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 30, 2008
Commission File Number: 000-22071
OVERLAND STORAGE, INC.
(Exact name of
registrant as specified in its charter)
California
|
|
95-3535285
|
(State or
other jurisdiction of incorporation)
|
|
(IRS
Employer Identification No.)
|
|
|
|
4820 Overland Avenue, San
Diego, California
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|
92123
|
(Address of principal
executive offices)
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(Zip Code)
|
(858) 571-5555
(Registrants
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
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
o
|
Non-accelerated filer
o
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|
Smaller reporting company
x
|
(Do not check if a smaller reporting
company)
|
|
|
Indicate by check mark
whether the registrant is a shell company (as defined by Rule 12b-2 of the
Act). Yes
o
No
x
As of April 28,
2008, there were 12,763,679 shares of the registrants common stock, no par
value, issued and outstanding.
OVERLAND
STORAGE, INC.
FORM 10-Q
For the quarterly period ended March 30,
2008
Table of
Contents
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Overland
Storage, Inc.
Consolidated
Condensed Statement of Operations
(In
thousands, except per share amounts)
|
|
Three Months Ended
March 31,
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|
Nine Months Ended
March 31,
|
|
|
|
2008
|
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2007
|
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2008
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2007
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(Unaudited)
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(Unaudited)
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Net revenue:
|
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|
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Product revenue
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$
|
26,252
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$
|
33,187
|
|
$
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83,071
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$
|
113,264
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|
Service revenue
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5,337
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|
4,268
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|
14,927
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|
11,950
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|
Royalty fees
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205
|
|
343
|
|
757
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|
1,171
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|
|
|
31,794
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|
37,798
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|
98,755
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126,385
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|
Cost of product revenue
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20,996
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|
30,324
|
|
68,513
|
|
101,035
|
|
Cost of service revenue
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|
3,101
|
|
2,442
|
|
8,291
|
|
7,161
|
|
Gross profit
|
|
7,697
|
|
5,032
|
|
21,951
|
|
18,189
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
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Sales and marketing
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7,988
|
|
7,408
|
|
22,549
|
|
25,633
|
|
Research and development
|
|
1,972
|
|
3,351
|
|
7,229
|
|
12,400
|
|
General and administrative
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|
2,409
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|
3,476
|
|
7,590
|
|
10,750
|
|
Impairment of acquired technology
|
|
|
|
|
|
|
|
8,411
|
|
|
|
12,369
|
|
14,235
|
|
37,368
|
|
57,194
|
|
Loss from operations
|
|
(4,672
|
)
|
(9,203
|
)
|
(15,417
|
)
|
(39,005
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
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Interest income
|
|
177
|
|
308
|
|
708
|
|
1,487
|
|
Other expense, net
|
|
(369
|
)
|
(171
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)
|
(970
|
)
|
(493
|
)
|
Loss before income taxes
|
|
(4,864
|
)
|
(9,066
|
)
|
(15,679
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)
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(38,011
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)
|
Provision for income taxes
|
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71
|
|
137
|
|
281
|
|
78
|
|
Net loss
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$
|
(4,935
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)
|
$
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(9,203
|
)
|
$
|
(15,960
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)
|
$
|
(38,089
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)
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|
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|
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|
|
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|
Net loss per share:
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|
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Basic and diluted
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$
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(0.39
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)
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$
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(0.72
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)
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$
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(1.25
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)
|
$
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(2.97
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)
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|
|
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|
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Shares used in computing net loss per
share:
|
|
|
|
|
|
|
|
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Basic and diluted
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|
12,761
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|
12,743
|
|
12,757
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|
12,815
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|
See accompanying notes to
consolidated condensed financial statements.
3
Overland
Storage, Inc.
Consolidated
Condensed Balance Sheets
(In
thousands)
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|
March 31,
2008
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June 30,
2007
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|
(Unaudited)
|
|
Assets
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|
|
|
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|
Current assets:
|
|
|
|
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|
Cash and cash equivalents
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|
$
|
13,576
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|
$
|
17,503
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|
Short-term investments
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|
5,570
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|
5,322
|
|
Accounts receivable, less allowance for
doubtful accounts of $458 and $374, as of March 31, 2008 and
June 30, 2007, respectively
|
|
18,480
|
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22,572
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Inventories
|
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17,264
|
|
20,556
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|
Deferred tax assets
|
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185
|
|
185
|
|
Other current assets
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7,960
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|
6,953
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|
Total current assets
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63,035
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73,091
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|
|
|
|
|
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Property and equipment, net
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8,955
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11,052
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Intangible assets, net
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433
|
|
1,731
|
|
Other assets
|
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2,171
|
|
2,179
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|
Total assets
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|
$
|
74,594
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|
$
|
88,053
|
|
|
|
|
|
|
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Liabilities and Shareholders Equity
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Current liabilities:
|
|
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Accounts payable
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|
$
|
9,176
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|
$
|
8,094
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|
Accrued liabilities
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|
16,216
|
|
15,773
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|
Accrued payroll and employee compensation
|
|
2,911
|
|
3,122
|
|
Income taxes payable
|
|
213
|
|
402
|
|
Accrued warranty
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|
5,669
|
|
6,134
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|
Total current liabilities
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34,185
|
|
33,525
|
|
|
|
|
|
|
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Deferred tax liabilities
|
|
185
|
|
185
|
|
Other liabilities
|
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6,030
|
|
5,233
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|
Total liabilities
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40,400
|
|
38,943
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
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|
|
|
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|
|
|
Shareholders equity:
|
|
|
|
|
|
Common stock, no par value, 45,000 shares
authorized; 12,764 and 12,748 shares issued and outstanding, as of
March 31, 2008 and June 30, 2007, respectively
|
|
68,778
|
|
67,841
|
|
Accumulated other comprehensive income
|
|
280
|
|
91
|
|
Accumulated deficit
|
|
(34,864
|
)
|
(18,822
|
)
|
Total shareholders equity
|
|
34,194
|
|
49,110
|
|
Total liabilities and shareholders equity
|
|
$
|
74,594
|
|
$
|
88,053
|
|
See accompanying notes to
consolidated condensed financial statements.
4
Overland
Storage, Inc.
Consolidated
Condensed Statement of Cash Flows
(In
thousands)
|
|
Nine Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
Operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(15,960
|
)
|
$
|
(38,089
|
)
|
Adjustments to reconcile net loss to cash
used in operating activities:
|
|
|
|
|
|
Impairment of acquired technology
|
|
|
|
8,411
|
|
Depreciation and amortization
|
|
3,608
|
|
4,363
|
|
Deferred tax provision
|
|
|
|
(135
|
)
|
Share-based compensation
|
|
911
|
|
(166
|
)
|
Loss on short-term investments, net
|
|
795
|
|
158
|
|
Loss on disposal of fixed asset
|
|
|
|
19
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
4,092
|
|
4,438
|
|
Inventories
|
|
3,292
|
|
(10,918
|
)
|
Accounts payable and accrued liabilities
|
|
1,060
|
|
(3,137
|
)
|
Accrued payroll and employee compensation
|
|
(211
|
)
|
(754
|
)
|
Other assets and liabilities, net
|
|
(223
|
)
|
4
|
|
Net cash used in operating activities
|
|
(2,636
|
)
|
(35,806
|
)
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Purchases of short-term investments
|
|
(8,100
|
)
|
(47,525
|
)
|
Proceeds from maturities of short-term
investments
|
|
4,528
|
|
72,056
|
|
Proceeds from sales of short-term
investments
|
|
2,551
|
|
3,626
|
|
Capital expenditures
|
|
(463
|
)
|
(3,224
|
)
|
Net cash (used in) provided by investing
activities
|
|
(1,484
|
)
|
24,933
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Proceeds from the exercise of stock options
and the sale of stock under the employee stock purchase plans
|
|
26
|
|
142
|
|
Repurchase of common stock
|
|
|
|
(2,722
|
)
|
Net cash provided by (used in) financing
activities
|
|
26
|
|
(2,580
|
)
|
Effect of exchange rate changes on cash
|
|
167
|
|
176
|
|
Net decrease in cash and cash equivalents
|
|
(3,927
|
)
|
(13,277
|
)
|
Cash and cash equivalents, beginning of
period
|
|
17,503
|
|
20,315
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,576
|
|
$
|
7,038
|
|
See accompanying notes to
consolidated condensed financial statements.
5
OVERLAND
STORAGE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1
Basis of Presentation
The accompanying
consolidated condensed financial statements of Overland Storage, Inc. and
its subsidiaries (the Company) have been prepared 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. The Company operates its business in one operating
segment.
The Company operates and
reports using a 52-53 week fiscal year with each quarter ending on the Sunday
closest to the calendar quarter. The Companys last fiscal year is considered
to have ended June 30, 2007. The Companys third quarter of fiscal 2008
ended March 30, 2008; however, for ease of presentation it is considered
to have ended March 31, 2008. For example, references to the third quarter
of fiscal 2008, the three months ended March 31, 2008, the first nine
months of fiscal 2008 and the nine months ended March 31, 2008 refer to
the fiscal period ended March 30, 2008. The Companys third quarter of
fiscal 2007 ended April 1, 2007. The third quarter of fiscal 2008 and the
third quarter of fiscal 2007 each contained 13 weeks.
In the opinion of management, these statements include
all the normal recurring adjustments necessary to state fairly our consolidated
condensed results of operations, financial position and cash flows as of March 31,
2008 and for all periods presented. These consolidated condensed financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Companys annual report on Form 10-K
for the year ended July 1, 2007. The results reported in these
consolidated condensed financial statements for the three and nine months ended
March 31, 2008 are not necessarily indicative of the results that may be
expected for the full fiscal year.
The year end consolidated condensed balance sheet data
was derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.
Reclassification
Due to the other-than temporary impairment charge of
$492,000 on the Companys auction rate securities in the second quarter of
fiscal 2008, losses on short-term investments are now disclosed in a separate
line item in the consolidated condensed statement of cash flows. Consequently,
prior year realized losses on short-term investments have been reclassified within
operating activities for consistency with current period presentation. This
reclassification had no impact on reported results of operations, financial
position or cash flows.
Note 2 Asset Impairment and Restructuring
Asset Impairment
In August 2005, the Company acquired all
of the outstanding stock of Zetta Systems, Inc. (Zetta). Zetta developed
data protection software that was incorporated into the Companys ULTAMUS
®
Pro
storage appliance which was launched in the first quarter of fiscal 2007.
ULTAMUS Pro did not generate revenue subsequent to its launch. In October 2006,
the Companys Board of Directors approved the closure of the Zetta-related
software development office near Seattle, Washington and the elimination of the
ULTAMUS Pro product from future forecasts and sales commission goals.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
, the Company
evaluated the acquired technology intangible asset for impairment as of September 30,
2006, due to the significant underperformance of the ULTAMUS Pro product
subsequent to its launch. Based on the Companys revised forecasts, the Company
concluded that the carrying amount of the asset was not recoverable and an
impairment loss should be recognized. An impairment charge equal to the
remaining intangible asset balance of $8.4 million was recorded in the first
quarter of 2007, as the acquired technology was not considered to have any
remaining value. In addition, in the first quarter of fiscal 2007, the Company
recorded a write-down of $350,000 to cost of product revenue against specific
inventory associated with the ULTAMUS Pro product because it can no longer be
used in production.
6
Restructurings
October 2006 Reduction of Workforce
In the second quarter of fiscal 2007, the
Company recorded $962,000 in severance for the termination of 28 employees in
connection with an October 2006 reduction in workforce. In the third
quarter of fiscal 2007, the Company recorded a net adjustment of $36,000 to
severance for foreign employees whose settlements were estimated at the end of
the second quarter of fiscal 2007. As of June 30, 2007, all severance was
paid. Severance charges are included in sales and marketing expense and
research and development expense in the accompanying consolidated condensed
statement of operations.
The October 2006 reduction in workforce
included a closure of the Companys leased software development facility near
Seattle, Washington, which lease expired on October 31, 2007. In the third
quarter of fiscal 2007, the Company recorded a charge of $42,000 to research
and development expense for the estimated fair value of the liability
associated with this location that the Company ceased using in March 2007.
April 2007 Cost Reductions and
Restructuring of Workforce
In April 2007, the Company announced
that it reduced its employee workforce by 14% worldwide, or 54 employees, in
accordance with the Companys initiatives to reduce costs and restructure its
workforce. Severance related to the terminated employees was $758,000. As of September 30,
2007, all severance was paid. Severance charges are included in sales and
marketing expense, research and development expense and general and administrative
expense in the accompanying consolidated condensed statement of operations.
The following table summarizes the activity
and balances of accrued restructuring charges through March 31, 2008 (in
thousands):
|
|
Employee
Related
|
|
Facilities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
|
|
$
|
53
|
|
$
|
24
|
|
$
|
77
|
|
Cash payments
|
|
(53
|
)
|
(24
|
)
|
(77
|
)
|
Balance at March 31, 2008
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3 Short-Term Investments
The following table summarizes short-term
investments by security type (in thousands). For all periods presented the
Company had no unrecorded unrealized losses:
|
|
March 31, 2008
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
4,206
|
|
$
|
|
|
$
|
4,206
|
|
Asset-backed securities
|
|
1,342
|
|
22
|
|
1,364
|
|
|
|
$
|
5,548
|
|
$
|
22
|
|
$
|
5,570
|
|
|
|
June 30, 2007
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
4,322
|
|
$
|
|
|
$
|
4,322
|
|
Auction rate securities
|
|
1,000
|
|
|
|
1,000
|
|
|
|
$
|
5,322
|
|
$
|
|
|
$
|
5,322
|
|
7
The following table summarizes the
contractual maturities of the Companys short-term investments (in thousands):
|
|
March 31,
2008
|
|
June 30,
2007
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
|
|
$
|
|
|
Due in one to two years
|
|
260
|
|
|
|
Due in two to five years
|
|
|
|
329
|
|
Due after five years
|
|
5,310
|
|
4,993
|
|
|
|
$
|
5,570
|
|
$
|
5,322
|
|
Asset-backed securities have been allocated
within the contractual maturities table based upon the set maturity date of the
security. Realized gains and losses on short-term investments are included in
other expense, net, in the accompanying consolidated condensed statement of
operations.
The following table summarizes gross realized
gains and gross realized losses on the Companys short-term investments (in
thousands):
|
|
Three months ended
March 31,
|
|
Nine months ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Realized gains
|
|
$
|
35
|
|
$
|
|
|
$
|
35
|
|
$
|
|
|
Realized losses:
|
|
|
|
|
|
|
|
|
|
Realized from sale of short-term investments
|
|
|
|
(27
|
)
|
(16
|
)
|
(51
|
)
|
Impairment under SFAS No. 115-1 and
124-1
|
|
(302
|
)
|
(107
|
)
|
(814
|
)
|
(107
|
)
|
|
|
$
|
(267
|
)
|
$
|
(134
|
)
|
$
|
(795
|
)
|
$
|
(158
|
)
|
In accordance with Financial Accounting
Standards Board (FASB) Staff Position (FSP) FAS 115-1 and 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments,
the Company performs a review of its
investments quarterly. Based upon this review management noted no asset-backed
securities in an unrealized loss position at the end of its third quarter of
fiscal 2008. In the second quarter of fiscal 2008, management determined losses
on its asset-backed securities to be other-than-temporary and recorded an
impairment charge of approximately $20,000, pre-tax. This impairment is
recorded in other expense, net, in the accompanying consolidated condensed
statement of operations.
As of March 31, 2008, the Company held
auction rate securities, purchased as highly rated (AAA) investment grade
securities, with a par value of $5.0 million which are collateralized by
corporate debt obligations. These securities, although not mortgage-backed,
have experienced failed auctions primarily as a result of the impact sub prime
mortgages have had on liquidity in the credit markets. As a result, the Company
recognized other-than-temporary impairment losses of $302,000, pre-tax, and
$794,000, pre-tax, on these investments during the three and nine month periods
ended March 31, 2008, respectively. The impairment losses are recorded in
other expense, net, in the consolidated condensed statement of operations. As
allowed by SFAS No. 115, the Company elected to estimate the fair value of
the auction rate securities using a probability-weighted discounted cash flow
analysis. Assumptions used by the Company included estimates of (i) when a
successful auction would occur or the securities would be redeemed, (ii) a
discount rate commensurate with the implied risk associated with holding the
securities and (iii) cash flow streams. If the auctions continue to fail,
or the Company determines that one or more of the assumptions used in the
estimate needs to be revised, the Company may be required to record an
additional impairment on these securities in the future.
8
Note 4 Composition of Certain Financial
Statement Captions
The following table summarizes inventories
(in thousands):
|
|
March 31,
2008
|
|
June 30,
2007
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
8,782
|
|
$
|
11,539
|
|
Work in process
|
|
905
|
|
1,134
|
|
Finished goods
|
|
7,577
|
|
7,883
|
|
|
|
$
|
17,264
|
|
$
|
20,556
|
|
Note 5 Net Loss Per Share
Basic net loss per share is computed based on
the weighted-average number of shares of common stock outstanding during the
period. Diluted net loss per share is computed based on the weighted-average
number of shares of common stock outstanding during the period increased by the
weighted-average number of dilutive common stock equivalents outstanding during
the period, using the treasury stock method. Dilutive securities are comprised
of options granted and restricted stock awards issued under the Companys stock
option plans and employee stock purchase plan (ESPP) share purchase rights. For
all periods presented, there is no difference in the number of shares used to
calculate basic and diluted shares outstanding due to the Companys net loss
position.
Anti-dilutive common stock equivalents
excluded from the computation of diluted net loss per share were as follows (in
thousands):
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and ESPP share purchase
rights
|
|
2,492
|
|
1,878
|
|
2,527
|
|
2,096
|
|
Restricted stock awards outstanding
|
|
|
|
2
|
|
|
|
28
|
|
Note 6 Comprehensive Loss
Comprehensive loss for the Company includes
net loss, foreign currency translation adjustments and unrealized gains on
available-for-sale securities, which are charged or credited to accumulated
other comprehensive income within shareholders equity. Comprehensive loss was
as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,935
|
)
|
$
|
(9,203
|
)
|
$
|
(15,960
|
)
|
$
|
(38,089
|
)
|
Change in foreign currency translation
|
|
103
|
|
8
|
|
167
|
|
112
|
|
Change in unrealized gain on short-term
investments
|
|
(19
|
)
|
161
|
|
22
|
|
284
|
|
Total comprehensive loss
|
|
$
|
(4,851
|
)
|
$
|
(9,034
|
)
|
$
|
(15,771
|
)
|
$
|
(37,693
|
)
|
Note 7
Income Taxes
FIN No. 48 Implementation
In July 2006, the FASB issued
Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements in accordance with
FASB Statement No. 109,
Accounting for Income Taxes
,
and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN No. 48, the impact of an uncertain income tax position
must be recognized at the largest amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
9
The Company adopted the provisions of FIN No. 48
in fiscal 2008. The total liability, including a reduction for income tax
receivables, for unrecognized tax benefits as of the date of adoption was
$402,000. As a result of the implementation of FIN No. 48, the Company
recognized an increase in the liability for unrecognized tax benefits in the
amount of $82,000, with a corresponding increase in its accumulated deficit. In
addition, the Company reduced its gross deferred tax assets by $80,000 for
unrecognized tax benefits, which was offset by a reduction in its valuation
allowance by the same amount.
Included in the balance of unrecognized tax
benefits at March 31, 2008, are $520,000 of tax benefits that may affect
the effective tax rate, if recognized. Of this amount, $161,000 of tax benefit
may also be impacted by an increase in the valuation allowance with no net
affect on the effective tax rate, depending upon the Companys financial
condition at the time the benefits are recognized.
The Company believes that it is reasonably
possible that in the next twelve months, the amount of unrecognized tax
benefits may be reduced by up to $151,000. The reduction in unrecognized tax
benefits would relate to the settlement of pending claims for refund and the
expiration of statute of limitations for certain years.
The Company recognizes interest and penalties
related to unrecognized tax benefits in its provision for income taxes. Upon
adoption of FIN No. 48 and through March 31, 2008, the Company did
not record any material amounts of interest or penalties.
The Company is subject to taxation in the
United States, various state and foreign tax jurisdictions. Generally, the
Companys tax returns for fiscal 2004 and forward are subject to examination by
the U. S. federal tax authorities and fiscal 2003 and forward are subject to
examination by state tax authorities.
During the third quarter of fiscal 2008, the
Companys liability for unrecognized tax benefits decreased by $214,000 due to
the expiration of statute of limitations for certain years. Of this amount,
$171,000 was offset by an increase in the valuation allowance, with no net
affect on the effective tax rate.
Potential 382 Limitation
Utilization of our net operating loss (NOL) and
research and development (R&D) credit carryforwards may be subject to a
substantial annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by Section 382 of
the Internal Revenue Code of 1986, as amended (the Code), as well as similar
state provisions. These ownership changes may limit the amount of NOL and
R&D credit carryforwards that can be utilized annually to offset future
taxable income and tax, respectively. In general, an ownership change as
defined by Section 382 of the Code results from a transaction or series of
transactions over a three-year period resulting in an ownership change of more
than 50 percentage points of the outstanding stock of a company by certain
stockholders or public groups.
The Company has not completed a study to
assess whether an ownership change has occurred or whether there have been
multiple ownership changes since the Company became a loss corporation under
the definition of Section 382. If the Company has experienced an ownership
change, utilization of the NOL or R&D credit carryforwards would be subject
to an annual limitation under Section 382 of the Code, which is determined
by first multiplying the value of the Companys stock at the time of the
ownership change by the applicable long-term, tax-exempt rate, and then could
be subject to additional adjustments, as required. Any limitation may result in
expiration of a portion of the NOL or R&D credit carryforwards before
utilization. Further, until a study is completed and any limitation known, no
amounts are being considered as an uncertain tax position or disclosed as an
unrecognized tax benefit under FIN No. 48. Any carryforwards that expire
prior to utilization as a result of such limitations will be removed from
deferred tax assets with a corresponding reduction of the valuation allowance.
Due to the existence of the valuation allowance, it is not expected that any
possible limitation will have an impact on the results of operations of the
Company.
Note 8 Bank Borrowings and Debt
Arrangements
On November 30, 2006, the Companys
$10.0 million revolving line of credit expired in accordance with its terms.
10
Note 9 Commitments and Contingencies
Warranty and Extended Warranty
The Company records a provision for estimated future
warranty costs for both the return-to-factory and on-site warranties. If future
actual costs to repair were to differ significantly from estimates, the impact
of these unforeseen costs or cost reductions would be recorded in subsequent
periods.
Separately priced extended on-site warranties are
offered for sale to customers of all product lines. The Company contracts with
third-party service providers to provide service relating to all on-site
warranties. Extended warranty revenue and amounts paid in advance to outside
service organizations are deferred and recognized as service revenue and cost
of service revenue, respectively, over the period of the service agreement.
Changes in the liability for product warranty
and deferred revenue associated with extended warranties were as follows (in
thousands):
|
|
Accrued
Warranty
|
|
Deferred
Revenue
|
|
|
|
|
|
|
|
Liability at June 30, 2007
|
|
$
|
6,134
|
|
$
|
11,453
|
|
Settlements made during the period
|
|
(1,676
|
)
|
(9,609
|
)
|
Change in liability for warranties issued
during the period
|
|
1,470
|
|
12,187
|
|
Change in liability for preexisting
warranties
|
|
(259
|
)
|
(2
|
)
|
Liability at March 31, 2008
|
|
$
|
5,669
|
|
$
|
14,029
|
|
Litigation
From time to time, the Company may be
involved in various lawsuits, legal proceedings or claims that arise in the
ordinary course of business. Management does not believe any legal proceedings
or claims pending at March 31, 2008 will have, individually or in the
aggregate, a material adverse effect on its business, liquidity, financial
position or results of operations. Litigation, however, is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm the Companys business.
Note 10 Intangible Assets
Intangible assets consist of the following
(in thousands):
|
|
March 31,
2008
|
|
June 30,
2007
|
|
|
|
|
|
|
|
Acquired technology
|
|
$
|
20,594
|
|
$
|
20,594
|
|
Impairment of Zetta acquired technology
|
|
(8,411
|
)
|
(8,411
|
)
|
Adjusted cost basis
|
|
12,183
|
|
12,183
|
|
Accumulated amortization
|
|
(11,750
|
)
|
(10,452
|
)
|
|
|
$
|
433
|
|
$
|
1,731
|
|
As a result of the impairment of the Zetta
technology, intangible assets at March 31, 2008 consist solely of the
remaining unamortized balance of the technology acquired in the June 2003
acquisition of Okapi Software, Inc. (Okapi). Amortization expense of intangible
assets was $433,000 during both the third quarter of fiscal 2008 and fiscal
2007, respectively. Amortization expense of intangible assets was $1.3 million
and $2.0 million during the first nine months of fiscal 2008 and fiscal 2007,
respectively. The technology acquired
from Zetta was being amortized over four years before its impairment in the
first quarter of fiscal 2007. The technology acquired from Okapi is
being amortized over five years. The
remaining amortization expense for the Okapi intangible asset,
approximately $433,000, will be amortized in the fourth quarter of fiscal 2008.
11
Note 11 Common Stock
Share repurchase program
In October 2005, the Companys Board of
Directors expanded the Companys share repurchase program to allow for the
purchase of up to 2.5 million shares of its common stock with no fixed dollar
amount. In October 2006, the Companys Board of Directors terminated the
share repurchase program. There were no share repurchases after the first
quarter of fiscal 2007. During the first nine months of fiscal 2007, an
aggregate of approximately 373,000 shares were repurchased at a cost of
approximately $2.7 million pursuant to the repurchase program.
Stock Options and Employee Stock Purchase
Plan
During the first nine months of fiscal 2008
and fiscal 2007, respectively, the Company issued approximately 16,000 and
23,000 shares of common stock purchased through the Companys ESPP.
Note 12 Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which
defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America and
expands disclosure about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 (fiscal 2009
for the Company). In February 2008, the FASB deferred the effective date
of SFAS No. 157 for one year (fiscal 2010 for the Company) as it relates to
fair value measurement requirements for nonfinancial assets and nonfinancial
liabilities. Management is currently evaluating the impact, if any, SFAS No. 157
will have on its consolidated financial position, results of operations and
cash flows.
In February 2007, the FASB issued SFAS No. 159,
The
Fair
Value Option for Financial Assets and Financial Liabilities including an
amendment of FASB Statement No. 115,
which permits an entity to
choose to elect irrevocably fair value on a contract-by-contract basis as the
initial and subsequent measurement attribute for many financial assets and
liabilities and certain other items including insurance contracts. Entities
electing the fair value option would be required to recognize changes in fair
value in earnings and to expense upfront cost and fees associated with the item
for which the fair value option is elected. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15,
2007 (fiscal 2009 for the Company). Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No. 157.
Management is currently evaluating the impact, if any, SFAS No. 159 will
have on its consolidated financial position, results of operations and cash
flows.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
(SFAS No. 141(R)), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an
acquirer in a business combination: (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest; (ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and (iii) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after an entitys fiscal
year that begins after December 15, 2008 (fiscal 2010 for the Company).
Management is currently evaluating the impact, if any, SFAS No. 141(R) will
have on its consolidated financial position, results of operations and cash
flows.
From time to
time, new accounting pronouncements are issued by the FASB that are adopted by
the Company as of the specified effective date. Unless otherwise discussed,
management believes that the impact of recently issued standards, which are not
yet effective, will not have a material impact on the Companys consolidated
financial statements upon adoption.
12
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The discussion in this section contains
statements of a forward-looking nature relating to future events or our future
performance. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates and similar expressions or variations of such words are
intended to identify forward-looking statements, but are not the only means of
identifying forward-looking statements. Such statements are only predictions
and actual events or results may differ materially. In evaluating such
statements, you should specifically consider various factors identified in this
report, including the matters set forth in Part II, Item 1A.
Risk Factors, which could cause actual results to differ materially from those
indicated by such forward-looking statements.
We are
a market leader and innovative provider of data protection appliances that help
small and medium-sized businesses and distributed enterprises ensure their data
is constantly protected, readily available and always there. Our portfolio of data protection appliances
includes the following:
·
the ULTAMUS
SERIES
TM
of nearline data protection appliances;
·
the REO SERIES
®
of disk-based backup and recovery appliances; and
·
the NEO SERIES
®
and ARCVault
®
family of tape backup and archive appliances.
Our products enable us to offer our customers
end-to-end data protection solutions. End-users of our products include small
and medium-size businesses, as well as distributed enterprise customers
represented by divisions and operating units of large multi-national
corporations, governmental organizations, universities and other non-profit
institutions operating in a broad range of industry sectors. See the Business
section in Part I, Item 1 of our annual report on Form 10-K for more
information about our business, products and operations.
Overview
This overview discusses matters on which our
management primarily focuses in evaluating our financial condition and
operating performance.
Generation
of revenue
. We generate the vast majority of our revenue from
sales of our data protection appliances. The balance of our revenue is provided
by selling spare parts, rendering services to our customers and earning
royalties on our licensed technology. Historically, a large share of our
product sales have been made through private label arrangements with original
equipment manufactures (OEMs), and the remainder have been made through
commercial distributors, direct market resellers (DMRs) and value added
resellers (VARs) in our branded channel. However, our strategy moving forward
is to focus heavily on the delivery of new and expanded products to our branded
channel, which historically has produced higher gross margins in comparison to
OEM business.
Declining
sales to HP.
In August 2005, our largest OEM customer,
Hewlett Packard Company (HP), notified us that it had selected an alternate
supplier for its next-generation mid-range tape automation products. HP began
purchasing the first product of this new line from the alternate supplier
during the first quarter of calendar year 2006. Although HP will continue to
purchase the tape automation products currently supplied by us for some time,
the alternate suppliers product has replaced a significant portion of those
purchases. Although we believe that sales to HP will continue to
decline, HP has recently relaunched the tape automation products supplied by us
with support for HPs new LTO4 tape drives, which may slow the rate of
replacement of our supplied products by the alternate suppliers product.
Revenue from HP in the third quarter of fiscal 2008 decreased 3.4% compared to
the second quarter of fiscal 2008, but increased 4.5% compared to the first
quarter of fiscal 2008.
Previous
setbacks.
During fiscal 2007, we experienced significant
setbacks related to the outsourcing of our manufacturing to Sanmina-SCI Corporation (Sanmina), our
supply contract with Dell Computer (Dell), and the commercialization of the
technology we acquired from Zetta Systems, Inc. (Zetta):
·
In September 2004, we announced a plan to
outsource all of our manufacturing to Sanmina, a U.S. third party manufacturer.
We completed this transfer in August 2005. During fiscal 2006, however, we failed to
achieve the customer service levels, product quality and cost reductions we
expected from the outsourcing. Additionally, we incurred a significant amount
of redundant costs to support the outsourcing, which eroded our gross margins
during the year. Consequently, we decided to bring manufacturing back to our
San Diego facility and entered into a transition agreement with Sanmina
effective September 2006. In February 2007, we completed the transfer
of all production lines back to San Diego. In the first quarter of fiscal 2008,
we completed the purchase of the remaining inventory under the transition
agreement.
13
·
In October 2005,
we announced that we would supply Dell with our next generation tape library
that was under development (ARCVault). We spent considerable resources during
the ensuing year to complete the development of this tape library and to meet
Dells specifications and other requirements. In October 2006, we were
notified by Dell of its intent to terminate the supply agreement. Shipments of
the tape libraries had not yet commenced at that date but were expected to
begin shortly.
·
In August 2006,
after a year of development, we launched our ULTAMUS Pro product which
incorporated the technology we acquired from Zetta. We had planned to
facilitate our entry into the primary protected disk market with ULTAMUS Pro,
but this product failed to achieve market acceptance. In October 2006, we
discontinued our research and development efforts on the Zetta technology, and
recorded an impairment charge of $8.4 million in the first quarter of fiscal
2007.
Related in large part to
the overall decline in HP revenue, we reported net revenue of $98.8 million for
the first nine months of fiscal 2008, compared with $126.4 million for the
first nine months of fiscal 2007. The decline in net revenue resulted in a net
loss
of $16.0
million, or $1.25 per share, for the first nine months of fiscal 2008 compared to a net loss of
$38.1 million, or $2.97 per share, for the first nine months of fiscal 2007.
Positive trends.
Despite the
disappointing financial results in recent quarters, we continue to achieve a
number of financial and operational objectives, some of which we believe will
assist us in our efforts to regain profitability:
·
Operating
expenses, excluding sales and marketing expenses, continued to decrease
compared to the first quarter of fiscal 2008 due to the completion of a number
of material-intensive development projects and continued strict expense control efforts.
Operating expenses for the quarter ended March 31, 2008 were $12.4 million
compared to $14.2 million for the quarter ended March 31, 2007 and $13.9
million for the quarter ended December 31, 2007 (including a $1.3 million
charge for software code which we expect to incorporate into a new product
currently under development.)
·
General and
administrative expense has continued to decrease compared to the first and
second quarters of fiscal 2008 through continued strict expense control
efforts.
·
Research and
development expense in the third quarter of fiscal 2008 also decreased compared
to the second quarter of fiscal 2007 excluding the $1.3 million charge (in the
second quarter of fiscal 2008) for software code which we expect to incorporate
into a new product currently under development.
·
Sales and
marketing expenses increased 1.1% compared to the second quarter of fiscal 2008
and 8.1% compared to the third quarter of fiscal 2008, as we marketed new
products and began rebuilding our sales force.
·
During the third
quarter of fiscal 2008, inventory turns and inventory levels remained
relatively flat compared to the second quarter of fiscal 2008. We had reduced
inventory levels in the prior three consecutive quarters, from the record high
levels reached during the second and third quarters of fiscal 2007, in part due
to increased turn rates in the first two quarters of fiscal 2008. We continue to target reducing inventory
levels and push toward higher inventory turns.
·
Having completed
the transfer of manufacturing back to our headquarters in San Diego in February 2007,
our product lead times have been reduced to target levels and we believe that
we have regained our reputation for timely delivery of quality products. We
also have resolved the backlog issues that arose during the outsourced period.
·
In the first
nine months of fiscal 2008, we launched three new products: the REO
®
4500c, in late September 2007; the REO 9100c, in October 2007; and
the REO 9500D, in November 2007. We have additional REO products scheduled
for launch through fiscal 2009. We expect these new REO products to contribute
to an improvement in branded sales in future periods.
14
Liquidity
and capital resources.
Historically, our primary source of
liquidity has been cash generated from operations. Despite incurring a net loss
of $4.9 million during the third quarter of fiscal 2008, we only used $1.2
million in cash to fund our operating activities. Our cash, cash equivalents
and short-term investments balance decreased by $2.1 million compared to the
balance at March 31, 2007 and $3.7 million (approximately $0.8 million of
which relates to the non-cash other-than-temporary impairment of our auction rate
securities) compared to the balance at June 30, 2007. At March 31,
2008, we had $19.1 million of cash, cash equivalents and short-term
investments, compared to $22.8 million at June 30, 2007. We have no other
unused sources of liquidity at this time. Cash management and preservation will
continue to be a top priority. However, we expect to incur negative operating
cash flows during the remainder of calendar 2008 as we introduce and market our
new products.
Industry trends.
Historically,
magnetic tape has been used for all forms of data backup and recovery, because
magnetic tape was, and still is, the only cost-effective, removable, high
capacity storage media that can be taken off-site to ensure that data is
safeguarded in case of disaster. For a number of years now, we have held a
market-leading position in mid-range tape automation with our flagship NEO
®
products, and sales of tape automation
appliances have represented more than 59% of our revenue for all periods
presented. In the fourth quarter of fiscal 2005, we commenced development of
ARCVault, our new tape automation platform. The first two products in the
ARCVault family were launched in July 2006 with the final product launched
in April 2007. Revenue from ARCVault products represented 10.2% and 8.1%,
respectively, of total net revenue during the fiscal quarters ended March 31,
2008 and March 31, 2007. Although we expect that tape solutions will
continue to be the anchor of the data protection strategy at most companies for
some time, tape backup is time consuming and often unreliable and inefficient.
The process of recovering data from tape is also time consuming and
inefficient. Ultimately, we expect that tape will be relegated to an archival
role for infrequently accessed data, and that companies will focus more on
disk-based solutions moving forward to protect data that needs to be accessed.
Recent Developments
In September 2007, October 2007 and November 2007, we
launched three additional REO products, the REO 4500c, the REO 9100c and the REO
9500D, respectively.
In April 2008, we announced the appointment of a Ravi Pendekanti
as our Vice President of Worldwide Marketing, a position that had been vacant
since October 2007.
Critical Accounting Policies and Estimates
We describe our significant accounting
policies in Note 1,
Operations and
Summary of Significant Accounting Policies
,
of the Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the fiscal year ended July 1, 2007. We discuss our
critical accounting policies and estimates in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations
, in our Annual Report on Form 10-K
for the fiscal year ended July 1, 2007. Unless otherwise described below,
there have been no significant changes in our critical accounting policies and
estimates.
Business Acquisitions and
Intangible Assets
Our business acquisitions typically result in
recognition of intangible assets (acquired technology), which affect the amount
of current and future period charges and amortization expenses, and in certain
cases non-recurring charges associated with in-process research and development
(IPR&D). We amortize our definite-lived intangible assets using the
straight-line method over their estimated useful lives, while IPR&D is
recorded as a non-recurring charge on the acquisition date.
The determination of the value of these
components of a business combination, as well as associated asset useful lives,
requires management to make various estimates and assumptions. Critical
estimates in valuing intangible assets may include but are not limited to:
future expected cash flows from product sales and services, maintenance
agreements, and acquired development technologies and patents or trademarks;
expected costs to develop the IPR&D into commercially viable products and
estimated cash flows from projects when completed; the acquired companys brand
awareness and market position, as well as assumptions about the period of time
the acquired products and services will continue to be used in our product
portfolio; and discount rates. Managements estimates of fair value and useful
lives are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable. Unanticipated events and circumstances
may occur and assumptions may change. Estimates using different assumptions
could also produce significantly different results.
During the first quarter of fiscal 2007, we
recorded an $8.4 million impairment charge related to acquired technology. See Impairment of Acquired Technology under
the discussion of Results of Operations below.
15
Income Tax Provision and Uncertain Tax
Positions
Significant judgment is required in
determining our consolidated income tax provision and evaluating our U.S. and
foreign tax positions. In July 2006, the FASB issued Interpretation 48,
Accounting for Uncertainty in Income Taxes
(FIN No. 48), which became effective for us beginning July 2, 2007.
FIN No. 48 addressed the determination of how tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN No. 48, we must recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate resolution
(audit). The impact of our reassessment of tax positions in accordance with FIN
No. 48 did not have a material impact on our results of operations,
financial position or liquidity. If we are unable to uphold our position upon
audit, it may impact our results of operations, financial position or
liquidity.
Available-for-Sale Securities
Available-for-sale
securities are recorded at fair value, and temporary unrealized holding gains
and losses are recorded, net of tax, as a separate component of accumulated
other comprehensive income. Unrealized losses are charged against net earnings
when a decline in fair value is determined to be other-than-temporary. In
accordance with Emerging Issues Task Force Issue No. 03-1 and FSP
FAS 115-1 and 124-1,
The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
we
review several factors to determine whether a loss is other-than-temporary.
These factors include but are not limited to (i) the length of time a
security is in an unrealized loss position, (ii) the extent to which fair
value is less than cost, (iii) the financial condition and near term
prospects of the issuer and, (iv) our intent and ability to hold the
security for a period of time sufficient to allow for any anticipated recovery
in fair value. Realized gains and losses are accounted for on the specific
identification method.
We hold two
auction-rate securities (ARS) which are collateralized by corporate debt
obligations. These ARS are intended to provide liquidity via an auction process
that resets the applicable interest rate at predetermined intervals, usually
every 30 days. Since July 2007, our auction-rate securities have
experienced failed auctions and are considered to have experienced an
other-than-temporary decline in fair value. An auction failure means that the
parties wishing to sell their securities could not do so.
Significant
judgment is required in determining the fair value of investments, when no
quoted prices exist. As allowed by SFAS No. 115, we elected to estimate
the fair value of the auction rate securities using a probability-weighted
discounted cash flow analysis. Assumptions used by us included estimates of (i) when
a successful auction would occur or the securities would be redeemed, (ii) a
discount rate commensurate with the implied risk associated with holding the
securities and (iii) cash flow streams. If the auctions continue to fail,
or we determine that one or more of the assumptions used in the estimate needs
to be revised, we may be required to record an additional impairment on these
securities in the future. If the discount rate used in our assumptions
increased or decreased by 100 basis points, all other assumptions remaining
constant, the fair value of the ARS at March 31, 2008, would have
decreased or increased by approximately $0.2 million with a corresponding
increase or decrease in the impairment loss. Alternatively, if an increase or
decrease of approximately one year in the probability-weighted average length
of time to a successful auction or redemption occurred, all other assumptions
remaining constant, the fair value of the ARS would have decreased or increased
by approximately $0.1 million with a corresponding increase or decrease in the
impairment loss.
16
Results of Operations
The following tables set forth certain
financial data as a percentage of net revenue:
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of revenue
|
|
75.8
|
|
86.7
|
|
77.8
|
|
85.6
|
|
Gross profit
|
|
24.2
|
|
13.3
|
|
22.2
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
25.1
|
|
19.6
|
|
22.8
|
|
20.3
|
|
Research and development
|
|
6.2
|
|
8.9
|
|
7.3
|
|
9.8
|
|
General and administrative
|
|
7.6
|
|
9.2
|
|
7.7
|
|
8.5
|
|
Impairment of acquired technology
|
|
|
|
|
|
|
|
6.7
|
|
|
|
38.9
|
|
37.7
|
|
37.8
|
|
45.3
|
|
Loss from operations
|
|
(14.7
|
)
|
(24.4
|
)
|
(15.6
|
)
|
(30.9
|
)
|
Other (expense) income, net
|
|
(0.5
|
)
|
0.3
|
|
(0.3
|
)
|
0.8
|
|
Loss before income taxes
|
|
(15.2
|
)
|
(24.1
|
)
|
(15.9
|
)
|
(30.1
|
)
|
Provision for income taxes
|
|
0.3
|
|
0.3
|
|
0.3
|
|
|
|
Net loss
|
|
(15.5
|
)%
|
(24.4
|
)%
|
(16.2
|
)%
|
(30.1
|
)%
|
The
following table summarizes sales mix by product:
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Tape based products:
|
|
|
|
|
|
|
|
|
|
NEO Series
|
|
49.3
|
%
|
63.6
|
%
|
54.7
|
%
|
68.3
|
%
|
ARCVault Series
|
|
10.2
|
|
8.1
|
|
9.5
|
|
6.6
|
|
Other
|
|
(0.1
|
)
|
(0.2
|
)
|
|
|
1.5
|
|
|
|
59.4
|
|
71.5
|
|
64.2
|
|
76.4
|
|
Service
|
|
16.8
|
|
11.3
|
|
15.2
|
|
9.5
|
|
Spare parts and other
|
|
16.5
|
|
10.1
|
|
11.6
|
|
7.3
|
|
Disk based products (1)
|
|
6.9
|
|
6.3
|
|
8.5
|
|
5.9
|
|
VR
2
|
|
0.4
|
|
0.8
|
|
0.5
|
|
0.9
|
|
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
(1) Includes REO
series and ULTAMUS series products.
The third quarter of fiscal 2008 compared to
the third quarter of fiscal 2007
Net revenue.
Net revenue decreased to $31.8 million during the third quarter of fiscal 2008
from $37.8 million during the third quarter of fiscal 2007, a decrease of $6.0
million, or 15.9%. This decrease was primarily the result of anticipated lower
OEM revenue, specifically from HP, reflecting the previously announced
transition by HP to an alternate supplier. We also experienced an overall
decrease in net revenue in our branded channel. By geographic area, the
majority of this decrease was attributable to our Americas region.
Product revenue
Net product revenue from OEM customers
decreased to $12.6 million during the third quarter of fiscal 2008 from
$18.4 million during the third quarter of fiscal 2007. The decrease of
$5.8 million, or 31.5%, was primarily a result of decreased volumes. Sales to
HP represented approximately 38.1% of net revenue in the third quarter of fiscal
2008 compared to 44.7% of net revenue in the third quarter of fiscal 2007.
17
Net revenue from Overland branded products,
excluding service revenue, decreased to $13.8 million during the third
quarter of fiscal 2008 from $14.9 million during the third quarter of fiscal
2007. The decrease of $1.1 million, or 7.4%, was due primarily to a decrease in
revenue from NEO products of $1.4 million, partially offset by an increase in
revenue from ULTAMUS products of $0.3 million. The decrease in net revenue in
our branded channel primarily related to a lack of sufficient sales personnel
in our Americas region during the third quarter of fiscal 2008. As we re-build
our sales team we anticipate improved net revenue in this region.
Service revenue
Service revenue increased to $5.3 million
during the third quarter of fiscal 2008 from $4.3 million during the third
quarter of fiscal 2007. The increase of $1.0 million, or 23.3%, was due
primarily to an increase in the quantity and value of warranty contracts
recognized during the third quarter of fiscal 2008 compared to the third
quarter of fiscal 2007.
Royalty fees
Royalty revenue during the third quarter of
fiscal 2008 decreased to $0.2 million from $0.3 million during the third
quarter of fiscal 2007. This decrease of $0.1 million, or 33.3%, was primarily
the result of a decrease in VR
2®
royalties, partially offset by an
increase in other royalty fees which we began receiving in the third quarter of
fiscal 2007. VR
2
royalties during the third quarter of fiscal
2008 totaled approximately $0.1 million compared to $0.3 million during the
third quarter of fiscal 2007.
Gross profit.
Gross profit in the third quarter of fiscal 2008 increased to $7.7 million from
$5.0 million in the third quarter of fiscal 2007, despite the 15.9% decline in
net revenue. The improvement in gross margin (24.2% compared to 13.3%) over the
prior year period primarily reflects the elimination of charges and redundant
costs associated with our terminated outsourced manufacturing arrangement.
Product revenue
Gross profit on product revenue was $5.3
million for the third quarter of fiscal 2008 compared to $2.9 million for the
third quarter of fiscal 2007. The increase of $2.4 million, or 82.8%, was due
to the completion of the transition of manufacturing back to our San Diego
headquarters and a more favorable sales mix by channel (reflecting a reduction
in net revenue from our OEM customers), each of which positively affected our
gross profit on product revenue for the third quarter of fiscal 2008.
Service revenue
Gross profit on service revenue increased to
$2.2 million during the third quarter of fiscal 2008 from $1.8 million during
the third quarter of fiscal 2007. The increase of $0.4 million, or 22.2%, was
due to revenue from warranty contracts recognized in the third quarter of
fiscal 2008 (which increased 35.9% compared to the third quarter of fiscal
2007), while the related costs decreased slightly. This increase in revenue
from warranty contracts was slightly offset by a decrease in out of warranty
services provided.
Share-based compensation
.
During the third quarter of fiscal 2008, we recorded share-based compensation
expense of approximately $0.2 million compared to $0.3 million of expense
during the third quarter of fiscal 2007. Share-based compensation expense for
the fourth quarter of fiscal 2008 is expected to be approximately $0.1 million.
We allocated share-based compensation as
follows (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Cost of product revenue
|
|
$
|
31
|
|
$
|
2
|
|
$
|
29
|
|
Sales and marketing
|
|
72
|
|
34
|
|
38
|
|
Research and development
|
|
27
|
|
(12
|
)
|
39
|
|
General and administrative
|
|
100
|
|
274
|
|
(174
|
)
|
|
|
$
|
230
|
|
$
|
298
|
|
$
|
(68
|
)
|
18
Sales and marketing expense.
Sales and marketing expense increased to $8.0 million during the third quarter
of fiscal 2008 from $7.4 million during the third quarter of fiscal 2007. The
increase of $0.6 million, or 8.1%, is primarily due to (i) an increase of
$0.4 million in advertising expense related to the recent launch of new
products, and (ii) an increase of approximately $0.2 million in employee
and related expenses (including travel and sales commissions) (from an increase
in average headcount by eight employees) related to the addition of a sales
lead generation team.
Research and development
expense.
Research and development expense
decreased to $2.0 million during the third quarter of fiscal 2008 from $3.4
million during the third quarter of fiscal 2007. The decrease of $1.4 million,
or 41.2%, is primarily due to (i) a decrease of approximately $0.8 million
in employee and related expenses (from a decrease in average headcount by 15
employees) associated with our fiscal 2007 restructurings and closing of our
software development office near Seattle, Washington, and (ii) a decrease
of $0.6 million in material-intensive product development expenses due to the
completion of scheduled R&D projects in fiscal 2007.
General and administrative
expense
. General and administrative expense
decreased to $2.4 million during the third quarter of fiscal 2008 from $3.5
million during the third quarter of fiscal 2007. The decrease of $1.1 million,
or 31.4%, is primarily due to (i) a decrease of $0.5 million in employee
and related expenses (from a decrease in average headcount by nine employees)
associated with our fiscal 2007 restructurings, (ii) a decrease of $0.3
million in bad debt expense, and (iii) a decrease of $0.2 million in
share-based compensation expense recorded
under FIN No. 28 associated with our accelerated amortization methodology.
Interest income
.
Interest income decreased to $0.2 million during the third quarter of fiscal
2008 from $0.3 million during the third quarter of fiscal 2007. The decrease of
$0.1 million, or 33.3%, is due to lower cash and investment balances, when
compared to the third quarter of fiscal 2007, and lower interest rates earned
on such balances.
Other expense, net.
Other expense, net, increased to $0.4 million during the third quarter of
fiscal 2008 from $0.2 million during the third quarter of fiscal 2007. During
the quarter ended March 31, 2008, we recorded an other-than-temporary
impairment loss of $0.3 million, pre-tax, associated with our auction rate
securities due to failed auctions (see Note 3 in the accompanying consolidated
condensed financial statements (unaudited)). For the quarter ended March 31,
2007, other expense, net, primarily related to realized losses on short-term
investments, which included a $0.1 million impairment charge under FSP FAS
115-1 and 124-1.
The first nine months of fiscal 2008 compared
to the first nine months of fiscal 2007
Net
revenue
.
Net
revenue decreased to $98.8 million during the first nine months of fiscal 2008
from $126.4 million during the first nine months of fiscal 2007, a decrease of
$27.6 million, or 21.8%. This decrease was primarily the result of anticipated
lower OEM revenue, specifically from HP, reflecting the previously announced
transition by HP to an alternate supplier. In our branded channel, the decrease
in net revenue was attributable to decreased volumes across all channels.
Product revenue
Net product revenue from OEM customers
decreased to $37.6 million in the first nine months of fiscal 2008 from $62.6
million in the first nine months of fiscal 2007. The decrease of $25.0 million,
or 39.9%, was primarily a result of decreased volumes. Sales to HP represented
approximately 36.7% of total net revenue in the first nine months of fiscal
2008 compared to 47.0% of total net revenue in the first nine months of fiscal
2007.
Net revenue from Overland branded products,
excluding service revenue, decreased to $45.7 million in the first nine months
of fiscal 2008 from $50.7 million during the first nine months of fiscal
2007. The decrease of $5.0 million, or 9.9%, was due primarily to (i) a
decrease of $5.7 million from NEO products and (ii) a decrease of $1.7 million
due to the discontinuation of our Power Loader and LoaderXpress products. These
decreases were offset by an increase in revenue from ARCVault products of $1.0
million and ULTAMUS products of $1.8 million. The sales of our ULTAMUS products
have not yet achieved expected sales volumes.
Service revenue
Service revenue increased to $14.9 million
during the first nine months of fiscal 2008 from $12.0 million during the first
nine months of fiscal 2007. The increase of $2.9 million, or 24.2%, was
primarily due to an increase in the quantity and value of warranty contracts
recognized during the first nine months of fiscal 2008 compared to the first
nine months of fiscal 2007 and a slight increase in out of warranty service
provided.
19
Royalty fees
Royalty revenue during the first nine months
of fiscal 2008 decreased to $0.8 million from $1.2 million during the first
nine months of fiscal 2007. This decrease of $0.4 million, or 33.3%, was
primarily the result of a decrease in VR
2
royalties,
partially offset by an increase in other royalty fees, which we began receiving
in the second quarter of fiscal 2007. VR
2
royalties during
the first nine months of fiscal 2008 totaled approximately $0.5 million
compared to $1.1 million during the first nine months of fiscal 2007.
Gross
profit.
Gross profit in the first nine months of
fiscal 2008 increased by $3.8 million, or 20.9%, to $22.0 million from $18.2
million in the first nine months of fiscal 2007, despite the 21.8% percent
decline in net revenue. The improvement in gross margin (22.2% compared to 14.4%)
over the prior year period primarily reflects the elimination of charges and
redundant costs associated with our terminated outsourced manufacturing
arrangement.
Product revenue
Gross profit
on product revenue was $14.6 million for the first nine months of fiscal 2008
compared to $12.2 million for the first nine months of fiscal 2007, despite a
26.7% decrease in product revenue during the same period. Fiscal 2007 gross
profit was negatively impacted by (i) a $1.3 million increase in inventory
reserves associated with obsolete inventories and components originally
acquired for the Dell contract, and (ii) $0.7 million in amortization
expense related to the technology we acquired from Zetta, which amortization
expense was eliminated upon the impairment of that technology in the first
quarter of fiscal 2007.
Service revenue
Gross profit on service revenue increased to
$6.6 million during the first nine months of fiscal 2008 from $4.8 million
during the first nine months of fiscal 2007. The increase of $1.8 million, or
37.5%, was primarily due to the increase in warranty contracts recognized in
the first nine months of fiscal 2008 (which costs increased by 37.8% compared
to the first nine months of fiscal 2007).
Share-based compensation
.
During the first nine months of fiscal 2008, we recorded share-based
compensation expense of approximately $0.9 million compared to a net reversal
of $0.2 million of expense during the first nine months of fiscal 2007.
Share-based compensation expense increased in the first nine months of fiscal
2008 due to a one-time grant of options in August 2007 for a total of
approximately 1.5 million shares to executive officers and key employees as a
retention tool. These options vest
monthly for one year and are expected to result in increased share-based
compensation expense through the first quarter of fiscal 2009. In the first
nine months of fiscal 2007, the net reversal resulted from significant pre-vesting
forfeitures (in excess of amounts previously estimated) related to the
forfeiture of shares previously granted to two executives and individuals
terminated as part of the fiscal 2007 restructurings. The pre-vesting
forfeitures resulted in the reversal of previously recognized share-based
compensation expense and such reversal exceeded the amount of expense recorded
for other awards in the first nine months of fiscal 2007.
We allocated share-based compensation as
follows (in thousands):
|
|
Nine months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Cost of revenue
|
|
$
|
117
|
|
$
|
4
|
|
$
|
113
|
|
Sales and marketing
|
|
297
|
|
(268
|
)
|
565
|
|
Research and development
|
|
133
|
|
(102
|
)
|
235
|
|
General and administrative
|
|
364
|
|
200
|
|
164
|
|
|
|
$
|
911
|
|
$
|
(166
|
)
|
$
|
1,077
|
|
Sales and marketing expense
.
Sales and marketing expense was $22.5
million during the first nine months of fiscal 2008 compared to $25.6 million
during the first nine months of fiscal 2007. The decrease of $3.1 million, or
12.1%, is primarily due to (i) a decrease of approximately $2.4 million in
employee and related expenses (including travel and sales commissions) (from a
decrease in average headcount by 12 employees) related to our fiscal 2007
restructurings and the realignment of our sales force, (ii) a $0.7 million
reduction in severance primarily associated with the fiscal 2007
restructurings, and (iii) a $0.8 million reduction in new product sales
development expense and related public relations expense due to decreased
product launch activities in the current year. These decreases were offset by (i) an
increase of $0.6 million in share-based compensation expense associated with
options granted in August 2007 (compared to a net reversal of share-based
compensation expense in the second quarter of fiscal 2007 which was associated
with awards canceled prior to vesting) and a reduction of related expense under
FIN No. 28 associated with our accelerated amortization methodology, and (ii) an
increase of $0.6 million in advertising expense due to the launch of new products.
20
Research
and development expense
.
Research and development expense was $7.2 million during
the first nine months of fiscal 2008, compared to $12.4 million during the
first nine months of fiscal 2007. The decrease of $5.2 million, or 41.9%, is
primarily due to (i) a decrease of approximately $3.7 million in employee
and related expenses (from a decrease in average headcount by 26 employees)
related to our fiscal 2007 restructurings, and (ii) a decrease of $2.5
million in material-intensive product development expenses due to the
completion of scheduled R&D projects. These decreases were offset by (i) a
$1.3 million charge for software code that we expect to incorporate into a new
product that is currently under development, and (ii) an increase of $0.2
million in share-based compensation expense associated with options granted in August 2007
(compared to a net reversal of share-based compensation expense in the first
nine months of fiscal 2007).
General
and administrative expense
.
General and administrative expense of
$7.6 million during the first nine months of fiscal 2008 decreased from $10.7
million during the first nine months of fiscal 2007. The decrease of $3.1
million, or 29.0%, is primarily due to (i) a decrease of $1.2 million in
employee and related expenses (from a decrease in average headcount by 12
employees) related to our fiscal 2007 restructurings, (ii) a decrease of
approximately $0.5 million in severance expense, which expense was higher in
the first nine months of fiscal 2007 due to the termination of our former
president and chief executive officer, (iii) a decrease of $0.7 million in
legal fees which were significantly higher in the first nine months of fiscal
2007 due to the termination of our former president and chief executive office
and the termination of our agreement with our third party manufacturer, (iv) a
decrease of $0.3 million in audit, tax and consulting fees related to the
material weakness we reported at the end of fiscal 2006, and (v) a
decrease of $0.3 million in bad debt expense. These reductions were offset by
an increase of $0.2 million in share-based compensation expense associated with
options granted in August 2007 and a recording of related expense under
FIN No. 28 associated with our accelerated amortization methodology.
Impairment of acquired
technology.
In the first quarter of fiscal 2007,
we recorded an impairment charge of $8.4 million related to the technology
acquired from Zetta in August 2005. As more fully discussed in Note 2 in
the accompanying consolidated condensed financial statements (unaudited),
management performed an impairment analysis of the technology acquired from
Zetta, in accordance with SFAS No. 144, and concluded that the asset was
not recoverable and that an impairment loss of the full remaining intangible
asset should be recognized as of September 30, 2006.
Interest
income
.
During
the first nine months of fiscal 2008, we generated interest income of $0.7
million compared to $1.5 million during the same period of the prior fiscal
year. The decrease of $0.8 million, or 53.3%, is due to lower cash and
investment balances when compared to the same period in fiscal 2007, and lower
interest rates earned on such balances.
Other expense, net.
Other expense, net, increased to $1.0 million during the first nine months of
fiscal 2008 from $0.5 million during the first nine months of fiscal 2007.
During the nine months ended March 31, 2008, we recorded an
other-than-temporary impairment loss of $0.8 million, pre-tax, associated with
our auction rate securities due to failed auctions. For the first nine months
of fiscal 2007, other expense, net, primarily related to realized losses on our
short-term investments, including a $107,000 impairment charge under FSP FAS
115-1 and 124-1, and the impact of changes in certain foreign currency exchange
rates.
Liquidity
and Capital Resources.
At March 31, 2008, we had $19.1 million of cash,
cash equivalents and short-term investments, compared to $22.8 million at June 30, 2007. We have no
other unused sources of liquidity at this time.
Historically, our primary source
of liquidity has been cash generated from operations. However, we have incurred
losses since the fourth quarter of fiscal 2005, and negative cash flows from
operating activities from the fourth quarter of fiscal 2005 through the third
quarter of fiscal 2008, with the exception of the fourth quarter of fiscal 2007
and the first quarter of fiscal 2008, in which we generated cash from operating
activities. For the nine months ended March 31, 2008, we incurred a net
loss of $16.0 million and the balance of cash, cash equivalents and short-term
investments declined by $3.7 million
(approximately $0.8 million of
which relates to the non-cash other-than-temporary impairment of our auction
rate securities) compared to the balance at
June 30, 2007.
During the fourth quarter of
fiscal 2008, we expect negative cash flows from operating activities and to
continue to incur losses as we rebuild our sales force and introduce and market
our new products. However, we expect to increase inventory turns and at least
maintain or slightly reduce our inventory levels. Management expects our
current balance of cash, cash equivalents and short-term investments, and
anticipated funds from operations
will be sufficient to fund our operations
for the next twelve months. We need to generate additional revenue, continue to
improve our gross profit margins and reduce operating expenses to be profitable
in future periods. Our recent history of net losses could cause current or
potential customers to defer new orders with us or select other vendors, and
may cause suppliers to require terms that are unfavorable to us. Failure to
achieve profitability, or maintain profitability if achieved, may require us to
raise additional funding which
21
(i) could have a material adverse effect on the market value of
our common stock, (ii) we may not be able to obtain in the necessary time
frame to avoid disruptions to our business or on terms favorable to us, if at
all, or (iii) may be inadequate to enable us to continue to conduct
business. If needed, failure to raise such additional funding may adversely
affect our ability to achieve our longer term business objectives.
We hold two auction rate securities (ARS) that represent
interests in pools of collateralized debt obligations. These ARS are intended
to provide liquidity via an auction process that resets the applicable interest
rate at predetermined intervals, allowing investors to either roll over their
holdings or gain immediate liquidity by selling such interests at par. As a
result of negative conditions in the global credit markets, auctions for our
$5.0 million investment (at par) in these securities have failed, since July 2007,
to settle on their respective settlement dates. An auction failure means that
the parties wishing to sell their securities could not do so. Accordingly, as
of March 31, 2008, we have recorded an other-than-temporary impairment of
$0.8 million on our auction rate securities. If the auctions continue to fail,
or we determine that one or more of the assumptions used in estimating the fair
value of the auction rate securities needs to be revised, we may be required to
record an additional impairment on the auction rate securities in future
periods. Additionally, our ability to liquidate and fully recover the carrying
value of the auction rate securities in the near term may be limited or not
exist.
To our knowledge, none of our ARS investments
have been downgraded. As of March 31, 2008 all of the ARS investments
continue to be investment grade quality.
During the first
nine months of fiscal 2008, we used $2.6 million in cash for operating
activities compared to $35.8 million used during the first nine months of
fiscal 2007
. The change
of $33.2 million was primarily due to the improvement in gross profit between
periods excluding the one-time non-cash impairment charge for the technology we
acquired from Zetta in the first quarter of fiscal 2007. Also
contributing to the improvement was a $14.2 million change in cash provided by
operating activities related to inventories
due to a $3.3 million reduction in inventory balances during the first nine
months of fiscal 2008, compared to $10.9 million in cash used for the purchase of
inventories during the first nine months of fiscal 2007. The decrease in
inventories in fiscal 2008 was due to cost savings measures we implemented
during the first nine months of fiscal 2008. The increase in inventories during
the first nine months of fiscal 2007 was due to our transition back to in-house
manufacturing.
Cash used in
investing activities was $1.5 million for the first nine months of fiscal 2008,
compared to cash provided by investing activities of $24.9 million during the
first nine months of fiscal 2007. During the first nine months of fiscal 2008,
we used net cash of approximately $1.0 million for the purchase of short-term
investments, net of proceeds from the maturities and sales of investments.
During the first nine months of fiscal 2007, we liquidated some of our
investments to support our operations. Capital expenditures during the first
nine months of fiscal 2008 and 2007 totaled $0.5 million and $3.2 million,
respectively. During the first nine months of fiscal 2008, such expenditures
were primarily associated with tooling to support new product development.
During the first nine months of fiscal 2007, such expenditures were primarily
associated with computers, machinery and equipment to support new product
development and the transition of manufacturing back in-house.
We generated cash from our financing
activities of $26,000 during the first nine months of fiscal 2008 in comparison
to cash used in financing activities of $2.6 million during the first nine
months of fiscal 2007. During the first nine months of fiscal 2008, cash
provided by financing activities was primarily the result of the purchase of
shares of our common stock through our 2006 Employee Stock Purchase Plan
(ESPP). During the first nine months of fiscal 2007, cash used in financing
activities was primarily the result of the repurchase of 373,000 shares of our
stock under our repurchase program for $2.7 million. This use of cash was
slightly offset by the exercise of options and the purchase of shares of our
common stock under our ESPP for aggregate proceeds of $0.1 million.
Inflation
Inflation has not had a significant impact on
our operations during the periods presented. Historically we have been able to
pass on to our customers any increases in raw material prices caused by
inflation. If at any time we cannot pass on such increases, our margins could
suffer. Our exposure to the effects of inflation could be magnified by the
concentration of OEM business, where our margins tend to be lower.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or
significant guarantees to third parties that are not fully recorded in our
consolidated condensed balance sheets (unaudited) or fully disclosed in the
notes to our consolidated condensed financial statements (unaudited).
22
Recent Accounting Pronouncements
See Note 12 to our consolidated condensed
financial statements (unaudited) for information about recent accounting
pronouncements.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Market risk represents
the risk of loss that may impact our results of operations, financial position
or cash flows due to adverse changes in financial and commodity market prices
and rates. We are exposed to market risk in the areas of changes in U.S.
interest rates and changes in foreign currency exchange rates as measured
against the U.S. dollar. These exposures are directly related to our normal
operating and funding activities. Historically, we have not used derivative
instruments or engaged in hedging activities.
Interest
Rate Risk.
All of our fixed income investments are
classified as available-for-sale and therefore reported on the balance sheet at
market value. Changes in the overall level of interest rates affect our
interest income that is generated from our investments. For the first nine
months of fiscal 2008, total interest income was $0.7 million with investments
yielding an annual average of 4.7% on a worldwide basis. The interest rate level
was down approximately 50 basis points from 5.2% in the first nine months of
fiscal 2007. Assuming consistent investment levels, if interest rates were to
fluctuate (increase or decrease) by 10%, or 50 basis points, we could expect a
corresponding fluctuation in interest income of approximately $25,000 during
the fourth quarter of fiscal 2008. We also have market risk related to our
auction rate securities, See Note 3 to the accompanying consolidated condensed
financial statements (unaudited).
The table below presents
the cash, cash equivalents and short-term investment balances and related
weighted-average interest rates at the end of March 31, 2008. The cash,
cash equivalents and short-term investment balances approximate fair value (in thousands):
|
|
Approximate
Market Value
|
|
Weighted-
Average
Interest Rate
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,576
|
|
2.4
|
%
|
Short-term investments:
|
|
|
|
|
|
Due in 2 5 years
|
|
260
|
|
4.0
|
%
|
Due after 5 years
|
|
5,310
|
|
3.9
|
%
|
|
|
$
|
19,146
|
|
3.0
|
%
|
The table above includes
the U.S. dollar equivalent of cash, cash equivalents and short-term
investments, including $2.3 million and $0.4 million equivalents denominated in
the British pound and the euro, respectively.
Foreign
Currency Risk.
We conduct business on a global basis and
essentially all of our products sold and services provided in international
markets are denominated in U.S. dollars. Historically, export sales have
represented a significant portion of our revenue and are expected to continue
to represent a significant portion of revenue.
Our wholly-owned
subsidiaries in the United Kingdom, France and Germany incur costs which are
denominated in local currencies. As exchange rates vary, these results when
translated into U.S. dollars may vary from expectations and adversely impact
overall expected results. The effect of exchange rate fluctuations on our
results during the first nine months of fiscal 2008 and the first nine months
of fiscal 2007 resulted in losses of approximately $0.2 million and $0.3
million, respectively.
Item 4.
Controls and Procedures
Not applicable
Item 4T.
Controls and Procedures
Disclosure
Controls and Procedures
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control over
financial reporting during the fiscal quarter ended March 31, 2008 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
23
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time involved in various
lawsuits, legal proceedings or claims that arise in the ordinary course of
business. We do not believe any such legal proceedings or claims will have,
individually or in the aggregate, a material adverse effect on our business,
liquidity, results of operations or financial position. Litigation, however, is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.
Item 1A. Risk Factors
An
investment in our company involves a high degree of risk. In addition to the
other information included in this report, you should carefully consider the
following risk factor and the risk factors set forth in our annual report on Form 10-K
for the year ended June 30, 2007 and in our quarterly reports on Form 10-Q
for the quarters ended September 30, 2007 and December 31, 2007 in
evaluating an investment in our company. You should consider these matters in
conjunction with the other information included or incorporated by reference in
this report.
We
recorded an impairment charge to reduce the carrying value of our auction rate
securities and we may incur additional impairment charges with respect to
auction rate securities in the future.
Credit
concerns in the capital markets have significantly reduced our ability to
liquidate auction rate securities (ARS) that we classify as short-term
investments on our balance sheet. As of March 31, 2008, we held two ARS with
a par value of $5.0 million. These securities are collateralized by
corporate debt obligations. Due to the failed auctions for the ARS in the
second and third quarters of fiscal 2008, we recorded other-than-temporary
impairment charges of $0.5 million and $0.3 million, respectively, to reduce
the value of our ARS to their estimated fair value of $4.2 million as of March 31,
2008. An auction failure means that the parties wishing to sell their
securities could not do so. If the auctions continue to fail, or we determine
that one or more of the assumptions used in estimating the fair value of the
ARS needs to be revised, we may be required to record an additional impairment
on the ARS in future periods. Additionally, our ability to liquidate and fully
recover the carrying value of the ARS in the near term may be limited or not
exist.
24
Item 6. Exhibits
10.1*
|
|
Separation
Agreement between the Company and Robert Scroop dated February 14, 2008
(incorporated by reference from Exhibit 99.1 to the Companys
Form 8-K filed with the Commission on February 15, 2008).
|
|
|
|
10.2*
|
|
Offer Letter
between the Company and Ravi Pendekanti dated April 4, 2008.
|
|
|
|
10.3
|
|
Second
Transition Amendment between the Company and Sanmina-SCI Corporation dated
June 29, 2007. +
|
|
|
|
10.4
|
|
Addendum to
Product Purchase Agreement between the Company and Hewlett-Packard Company
dated December 15, 2007. +
|
|
|
|
10.5*
|
|
Summary Sheet of Director and Executive
Officer Compensation.
|
|
|
|
31.1
|
|
Certification
of Vernon A. LoForti, President and Chief Executive Officer, pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification
of Kurt L. Kalbfleisch, Vice President of Finance and Chief Financial
Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities and Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, executed by Vernon A.
LoForti, President and Chief Executive Officer, and Kurt L. Kalbfleisch, Vice
President of Finance and Chief Financial Officer.
|
*
Management
contract or compensatory plan or arrangement.
+
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment and the non-public information has been filed separately with the
Commisison.
25
SIGNATURE
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: May 1, 2008
|
By:
|
/s/ Kurt L. Kalbfleisch
|
|
|
|
Kurt L.
Kalbfleisch
|
|
|
|
Vice President of Finance and
Chief Financial Officer
(Principal financial officer and duly
authorized to sign on behalf of
registrant)
|
26
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