<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission File Number: 0-22071
OVERLAND DATA, INC.
(Exact name of registrant as specified in its charter)
California 95-3535285
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
8975 Balboa Avenue, San Diego, California 92123-1599
(Address of principal executive offices, including zip code)
(619) 571-5555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of FEBRUARY 10, 1999 there were 10,101,100 shares of the registrant's common
stock, no par value, issued and outstanding.
<PAGE>
OVERLAND DATA, INC.
FORM 10-Q
For the quarterly period ended December 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated condensed statement of operations --
Three months and six months ended
December 31, 1998 and 1997..................................3
Consolidated condensed balance sheet --
December 31, 1998 and June 30, 1998........................4
Consolidated condensed statement of cash flows --
Six months ended December 31, 1998 and 1997................5
Notes to consolidated condensed financial statements.............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................17
Item 4. Submission of Matters to a Vote of Security Holders.............18
Item 6. Exhibits and Reports on Form 8-K................................18
Signatures....................................................................19
</TABLE>
2
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ............................................ $24,240 $18,071 $48,612 $32,069
Cost of goods sold ................................... 16,927 12,367 33,883 21,705
------- ------- ------- -------
Gross profit ......................................... 7,313 5,704 14,729 10,364
------- ------- ------- -------
Operating expenses:
Sales and marketing ............................ 3,015 2,196 5,803 4,303
Research and development ....................... 1,219 957 2,587 1,903
General and administrative ..................... 1,208 1,537 2,529 3,068
------- ------- ------- -------
Total operating expenses .................... 5,442 4,690 10,919 9,274
------- ------- ------- -------
Income from operations ............................... 1,871 1,014 3,810 1,090
Other income:
Interest, net .................................. 221 220 457 464
Other income, net .............................. 77 38 112 4
------- ------- ------- -------
Income before income taxes ........................... 2,169 1,272 4,379 1,558
Provision for income taxes ........................... 854 483 1,716 592
------- ------- ------- -------
Net income ........................................... $ 1,315 $ 789 $ 2,663 $ 966
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic .......................................... $ 0.13 $ 0.07 $ 0.26 $ 0.09
------- ------- ------- -------
------- ------- ------- -------
Diluted ........................................ $ 0.12 $ 0.07 $ 0.25 $ 0.09
------- ------- ------- -------
------- ------- ------- -------
Number of shares used in computing earnings per share:
Basic .......................................... 10,232 10,538 10,386 10,498
------- ------- ------- -------
------- ------- ------- -------
Diluted ........................................ 10,563 11,111 10,669 11,100
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except number of shares)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------- -------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ............................... $17,202 $15,550
Accounts receivable, less allowance for doubtful accounts
and returns of $968 and $922, respectively ........ 14,030 15,683
Inventories ............................................. 14,723 16,077
Deferred income taxes ................................... 1,558 1,558
Other current assets .................................... 958 873
------- -------
Total current assets ....................... 48,471 49,741
Property and equipment, net ..................................... 4,025 4,207
Intangible and other assets ..................................... 76 48
------- -------
$52,572 $53,996
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ........................................ $ 4,926 $ 6,970
Accrued liabilities ..................................... 1,670 2,075
Accrued payroll and employee compensation ............... 1,654 1,198
------- -------
Total current liabilities .................. 8,250 10,243
Deferred income taxes and other liabilities ..................... 663 385
------- -------
Total liabilities .......................... 8,913 10,628
------- -------
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized; 10,097,180 and 10,549,486 shares
issued and outstanding, respectively .............. 31,121 33,496
Accumulated other comprehensive income .................. 21 18
Retained earnings ....................................... 12,517 9,854
------- -------
Total shareholders' equity ................. 43,659 43,368
------- -------
$52,572 $53,996
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
------------ ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 2,663 $ 966
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization ............................... 678 694
Changes in operating assets and liabilities:
Accounts receivable .................................... 1,653 388
Inventories ............................................ 1,354 (2,204)
Other assets ........................................... (113) (120)
Accounts payable and accrued liabilities ............... (2,171) (2,519)
Accrued payroll and employee compensation .............. 456 160
-------- --------
Net cash provided by (used in) operating activities 4,520 (2,635)
INVESTING ACTIVITIES:
Capital expenditures .............................................. (496) (1,420)
-------- --------
Net cash used in investing activities ............. (496) (1,420)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ........................... 45 82
Stock repurchases ................................................. (2,596) --
Net proceeds from issuance of common stock ........................ 176 189
-------- --------
Net cash (used in) provided by financing activities (2,375) 271
-------- --------
Effect of exchange rate changes on cash ................................... 3 7
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... 1,652 (3,777)
Cash and cash equivalents at the beginning of the period .................. 15,550 18,926
-------- --------
Cash and cash equivalents at the end of the period ........................ $ 17,202 $ 15,149
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Overland
Data, Inc. and its subsidiaries (the "Company") have been prepared by the
Company without audit pursuant to the rules and regulations of the Securities
and Exchange Commission for Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, these
statements reflect all normal recurring adjustments necessary for a fair
presentation of the financial position, results of operations and cash flows
for all periods presented. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year. The
Company's second fiscal quarter ends on the Sunday closest to December 31.
For ease of presentation, the Company's second fiscal quarter end is deemed
to be December 31. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form
10-K for the fiscal year ended June 30, 1998 on file with the Securities and
Exchange Commission.
NOTE 2 -- NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share," as required in the second quarter of
fiscal 1998. Basic earnings per share ("EPS") is computed based on the
weighted average number of shares of common stock outstanding during the
period. Diluted EPS is computed based on the weighted average number of
shares of common stock outstanding during the period increased by the
weighted average number of common stock equivalents outstanding during the
period, using the treasury stock method. All prior period EPS amounts have
been presented to conform to the provisions of SFAS 128.
6
<PAGE>
A reconciliation of the calculation of basic and diluted EPS is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-------- -------- --------- ---------
(unaudited)
<S> <C> <C> <S> <C>
Net income ........................... $ 1,315 $ 789 $ 2,663 $ 966
------- ------- ------- -------
------- ------- ------- -------
BASIC EPS:
Weighted average number of common
shares outstanding ............. 10,232 10,538 10,386 10,498
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per share ............. $ 0.13 $ 0.07 $ 0.26 $ 0.09
------- ------- ------- -------
------- ------- ------- -------
DILUTED EPS:
Weighted average number of common
shares outstanding .............. 10,232 10,538 10,386 10,498
Common stock equivalents from the
issuance of options using the
treasury stock method ............ 331 573 283 602
------- ------- ------- -------
10,563 11,111 10,669 11,100
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share ........... $ 0.12 $ 0.07 $ 0.25 $ 0.09
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the display and reporting of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's current or previously reported net income or shareholders' equity.
Comprehensive income includes all changes in shareholders' equity with the
exception of additional investments by shareholders or distributions to
shareholders. Comprehensive income includes, in addition to net income,
foreign currency translation effects which are charged or credited to the
accumulated other comprehensive income account within shareholders' equity.
7
<PAGE>
Comprehensive income for the three months and six months ended December 31, 1998
and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net income ........................ $1,315 $ 789 $2,663 $ 966
Foreign currency translation effect (16) 2 3 7
------ ------ ------ ------
Total comprehensive income ........ $1,299 $ 791 $2,666 $ 973
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
NOTE 4 -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ ---------
(unaudited)
<S> <C> <C>
Raw materials ........... $ 7,912 $10,195
Work-in-process ......... 3,400 3,259
Finished goods .......... 3,411 2,623
------- -------
$14,723 $16,077
------- -------
------- -------
</TABLE>
NOTE 5 -- LITIGATION
The Company, its directors and certain of its officers were named as
defendants in two putative class action lawsuits filed on April 21, 1997 and
May 2, 1997 in the U.S. District Court for the Southern District of
California. In both cases, the plaintiffs purported to represent a class of
all persons who purchased the Company's Common Stock between February 21,
1997 and March 14, 1997. The complaints alleged that the defendants violated
various federal securities laws through material misrepresentation and
omissions in connection with the Company's initial public offering and its
registration statement on Form S-1 which was declared effective by the
Securities and Exchange Commission on February 21, 1997. The plaintiffs seek
rescission of their share purchases or rescissory damages if their shares
have been sold, as well as attorneys' fees and other costs and expenses.
On September 16, 1997, the Court entered an order permitting the voluntary
dismissal of the first-filed lawsuit without prejudice and the plaintiff in
the second lawsuit was appointed as the lead
8
<PAGE>
plaintiff in this litigation. That person then resigned as the lead
plaintiff, and the shareholder who had filed the first of the two lawsuits
petitioned the Court for permission to intervene and serve as the lead
plaintiff. The petition was granted on September 29, 1998 and the shareholder
has moved the Court to allow the matter to go forward as a class action. That
motion is pending.
The defendants have answered the second complaint, have denied the material
allegations and have disavowed any wrongdoing. The litigation currently is in
the discovery phase, and trial has been scheduled for the summer of 1999.
Although the outcome of the lawsuit cannot be determined, management believes
it has meritorious defenses and intends to defend against the lawsuit
vigorously. The Company maintains directors' and officers' liability
insurance to provide coverage against suits of this nature, and other than
legal fees incurred to date, no amounts have been recorded in the financial
statements for any losses which may result from this litigation.
9
<PAGE>
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements usually contain the words "estimate,"
"anticipate," "expect" or similar expressions. All forward-looking statements
are inherently uncertain as they are based on various expectations and
assumptions concerning future events and they are subject to numerous known
and unknown risks and uncertainties. The forward-looking statements included
herein are based on current expectations and entail such risks and
uncertainties as those set forth below which could cause the Company's actual
results to differ materially from those projected in the forward-looking
statements. The Company disclaims any obligation to update or publicly
announce revisions to any such statements to reflect future events or
developments.
Advanced technology companies such as Overland Data are subject to numerous
risks and uncertainties generally characterized by rapid technological change
and other highly competitive factors. The Company's future revenue and
operating results are dependent upon gaining further market acceptance for
its LibraryXpress line of automated tape libraries and its ability to
manufacture sufficient product to satisfy demand. The LibraryXpress products
incorporate a line of DLT tape drives supplied by Quantum Corporation, which
has been the sole source for DLT tape technology. At certain times in the
past, the Company has not obtained an adequate supply of such drives and
there can be no assurance that such supply interruptions will not recur. In
September 1998, Quantum announced that it had entered into a manufacturing
license and marketing agreement with Tandberg Data ASA through which Tandberg
can become an independent second source of DLT tape drives. Tandberg is now
developing this capability which is expected to mitigate Overland's
dependence on Quantum.
The Company's future revenue and operating results are also dependent upon
market demand for its TapeXpress line of 36-track products, which could be
adversely affected by newly introduced competitive products and other
factors. Although IBM is the Company's primary customer for this product
line, IBM is not required to purchase minimum quantities pursuant to the
supply arrangement, and IBM's orders can fluctuate from quarter to quarter.
The Company's future success also will depend upon its ability to develop,
manufacture and market new and enhanced products on a timely and cost
effective basis, including products and licensing agreements related to the
Company's new Variable Rate Randomizer ("VR2") encoding technology which was
announced on December 11, 1997. Although a cross-licensing agreement was
announced on April 1, 1998 with Tandberg Data ASA whereby Tandberg will
include VR2 technology in Tandberg's MLR and SLR tape drives, success in this
area cannot be assured because of the inherent uncertainty of development
projects for high technology
10
<PAGE>
products, the possible introduction of competing products in the marketplace,
the uncertainty of market acceptance of the products and other such factors.
The risks and uncertainties noted above, along with others which could
materially and adversely affect the Company's business, are set forth more
fully in the "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and other sections of the
Company's Form 10-K for the most recently completed fiscal year on file with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's statement of operations
as a percentage of net sales for the periods presented. The data has been
derived from the Company's unaudited condensed consolidated financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ...................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............. 69.8 68.4 69.7 67.7
----- ----- ----- -----
Gross profit ................... 30.2 31.6 30.3 32.3
----- ----- ----- -----
Operating expenses:
Sales and marketing ....... 12.4 12.2 11.9 13.4
Research and development .. 5.0 5.3 5.3 5.9
General and administrative 5.0 8.5 5.2 9.6
----- ----- ----- -----
Total operating expenses 22.4 26.0 22.4 28.9
----- ----- ----- -----
Income from operations ......... 7.8 5.5 7.9 3.4
Other income:
Interest, net ............. 0.9 1.2 0.9 1.4
Other income, net ......... 0.3 0.2 0.2 0.1
----- ----- ----- -----
Income before income taxes ..... 9.0 7.0 9.0 4.9
Provision for income taxes ..... 3.5 2.7 3.5 1.9
----- ----- ----- -----
Net income ..................... 5.5% 4.3% 5.5% 3.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales of $24.2 million in the fiscal 1999 second quarter
grew by $6.1 million or 34.1% over sales of $18.1 million in the comparable
quarter of the prior fiscal year. The Company experienced increases in all
product lines with the exception of its end-of-life 18-track products. The
largest growth was attributable to increased sales of the LibraryXpress
product. LibraryXpress sales grew 58.0% from $8.5 million in the fiscal 1998
second quarter to $13.4 million in the fiscal 1999 second quarter. Sales to
Digital Equipment Corporation/Compaq ("DEC/CPQ") of our DLT7000-based
LibraryXpress increased almost three times over the
11
<PAGE>
prior quarter. We commenced shipments of our new LoaderXpress product during
fiscal 1998 third quarter, which contributed $2.1 million of incremental
sales versus fiscal 1998 second quarter. Sales of 36-track products grew 8.6%
from $5.8 million in the fiscal 1998 second quarter to $6.3 million in the
fiscal 1999 second quarter. Strong OEM and Asian Pacific Latin America
("APLA") shipments were offset by declines in the volume and reseller
channels. Sales of standalone DLT exceeded fiscal 1998 second quarter by
$607,000 ($893,000 to $1.5 million in the fiscal 1999 second quarter)
primarily due to sales of DLT7000 to DEC/CPQ. Combined sales of 18-track and
9-track products of $1.5 million in the 1999 second quarter declined by
5.7% from sales of $1.6 million in the fiscal 1998 second quarter. The
announcement of end-of-life on one of the 9-track products spurred final
purchases. The Company expects that sales of this mature business will
continue to decline in future quarters.
A summary of the sales mix by product for the periods presented in the
statement of operations follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------ ------- ------- --------
<S> <C> <C> <C> <C>
Company products:
LibraryXpress ................. 55.1% 46.9% 51.2% 43.5%
36-track ...................... 25.9 31.9 31.8 27.7
18-track ...................... 0.2 2.5 0.2 3.5
9-track ....................... 6.1 6.4 5.7 10.5
Spare parts, controllers, other 6.4 7.4 5.4 8.6
Other products:
DLT distributed product ....... 6.3 4.9 5.7 6.2
----- ------ ----- -----
100.0% 100.0% 100.0% 100.0%
----- ------ ----- -----
----- ------ ----- -----
</TABLE>
GROSS PROFIT. The Company's gross profit for the fiscal 1999 second
quarter was $7.3 million, an increase of 28.2%, from $5.7 million in the
fiscal 1998 second quarter. As a percentage of sales, the fiscal 1999 second
quarter gross margin declined to 30.2% from 31.6% in the fiscal 1998 second
quarter but was flat with the fiscal 1999 first quarter gross margin. The
decline compared to the prior quarter was due to a greater mix of OEM
business (48% in fiscal 1999 second quarter versus 34% in fiscal 1998 second
quarter). Although the level of OEM business in 1999 second quarter declined
from fiscal 1999 first quarter, margins were comparable due to changes in
product mix.
SALES AND MARKETING EXPENSE. Sales and marketing expense amounted to
$3.0 million or 12.4% of net sales in the fiscal 1999 second quarter compared
to $2.2 million or 12.2% of net sales in the fiscal 1998 second quarter. The
growth of expenses resulted from increased spending for advertising and
promotions and new
12
<PAGE>
sales personnel used to promote the new products and to generate demand
through our new commercial distribution channel.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
amounted to $1.2 million or 5.0% of net sales in the fiscal 1999 second
quarter compared to $957,000 or 5.3% of net sales in the fiscal 1998 second
quarter. The increased expenses in the fiscal 1999 second quarter reflect
personnel additions and increased development material costs, offset by a
non-recurring engineering reimbursement received from a customer.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
amounted to $1.2 million or 5.0% of net sales in the fiscal 1999 second
quarter compared to $1.5 million or 8.5% of net sales in the fiscal 1998
second quarter. The decrease in expenses in the fiscal 1999 second quarter
reflects a number of factors including reduced expenses for computer
equipment, reduced recruiting expenses, and a reduction in our provision for
bad debts due to an increase in the quality of receivables incident to the
larger level of OEM business and other customers who represent relatively
lower credit risk.
OTHER INCOME, NET. In the fiscal 1999 second quarter, the Company
generated net other income of $298,000 which consisted of $221,000 of
interest income and $77,000 of foreign currency gains, compared to net other
income of $258,000 in the fiscal 1998 second quarter which consisted of
$220,000 of interest income and $38,000 of foreign currency gains.
INCOME TAXES. The Company's effective tax rate in the fiscal 1999 second
quarter was 39% compared to 38% in the fiscal 1998 second quarter and 38.5%
for the full fiscal year 1998.
NET INCOME. Net income amounted to $1.3 million in the fiscal 1999
second quarter compared to $789,000 in the fiscal 1998 second quarter.
Diluted net income per share increased from $.07 in the fiscal 1998 second
quarter to $.12 in the fiscal 1999 second quarter and basic net income per
share increased from $.07 to $.13 in the same time periods. In addition to
the higher level of earnings, the Company also benefited from a reduced
number of shares outstanding incident to the stock repurchase of
approximately 400,000 shares of its common stock.
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. The Company's net sales of $48.6 million in the fiscal 1999
first half grew by $16.5 million or 51.6% over sales of $32.1 million in the
comparable period of the prior year. The growth resulted from increased sales
in both the LibraryXpress and 36-track products. The Company experienced its
largest increase in the LibraryXpress product, sales of which grew from $14.1
million in the fiscal 1998 first half to $24.9 million in fiscal 1999 first
half, an increase of 76.6%. Sales of the Company's 36-track product of $15.5
million in the fiscal 1999 first half increased from $8.9 million in the
prior year. In total, the OEM business comprised 51.2% of revenues for the
fiscal 1999 first half
13
<PAGE>
compared to 29.5% of revenues for the fiscal 1998 first half. In addition,
sales of standalone DLT product of $2.8 million in the fiscal 1999 first half
exceeded comparable sales in fiscal 1998 first half by $781,000 primarily due
to sales of DLT7000 to DEC/CPQ. As expected, these gains were offset
partially by declines in sales of the Company's mature 18-track and 9-track
products, which fell by a combined 36.1% from $4.5 million in the prior
period to $2.9 million in the current period. Finally, the fiscal 1999 first
half sales of controllers, spare parts, software and other products amounted
to $2.7 million, a decrease of 5.0% from the fiscal 1998 first half sales of
$2.8 million.
GROSS PROFIT. The Company's gross profit for the fiscal 1999 first half
was $14.7 million, a 42.1% increase from the $10.4 million reported in the
fiscal 1998 first half. The gross margin percentage declined from 32.3% in
the fiscal 1998 first half to 30.3% in the fiscal 1999 first half primarily
due to a greater mix of OEM business.
SALES AND MARKETING EXPENSE. Sales and marketing expense amounted to
$5.8 million or 11.9% of net sales in the fiscal 1999 first half compared to
$4.3 million or 13.4% of net sales in the fiscal 1998 first half. Growth in
sales expenses of $771,000 was due primarily to recruiting expenses and wages
of the new sales personnel hired to generate demand through our new
commercial distribution channel. The $728,000 increase in marketing expenses
resulted from increased advertising and promotion costs for new products, as
well as to stimulate product demand through the commercial distribution
channel.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
amounted to $2.6 million or 5.3% of net sales in the fiscal 1999 first half
compared to $1.9 million or 5.9% of net sales in the fiscal 1998 first half.
The increased expenses resulted from personnel additions and higher
development costs related to VR2.
GENERAL AND ADMINISTRATIVE. General and administrative expense amounted
to $2.5 million or 5.2% of net sales in the fiscal 1999 first half compared
to $3.1 million or 9.6% of net sales in the fiscal 1998 first half. The
decrease in expenses in the fiscal 1999 first half was due primarily to lower
computer purchases and reduced legal expenses related to the class-action
lawsuit filed against the Company. During fiscal 1998 first half, the Company
incurred expenses to upgrade computer equipment in preparation for the
implementation of its ERP system in October 1997. In addition, during fiscal
1998 first half, the Company incurred legal expenses related to the
class-action lawsuit because the related insurance deductible had not been
reached. Current expenses related to the class-action lawsuit are recorded as
a receivable awaiting reimbursement by the Company's insurance carrier.
OTHER INCOME, NET. In the fiscal 1998 first half, net other income of
$468,000 consisted almost entirely of interest income. The net other income
of $569,000 in the fiscal 1999 first half consisted of $457,000 of interest
income and $112,000 of foreign currency gains.
14
<PAGE>
INCOME TAXES. The Company's provision for state and federal income taxes
in the first half of fiscal year 1999 was 39% of income before taxes versus
38% in the first half of fiscal year 1998.
NET INCOME. Net income amounted to $2.7 million in the fiscal 1999 first
half compared to $966,000 in the fiscal 1998 first half. Diluted net income
per share increased to $.25 in the fiscal 1999 first half compared to $.09 in
the first half of the prior year. Basic net income per share increased from
$.09 to $.26 in the same time periods. In addition to the higher level of
earnings, the Company also benefited from a reduced number of shares
outstanding incident to the stock repurchase of approximately 400,000 shares
of its common stock.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal 1999 first half, the Company generated $1.6 million of
cash. Cash was generated through an increase of $3.3 million in earnings
before depreciation and amortization, a decrease in accounts receivable of
$1.6 million caused by strong collections, and a decrease in inventories of
$1.4 million. Items which partially offset these amounts included a $1.8
million increase in accounts payable, accrued liabilities, and other, $2.4
million used primarily to repurchase shares of the Company's stock pursuant
to its share buyback program, and $496,000 spent on capital equipment during
the period. On an aggregate basis, these activities increased the Company's
cash reserves to $17.2 million at December 31, 1998 compared to $15.6 million
at June 30, 1998. At that date, the Company's working capital amounted to
$40.2 million with no outstanding funded debt. The Company believes that
these resources will be sufficient to fund its operations and to provide for
its growth into the foreseeable future.
YEAR 2000 COMPLIANCE
Many computer systems experience problems handling dates in and beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. During fiscal
year 1998, the Company replaced its internal enterprise wide computer system
and believes that the system is year 2000 compliant. The Company's internally
manufactured products have no date functionality built into them with the
exception of certain products have a display-only date/time function. This
function, which is year 2000 compliant, allows the operator to set the LCD
front panel display date and time from the front panel. Although not used in
any way when reading/writing data or to otherwise operate the products, it is
used for date/time stamping entries into the internal history and error logs.
The Company is also assessing and addressing the possible effects on the
Company's operations of the year 2000 readiness of its other internal systems
and of its key suppliers and subcontractors. If the Company's suppliers and
subcontractors fail to address their year 2000 issues, the Company could
experience an adverse material impact on its business, financial condition,
and results of operations. The Company's smaller vendors present the largest
risks because the Company believes that these vendors may not address the
year 2000 issues adequately. If a vendor is deemed to be high risk for year
2000 issues, the Company will pursue alternative sources of suppliers because
an inability to supply parts may delay production of the Company's products.
To date, the Company has incurred an immaterial amount of costs of less than
$20,000. The potential impact and related costs of year 2000 readiness for
both the remaining internal systems and key suppliers and subcontractors are
still unknown at this time. However, based on assessment underway, the
Company currently expects that the total cost of addressing the year 2000
issue will remain an immaterial amount.
The Company does not know how customer spending patterns may be impacted by
year 2000 programs. As customers focus on preparing their business for the
year 2000 in the near term, capital budgets may be spent on remediation
efforts, potentially delaying the purchase and implementation of new systems,
thereby creating less demand for
15
<PAGE>
the Company's products and services. Conversely, demand for the Company's
products could accelerate as customers focus on the need to protect their
stored data by enhancing their backup capabilities. The Company does not know
the resulting impact on its revenues at this time.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, its directors and certain of its officers were named as
defendants in two putative class action lawsuits filed on April 21, 1997 and
May 2, 1997 in the U.S. District Court for the Southern District of
California. In both cases, the plaintiffs purported to represent a class of
all persons who purchased the Company's Common Stock between February 21,
1997 and March 14, 1997. The complaints alleged that the defendants violated
various federal securities laws through material misrepresentation and
omissions in connection with the Company's initial public offering and its
registration statement on Form S-1 which was declared effective by the
Securities and Exchange Commission on February 21, 1997. The plaintiffs seek
rescission of their share purchases or rescissory damages if their shares
have been sold, as well as attorneys' fees and other costs and expenses.
On September 16, 1997, the Court entered an order permitting the voluntary
dismissal of the first-filed lawsuit without prejudice and the plaintiff in
the second lawsuit was appointed as the lead plaintiff in this litigation.
That person then resigned as the lead plaintiff, and the shareholder who had
filed the first of the two lawsuits petitioned the Court for permission
to intervene and serve as the lead plaintiff. The petition was granted on
September 29, 1998 and the shareholder has moved the Court to allow the
matter to go forward as a class action. That motion is pending.
The defendants have answered the second complaint, have denied the material
allegations and have disavowed any wrongdoing. The litigation currently is in
the discovery phase, and trial has been scheduled for the summer of 1999.
Although the outcome of the lawsuit cannot be determined, management believes
it has meritorious defenses and intends to defend against the lawsuit
vigorously. The Company maintains directors' and officers' liability
insurance to provide coverage against suits of this nature, and other than
legal fees incurred to date, no amounts have been recorded in the financial
statements for any losses which may result from this litigation.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 12, 1998, the Company held its Annual Meeting of Shareholders. At
the meeting, the shareholders approved five out of the six management
proposals with the following vote distribution:
<TABLE>
<CAPTION>
BROKER
ITEM AFFIRMATIVE NEGATIVE WITHHELD NON-VOTE
---- ----------- -------- -------- ---------
<S> <C> <C> <C> <C>
1) Election of Board Members:
Scott McClendon 9,400,462 465,328
Martin D. Gray 9,400,462 465,328
William W. Otterson 9,395,162 470,628
Peter Preuss 9,400,462 465,328
John A. Shane 9,396,162 469,628
2) Readoption of the supermajority vote
provisions of the Company's Articles of
Incorporation relating to the "fair price
provisions" for certain business
combinations (1) 4,794,002 2,509,970 16,446 2,545,372
3) Increase the number of shares
issuable under the Company's
1995 Stock Option Plan 6,301,497 785,189 275,105 2,503,999
4) Increase the number of shares
issuable under the Company's
1997 Executive Stock Option Plan 5,854,390 1,218,511 288,890 2,503,999
5) Increase the number of shares which
can be sold to employees under the
Company's 1996 Employee Stock
Purchase Plan 6,676,114 669,213 16,464 2,503,999
6) Reappoint PricewaterhouseCoopers
LLP as independent accountants 9,763,338 95,000 7,452
</TABLE>
____________________________
(1) The supermajority vote provisions of the Company's Articles of
Incorporation relating to the "fair price provisions" for certain business
combinations were not adopted and renewed because less than two-thirds (2/3)
voted in favor. Consequently, the "fair price provisions" now require only
a majority vote of the outstanding shares of Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
OVERLAND DATA, INC.
Date: February 10, 1999 By: /s/ Vernon A. LoForti
----------------------
Vernon A. LoForti
Vice President and
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER
31, 1998, THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER
31, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,202
<SECURITIES> 0
<RECEIVABLES> 14,030
<ALLOWANCES> 0
<INVENTORY> 14,723
<CURRENT-ASSETS> 48,471
<PP&E> 4,025
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,572
<CURRENT-LIABILITIES> 8,250
<BONDS> 0
0
0
<COMMON> 31,121
<OTHER-SE> 12,538
<TOTAL-LIABILITY-AND-EQUITY> 52,572
<SALES> 48,612
<TOTAL-REVENUES> 48,612
<CGS> 33,883
<TOTAL-COSTS> 33,883
<OTHER-EXPENSES> 10,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (457)
<INCOME-PRETAX> 4,379
<INCOME-TAX> 1,716
<INCOME-CONTINUING> 2,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,663
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
</TABLE>
