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 |
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For the quarterly period ended September 30, 2002 |
Commission File Number: 000-22071
OVERLAND STORAGE, INC.
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation) |
95-3535285 (IRS Employer Identification No.) |
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4820 Overland Avenue, San Diego, California 92123-1599 (Address of principal executive offices, including zip code) |
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(858) 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 ý No o
As of November 7, 2002, there were 11,039,669 shares of the registrant's common stock, no par value, issued and outstanding.
OVERLAND STORAGE, INC.
FORM 10-Q
For the quarterly period ended September 30, 2001
Table of Contents
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Page Number |
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PART IFINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements: |
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Consolidated Condensed Statement of OperationsThree months ended September 30, 2002 and 2001 |
3 |
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Consolidated Condensed Balance SheetSeptember 30, 2002 and June 30, 2002 |
4 |
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Consolidated Condensed Statement of Cash FlowsThree months ended September 30, 2002 and 2001 |
5 |
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Notes to Consolidated Condensed Financial Statements |
6 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
22 |
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Item 4. |
Controls and Procedures |
22 |
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PART IIOTHER INFORMATION |
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Item 6. |
Exhibits and Reports on Form 8-K |
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Signature |
24 |
2
OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended September 30, |
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2002 |
2001 |
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Net revenues: | ||||||||
Product sales | $ | 33,994 | $ | 39,887 | ||||
Royalties & services | 546 | 85 | ||||||
Total net revenues | 34,540 | 39,972 | ||||||
Cost of revenues |
25,528 |
30,649 |
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Gross profit | 9,012 | 9,323 | ||||||
Operating expenses: | ||||||||
Sales and marketing | 6,051 | 4,207 | ||||||
Research and development | 1,694 | 1,627 | ||||||
General and administrative | 2,151 | 2,126 | ||||||
Total operating expenses | 9,896 | 7,960 | ||||||
(Loss) income from operations | (884 | ) | 1,363 | |||||
Other income (expense): |
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Interest income, net | 68 | 108 | ||||||
Other (expense) income, net | (34 | ) | 222 | |||||
(Loss) income before income taxes | (850 | ) | 1,693 | |||||
(Benefit) provision for income taxes | (293 | ) | 643 | |||||
Net (loss) income | $ | (557 | ) | $ | 1,050 | |||
(Loss) earnings per share: | ||||||||
Basic | $ | (0.05 | ) | $ | 0.10 | |||
Diluted | $ | (0.05 | ) | $ | 0.10 | |||
Number of shares used in computing (loss) earnings per share: | ||||||||
Basic | 11,024 | 10,525 | ||||||
Diluted | 11,024 | 10,760 | ||||||
See accompanying notes to consolidated condensed financial statements.
3
OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands)
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September 30, 2002 |
June 30, 2002 |
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(unaudited) |
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ASSETS: | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 24,941 | $ | 26,884 | |||||
Accounts receivable, less allowance for doubtful accounts of $697 and $652, respectively | 22,275 | 21,391 | |||||||
Inventories | 17,493 | 17,503 | |||||||
Deferred income taxes | 3,368 | 3,368 | |||||||
Other current assets | 3,563 | 2,187 | |||||||
Total current assets | 71,640 | 71,333 | |||||||
Property and equipment, net |
8,778 |
9,171 |
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Other assets | 583 | 499 | |||||||
$ | 81,001 | $ | 81,003 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY: |
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Current liabilities: | |||||||||
Accounts payable | $ | 8,046 | $ | 8,266 | |||||
Accrued liabilities | 3,973 | 3,705 | |||||||
Accrued payroll and employee compensation | 2,563 | 2,718 | |||||||
Accrued warranty | 1,604 | 1,405 | |||||||
Current portion of long-term debt | 931 | 776 | |||||||
Total current liabilities | 17,117 | 16,870 | |||||||
Long-term debt |
3,724 |
3,879 |
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Other liabilities | 1,232 | 988 | |||||||
Total liabilities | 22,073 | 21,737 | |||||||
Shareholders' equity: |
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Common stock, no par value, 25,000 shares authorized; 11,039 and 11,003 shares issued and outstanding, respectively | 36,865 | 36,654 | |||||||
Accumulated other comprehensive loss | (270 | ) | (278 | ) | |||||
Retained earnings | 22,333 | 22,890 | |||||||
Total shareholders' equity | 58,928 | 59,266 | |||||||
$ | 81,001 | $ | 81,003 | ||||||
See accompanying notes to consolidated condensed financial statements.
4
OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended September 30, |
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2002 |
2001 |
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OPERATING ACTIVITIES: | |||||||||||
Net (loss) income | $ | (557 | ) | $ | 1,050 | ||||||
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: | |||||||||||
Depreciation and amortization | 582 | 419 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (884 | ) | (3,578 | ) | |||||||
Inventories | 10 | 1,797 | |||||||||
Accounts payable and accrued liabilities | 247 | 3,834 | |||||||||
Accrued payroll and employee compensation | (155 | ) | (122 | ) | |||||||
Other, net | (1,216 | ) | (416 | ) | |||||||
Net cash (used in) provided by operating activities | (1,973 | ) | 2,984 | ||||||||
INVESTING ACTIVITIES: | |||||||||||
Capital expenditures | (189 | ) | (364 | ) | |||||||
Net cash used in investing activities | (189 | ) | (364 | ) | |||||||
FINANCING ACTIVITIES: | |||||||||||
Proceeds from the exercise of stock options and the sale of stock under the employee stock purchase plan | 211 | 167 | |||||||||
Net cash provided by financing activities | 211 | 167 | |||||||||
Effect of exchange rate changes on cash | 8 | 89 | |||||||||
Net (decrease) increase in cash and cash equivalents | (1,943 | ) | 2,876 | ||||||||
Cash and cash equivalents at the beginning of the period | 26,884 | 10,844 | |||||||||
Cash and cash equivalents at the end of the period | $ | 24,941 | $ | 13,720 | |||||||
See accompanying notes to consolidated condensed financial statements.
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OVERLAND STORAGE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1Basis of Presentation
The accompanying condensed consolidated financial statements of Overland Storage, Inc. and its subsidiaries ("Overland Storage" or 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 in the United States of America 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 first fiscal quarter ends on the Sunday closest to September 30. For ease of presentation, the Company's first fiscal quarter end is deemed to be September 30. 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, 2002 on file with the Securities and Exchange Commission.
Note 2Inventories
Inventories consist of the following (in thousands):
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September 30, 2002 |
June 30, 2002 |
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(unaudited) |
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Raw materials | $ | 7,665 | $ | 8,659 | ||
Work-in-process | 2,278 | 2,724 | ||||
Finished goods | 7,550 | 6,120 | ||||
$ | 17,493 | $ | 17,503 | |||
Note 3Earnings 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. Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share amounted to 3,383,666 and 1,880,266 at September 30, 2002 and 2001, respectively.
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A reconciliation of the calculation of basic and diluted EPS is as follows (in thousands, except per share data):
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Three Months Ended September 30, |
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2002 |
2001 |
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(unaudited) |
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Net (loss) income | $ | (557 | ) | $ | 1,050 | ||
BASIC EPS: | |||||||
Weighted average number of common shares outstanding | 11,024 | 10,525 | |||||
Basic (loss) earnings per share | $ | (0.05 | ) | $ | 0.10 | ||
DILUTED EPS: | |||||||
Weighted average number of common shares outstanding | 11,024 | 10,525 | |||||
Common stock equivalents from the issuance of options using the treasury stock method |
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235 |
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11,024 | 10,760 | ||||||
Diluted (loss) earnings per share | $ | (0.05 | ) | $ | 0.10 | ||
Note 4Comprehensive Income
Comprehensive income includes, in addition to net income, foreign currency translation effects which are charged or credited to accumulated other comprehensive income within shareholders' equity.
Comprehensive (loss) income for the three months ended September 30, 2002 and 2001 was as follows (in thousands):
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Three Months Ended September 30, |
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2002 |
2001 |
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(unaudited) |
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Net (loss) income | $ | (557 | ) | $ | 1,050 | |
Foreign currency translation effect | 8 | 89 | ||||
Comprehensive (loss) income | $ | (549 | ) | $ | 1,139 | |
Note 5Bank Borrowings and Debt Arrangements
At September 30, 2002, the Company had a credit facility consisting of a $5,000,000 five-year term note for capital equipment purchases that matures on August 28, 2007 and a $10,000,000 two-year revolving line of credit for working capital purposes that expires on November 30, 2003. Both the term note and the line of credit are collateralized by a general security interest in the Company's assets. Interest on the term note is set at variable rates equal to the bank's prime rate (4.75% on September 30, 2002) in effect from time to time. Interest on the line of credit is set at the bank's prime rate in effect from time to time minus 0.25% or, at the Company's option, a rate equal to LIBOR plus 2.25%. The loan agreement that governs the credit facility contains certain financial and non-financial
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covenants. In August 2002, the credit facility was modified to provide an exception to a covenant requiring that the Company not incur two consecutive quarterly losses. As of September 30, 2002, the Company was in compliance with this modified covenant. The term note provided for a nine-month draw period through August 28, 2002, during which period only interest was paid. Upon expiration of the draw period, all amounts outstanding under the note became payable in 60 equal payments of principal plus interest. At September 30, 2002, $4,655,000, including $931,000 due within one year, was outstanding under the term note and no amounts were outstanding under the line of credit. Under a prior revolving credit facility, no borrowings were outstanding at September 30, 2001.
Note 6Accrued Restructuring Charges
During the fourth quarter of fiscal year 2001, the Company recorded a pretax charge of approximately $2.5 million, including $2.2 million in inventory and fixed asset impairments and $363,000 of restructuring charges, related to the sale of its Travan-based WS30 and EDT40 tape drive designs and related assets and the exit of the entry-level tape drive business including the planned closure of its Longmont, Colorado facility. The following table summarizes the activity and balances of the accrued restructuring charges through September 30, 2002:
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Employee Related |
Lease and Facility |
Total |
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Restructuring charge | $ | 159,000 | $ | 204,000 | $ | 363,000 | ||||
Cash payments | (31,000 | ) | | (31,000 | ) | |||||
Accrued restructuring charges at June 30, 2001 | 128,000 | 204,000 | 332,000 | |||||||
Cash payments |
(128,000 |
) |
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(128,000 |
) |
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Adjustments | | 228,000 | 228,000 | |||||||
Accrued restructuring charges at June 30, 2002 | $ | | $ | 432,000 | $ | 432,000 | ||||
Cash payments | | | | |||||||
Accrued restructuring charges at September 30, 2002 | $ | | $ | 432,000 | $ | 432,000 | ||||
The remaining accrued facility costs are expected to be paid over the remaining life of the lease relating to the Company's Longmont, Colorado facility, which lease expires in November 2005.
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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. Words and expressions reflecting optimism and satisfaction with current prospects, as well as words such as "believes," "intends," "expects," "plans," "anticipates," and variations thereof, identify forward-looking statements, but their absence does not mean that a statement is not forward looking. 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 not guarantees of performance. Such forward-looking statements 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. Factors that could cause or contribute to such differences include: continuing transitional issues at the Company's major OEM customer; technology spending levels; unexpected shortages of critical components; rescheduling or cancellation of customer orders; loss of a major customer; the timing and market acceptance of new product introductions by the Company, its competitors or its licensees (including the launch of the Company's new software products); the timing and amount of licensing royalties; general competition and price pressures in the marketplace; the Company's ability to control costs and expenses and general economic conditions. The Company disclaims any obligation to update or publicly announce revisions to any such statements to reflect future events or developments. For a more detailed discussion of these and other risks, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 and filed with the Securities and Exchange Commission on September 27, 2002.
Overview
Overland Storage designs, develops, manufactures, markets and supports magnetic tape data automation solutions. Businesses use these solutions for backup, archival and data interchange functions in high-availability network computing environments.
The Company's primary products are automated tape libraries, minilibraries and loaders which combine electro-mechanical robotics, electronic hardware and firmware developed by the Company with an emphasis on efficiency of design, functionality and reliability. Overland also distributes products manufactured by other original equipment manufacturers ("OEMs") and markets various other products including spare parts and tape media. The Company also licenses a proprietary tape encoding technology that it developed under the name Variable Rate Randomizer or "VR2".
On June 11, 2002, the Company entered the software market and launched a new family of open storage management software solutions. To date, sales generated from software products have not been material.
Overland was formerly known as Overland Data, Inc., but changed its name on June 28, 2002 to Overland Storage, Inc. to reflect the Company's expanded commitment to both hardware and software storage solutions.
Risk Factors
Rapid Technological Change and Dependence on New and Enhanced Products
Advanced technology companies like Overland Storage are subject to numerous risks and uncertainties, generally characterized by rapid technological change and intense competition. In such an environment, the Company's future success 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
9
introduce, manufacture and achieve market acceptance of these new and enhanced products. Development schedules for high technology products are inherently subject to uncertainty and there can be no assurance that the Company will be able to meet its product development schedules, including those for products based on its VR2 tape coding technique (both by the Company and its licensees) or the recently announced storage management software products (both by the Company and its licensors), 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 technologies such as new sequential or random access mass storage devices and the emergence of new industry standards could render existing products obsolete or not marketable.
Competition and Price Pressure
The worldwide storage market is intensely competitive as a number of manufacturers of tape automation solutions and storage management software products compete for a limited number of customers. In addition, barriers to entry are relatively low in these markets. The Company currently participates in two segments of the tape backup market: (1) enterprise-level applications and (2) mid-sized applications for workgroups, departments and small enterprises. In both of these spaces, 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. The Company's hardware products currently compete with products made by Advanced Digital Information Corporation, Quantum, StorageTek, Exabyte Corporation and Qualstar Corporation. The Company expects that its software products will compete with products made by IBM, HP, Computer Associates, BMC, Veritas and numerous small software startups. The markets for the Company's products are characterized by significant price competition, and the Company anticipates that its products will face increasing price pressure. This pressure could result in significant price erosion, reduced profit margins and loss of market share, which could have a material adverse effect on the Company's business, financial condition and results of operations.
Dependence on Certain Customers
The Company's revenues are highly dependent upon the level of sales to certain major OEM customers. Historically the Company's largest customer has been Compaq, accounting for approximately 62%, 63% and 54% of net revenues in fiscal years 2002, 2001 and 2000 respectively. On May 3, 2002, Hewlett-Packard ("HP") announced the consummation of its merger with Compaq. Sales to HP accounted for approximately 54% of the Company's net revenues for the quarter ended September 30, 2002. No other customer accounted for more than 10% of net revenues during the quarter ended September 30, 2002. No customer is presently obligated to purchase a specific amount of products or provide binding forecasts of purchases for any period.
The Company's sales to HP may be affected adversely by various factors relating to HP's post-merger transition. The Company is currently in the process of finalizing its new contract with HP. The Company expects that HP will continue to represent a significant portion of the Company's revenues in future periods. Consequently, the Company's future operating results would be materially adversely impacted by the loss of the HP account, or the reduction, delay or cancellation of HP orders.
It is unclear at this time what effect HP's merger with Compaq will have on the Company's sales to HP and its business generally. HP's transition, including the discontinuation of the automated mid-range tape libraries formerly manufactured by HP, is expected to negatively impact the Company's
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sales through the second quarter of fiscal year 2003. However, there is no assurance that these issues will be resolved by that time.
Dependence on Tape Technology
The Company derives a majority of its revenue from products that incorporate tape drives purchased from other manufacturers that are based on unique formats and tape technologies. Typically, these tape drives represent the largest cost component of the Company's tape automation products. Certain of these tape drives are only available from a single manufacturer, and the Company expects to continue to derive a substantial amount of its revenue from products incorporating such tape drives for the foreseeable future. As a result, the Company's future operating results depend on the continued availability and market acceptance of the current tape technologies. If tape drives incorporating other technologies gain comparable or superior market acceptance than those currently incorporated by the Company, the Company might have to modify the design of its tape automation products to incorporate such tape drives. Its inability to do so or to obtain sufficient quantities of such tape drives could have a material adverse effect on the Company's business, financial condition and results of operations.
Dependence on Certain Suppliers
The Company's products have a large number of components and subassemblies produced by outside suppliers. Accordingly, Overland is highly dependent on these suppliers for 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, a large portion of the Company's products incorporate DLTtape drives manufactured by Quantum, which is also a competitor of the Company because Quantum markets its own tape automation products. Although Quantum has licensed Tandberg Data to be a second source manufacturer of DLTtape drives, Overland has not qualified Tandberg as its alternative supplier. The Company does not have a long-term contract with Quantum, which could cease supplying DLTtape drives directly to the Company. From time to time in the past, the Company has not been able to obtain as many drives as it has needed from Quantum due to drive shortages or quality issues. Any prolonged inability to obtain adequate deliveries could require the Company to pay more for components, parts and other supplies, seek alternative sources of supply, delay shipment of products and damage relationships with current and prospective customers. Any such delay or damage could have a material adverse effect on the Company's business, financial condition and results of operations. In the past, the Company experienced problems with the supply of a newly introduced DLTtape drive and such problems adversely affected the Company's sales and earnings. No assurance can be given that such problems will not reoccur, or that the Company will not experience similar or more serious disruptions in supply in the future with current or new versions of DLTtape drives.
New Software Business Unit Involves Significant Risks
The success of the Company's new software business unit is uncertain and subject to significant risks, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company must commit significant resources to this new business unit before determining whether it will result in any successful software products. The Company has not been involved previously in the development, marketing and sale of software products, and these areas are new to many of the Company's personnel. Also, because the Company licenses the majority of its
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software code from other companies, it is dependent upon those software developers for timely delivery of competitive, defect-free software which forms the basis for Overland's software offerings. There can be no assurance that the Company will successfully develop (in concert with its licensors), market and sell viable software products or a complete product offering. Any delay in the commercial release of new or enhanced software products could result in a significant loss of potential revenues. The software industry is highly competitive and some of the Company's competitors may have an advantage as a result of their relationships with their customers and other third-parties and significantly greater financial, technical, marketing and other resources. In addition, the Company's software licensors, which are relatively young companies with limited financial resources, may also market similar and competitive software offerings. In the event of the demise of a licensor, the Company's contractual agreement provides that it will obtain rights to the source code, but there can be no assurance that the Company will be able to maintain, support or enhance the code without significant additional resources. Furthermore, it is possible that one or more of these early stage companies could be acquired by a larger company with substantially greater financial and other resources than Overland, including an enhanced capability to develop and market competitive offerings. If the Company's software products do not achieve market acceptance or success, then the association of the Company's brand name with these products may adversely affect the Company's reputation and its sales of other products, as well as dilute the value of the Overland name. In addition, to the extent that the Company's new software products are not successful, the Company may not recover the costs associated with their development and ongoing marketing and sales, which could have a material adverse effect on the Company's business, financial condition and results of operations.
Fluctuation in Results
The Company's results can fluctuate substantially from time to time for various reasons. All of the markets served by the Company are volatile and subject to market shifts, which may or may not be discernible in advance by the Company. A slowdown in the demand for workstations, mid-range computer systems, networks and servers 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 portion of the Company's sales are generated by its European channel, the first fiscal quarter (July through September) is commonly impacted by seasonally slow European orders, reflecting the summer holiday period in Europe. The Company's operations may reflect substantial fluctuations from period to period as a consequence of such industry shifts, price erosion, general economic conditions affecting the timing of orders from customers, the supply of tape drives, as well as other factors discussed herein. In particular, the Company's ability to forecast sales to distributors, integrators and VARs is especially limited as such customers typically provide the Company with relatively short order lead times or are permitted to change orders on short notice.
Portions of the Company's expenses are fixed and difficult to reduce should revenues not meet the Company's expectations, thus magnifying the material adverse effect of any revenue shortfall. The Company's gross profit has fluctuated and will continue to fluctuate quarterly and annually based upon a variety of factors such as:
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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 quarters, 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.
International Operations
Historically, export sales have represented a significant portion of the Company's sales and are expected to continue to represent a significant portion of sales. Sales to customers outside the U.S. are subject to various risks, including:
Furthermore, there can be no assurance that the Company will be able to comply with changes in foreign standards in the future, even though the Company endeavors to meet standards established by foreign regulatory bodies. The inability of the Company to design products that comply with foreign standards could have a material adverse effect on the Company's business, financial condition and results of operations. Currently, nearly 100% of the Company's international sales are denominated in U.S. dollars and fluctuations in the value of foreign currencies relative to the U.S. dollar could, therefore, make the Company's products less price competitive. Additionally, the expenses of the Company's international subsidiaries are denominated in their local currencies. The Company currently does not engage in foreign currency hedging transactions, and is therefore exposed to some level of currency risk.
Dependence on Key Employees
Overland experienced a number of changes in its senior management during fiscal years 2001 and 2002. In particular, Christopher Calisi succeeded Scott McClendon as President and Chief Executive Officer, Chet Baffa joined the Company as Vice President of Sales, Martin Gray resigned from his
13
position as Vice President and Chief Technical Officer, Diane Gallo joined the Company as Vice President of Human Resources and Darin Richins joined as Vice President of Marketing. In addition, during fiscal year 2002, Robert Scroop, formerly the Company's Vice President of Engineering, was named Vice President and General Manager, Storage Resource Business Unit; and John Cloyd, formerly the Company's Vice President of Information Technology Services, was named Vice President and General Manager, Storage Management Business Unit. In order to successfully operate, the Company must continue to integrate its new executive team in a timely and effective manner. Failure to successfully integrate its new executive team could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's future success depends in large part on its ability to attract and retain its key executives and other key personnel, many of whom have been instrumental in developing new technologies and setting strategic plans. The Company's growth also depends in large part on its continuing ability to hire, motivate and retain highly qualified management, technical, sales and marketing team members. Competition for such personnel is intense and there can be no assurance that the Company will retain existing personnel or attract additional qualified personnel in the future.
Technology and Intellectual Property
The Company's ability to compete effectively depends in part on its ability to develop and maintain proprietary aspects of its technology. There can be no assurance that any future patents will be granted or that any patents will be valid or provide meaningful protection for the Company's product innovations. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as U.S. laws. Furthermore, competitors may independently develop similar products, duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company. The Company also relies on a combination of copyright, trademark, trade secret and other intellectual property laws to protect its proprietary rights. These rights, however, may not prevent competitors from developing substantially equivalent or superior products to those of the Company's. While the Company is not currently engaged in any intellectual property litigation or proceedings, there can be no assurance that the Company will not become involved in any such litigation in the future or that its products or other trademarks do not infringe any intellectual property or other proprietary right of any third party. An adverse outcome in litigation or similar proceedings could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from others or require the Company to cease marketing or using certain products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
Risks Associated with Possible Mergers and Acquisitions
In the future, the Company may pursue mergers and acquisitions of complementary businesses, products or technologies as it seeks to expand and increase the value-added component of its product offerings. Mergers and acquisitions involve numerous risks, including difficulties in the assimilation of the operations and personnel of the acquired business, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no direct prior experience, and the potential loss of key employees of the acquired business.
Future mergers and acquisitions by the Company may also result in dilutive issuances of equity securities and the incurrence of additional debt and amortization expenses related to intangible assets, which could adversely affect the Company's business, financial condition and results of operations.
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Warranty Exposure
The Company's standard warranty is a three-year return-to-factory policy that covers both parts and labor. For products that it distributes and for drives and tapes used in its products that are manufactured by a third party, the Company passes on to the customer the warranty provided by the manufacturer. The Company also provides on-site service for the first warranty year of its enterprise-class products, for which it contracts with third-party service providers. For certain products, the Company offers a program called XchangeNOW® as part of its return-to-factory warranty, which enables customers to receive an advance replacement unit shipped within two business days after placing a service request. The defective unit is then shipped back to Overland using the shipping materials from the replacement unit. 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.
Possible Volatility of Stock Price
The market price of the Common Stock has experienced significant fluctuations since it commenced trading in February 1997. There can be no assurance that the market price of the Common Stock will not fluctuate significantly in the future. Many factors could cause the market price of the Common Stock to fluctuate substantially, including: announcements concerning the Company or its competitors, changes in earnings estimates by analysts, purchasing decisions of our significant customers, quarterly variations in operating results, the introduction of new technology or products and changes in product pricing policies by the Company or its competitors. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock.
The risks and uncertainties noted above, along with others that 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, 2002 and filed with the Securities and Exchange Commission on September 27, 2002.
Critical Accounting Policies and Estimates
Overland's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, inventories, income taxes, warranty obligations and contingencies. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
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Revenue Recognition
Revenue on direct product sales (excluding sales to commercial distributors and HP) is recognized upon shipment of products to such customers. These customers are not entitled to any specific right of return or price protection, except for any defective product which may be returned under the Company's warranty policy. Title and risk of loss transfer to the customer when the product leaves the Company's dock. Product sales to commercial distribution customers are subject to certain rights of return, stock rotation privileges and price protection. Revenue from shipments to these customers is not recognized until the related products are in turn sold to the ultimate customer by the commercial distributor. At September 30, 2002, approximately $1.5 million of product had been shipped to the Company's commercial distributors, but not yet shipped to ultimate customers. As part of its existing agreement with Compaq/HP, the Company ships products to various distribution hubs around the world and retains ownership of that inventory until it is pulled by HP to fulfill its customer orders, at which time, generally the same business day, the Overland sale is recorded.
The Company has entered into various licensing agreements relating to its VR2 technology. These agreements typically call for royalty fees based on sales by licensees of products containing VR2. Royalties on sales by licensees of products containing VR2 are recorded when earned, generally in the period during which the licensee ships the products containing VR2 technology. In certain instances, the customer has elected to purchase from the Company the ASIC chips embodying VR2, which are priced to include the cost of the chip plus an embedded royalty fee. In these instances, revenues on ASIC chip sales are recorded as product revenue when earned, which is upon the shipment of the underlying ASIC chip incorporating the VR2 technology to the customer.
In some cases, these licensing agreements include initial payments to the Company for the delivery of the VR2 technology platform, consulting services or both. The Company recognizes revenues related to the transfer of the technology platform upon delivery and acceptance by the customer, which entitles the Company to the initial fee and eliminates any further obligations under the agreement. The Company recognizes revenue related to consulting services as earned, typically based on time committed to the project.
The Company recognizes software revenues in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). The Company licenses software under noncancelable perpetual agreements. License revenues are recognized in the period in which the license agreement is in place, the fee is fixed and determinable, delivery of the technology has occurred and collectibility is probable. Sales through the Company's resellers are evidenced by a master agreement governing the relationship together with binding purchase orders digitally/electronically placed on the Company's business to business ordering system. The license is considered delivered, and the license revenue is recognized, when the reseller is issued a license key in the name of a specifically identified end user.
For software arrangements that include multiple elements, SOP 97-2 requires the Company to allocate the fee to the individual elements based on vendor-specific objective evidence of fair value ("VSOE"), regardless of the prices stated within the contract. VSOE is limited to the price charged when the element is sold separately or, for an element that is not yet sold separately, the price established by management having the relevant authority. When there is VSOE for the undelivered elements in multiple-element arrangements that are not accounted for using contract accounting, the Company allocates revenue to the delivered elements of the arrangement using the residual value method. Therefore, the Company defers revenues from the arrangement fee equal to the fair value of the undelivered elements and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. The
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fair value of maintenance and postcontract customer support ("PCS") obligations are based upon separate sales of renewals to other customers or upon renewal rates quoted in the contracts.
When VSOE does not exist to allocate revenue to each of the various elements of an arrangement and revenue cannot be allocated using the residual value method, the entire fee from the arrangement is deferred until the earlier of the establishment of VSOE or the delivery of all the elements of the arrangement.
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolio. The Company specifically analyzes trade and other receivables, and analyzes historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customers' payment terms and/or patterns, when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make additional payments, additional allowances may be required. Likewise, should the Company determine that it could realize more of its receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.
Inventory Valuation
The Company records inventory at the lower of cost or market value. The Company assesses the value of its inventories periodically based upon numerous factors including expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, the Company adjusts its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value. Likewise, the Company records an adverse purchase commitment liability when anticipated market sales prices are lower than committed costs. If actual market conditions are less favorable than those projected by management, additional inventory adjustments and adverse purchase commitment liabilities may be required.
Income Taxes
The Company estimates its tax liability based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets. If the Company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the Company could experience potential significant losses in excess of provisions established. Likewise, if the Company is able to realize additional deferred tax assets or if tax laws change favorably, the Company could experience potential significant gains.
Warranty Obligations
The Company's standard warranty is a three-year return-to-factory policy that covers both parts and labor. For products that it distributes and for drives and tapes used in its products that are manufactured by a third party, the Company passes on to the customer the warranty provided by the manufacturer. The Company also provides on-site service for the first warranty year of its enterprise-class products, for which it contracts with third-party service providers. For certain products, the Company offers a program called XchangeNOW as part of its return-to-factory warranty which enables
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customers to receive an advance replacement unit shipped within two business days after placing a service request. The defective unit is then shipped back to Overland using the shipping materials from the replacement unit.
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company's warranty obligation is affected by product failure rates and material usage or service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, revisions to the estimated warranty liability would be required.
Impairment of Assets
The Company also considers potential impairment of both tangible and intangible assets when circumstances indicate that the carrying amount of an asset may not be recoverable. In such circumstances, the Company may be required to incur material charges relating to the impairment of such asset. Any required impairment loss would be measured as the amount by which the asset's carrying value exceeds its fair value and would be recorded as a reduction in the carrying value of the related assets and be charged to results of operations.
Results Of Operations
The following table sets forth items in the Company's statement of operations as a percentage of net revenues for the periods presented. The data has been derived from the Company's unaudited condensed consolidated financial statements.
|
Three Months Ended September 30, |
||||||
---|---|---|---|---|---|---|---|
|
2002 |
2001 |
|||||
Net revenues | 100.0 | % | 100.0 | % | |||
Cost of goods sold | 73.9 | 76.7 | |||||
Gross profit | 26.1 | 23.3 | |||||
Operating expenses: | |||||||
Sales and marketing | 17.5 | 10.5 | |||||
Research and development | 4.9 | 4.1 | |||||
General and administrative | 6.2 | 5.3 | |||||
Total operating expenses | 28.6 | 19.9 | |||||
(Loss) income from operations | (2.5 | ) | 3.4 | ||||
Other income: | |||||||
Interest income, net | 0.2 | 0.3 | |||||
Other (expense) income, net | (0.1 | ) | 0.6 | ||||
(Loss) income before income taxes | (2.4 | ) | 4.3 | ||||
(Benefit) provision for income taxes | (0.8 | ) | 1.6 | ||||
Net (loss) income | (1.6 | %) | 2.7 | % | |||
For the three months ended September 30, 2002 and 2001
Net Revenues. Net revenues of $34.5 million in the first quarter of fiscal year 2003 were $5.4 million or 13.6% below net revenues of $40.0 million in the first quarter of fiscal year 2002. Revenues from the Company's OEM customers as a group during the first quarter of fiscal year 2003
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decreased by $10.5 million or 35.2% when compared to the first quarter of fiscal year 2002. This revenue decline was driven largely by transitional issues within our largest OEM customer. In addition, the decline also reflects the discontinuation of the Company's 36-track products during the third quarter of fiscal year 2002, which products accounted for net revenues of $3.0 million in the first quarter of fiscal year 2002. Sales to HP accounted for 53.7% of net revenues in the first quarter of fiscal year 2003, compared to 65.3% in the first quarter of fiscal year 2002.
Net revenues from Overland branded products during the first quarter of fiscal year 2003 grew 47.1% over the first quarter of fiscal year 2002 from $9.9 million to $14.6 million. This increase reflects the Company's increased focus on the Overland branded channel over the past year. Overland branded products saw an 82.7% increase in library sales over the first quarter of fiscal year 2002, driven primarily by the Neo series libraries, and a 30.8% increase in autoloader revenues, due primarily to an increased focus with our domestic direct marketers.
VR2 revenues during the first quarter of fiscal year 2003 amounted to $655,000 and were comprised of royalties of $296,000, engineering service fees of $250,000 and chip sales of $109,000. VR2 revenues during the first quarter of fiscal year 2002 amounted to $173,000 and were comprised of royalties of $85,000 and chip sales of $88,000.
A summary of the sales mix by product for the periods presented in the statement of operations follows:
|
Three Months Ended September 30, |
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---|---|---|---|---|---|---|
|
2002 |
2001 |
||||
Library products: | ||||||
Neo series | 60.3 | % | 29.7 | % | ||
Autoloaders | 11.3 | 8.0 | ||||
LibraryPro | 8.2 | 8.1 | ||||
MinilibraryXpress | 3.5 | 2.7 | ||||
LibraryXpress | 0.2 | 31.1 | ||||
83.5 | 79.6 | |||||
Other: | ||||||
Spare parts, controllers, other | 14.6 | 12.0 | ||||
Discontinued products | | 8.0 | ||||
VR2 royalties and services | 1.9 | 0.4 | ||||
100.0 | % | 100.0 | % | |||
Gross Profit. The Company's gross profit amounted to $9.0 million in the first quarter of fiscal year 2003, a decrease of $311,000 or 3.3% from $9.3 million in the first quarter of fiscal year 2002, resulting primarily from lower sales volumes. The gross margin percentage increased to 26.1% in the first quarter of fiscal year 2003 from 23.3% in the first quarter of fiscal year 2002. The relatively low margin in the first quarter of fiscal year 2002 was due primarily to the high cost of the initial production volumes of the Neo series libraries. The increase in the gross margin percentage was primarily a result of cost reductions realized from increasing production volumes of the Neo series products. Somewhat offsetting these cost reductions were (i) lower utilization of fixed manufacturing costs as a result of lower unit production levels, (ii) lower average selling prices of the Overland branded products and (iii) increased warranty expense as Overland branded products became a larger share of the Company's revenues.
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Sales and Marketing Expense. Sales and marketing expense amounted to $6.1 million, representing 17.5% of net revenues in the first quarter of fiscal year 2003, compared to $4.2 million or 10.5% of net revenues in the first quarter of fiscal year 2002. Increased expenditures were due primarily to salary and related expenses associated with the expansion of the Company's branded sales force, incremental expenses associated with the Company's software products, and the enhancement of the Company's internal marketing team.
Research and Development Expense. Research and development expense of $1.7 million, representing 4.9% of net revenues in the first quarter of fiscal year 2003, were relatively flat in absolute dollars compared to $1.6 million or 4.1% of net revenues in the first quarter of fiscal year 2002. In the first quarter of fiscal year 2003, the Company reduced general research and development spending relative to the prior year quarter, but this reduction was directly offset by expenses associated with the temporary establishment of an advanced engineering group.
General and Administrative Expense. General and administrative expense of $2.2 million, representing 6.2% of net revenues in the first quarter of fiscal year 2003, were relatively flat in absolute dollars compared to $2.1 million or 5.3% of net revenues in the first quarter of fiscal year 2002.
Interest Income, net. During the first quarter of fiscal year 2003, the Company generated net interest income of $68,000 compared to $108,000 during the same period of the prior fiscal year. This decrease was due to interest expense as a result of the Company's outstanding term loan combined with lower yields on the Company's investments notwithstanding higher average cash balances.
Other (Expense) Income, Net. In the first quarter of fiscal year 2003, the Company generated other expense of $34,000 compared to other income of $222,000 during the first quarter of fiscal year 2002. These amounts are primarily related to foreign currency transaction fluctuations related to the Company's United Kingdom operations.
Income Taxes. The Company's effective tax rate in the first quarter of fiscal year 2003 was 34.5%, based on the estimated effective tax rate for the entire fiscal year 2003, compared to 38.0% in the first quarter of fiscal year 2002. The effective tax rate for the entire fiscal year 2002 was 34.3%.
Liquidity and Capital Resources. The primary source of liquidity for the Company has historically been cash generated from operations. In the second and third quarters of fiscal year 2002, the Company supplemented cash generated from operations by borrowing on a term loan under a new credit facility (described below) to fund tenant improvements and equipment purchases for its new headquarter facilities. During the first quarter of fiscal year 2003, the Company's cash and cash equivalents decreased by $1.9 million as operating cash outflows of $2.0 million and capital expenditures of $189,000 exceeded inflows from financing activities of $211,000. Operating cash outflows during the first quarter of fiscal year 2003 resulted primarily from an increase in accounts receivable, an increase in income taxes and V.A.T. taxes receivable, and the net loss for the period. Capital expenditures during the first quarter of fiscal year 2003 were comprised primarily of computer and related equipment. Financing cash inflows during the first quarter of fiscal year 2003 were a result of stock option exercises and the sale of stock under the employee stock purchase plan.
At September 30, 2002, the Company had a credit facility consisting of a $5,000,000 five-year term note for capital equipment purchases that matures on August 28, 2007 and a $10,000,000 two-year revolving line of credit for working capital purposes that expires on November 30, 2003. Both the term note and the line of credit are collateralized by a general security interest in the Company's assets. Interest on the term note is set at variable rates equal to the bank's prime rate (4.75% on September 30, 2002) in effect from time to time. Interest on the line of credit is set at the bank's prime rate in effect from time to time minus 0.25% or, at the Company's option, a rate equal to LIBOR plus 2.25%. The loan agreement that governs the credit facility contains certain financial and non-financial
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covenants. In August 2002, the credit facility was modified to provide an exception to a covenant requiring that the Company not incur two consecutive quarterly losses. As of September 30, 2002, the Company was in compliance with this modified covenant. The term note provided for a nine-month draw period through August 28, 2002, during which period only interest was paid. Upon expiration of the draw period, all amounts outstanding under the note became payable in 60 equal payments of principal plus interest. At September 30, 2002, $4,655,000, including $931,000 due within one year, was outstanding under the term note and no amounts were outstanding under the line of credit. Under a prior revolving credit facility, no borrowings were outstanding at September 30, 2001.
In fiscal year 2001, the Company entered into a lease for its new headquarters in San Diego, California. The new headquarters comprise two buildings, representing approximately 160,000 total square feet. The buildings were completed in March 2002 at which time the Company occupied the buildings and the lease commenced. The lease is for a period of 12 years and can be renewed for one additional five-year period.
At September 30, 2002, the Company had $24.9 million of cash and cash equivalents, $54.5 million of working capital, and an unused bank line of credit of $10.0 million. The Company believes that these resources will be sufficient to fund its operations and to provide for its growth into the foreseeable future. However, the Company's inability to collect its accounts receivable in a timely manner and/or a material decrease in demand for the Company's products (i) would materially and adversely affect the Company's cash generated from operations, which in turn would materially and adversely impact the Company's liquidity, results of operations and financial position, and (ii) could constitute or result in default under the Company's credit facility, which would enable the lender under the credit facility, at its option without notice, to accelerate all then outstanding indebtedness under the credit facility and/or terminate the lender's obligation to extend credit under the credit facility, either of which could materially and adversely impact the Company's liquidity, results of operation and financial position.
In addition, the credit facility requires the Company to comply with several financial and non-financial covenants. One such covenant is a profitability covenant that prohibits the Company from experiencing two consecutive quarterly losses (meaning net loss prior to taxes), in addition to requiring profitability on an annual basis. In August 2002, the profitability covenant was modified to provide an exception for the two consecutive quarters ended September 30, 2002, during each of which the Company experienced losses. However, if the Company incurs a loss for the quarter ending December 31, 2002, then the Company will be in violation of the profitability covenant. A violation of the profitability covenant or one or more of the other covenants would constitute a default under the credit facility, which would enable the lender, at its option without notice, to accelerate all then outstanding indebtedness under the credit facility and/or terminate the lender's obligation to extend credit under the credit facility, either of which could materially and adversely impact the Company's liquidity, results of operation and financial position.
The following schedule summarizes the Company's contractual obligations to make future payments as of September 30, 2002: (in thousands)
|
Payments Due by Period |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations |
Total |
Less than 1 year |
2-3 years |
4-5 years |
After 5 years |
||||||||||
Operating Leases | 38,482 | $ | 3,131 | $ | 6,399 | $ | 6,308 | $ | 22,644 | ||||||
Debt | 4,655 | 931 | 1,862 | 1,862 | | ||||||||||
Total Contractual Cash Obligations | $ | 43,137 | $ | 4,062 | $ | 8,261 | $ | 8,170 | $ | 22,644 | |||||
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial and commodity market prices and rates. The Company is exposed to market risk in the areas of changes in United States interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These exposures are directly related to its normal operating and funding activities. Historically the Company has not used derivative instruments or engaged in hedging activities.
Interest Rate Risk. The Company's financial instruments with market risk exposure are the Company's cash equivalents, term note and, to the extent utilized, revolving line of credit. At September 30, 2002 $4,655,000, including $931,000 due within one year, was outstanding under the term note and no amounts were outstanding under the line of credit. The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. To achieve this objective, the Company currently maintains a portfolio of high-grade commercial paper and money market funds.
Interest on the Company's term note is set at variable rates equal to the bank's prime rate in effect from time to time. Interest on the line of credit is set at the bank's prime rate from time to time minus 0.25% or, at the Company's option, a rate equal to LIBOR plus 2.25%. The Company's objective in maintaining access to these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared with fixed rate borrowings.
Under the Company's current policies, it does not use interest rate derivative instruments to manage its exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would result in no material change in the Company's pre-tax earnings and cash flow.
Foreign Currency Risk. The Company conducts business on a global basis and essentially all of its products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of the Company's sales and are expected to continue to represent a significant portion of sales.
The Company's wholly-owned subsidiaries in the United Kingdom, France and Germany incur costs that are denominated in local currencies. As exchange rates vary, these results when translated may vary from expectations and adversely impact overall expected results. The statement of operations impact of exchange rate fluctuations on foreign currency transactions during the first quarter of 2003 was not material.
Item 4.Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that material information related to Overland, including the Company's consolidated subsidiaries, is made known to management on a regular basis.
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Item 6.Exhibits and Reports on Form 8-K
(a) | Exhibits | |
10.1 |
First Modification to Business Loan Agreement dated August 13, 2002 by and between Overland Storage, Inc. and Comerica Bank-California. |
|
(b) |
Reports on Form 8-K. |
|
Current report on Form 8-K, dated July 1, 2002, announcing the effectiveness of the name change of Overland Data, Inc. to Overland Storage, Inc. |
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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 STORAGE, INC. | ||||
Date: November 13, 2002 |
By: |
/s/ VERNON A. LOFORTI Vernon A. LoForti Vice President, Chief Financial Officer and Secretary |
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I, Christopher Calisi, certify that:
Dated: November 13, 2002 | By: | /s/ CHRISTOPHER CALISI Christopher Calisi, President and Chief Executive Officer |
25
I, Vernon A. LoForti, certify that:
Dated: November 13, 2002 | By: | /s/ VERNON A. LOFORTI Vice President, Chief Financial Officer and Secretary |
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