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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 March 31, 1999
Commission File Number: 0-22071
OVERLAND DATA, INC.
(Exact name of registrant as specified in its charter)
California 95-3535285
(State or other jurisdiction of incorporation) (IRS Employer 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 May 11, 1999 there were 10,114,668 shares of the registrant's common
stock, no par value, issued and outstanding.
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OVERLAND DATA, INC.
FORM 10-Q
For the quarterly period ended March 31, 1999
TABLE OF CONTENTS
-----------------
Page
Number
------
PART I - FINANCIAL INFORMATION
- ----------------------------------
Item 1. Financial Statements:
Consolidated condensed statement of operations --
Three months and nine months ended
March 31, 1999 and 1998...................................3
Consolidated condensed balance sheet --
March 31, 1999 and June 30, 1998..........................4
Consolidated condensed statement of cash flows --
Nine months ended March 31, 1999 and 1998.................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..............................................18
Item 4. Submission of Matters to a Vote of Security Holders............19
Item 6. Exhibits and Reports on Form 8-K...............................19
Signatures.....................................................20
2
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OVERLAND DATA, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales:
Product sales .......................................... $22,048 $18,659 $70,660 $50,728
Royalties .............................................. 215 - 215 -
------- ------- -------- -------
Total net sales ..................................... 22,263 18,659 70,875 50,728
Cost of goods sold ............................................ 15,741 13,190 49,624 34,895
------- ------- -------- -------
Gross profit .................................................. 6,522 5,469 21,251 15,833
------- ------- -------- -------
Operating expenses:
Sales and marketing .................................... 2,966 2,241 8,769 6,544
Research and development ............................... 1,305 1,060 3,892 2,963
General and administrative ............................. 1,282 1,653 3,811 4,721
------- ------- -------- -------
Total operating expenses ............................ 5,553 4,954 16,472 14,228
------- ------- -------- -------
Income from operations ........................................ 969 515 4,779 1,605
Other income:
Interest, net .......................................... 188 247 645 710
Other income, net ...................................... 56 46 168 51
------- ------- -------- -------
Income before income taxes .................................... 1,213 808 5,592 2,366
Provision for income taxes .................................... 477 307 2,193 899
------- ------- -------- -------
Net income .................................................... $ 736 $ 501 $ 3,399 $ 1,467
------- ------- -------- -------
------- ------- -------- -------
Earnings per share:
Basic .................................................. $ 0.07 $ 0.05 $ 0.33 $ 0.14
------- ------- -------- -------
------- ------- -------- -------
Diluted ................................................ $ 0.07 $ 0.05 $ 0.32 $ 0.13
------- ------- -------- -------
------- ------- -------- -------
Number of shares used in computing earnings per share:
Basic .................................................. 10,100 10,542 10,291 10,512
------- ------- -------- -------
------- ------- -------- -------
Diluted ................................................ 10,711 10,990 10,547 10,987
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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OVERLAND DATA, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
----------- ----------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ........................................ $ 16,465 $ 15,550
Accounts receivable, less allowance for doubtful accounts
and returns of $961 and $922, respectively ................ 15,384 15,683
Inventories ...................................................... 14,475 16,077
Deferred income taxes ............................................ 1,558 1,558
Other current assets ............................................. 1,204 873
----------- ----------
Total current assets ................................ 49,086 49,741
Property and equipment, net .............................................. 4,051 4,207
Intangible and other assets .............................................. 43 48
----------- ----------
$ 53,180 $ 53,996
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ................................................. $ 5,209 $ 6,970
Accrued liabilities .............................................. 1,226 2,075
Accrued payroll and employee compensation ........................ 1,461 1,198
----------- ----------
Total current liabilities ........................... 7,896 10,243
Deferred income taxes and other liabilities .............................. 761 385
----------- ----------
Total liabilities ................................... 8,657 10,628
----------- ----------
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized; 10,147,668 and 10,549,486 shares
issued and outstanding, respectively ...................... 31,292 33,496
Accumulated other comprehensive income............................ (22) 18
Retained earnings ................................................ 13,253 9,854
----------- ----------
Total shareholders' equity .......................... 44,523 43,368
----------- ----------
$ 53,180 $ 53,996
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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OVERLAND DATA, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................ $ 3,399 $ 1,467
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization ....................................... 1,022 1,102
Changes in operating assets and liabilities:
Accounts receivable ........................................... 299 (2,161)
Inventories .................................................... 1,602 (1,156)
Other assets ................................................... (326) (292)
Accounts payable and accrued liabilities ....................... (2,234) (1,315)
Accrued payroll and employee compensation ...................... 263 40
--------- ---------
Net cash provided by (used in) operating activities ....... 4,025 (2,315)
INVESTING ACTIVITIES:
Capital expenditures ...................................................... (866) (1,744)
--------- ---------
Net cash used in investing activities ..................... (866) (1,744)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ................................... 89 87
Stock repurchases ......................................................... (2,631) (312)
Net proceeds from issuance of common stock ................................ 338 384
--------- ---------
Net cash (used in) provided by financing activities ....... (2,204) 159
--------- ---------
Effect of exchange rate changes on cash ........................................... (40) 30
--------- ---------
Net increase (decrease) in cash and cash equivalents .............................. 915 (3,870)
Cash and cash equivalents at the beginning of the period .......................... 15,550 18,926
--------- ---------
Cash and cash equivalents at the end of the period ................................ $ 16,465 $ 15,056
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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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 third fiscal quarter ends on the Sunday closest to March 31. For
ease of presentation, the Company's third fiscal quarter end is deemed to be
March 31. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on
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
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.
6
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A reconciliation of the calculation of basic and diluted EPS is as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net income ................................... $ 736 $ 501 $ 3,399 $ 1,467
-------- -------- -------- --------
-------- -------- -------- --------
BASIC EPS:
Weighted average number of common
stock shares outstanding ............... 10,100 10,542 10,291 10,512
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share ..................... $ 0.07 $ 0.05 $ 0.33 $ 0.14
-------- -------- -------- --------
-------- -------- -------- --------
DILUTED EPS:
Weighted average number of common
stock shares outstanding ................ 10,100 10,542 10,291 10,512
Common stock equivalents from the
issuance of options using the
treasury stock method ................... 611 448 256 475
-------- -------- -------- --------
10,711 10,990 10,547 10,987
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share ................... $ 0.07 $ 0.05 $ 0.32 $ 0.13
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
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
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Comprehensive income for the three months and nine months ended March 31, 1999
and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net Income ................................. $ 736 $ 501 $ 3,399 $ 1,467
Foreign currency translation effect ........ (43) 23 (40) 30
--------- --------- --------- ---------
Total comprehensive income ................. $ 693 $ 524 $ 3,359 $ 1,497
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 4 -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
----------- ---------
(unaudited)
<S> <C> <C>
Raw materials .......... $ 8,732 $10,195
Work-in-process ........ 3,277 3,259
Finished goods ......... 2,466 2,623
----------- ---------
$14,475 $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 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
8
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court for permission to intervene and serve as the lead plaintiff. The
petition was granted on September 29, 1998 and on December 17, 1998, the
court certified the shareholder class, allowing the litigation to proceed as
a class action.
The defendants have answered the second complaint, have denied the material
allegations and have disavowed any wrongdoing. Discovery is complete, and the
Company has filed a Motion for Summary Judgment, upon which the court is
expected to rule in June 1999. A pretrial conference has been scheduled for
July 26, 1999, but no trial date has been scheduled. Although the outcome of
the lawsuit cannot be determined, management believes that it has meritorious
defenses and intends to defend against the lawsuit vigorously. The Company
maintains directors' and officers' liability insurance to provide coverage
against suits of this nature and, other than legal fees incurred to date, no
amounts have been recorded in the financial statements for any losses which
may result from this litigation.
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 depend on 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 Data's dependence on
Quantum.
The Company's future revenue and operating results also depend on 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 on 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 ("VR(2)") encoding technology.
Although the Company has now entered into licensing agreements with both
Tandberg Data ASA and Imation Corp., the success of VR(2) depends on the
success of the licensee's tape drives which ultimately incorporate VR(2).
Success of VR(2) cannot be assured because of the potential difficulty of
incorporating it into the electronics of new tape technology platforms, the
possible introduction of competing techniques to enhance tape drive
performance, and the uncertain market acceptance of VR(2) enhanced tape
drives.
10
<PAGE>
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 Annual Report on Form 10-K for the fiscal year ended June 30, 1998
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................ 70.7 70.7 70.0 68.8
------- ------- ------- -------
Gross profit .................................. 29.3 29.3 30.0 31.2
------- ------- ------- -------
Operating expenses:
Sales and marketing ................... 13.3 12.0 12.4 12.9
Research and development .............. 5.9 5.7 5.5 5.8
General and administrative ............ 5.8 8.9 5.4 9.3
------- ------- ------- -------
Total operating expenses ........... 25.0 26.6 23.3 28.0
------- ------- ------- -------
Income from operations ........................ 4.3 2.7 6.7 3.2
Other income (expense):
Interest, net ......................... 0.8 1.3 0.9 1.4
Other income, net ..................... 0.2 0.3 0.2 0.1
------- ------- ------- -------
Income before income taxes .................... 5.3 4.3 7.8 4.7
Provision for income taxes .................... 2.1 1.6 3.1 1.8
------- ------- ------- -------
Net income .................................... 3.2% 2.7% 4.7% 2.9%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET SALES. Net sales of $22.3 million in the third quarter of fiscal
year 1999 grew by $3.6 million or 19.3% over net sales of $18.7 million in
the comparable quarter of the prior fiscal year. Improved sales of
LibraryXpress products, distributed DLT tape drives, and spares and
accessories more than offset declines in sales of more mature 36, 18, and
9-track products. In addition, for the first time, the Company recorded
royalties from its VR(2) tape encoding technology totaling $215,000. Sales of
the
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LibraryXpress product family benefited from strong OEM sales and grew 40.8%
from $10.3 million in the third quarter of fiscal year 1998 to $14.5 million
in the third quarter of fiscal year 1999. This included sales of the
Company's new LoaderXpress product, which commenced shipment during the third
quarter of fiscal year 1998, as well as initial shipments in March 1999 of
the new MinilibraryXpress product line. Sales of distributed DLT drives rose
23.0% from approximately $1.0 million in the third quarter of fiscal year
1998 to almost $1.3 million in the third quarter of fiscal year 1999, due
primarily to increased sales in the European and Asia Pacific/Latin America
channels. Sales of 36-track products declined only slightly from $4.5 million
in the third quarter of fiscal year 1998 to $4.4 million in the third quarter
of fiscal year 1999. A shift in customer mix caused the percentage of
36-track sales to OEM channel customers to rise from 52.8% to 71.2% in the
respective quarterly periods. Combined sales of 18 and 9-track products
continued to decline and fell by 67.1% from approximately $1.7 million in the
third quarter of fiscal year 1998 to $544,000 in the third quarter of fiscal
year 1999 due to the end-of-life of these mature products.
A summary of the sales mix by product for the periods presented in the
statement of operations follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Company products:
LibraryXpress ........................... 65.2% 55.4% 55.5% 47.7%
36-track ................................ 19.6 23.9 28.0 26.3
18-track ................................ 0.0 3.6 0.1 3.5
9-track ................................. 2.4 5.3 4.7 8.6
Spare parts, controllers, other ......... 6.1 6.4 5.7 7.9
Other products:
DLT distributed product ................. 5.7 5.4 5.7 6.0
Royalties 1.0 0.0 0.3 0.0
------- ------- ------- -------
100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
GROSS PROFIT. The Company's gross profit for the third quarter of fiscal
year 1999 grew 18.2% to $6.5 million from $5.5 million in the third quarter
of fiscal year 1998. As a percentage of sales, the gross margin of 29.3% in
the third quarter of fiscal year 1999 remained relatively level with the
gross margin in the comparable quarter of the prior year. Excluding the VR(2)
royalties, which had no associated direct costs, the gross margin for the
current quarter was 28.6%. The small margin decline from the prior year was
the result of changes in customer and product mixes.
SALES AND MARKETING EXPENSE. Sales and marketing expense amounted to
$3.0 million or 13.3% of net sales in the third quarter of fiscal year 1999
compared to
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$2.2 million or 12.0% of net sales in the third quarter of fiscal year 1998.
The increased expenses in the current quarter reflect additional sales
personnel used to generate demand through the Company's commercial
distribution channel as well as additional spending for advertising and
promotions.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
amounted to $1.3 million or 5.9% of net sales in the third quarter of fiscal
year 1999 compared to $1.1 million or 5.7% of net sales in the third quarter
of fiscal year 1998. The increased expenses in the current quarter reflect
personnel additions, higher legal fees to establish patents, and additional
development material costs.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
amounted to $1.3 million or 5.8% of net sales in the third quarter of fiscal
year 1999 compared to $1.7 million or 8.9% of net sales in the third quarter
of fiscal year 1998. The decrease in expenses was the result of reduced legal
fees, training and professional development costs, as well as a reduction in
the bad debt allowance incident to a higher concentration of receivables due
from OEM customers with relatively higher credit quality.
OTHER INCOME, NET. In the third quarter of the fiscal year 1999, net
other income amounted to $244,000, comprised of interest income of $188,000
and foreign currency gains of $56,000. This compared to net other income in
the third quarter of fiscal year 1998 of $293,000, comprised of interest
income of $247,000 and foreign currency gains of $46,000. Reduced interest
income in the current quarter reflects lower cash balances relative to the
comparable quarter of the prior year.
INCOME TAXES. The Company's effective tax rate in the third quarter of
fiscal year 1999 was 39% compared to 38% in the third quarter of fiscal year
1998 and 38.5% for the full fiscal year 1998.
NET INCOME. Net income amounted to $736,000 in the third quarter of
fiscal year 1999 compared to $501,000 in the third quarter of fiscal year
1998. Both diluted and basic net income per share increased from $.05 in the
third quarter of fiscal year 1998 to $.07 in the third quarter of fiscal year
1999.
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
NET SALES. The Company's net sales of $70.9 million in the first nine
months of fiscal year 1999 grew by $20.2 million or 39.8% over sales of $50.7
million in the comparable period of the prior fiscal year. The largest
increase was reported in sales of LibraryXpress products, which grew 62.1%
from $24.3 million in the first nine months of fiscal 1998 to $39.4 million
in the first nine months of fiscal year 1999. Sales in the first nine months
of fiscal year 1999 included the Company's new LoaderXpress product, which
commenced shipment during the third quarter of fiscal year 1998, as well as
initial shipments in March 1999 of the new MinilibraryXpress product line.
Sales of the Company's 36-track products amounted to $19.8 million in the
first nine months of fiscal year 1999, a 48.9% increase from $13.3 million in
the first nine months of fiscal 1998. The performance of both of these
product lines during the nine month period is attributable to the strength of
shipments to the Company's OEM
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customers, where sales doubled in comparison to the prior year period. Sales
of distributed DLT products grew by 33.9% to $4.0 million in the first nine
months of fiscal year 1999. Sales of controllers, spare parts, software and
other products amounted to $4.0 million and remained relatively unchanged
from the prior year period. The sales gains were partially offset by expected
declines in sales of the Company's mature 18-track and 9-track products,
which fell by a combined 44.3% from $6.1 million in the prior period to $3.4
million in the current period.
GROSS PROFIT. The Company's gross profit for the first nine months of
fiscal year 1999 amounted to $21.3 million, a 34.8% increase from $15.8
million reported in the first nine months of fiscal year 1998. The gross
margin percentage, however, declined from 31.2% in the first nine months of
fiscal year 1998 to 30.0% in the first nine months of fiscal year 1999. This
decline was caused primarily by a substantial increase in the amount of sales
generated to lower margin OEM customers which comprised 47.1% of net sales
for the first nine months of fiscal year 1999 compared to 32.9% for the first
nine months of fiscal year 1998.
SALES AND MARKETING EXPENSE. Sales and marketing expense amounted to
$8.8 million or 12.4% of net sales in the first nine months of fiscal year
1999 compared to $6.5 million or 12.9% of net sales in the first nine months
of fiscal year 1998. The growth in sales expenses resulted from increased
wages related to new sales personnel hired to generate demand through the
Company's commercial distribution channel as well as increased recruiting
expenses. In the marketing area, the Company also increased spending for
advertising and promotions for new products.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
amounted to $3.9 million or 5.5% of net sales in the first nine months of
fiscal year 1999 compared to $3.0 million or 5.8% of net sales in the first
nine months of fiscal year 1998. The increased expenses reflect personnel
additions, higher development material costs, and higher legal fees to
establish patents.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
amounted to $3.8 million or 5.4% of net sales in the first nine months of
fiscal year 1999 compared to $4.7 million or 9.3% of net sales in the first
nine months of fiscal year 1998. The decreased expenses in the first nine
months of fiscal year 1999 were the result of reduced legal fees, computer
equipment costs, training and development costs, recruiting expenses, as well
as a reduction in the bad debt allowance due to a higher concentration of
receivables due from OEM customers with relatively higher credit quality.
OTHER INCOME, NET. In the first nine months of fiscal year 1998, net
other income amounted to $761,000, comprised of interest income of $710,000
and foreign currency gains of $51,000. This compared to net other income in
the first nine months of fiscal year 1999 of $813,000, comprised of interest
income of $645,000 and foreign currency gains of $168,000.
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<PAGE>
INCOME TAXES. The Company's provision for state and federal income taxes
in the first nine months of fiscal year 1999 was 39% of income before taxes
versus 38% in the first nine months of fiscal year 1998.
NET INCOME. Net income amounted to $3.4 million in the first nine months
of fiscal year 1999 compared to $1.5 million in the first nine months of
fiscal year 1998. Diluted net income per share increased to $.32 in the first
nine months of fiscal year 1999 compared to $.13 in the first nine months of
the prior year. Basic net income per share increased from $.14 to $.33 in the
same time periods. The Company also benefited from a reduced number of shares
outstanding incident to the repurchase of approximately 547,000 shares of its
common stock.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1999, the Company generated $915,000
of cash. Cash was generated through $4.4 million in earnings before
depreciation and amortization, a decrease in inventories of $1.6 million, and
a decrease in accounts receivable of $299,000. These effects were partially
offset by a $2.3 million increase in accounts payable, accrued liabilities,
and other working capital items; $2.2 million used in financing activities
primarily from the repurchase of shares of the Company's common stock
pursuant to its share buyback program; and $866,000 spent on capital
equipment during the period. These activities, on an aggregate basis,
increased the Company's cash reserves to $16.5 million at March 31, 1999
compared to $15.6 million at June 30,1998. The Company's working capital
amounted to $41.2 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
The year 2000 computer issue arises because certain computer systems experience
problems handling dates in and beyond the year 1999. Consequently, some computer
hardware and software will need to be modified prior to the year 2000 in order
to remain functional. The widespread use and dependency on computer technology
in all areas of modern commerce may pose significant risks to companies,
including Overland, from year 2000 issues. These risks include potential
disruptions or failures within products and operations of Overland and its
suppliers, customers and service providers. Because a large part of the risk is
indirect through suppliers, service providers and customers, the Company cannot
accurately predict the impact of the year 2000 issue on the Company, its
financial condition and results of operations.
The Company is in the process of addressing year 2000 issues both within and
outside of Overland and has made significant progress to date. The Company has
completed its analysis of its own internally manufactured products and concluded
that none of the products sold by the Company has any date functionality built
into it, with the exception of certain products that employ a display-only
date/time function. This function, which is year 2000 compliant, allows the
operator to set the LCD front panel display date and time from the front panel.
The Company then focused on the year 2000 functionality of its internal computer
systems and operating equipment. Overland completed its year 2000 preparations
for its primary business systems in October 1997 when the Company replaced its
internal enterprise wide computer system, which it believes to be year 2000
compliant. This system replacement included material forecasting, inventory
management, manufacturing management, order administration, accounts payable,
accounts receivable and financial management. The Company is currently
completing a year 2000 assessment of its secondary business systems, both
information technology ("IT") and non-IT systems. This assessment is
approximately 75% complete and the Company expects to complete the assessment by
June 30, 1999. No significant issues have been revealed in this assessment to
date. Any year 2000 issues are remedied as they are revealed. The Company
expects to complete all remediation efforts by August 27, 1999 and testing and
certification by October 1, 1999.
The Company's final year 2000 focus is on external elements. As indicated above,
the Company's risk assessment includes understanding the year 2000 readiness of
its suppliers. The Company's risk assessment process associated with suppliers
includes soliciting and analyzing responses to questionnaires distributed to
these suppliers, as well as web-site and SEC filing research, telephone surveys,
and onsite interviews with certain critical suppliers. The Company has completed
interviews with more than 90% of its critical suppliers and expects to complete
the process by May 28, 1999. All of the critical suppliers surveyed to date have
year 2000 plans in place. The
15
<PAGE>
Company has placed 26% of its critical suppliers on a follow-up program to
ensure that they complete scheduled activities in a timely manner. None of
the follow-up items appear to present major year 2000 issues at this time.
The Company expects to have all vendors certified by August 27, 1999.
The year 2000 readiness of the Company's key supplier, Quantum Corporation, is
of particular importance. Quantum has implemented a year 2000 compliance program
using a resolution approach based on the U.S. General Accounting Office Year
2000 Assessment Guide. Quantum's program included the evaluation of all of its
products and internal systems and a review of the readiness of its suppliers and
service providers. On February 9, 1999, Quantum indicated in its Form 10-Q
filing with the SEC that it expected to be year 2000 compliant and certified by
March 31, 1999.
The Company also is working closely with key customers to evaluate their
readiness for year 2000 and will perform site visits if deemed necessary. The
ability of customers to deal with year 2000 issues may affect their operations
and their ability to order and pay for products. Based on the level of risk
assessed, the Company may develop contingency plans to address possible changes
in customer order patterns. The Company does not know how 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 the Company's products and
services. The Company does not know the resulting impact on its revenues at this
time.
Overland believes that its most reasonably likely worst case scenario would be
attributed to third party factors, rather than its internal systems and
applications. Because the Company relies heavily on third parties to manufacture
and transport products and services, a failure of third party systems could
disrupt service, which could delay shipments of Overland's products.
Although not directly related to the year 2000 issue, the cost of installing and
implementing the Company's new ERP system in October 1997 was approximately $1.5
million. The Company has had a policy since 1995 of purchasing year 2000
compliant products where possible. To date, the Company has incurred less than
$100,000 of other costs to address the year 2000 issue. Based on assessment and
remediation projects underway, the Company expects that the total cost of
addressing the year 2000 issue will not exceed $200,000 amounting to less than
10% of the Company's IT budget. No significant system projects have been
deferred due to the year 2000 program.
16
<PAGE>
Based on assessment and remediation completed to date, the Company does not
expect any significant disruption to its operations or operating results as a
result of year 2000 issues. The Company is taking all steps that it believes
are appropriate to identify and resolve any year 2000 issues; however, it is
uncertain to what extent the Company may be affected by such matters. Because
of the complexity and inherent uncertainty of the year 2000 issue, there can
be no assurance that the Company will be able to assess, identify and correct
year 2000 issues in a timely or successful manner. In addition, there can be
no assurance that the failure to ensure year 2000 capability by suppliers,
service providers, customers, or other third parties would not have a
material adverse affect on the Company's business, financial condition and
results of operations.
The foregoing statements regarding the Company's year 2000 plans and the
Company's expectations for resolving these issues and the costs associated
therewith are forward-looking statements and actual results could vary. The
Company's success in addressing year 2000 issues could be impacted by the
severity of the problems to be resolved within the Company, by year 2000 issues
affecting its suppliers and service providers, and by the costs to address these
issues.
17
<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 on December 17, 1998, the court certified the
shareholder class, allowing the litigation to proceed as a class action.
The defendants have answered the second complaint, have denied the material
allegations and have disavowed any wrongdoing. Discovery is complete, and the
Company has filed a Motion for Summary Judgment, upon which the court is
expected to rule in June 1999. A pretrial conference has been scheduled for
July 26, 1999, but no trial date has been scheduled. Although the outcome of
the lawsuit cannot be determined, management believes that it has meritorious
defenses and intends to defend against the lawsuit vigorously. The Company
maintains directors' and officers' liability insurance to provide coverage
against suits of this nature and, other than legal fees incurred to date, no
amounts have been recorded in the financial statements for any losses which
may result from this litigation.
18
<PAGE>
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the third
quarter of fiscal year 1999.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<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: May 12, 1999 By: /s/ Vernon A. LoForti
-----------------------
Vernon A. LoForti
Vice President and
Chief Financial Officer
20
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE 9 MONTHS ENDED MARCH 31,
1999, THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999, AND THE CONSOLIDATED
CONDENSED STATEMENT OF CASH FLOWS FOR THE 9 MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
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