any successor thereto) or to an
employee benefit plan of the Corporation, at a public offering price (prior to
underwriters' discounts and expenses) equal to or exceeding $4.00 per share of
Common Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares) and the aggregate proceeds to the Corporation and/or any
selling shareholders (after deduction for underwriters' discounts but excluding
expenses relating to the issuance) of which exceed $5,000,000; (ii) immediately
upon the closing of a merger, reorganization, sale of control, or any
transaction in which all or substantially all of the assets of the Company are
sold (other than a merger into a wholly-owned subsidiary or any other merger or
consolidation in which the holders of equity securities of the Corporation
immediately prior thereto hold a majority of the voting securities of the
surviving corporation immediately thereafter), and in which the aggregate net
proceeds available for distribution to shareholders of the Corporation
(exclusive of commission and other payments and expenses) per share of Common
Stock issued or issuable upon conversion of outstanding convertible securities
or upon exercise of outstanding warrants and options is not less than $4.00 (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), valued as set forth in Section B.5(c) below; (iii) after thirty (30)
days' notice following release of audited financial statements by the
Corporation for the first fiscal year in which the Corporation reports at least
$7,000,000 in earnings before taxes and before extraordinary items; or (iv)
pursuant to the provisions set forth in Section B.3(a) above.
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(c) Valuation of Consideration. Whenever a transaction
described in Section B.5(b)(ii) above shall provide for payment in securities of
a privately-held corporation or other entity or property other than cash, the
value of such securities or other property shall be deemed to be the fair market
value of such securities or other property as determined by mutual agreement of
the holders of a majority of the Series A Preferred Stock, the holders of a
majority of the Series B Preferred Stock, and the holders of a majority of the
Series C Preferred Stock and the Board of Directors of the Corporation.
(d) Mechanics of Conversion.
(i) Before any holder of Preferred Stock shall be
entitled to voluntarily convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the capital stock of the
Corporation, and shall given written notice to the Corporation at such office
that he elects to convert the same and shall state therein the number of shares
of Preferred Stock being converted. Thereupon, the Corporation shall as soon as
reasonably possible issue and deliver or cause to be issued and delivered at
such office to such holder of Preferred Stock a certificate or certificates for
the number of shares of Common Stock to which he shall be entitled. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of Preferred Stock
for conversion, be conditioned upon the closing with the underwriters of the
sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock upon conversion of the Preferred Stock
shall not be deemed to have converted such Preferred Stock until immediately
prior to the closing of such sale of securities.
(e) Adjustments to Conversion Price for Stock Dividends and
for Combinations or Subdivisions of Common Stock. In the event that the
Corporation at any time or from time to time after the date the first share of
Series C Preferred Stock was issued (the "Original Issue Date") shall declare or
pay, without consideration, any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock for no consideration, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or otherwise
than by payment of a dividend in Common Stock or in any right to acquire Common
Stock) or in the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, then the Conversion Price for each series of Preferred
Stock in effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate. In the event that the Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration, then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
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(f) Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section B.5(e) above or Corporate Reorganization referred to in Section B.2(a)
above), the applicable Conversion Price for each series of Preferred Stock then
in effect shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Preferred Stock shall
be convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Preferred Stock immediately before that change.
(g) Additional Series C Preferred Stock Adjustment.
(i) In the event the Corporation issues at any time or
from time to time an aggregate of more than two hundred fifty thousand (250,000)
shares of Additional Stock (as defined in Section B.5(g)(ii) hereof) during the
one (1) year period following the Original Issue Date for a consideration per
share less than the Series C Conversion Price in effect immediately prior to the
issuance of such Additional Stock, then the Series C Conversion Price in effect
immediately prior to such issuance shall forthwith be reduced to the price per
share at which such Additional Stock is issued and sold. The Conversion Price
adjustment referred to in this Section B.5(g) shall not be applicable to any
shares of Preferred Stock other than the Series C Preferred Stock, nor shall any
other shares of Preferred Stock receive any Conversion Price adjustment on
account of any Series C Conversion Price adjustment effected pursuant to this
Section B.5(g). Any consideration received by the Corporation shall be
calculated as follows:
(A) In the case of the issuance of the Common Stock
for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by the Corporation for any underwriting or
otherwise in connection with the issuance and sale thereof.
(B) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(C) In the case of the issuance of options to purchase
or rights to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities (which are not
excluded from the definition of Additional Stock), the following provisions
shall apply:
(x) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in Section B.5(g)(i)(A) and B.5(g)(i)(B)), if
any, received by the Corporation upon the issuance of such options or rights
plus the minimum purchase price provided in such options or rights for the
Common Stock covered thereby; and
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(y) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
the Corporation for any such securities and related options or rights, plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in Sections B.5(g)(i)(A) and B.5(g)(i)(B)).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to Section B.5(g)(i)(C) by
the Corporation, other than (A) Common Stock issued or issuable to officers,
directors or employees of or consultants to the Corporation, primarily for the
purpose of soliciting or retaining their services to the Corporation, directly
or pursuant to a stock option plan, restricted stock purchase plan or other
arrangement approved by the Board of Directors of the Corporation, in such
amount as shall be approved by the directors of the Corporation plus any shares
or additional shares repurchased by the Corporation from employees, officers,
directors or consultants at cost pursuant to the terms of stock repurchase
agreements approved by the Board of Directors of the Corporation that are
reissued by the Corporation in accordance with this clause (A); (B) Common Stock
issued or issuable upon conversion of any shares of Preferred Stock, including
any additional shares of Common Stock which may be issued or issuable upon any
adjustment in the Conversion Price of any shares of Preferred Stock; or (C)
Common Stock issued pursuant to a transaction described in Section B.5(e).
(h) No Impairment. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section B.5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(i) Certificates of Adjustment. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section B.5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Preferred Stock a certificate executed by the Corporation's President
or Chief Financial Officer setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price for such Preferred Stock at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such Preferred Stock.
(j) Notices of Record Date. In the event that the Corporation
shall propose at any time: (i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or
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not out of earnings or earned surplus; (ii) to offer for subscription pro rata
to the holders of any class or series of its stock any additional shares of
stock of any class or series or other rights; (iii) to effect any
reclassification or recapitalization of its Common Stock outstanding involving a
change in the Common Stock; or (iv) to effect any Corporate Reorganization, as
defined in Section B.2(a) above, or to sell, lease or convey all or
substantially all of its assets, or to liquidate, dissolve or wind up; then, in
connection with each such event, the Corporation shall send to the holders of
Preferred Stock:
(1) at least twenty (20) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote, if any, in
respect of the matters referred to in (iii) and (iv) above; and
(2) in the case of the matters referred to in (iii) and
(iv) above, at least twenty (20) days' prior written notice of the date when the
same shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
(k) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Preferred Stock pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.
(l) Reservation of Stock Issuance Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to these Articles of
Incorporation.
(m) Fractional Shares. No fractional share shall be issued
upon the conversion of any share of Preferred Stock. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
a series of Preferred Stock by a holder thereof shall be aggregated for purposes
of determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the Corporation
shall, in lieu of issuing any fractional shares, pay the holder otherwise
entitled to such fraction a sum in cash equal to the fair market value of such
fraction on the date of conversion (as determined in good faith by the Board of
Directors).
(n) Notices. Any notice required by the provisions of this
Section B.5 to be given to a holder of Preferred Stock shall be deemed given
when personally delivered to such holder or five (5) business days after the
same has been deposited in the United States mail,
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certified or registered mail, return receipt requested, postage prepaid, and
addressed to such holder at its address appearing on the books of the
Corporation.
6. Series A Restrictive Covenants. So long as any shares of the
Series A Preferred Stock shall be issued and outstanding, the Corporation shall
not, without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of not less than a majority of the total number
of shares of Series A Preferred Stock then outstanding:
(a) repurchase any Common Stock (except repurchases of Common
Stock issued to or held by employees, officers, directors and consultants upon
termination of their employment or services pursuant to agreements between the
Corporation and such persons approved by the Board of Directors of the
Corporation providing for the right of said repurchase) or any Preferred Stock
other than pursuant to the provisions set forth in Section B.3 above;
(b) authorize or issue any equity securities with any rights or
preferences senior to or pari passu with those of the Series A Preferred Stock;
or
(c) take any corporate action which materially or adversely
affects the powers, preferences or special rights of the Series A Preferred
Stock.
7. Series B Restrictive Covenants. So long as any shares of the
Series B Preferred Stock shall be issued and outstanding, the Corporation shall
not, without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of not less than a majority of the total number
of shares of Series B Preferred Stock then outstanding:
(a) repurchase any Common Stock (except repurchases of Common
Stock issued to or held by employees, officers, directors and consultants upon
termination of their employment or services pursuant to agreements between the
Corporation and such persons approved by the Board of Directors of the
Corporation providing for the right of said repurchase) or any Preferred Stock
other than pursuant to the provisions set forth in Section B.3 above;
(b) authorize or issue any equity securities with any rights or
preferences senior to or pari passu with those of the Series B Preferred Stock;
or
(c) take any corporate action which materially or adversely
affects the powers, preferences or special rights of the Series B Preferred
Stock.
8. Series C Restrictive Covenants. So long as any shares of the
Series C Preferred Stock shall be issued and outstanding, the Corporation shall
not, without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of not less than a majority of the total number
of shares of Series C Preferred Stock then outstanding:
(a) repurchase any Common Stock (except repurchases of Common
Stock issued to or held by employees, officers, directors and consultants upon
termination of their employment or services pursuant to agreements between the
Corporation and such persons approved by the Board of Directors of the
Corporation providing for the right of said repurchase) or any Preferred Stock
other than pursuant to the provisions set forth in Section B.3 above;
(b) authorize or issue any equity securities with any rights or
preferences senior to or pari passu with those of the Series C Preferred Stock;
or
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(c) take any corporate action which materially or adversely
affects the powers, preferences or special rights of the Series C Preferred
Stock.
9. Consent for Certain Repurchases of Common Stock Deemed to be
Distributions. Each holder of Preferred Stock shall be deemed to have
consented, for purposes of Sections 502, 503 and 506 of the California General
Corporation Law, to distributions made by the Corporation in connection with the
repurchase of shares of Common Stock issued to or held by employees, officers,
directors and consultants of the Corporation upon termination of their
employment or services pursuant to agreements between the Corporation and such
persons approved by the Corporation's Board of Directors providing for the right
of said repurchase.
ARTICLE IV
Section 1. (a) The term "Beneficial Owner" and correlative terms shall
have the meaning as set forth in Rule 13d-3 under the Securities Exchange Act of
1934, as amended, or any similar successor rule. Without limitation and in
addition to the foregoing, any shares of Voting Stock of the Corporation which
any Major Shareholder has the right to vote or to acquire (i) pursuant to any
agreement, (ii) by reason of tenders of shares by shareholders of the
Corporation in connection with or pursuant to a tender offer made by such Major
Shareholder (whether or not any tenders have been accepted, but excluding
tenders which have been rejected), or (iii) upon the exercise of conversion
rights, warrants, options or otherwise, shall be deemed "beneficially owned" by
such Major Shareholder.
(b) The term "Business Combination" shall mean:
(i) Any merger or consolidation (whether in a single
transaction or a series of related transactions, including a series of separate
transactions with a Major Shareholder, any Affiliate or Associate thereof, or
any Person acting in concert therewith) of the Corporation or any Subsidiary
with or into a Major Shareholder or of a Major Shareholder with or into the
Corporation or a Subsidiary;
(ii) Any sale, lease, exchange, transfer, distribution to
shareholders or other disposition, including, without limitation, a mortgage,
pledge or any other security device, to or with a Major Shareholder by the
Corporation or any of its Subsidiaries (in a single transaction or a series of
related transactions) of all, substantially all or any Substantial Part of the
assets of the Corporation or a Subsidiary (including, without limitation, any
securities of a Subsidiary);
(iii) The purchase, exchange, lease or other acquisition by the
Corporation or any of its Subsidiaries (in a single transaction or a series of
related transactions) of all, substantially all or any Substantial Part of the
assets or business of a Major Shareholder;
(iv) The issuance of any securities, or of any rights, warrants
or options to acquire any securities, of the Corporation or a Subsidiary, eighty
percent (80%) or more of which are issued to a Major Shareholder, or the
acquisition by the Corporation or a Subsidiary of any securities, or of any
rights, warrants or options to acquire any securities, of a Major Shareholder;
(v) Any reclassification of Voting Stock, recapitalization or
other transaction (other than a redemption in accordance with the terms of the
security redeemed) which has the effect, directly or indirectly, of increasing
the proportionate amount of Voting Stock of the Corporation or any Subsidiary
thereof which is beneficially owned by a Major Shareholder, or any partial
liquidation, spin off, split off or split up of the Corporation or any
Subsidiary thereof;
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provided, however, that this Section 1(B)(5) shall not relate to any transaction
of the types specified herein that has been approved by eighty percent (80%) of
the Board of Directors; or
(vi) Any agreement, contract or other arrangement providing for
any of the transactions described herein.
(c) The term "Major Shareholder" shall mean any Person which,
together with its "Affiliates" and "Associates" (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934, as amended, or any similar successor Rule) and
any Person acting in concert therewith, is the Beneficial Owner of shares
possessing ten percent (10%) or more of the voting power of the Voting Stock of
the Corporation, and any Affiliate or Associate of a Major Shareholder,
including a Person acting in concert therewith. The term "Major Shareholder"
shall not include a Subsidiary of the Corporation.
(d) The term "other consideration to be received" shall include,
without limitation, Voting Stock of the Corporation retained by its existing
shareholders in the event of a Business Combination which is a merger or
consolidation in which the Corporation is the surviving corporation.
(e) The term "Person" shall mean any individual, corporate,
partnership or other Person, group or entity (other than the Corporation, any
Subsidiary of the Corporation or a trustee holding stock for the benefit of
employees of the Corporation or its Subsidiaries, or any one of them, pursuant
to one or more employee benefit plans or arrangements). When two or more Persons
act as a partnership, limited partnership, syndicate, association or other group
for the purpose of acquiring, holding or disposing of shares of stock, such
partnerships, syndicate, association or group will be deemed a "Person."
(f) The term "Subsidiary" shall mean any business entity fifty
percent (50%) or more of which is beneficially owned by the Corporation.
(g) The term "Substantial Part" as used in reference to the assets
of the Corporation, of any Subsidiary or of any Major Shareholder means assets
having a value of more than five percent (5%) of the total consolidated assets
of the Corporation as of the most recent fiscal year ending prior to the time
the determination is made.
(h) The term "Voting Stock" shall mean stock or other securities
entitled to vote upon any action to be taken in connection with any Business
Combination or entitled to vote generally in the election of directors, and
shall also include stock or other securities convertible into Voting Stock.
Section 2. Notwithstanding any other provision of these Articles of
Incorporation and except as set forth in Section 3 of this Article IV, neither
the Corporation nor any Subsidiary shall be party to a Business Combination
unless:
(a) The Business Combination was approved by the Board of Directors
of the Corporation prior to the Major Shareholder involved in the Business
Combination becoming such; or
(b) The Major Shareholder involved in the Business Combination
sought and obtained the unanimous prior approval of the Board of Directors to
become a Major Shareholder and the Business Combination was approved by not less
than eighty percent (80%) of the Board of Directors; or
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(c) The Business Combination was approved by not less than ninety
percent (90%) of the Board of Directors of the Corporation.
Section 3. The approval requirements of Section 2 of this Article IV
shall not apply if the Business Combination is approved by the vote of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of the Voting Stock of
the Corporation and all of the following conditions are satisfied:
(a) The aggregate of the cash and the fair market value of other
consideration to be received per share (as adjusted for stock splits, stock
dividends, reclassification of shares into a lesser number and similar events)
by holders of the Voting Stock of the Corporation in the Business Combination is
not less than the higher of: (i) the highest per share price (including
brokerage commissions, soliciting dealers' fees, dealer-management compensation,
and other expenses, including, but not limited to, costs of newspaper
advertisements, printing expenses and attorneys' fees) paid by the Major
Shareholder in acquiring any of the Corporation's Voting Stock; or (ii) an
amount which bears the same or a greater percentage relationship to the market
price of the Corporation's Voting Stock as the highest per share price
determined in (i) above bears to the market price of the Corporation's Voting
Stock immediately prior to the commencement of acquisition of the Corporation's
Voting Stock by such Major Shareholder;
(b) The consideration to be received in such Business Combination
by holders of the Voting Stock of the Corporation shall be, except to the extent
that a shareholder agrees otherwise as to all or a part of his or her shares, in
the same form and of the same kind as paid by the Major Shareholder in acquiring
his Voting Stock of the Corporation;
(c) After become a Major Shareholder and prior to the consummation
of such Business Combination: (i) such Major Shareholder shall not have acquired
any newly-issued shares of capital stock, directly or indirectly, from the
Corporation or a Subsidiary (except upon conversion of convertible securities
acquired by it prior to becoming a Major Shareholder or upon compliance with the
provisions of this Article IV or as a result of a pro rata share dividend or
share split); and (ii) such Major Shareholder shall not have received the
benefits directly or indirectly (except proportionately as a shareholder), of
any loans, advances, guarantees, pledges or other financial assistance or tax
credits provided by the Corporation or a Subsidiary, or made any major changes
in the Corporation's business or equity capital structure; and
(d) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, as amended, and Rules promulgated thereunder,
whether or not the Corporation is then subject to such requirements, shall be
mailed to all shareholders of the Corporation for the purpose of soliciting
shareholders' approval of such Business Combination and shall contain at the
front thereof, in a prominent place: (i) any recommendations as to the
advisability (or inadvisability) of the Business Combination which any one or
more members of the Board of Directors may choose to state; and (ii) the opinion
of a reputable national investment banking firm as to the fairness (or lack
thereof) of the terms of such Business Combination, from the point of view of
the remaining shareholders of the Corporation (such investment banking firm to
be engaged solely on behalf of the remaining shareholders, to be paid a
reasonable fee for their services by the Corporation upon receipt of such
opinion, to be one of the so-called major bracket investment banking firms which
has not previously been associated with such Major Shareholder and to be
selected by the Board of Directors).
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Section 4. The affirmative vote required by this Article IV is in
addition to the vote of the holders of any class or series of stock of the
Corporation otherwise required by law, these Articles of Incorporation, or any
resolution which has been adopted by the Board of Directors providing for the
issuance of a class or series of stock.
Section 5. Any amendment, change or repeal of this Article IV or any
other amendment of these Articles of Incorporation which would have the effect
of modifying or permitting circumvention of the provisions of this Article IV
shall require approval by at least a sixty-six and two-thirds percent (66 2/3%)
vote of the Voting Stock of the Corporation.
Section 6. The requirement of a supermajority vote set forth in this
Article IV will expire only as required by Section 710 of the California
Corporations Code, as it may be amended from time to time, unless readopted in
accordance therewith.
ARTICLE V
A. The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
B. The Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code ("Section 317"))
through bylaw provisions, agreements with the agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317, subject only to the applicable limits set
forth in Section 204 of the California Corporations Code with respect to actions
for breach of duty to the Corporation or its shareholders. The Corporation is
further authorized to provide insurance as set forth in Section 317, provided
that, in cases where the Corporation owns all or a portion of the shares of the
company issuing the insurance policy, the company and/or policy must meet one of
the two sets of conditions set forth in Section 317, as amended.
C. Any repeal or modification of the foregoing provisions of this
Article V or by the shareholders of the Corporation shall not adversely affect
any right or protection of an agent of the Corporation existing at the time of
such repeal or modification.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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3. The foregoing amendment to the Corporation's Articles of Incorporation
has been approved by the Board of Directors of the Corporation.
4. The foregoing amendment to the Corporation's Articles of Incorporation
has been approved by the holders of the requisite number of shares of the
Corporation in accordance with Sections 902 and 903 of the California General
Corporation Law. The total number of outstanding shares of each class entitled
to vote with respect to the foregoing amendment was 5,453,735 shares of Common
Stock, 318,397 shares of Series A Preferred Stock, 487,619 shares of Series B
Preferred Stock and 1,286,747 shares of Series C Preferred Stock. The number of
shares voting in favor of the foregoing amendment equaled or exceeded the vote
required, such required vote being a majority of the outstanding shares of
Common Stock, a majority of the outstanding shares of Series A Preferred Stock,
a majority of the outstanding shares of Series B Preferred Stock and a majority
of the outstanding shares of Series C Preferred Stock.
We further declare, under penalty of perjury under the laws of the State of
California, that the matters set forth in this Amended and Restated Articles of
Incorporation of Overland Data, Inc. are true and correct of our own knowledge.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
January 24, 1997.
/s/ SCOTT MCCLENDON
--------------------------------------
Scott McClendon, President
/s/ VERNON A. LOFORTI
--------------------------------------
Vernon A. LoForti, Assistant Secretary
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[BAKER & MCKENZIE LETTERHEAD]
January 24, 1997
Overland Data, Inc.
8975 Balboa Avenue
San Diego, CA 92123-1599
Ladies and Gentlemen:
We have acted as counsel to Overland Data, Inc., a California corporation
(the "Company"), in connection with its filing with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), of a Registration Statement on Form S-1, No. 333-18583,
including amendments and exhibits thereto (the "Registration Statement"),
covering up to 2,700,000 shares of Common Stock offered to the public and up
to 405,000 additional shares subject to an over-allotment option granted to
the underwriters (collectively, the "Shares").
We have examined the originals, or photostatic or certified copies, of such
records of the Company, certificates of officers of the Company and of public
officials, and such other documents as we have deemed relevant and necessary
as the basis of the opinion set forth below. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as photostatic or certified copies and the authenticity of the
originals of such copies.
We express no opinion as to the applicability of, compliance with, or effect
of federal law or the law of any jurisdiction other than the General
Corporation Law of the State of California.
Based upon our examination, we are of the opinion that the Shares covered by
the Registration Statement have been validly authorized and will, when sold
as contemplated by the Registration Statement, be legally issued, fully paid
and non-assessable.
<PAGE>
Overland Data, Inc.
January 24, 1997
Page 2
We hereby consent to the use of our opinion as herein set forth as an exhibit
to the Registration Statement and to the use of our name under the caption
"Legal Matters" in the prospectus forming a part of the Registration
Statement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Securities Act.
Very truly yours,
/s/ Baker & McKenzie
<PAGE>
Exhibit 10.7
OVERLAND DATA, INC.
a California corporation
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into as of this ____ day of __________, 1997,
between OVERLAND DATA, INC., a California corporation ("Company"), and
________________ ("Indemnitee").
RECITALS
WHEREAS, the Company believes that it is essential to its best interest to
attract and retain highly capable persons to serve as directors, officers, and
agents of the Company;
WHEREAS, Indemnitee is or has been selected to be a director, officer,
and/or agent of the Company;
WHEREAS, the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors, officers, and
other agents of corporations;
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability, in order to enhance Indemnitee's service to the
Company, and in order to induce Indemnitee to continue to provide services to
the Company as a director, officer, and/or agent, the Company wishes to provide
in this Agreement for the Indemnification of and the advancement of expenses to
Indemnitee to the fullest extent permitted by law and as set forth in this
Agreement, and, to the extent applicable insurance is maintained, for the
coverage of Indemnitee under the Company's policies of directors' and officers'
liability insurance; and
WHEREAS, the Company's Bylaws provide for the indemnification of the
directors, officers, agents and employees of the Company to the maximum extent
authorized by the California Corporations Code;
NOW, THEREFORE, in consideration of the foregoing and of Indemnitee's
continued service to the Company directly or, at its request, with another
enterprise, the parties agree as follows:
SECTION 1. DEFINITIONS.
(a) "Board" means the board of directors of the Company.
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(b) "Change in Control" means a state of affairs that shall be deemed to
have occurred if:
(i) any person is or becomes the "beneficial owner" (as that term
is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
("Exchange Act")). directly or indirectly, of securities representing [50]
percent or more of the total voting power of the Company's then-outstanding
voting securities; or
(ii) during any period of two consecutive years, individuals who, at
the beginning of such period, constitute the board, together with any new
director whose election by the board or nomination for election by the Company's
shareholders was approved by a vote of at least two thirds of the directors then
in office who either were directors at the beginning of the two-year period, or
whose election or nomination was previously so approved, cease for any reason to
constitute a majority of the board; or
(iii) the shareholders of the Company approve a merger or
consolidating of the Company with any other corporation, other than a merger or
consolidation that would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation continued to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80 percent of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; or
(iv) the shareholders of the Company approve a plan of complete
liquidation of the Company, or an agreement for the sale of disposition by the
Company, or an agreement for the sale or disposition by the Company (whether in
one transaction or a series of transactions) of all or substantially all of the
Company's assets.
(c) "Expenses" means:
(i) Any expenses, liability, or loss, including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid
in settlement;
(ii) any interest, assessments or other charges imposed on any of
the items in part (i) of this subsection (c); and
(iii) any federal, state, local or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement paid or
incurred in connection with investigating, defending, being a witness in, or
participating in (including on appeal), or preparing for any of the foregoing
in, any proceeding relating to any indemnifiable event.
(d) "Indemnifiable Event" means any event or occurrence that takes place
either before or after the execution of this Agreement and that is related to
2
<PAGE>
(i) the fact that Indemnitee is or was a director or an officer of
the Company, or while a director or officer is or was serving at the request of
the Company as a director, officer, employee, trustee, agent, or fiduciary of
another foreign or domestic corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, or was a director, officer, employee,
or agent of a foreign or domestic corporation that was a predecessor corporation
of the Company or another enterprise at the request of such predecessor
corporation; or
(ii) anything done or not done by Indemnitee in any such capacity,
whether or not the basis of the proceeding is an alleged action in an official
capacity as a director, officer, employee, or agent, or in any other capacity
while serving as a director, officer, employee, or agent of the Company as
described in this subsection (d).
(e) "Independent Counsel" means the person or body appointed in connection
with Section 3.
(f) "Person" means the term "person" as that term is used in sections
13(d) and 14(d) of the Exchange Act, other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity, or a corporation owned directly or indirectly by the shareholders of
the Company in substantially the same proportions as their ownership of shares
of the Company at the date of this Agreement.
(g) "Participant" means a person who is a party to, or witness or
participant (including an appeal) in, a proceeding.
(h) "Potential Change in Control" means a state of affairs that shall be
deemed to exist if:
(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a change in control; or
(ii) any person (including the Company) announces publicly an
intention to take or to consider taking actions that, if consummated, would
constitute a change in control; or
(iii) any person who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing ten (10) percent or more
of the combined voting power of the Company's then outstanding voting
securities, increases his or her beneficial ownership of such securities by 5
percent or more over the percentage owned by such person on the date of this
Agreement; or,
(iv) the board adopts a resolution into the effect that, for
purposes of this Agreement, a potential change in control has occurred.
(i) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, or any inquiry, hearing, or investigation, whether conducted by
the
3
<PAGE>
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
(j) "Reviewing Party" means the person or body appointed in accordance
with Section 3.
(k) "Voting Securities" means any securities of the Company that have the
right to vote generally in the election of directors.
SECTION 2. AGREEMENT TO INDEMNIFY
(a) GENERAL AGREEMENT. In the event Indemnitee was, is, or becomes a
participant in, or is threatened to be made a participant in, a proceeding by
reason of (or arising in part out of) an indemnifiable event, the Company shall
indemnify Indemnitee from and against any and all expenses to the fullest extent
permitted by law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by statute
including, without limitation, any indemnification provided by the Company's
articles of incorporation, its bylaws, a vote of its shareholders or
disinterested directors, or applicable law.
(b) INITIATION OF PROCEEDING. Notwithstanding anything in this Agreement
to the contrary, Indemnitee shall not be entitled to indemnification under this
Agreement in connection with any proceeding initiated by Indemnitee against the
Company or any director or officer of the Company unless:
(i) the Company has joined in or the Board has consented to the
initiation of such proceeding; or
(ii) the proceeding is one to enforce indemnification rights under
Section 5; or
(iii) the proceeding is instituted after a change in control and
independent counsel has approved its initiation.
(c) EXPENSE ADVANCES. If so requested by Indemnitee, the Company shall,
within ten (10) business days of such request advance all expenses to Indemnitee
(an "expense advance"). Notwithstanding the foregoing, to the extent that the
reviewing party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company shall be entitled to be reimbursed
by Indemnitee for all such amounts, and Indemnitee hereby agrees to reimburse
the Company promptly for the same. If Indemnitee has commenced legal
proceedings in a court of competent
4
<PAGE>
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, as provided in Section 4, any determination made by the
reviewing party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding on the court for purposes of that judicial
determination, and Indemnitee shall not be required to reimburse the Company for
any expense advance until a final judicial determination is made with respect
thereto and all rights of appeal therefrom have been exhausted or have lapsed.
Indemnitee's obligation to reimburse the Company for expense advances shall be
unsecured and no interest shall be charged thereon.
(d) MANDATORY INDEMNIFICATION. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee has been successful on the merits
in defense of any proceeding relating in whole or in part to an indemnifiable
event or in defense of any issue or matter in such proceeding, Indemnitee shall
be indemnified against all expenses incurred in connection with that proceeding.
(e) PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for a portion of
expenses, but not for the total amount of expenses, the Company shall indemnify
Indemnitee for the portion to which Indemnitee is entitled.
(f) PROHIBITED INDEMNIFICATION. No indemnification under this Agreement
shall be paid by the Company on account of any proceeding in which judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company under the provisions of
Section 16(b) of the Exchange Act, or similar provisions of any federal, state,
or local laws.
SECTION 3. REVIEWING PARTY. Before any change in control, the reviewing party
shall be any appropriate person or body consisting of a member or members of the
board or any other person or body appointed by the board who is not a party to
the proceeding for which Indemnitee is seeking indemnification; after a change
in control (other than a change in control approved by a majority of the
directors of the board who were directors immediately before such change in
control) concerning the rights of Indemnitee to indemnity payments and expense
advances under this Agreement, any other agreement, applicable law, or the
Company's articles of incorporation or bylaws now or hereafter in effect
relating to indemnification for indemnifiable events, the Company shall seek
legal advice only from independent counsel selected by Indemnitee and approved
by the Company (which approval shall not be unreasonably withheld), and who has
not otherwise performed services for the Company or the Indemnitee (other than
in connection with indemnification matters) within the previous five years. The
independent counsel shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. Such counsel, among other
things, shall render a written opinion to the Company and Indemnitee on whether
and to what extent the Indemnitee should be permitted to be indemnified under
applicable law. The Company agrees to pay the reasonable fees of the
independent counsel.
5
<PAGE>
SECTION 4. INDEMNIFICATION PROCESS AND APPEAL
(a) INDEMNIFICATION PAYMENT. Indemnitee shall receive indemnification of
expenses from the Company in accordance with this Agreement as soon as
practicable after Indemnitee has made written demand on the Company for
Indemnification, unless the reviewing party has given a written opinion to the
Company that Indemnitee is not entitled to indemnification under this Agreement
or applicable law.
(b) SUIT TO ENFORCE RIGHTS. Regardless of any action by the reviewing
party, if Indemnitee has not received full indemnification within thirty (30)
days after making a demand in accordance with Section 4(a), Indemnitee shall
have the right to enforce its indemnification rights under this Agreement by
commencing litigation in any court in the State of California seeking an initial
determination by the court or challenging any determination by the reviewing
party or any aspect thereof. The Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the reviewing party
not challenged by the Indemnitee shall be binding on the Company and Indemnitee.
The remedy provided for in this Section 4 shall be in addition to any other
remedies available to Indemnitee in law or equity.
(c) DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF, AND PRESUMPTIONS. It
shall be a defense to any action brought by Indemnitee against the Company to
enforce this Agreement (other than an action brought to enforce a claim for
expenses incurred in defending a proceeding in advance of its final disposition
when the required undertaking has been tendered to the Company) that it is not
permissible, under this Agreement or the applicable law, for the Company to
indemnify Indemnitee for the amount claimed. In connection with any such
section or any determination by the reviewing party or otherwise on whether
Indemnitee is entitled to be indemnified under this Agreement, the burden of
proving such a defense or determination shall be on the Company. Neither the
failure of the reviewing party or the Company (including its board, independent
legal counsel, or its shareholders) to have made a determination before the
commencement of such action by Indemnitee that indemnification is proper under
the circumstances because the Indemnitee has met the standard of conduct set
forth in applicable law, nor an actual determination by the reviewing party or
Company (including its board, independent legal counsel, or its shareholders)
that the Indemnitee has not met the applicable standard of conduct, shall be a
defense to the action or create a presumption that the Indemnitee has not met
the applicable standard of conduct. For purposes of this Agreement, the
termination of any claim, action, suit, or proceeding, by judgment, order,
settlement (whether with or without court approval), conviction, or on a plea of
nolo contendere, or its equivalent, shall not create a presumption of conduct or
have any particular belief or that a court has determined that indemnification
is not permitted by applicable law.
SECTION 5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING
6
<PAGE>
RIGHTS. The Company shall indemnify Indemnitee against any and all expenses
incurred by Indemnitee in connection with any claim asserted against or action
brought by Indemnitee for
(a) indemnification of Expenses or advance of Expenses by the Company
under this Agreement, or any other agreement, or under applicable law, or the
Company's articles of incorporation of bylaws now or hereafter in effect
relating to Indemnification for indemnifiable events; and/or
(b) recovery under directors' and officers' liability insurance policies
maintained by the Company, for amounts paid in settlement, if the independent
counsel has approved the settlement.
If requested by Indemnitee, the Company shall, within ten (10) business days of
such request, advance to Indemnitee any expenses to which Indemnitee is entitled
under this Section 5. The Company shall not settle any proceeding in any manner
that would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither the Company nor the Indemnitee will unreasonably
withhold its consent to any proposed settlement. The Company shall not be
liable to indemnify the Indemnitee under this Agreement with regard to any
judicial award if the Company was not given a reasonable and timely opportunity,
at its expenses, to participate in the defense of such action; however, the
Company's liability under this Agreement shall not be excused if participation
in the proceeding by the Company was barred by this Agreement.
SECTION 6. ESTABLISHMENT OF TRUST. In the event of a change in control or a
potential change in control, the Company shall, on written request by
Indemnitee, create a trust for the benefit of the Indemnitee ("Trust") and from
time to time on written request of Indemnitee shall fund the Trust in an amount
sufficient to satisfy any and all expenses reasonably anticipated with
investigating, preparing for, participating in, and/or defending any proceeding
relating to any indemnifiable event. The amount or amounts to be deposited in
the Trust under the foregoing funding obligation shall be determined by the
reviewing party. The terms of the trust shall provide that on a change in
control:
(a) The Trust shall not be revoked or the principal invaded without the
written consent of the Indemnitee.
(b) The Trustee shall advance, within ten business days of a request by
the Indemnitee, all expenses to the Indemnitee (provided that the Indemnitee
hereby agrees to reimburse the Trust under the same circumstances for which the
Indemnitee would not be required to reimburse the Company under Section 2(c) of
this Agreement).
(c) The Trust shall continue to be funded by the Company in accordance
with the funding obligation set forth in this Section.
(d) The Trustee shall promptly pay to the Indemnitee all amounts for which
the Indemnitee shall be entitled to indemnification under this Agreement or
otherwise.
7
<PAGE>
(e) All unexpected funds in the Trust shall revert to the Company on a
final determination by the reviewing party or a court of competent jurisdiction
that the Indemnitee has been fully indemnified under the terms of this
Agreement.
The Trustee shall be chosen by the Indemnitee subject to the approval of the
Reviewing Party. Nothing in this Section 6 shall relieve the Company of any of
its obligations under this Agreement. All income earned on the assets held in
the Trust shall be reported as income by the Company for federal, sales, local,
and foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses, including attorneys' fees, claims, liabilities, loss, and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 7. NONEXCLUSIVITY. The rights of Indemnitee under this Agreement shall
be in addition to any other rights Indemnitee may have under the Company's
articles of incorporation, bylaws, applicable law, or otherwise. To the extent
that a change in applicable law (whether by statute or judicial decision)
permits greater indemnification by agreement than would be afforded currently
under the Company's articles of incorporation, bylaws, applicable law, or this
Agreement, it is the intent of the parties that Indemnitee enjoy by this
Agreement the greater benefit afforded by such change.
SECTION 8. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
SECTION 9. AMENDMENT OF THIS AGREEMENT. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties to it. No waiver of any of the provisions of this Agreement
shall operate as a waiver or any other provisions of this Agreement (whether or
not similar), nor shall such waiver constitute a continuing waiver. Except as
specifically provided in this Agreement, no failure to exercise or delay in
exercising any right or remedy under it shall constitute a waiver of the right
or remedy.
SECTION 10. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of that payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of any documents necessary to enable the Company effectively to bring suit
to enforce such rights.
8
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SECTION 11. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise received payment (under any
insurance policy, bylaw, or otherwise) of the amounts otherwise indemnifiable
under this Agreement.
SECTION 12. BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of and be enforceable by the parties to it and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation, or otherwise to all or substantially all of the Company's
business or assets or both), assigns, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect, by purchase, merger consolidation, or otherwise to all,
substantially all, or a substantial part, of the Company's business or assets or
both, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. The indemnification provided under this Agreement
shall continue for Indemnitee for any action taken or not taken while serving in
an indemnified capacity pertaining to an indemnifiable event even though
Indemnitee may have ceased to serve in such capacity at the time of any
proceeding.
SECTION 13. SEVERABILITY. If any portion of this Agreement shall be held by a
court of competent jurisdiction to be invalid, void, or otherwise unenforceable,
the remaining provisions shall remain enforceable to the fullest extent
permitted by law. Furthermore, to the fullest extent possible, the provisions
of this Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void, or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void, or
unenforceable.
SECTION 14. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California applicable
to contracts made and to be performed in such State without giving effect to the
principles to conflicts of laws.
SECTION 15. NOTICES. All notices, demands, and other communications required
or permitted under this Agreement shall be made in writing and shall be deemed
to have been duly given if delivered by hand, against receipt, or mailed, first
class postage prepaid, certified or registered mail, and addressed
9
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(a) to the Company at: Overland Data, Inc.
8975 Balboa Avenue
San Diego, California 92123-1599
(b) to Indemnitee at:
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be. Notice of change of
address shall be effective only when given in accordance with this Section. All
notices complying with this Section shall be deemed to have been received on the
date of delivery or on the third business day after mailing.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day specified above.
INDEMNITEE: OVERLAND DATA, INC.,
a California corporation
By:
- ------------------------------ ---------------------------
10
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EXHIBIT 11.1
OVERLAND DATA, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS YEAR ENDED SIX MONTHS ENDED
AUGUST 31, ENDED JUNE 30, DECEMBER 31,
-------------------- JUNE 30, ------------------------------- --------------------
1991 1992 1993 1994 1995 1996 1995 1996
--------- --------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)................ $ 107,000 $(486,000) $(484,000) $ 137,000 $ 501,000 $3,159,000 $1,112,000 $1,368,000
--------- --------- ----------- --------- --------- --------- --------- ---------
Weighted average number of common
stock shares outstanding....... 3,370,000 3,461,000 3,677,000 3,866,000 3,968,000 4,517,000 4,303,000 5,158,000
Weighted average number of
preferred stock shares
outstanding.................... 955,000 1,077,000 1,830,000 2,848,000 2,934,000 2,602,000 2,934,000 2,337,000
Common stock equivalents from the
issuance of options using the
treasury stock method.......... 128,000 -- -- 235,000 315,000 424,000 706,000 513,000
Cheap stock adjustment........... 188,000 188,000 188,000 188,000 188,000 188,000 188,000 188,000
--------- --------- ----------- --------- --------- --------- --------- ---------
Shares used in computing net
income (loss) per share........ 4,641,000 4,726,000 5,695,000 7,137,000 7,405,000 7,731,000 8,131,000 8,196,000
--------- --------- ----------- --------- --------- --------- --------- ---------
Net income (loss) per share...... $ 0.02 $ (0.10) $ (0.09) $ 0.02 $ 0.07 $ 0.41 $ 0.14 $ 0.17
--------- --------- ----------- --------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 30, 1996,
relating to the financial statements of Overland Data, Inc., which appears in
such Prospectus. We also consent to the reference to us under the headings
"Experts" and "Selected Consolidated Financial Data", respectively, in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
PRICE WATERHOUSE LLP
San Diego, California
January 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 28
<SECURITIES> 0
<RECEIVABLES> 8,706
<ALLOWANCES> 0
<INVENTORY> 9,971
<CURRENT-ASSETS> 20,215
<PP&E> 2,569
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,004
<CURRENT-LIABILITIES> 7,149
<BONDS> 0
5,200
0
<COMMON> 2,085
<OTHER-SE> 5,330
<TOTAL-LIABILITY-AND-EQUITY> 23,004
<SALES> 27,233
<TOTAL-REVENUES> 27,233
<CGS> 17,421
<TOTAL-COSTS> 17,421
<OTHER-EXPENSES> 7,402
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (135)
<INCOME-PRETAX> 2,281
<INCOME-TAX> 913
<INCOME-CONTINUING> 1,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,368
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
