UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2008
Commission File Number: 000-22071
OVERLAND STORAGE, INC.
(Exact name of registrant as specified in its charter)
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California
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95-3535285
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.)
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4820 Overland Avenue, San Diego, California
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92123
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(Address of principal executive offices)
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(Zip Code)
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(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
¨
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):
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Large accelerated filer
¨
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Accelerated filer
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Non-accelerated filer
¨
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Smaller reporting company
x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Act). Yes
¨
No
x
As of February 6, 2009, there were 12,776,550 shares of the registrants common stock, no par value, issued and outstanding.
OVERLAND STORAGE, INC.
FORM 10-Q
For the quarterly period ended December 28, 2008
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Overland Storage, Inc.
Consolidated Condensed Statement of
Operations (Unaudited)
(In thousands, except per share amounts)
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Three months ended
December 31,
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Six months ended
December 31,
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2008
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2007
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2008
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2007
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Net revenue:
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Product revenue
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$
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22,894
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$
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29,161
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$
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49,155
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$
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56,819
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Service revenue
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5,785
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4,649
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11,633
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9,590
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Royalty fees
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270
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250
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465
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552
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28,949
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34,060
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61,253
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66,961
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Cost of product revenue
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18,330
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23,629
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39,153
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47,513
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Cost of service revenue
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2,895
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2,649
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5,654
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5,194
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Gross profit
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7,724
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7,782
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16,446
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14,254
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Operating expenses:
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Sales and marketing
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7,387
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7,898
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16,812
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14,561
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Research and development
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2,798
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3,317
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5,975
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5,257
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General and administrative
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2,428
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2,658
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5,455
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5,181
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12,613
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13,873
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28,242
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24,999
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Loss from operations
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(4,889
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(6,091
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(11,796
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(10,745
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Other income (expense):
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Interest income, net
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37
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242
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101
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531
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Other expense, net
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(276
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(500
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(463
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(601
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Loss before income taxes
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(5,128
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(6,349
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(12,158
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(10,815
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Provision for (benefit from) income taxes
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24
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155
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(100
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210
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Net loss
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$
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(5,152
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$
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(6,504
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$
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(12,058
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$
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(11,025
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Net loss per share:
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Basic and diluted
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$
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(0.40
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$
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(0.51
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$
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(0.94
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$
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(0.86
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Shares used in computing net loss per share:
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Basic and diluted
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12,771
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12,756
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12,769
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12,755
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See accompanying notes to consolidated condensed financial statements.
2
Overland Storage, Inc.
Consolidated Condensed Balance Sheets (Unaudited)
(In thousands)
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December 31,
2008
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June 30,
2008
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Assets
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Current assets:
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Cash and cash equivalents
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$
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3,033
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$
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8,437
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Short-term investments
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1,214
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Accounts receivable, net of allowance for doubtful accounts of $391 and $396 as of December 31, 2008 and June 30, 2008, respectively
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15,781
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15,814
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Accounts receivable pledged as collateral
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1,235
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Inventories
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16,035
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17,126
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Other current assets
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7,327
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8,566
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Total current assets
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43,411
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51,157
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Property and equipment, net
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1,404
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1,139
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Intangible assets, net
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4,869
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5,483
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Other assets
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3,581
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4,811
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Total assets
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$
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53,265
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$
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62,590
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Liabilities and Shareholders Equity
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Current liabilities:
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Accounts payable
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$
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11,146
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$
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7,203
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Accrued liabilities
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19,568
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20,150
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Accrued payroll and employee compensation
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3,508
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3,801
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Income taxes payable
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110
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58
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Accrued warranty
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4,626
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5,928
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Debt
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2,228
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1,432
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Total current liabilities
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41,186
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38,572
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Other liabilities
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6,742
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5,835
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Total liabilities
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47,928
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44,407
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Commitments and contingencies (Note 10)
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Shareholders equity:
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Preferred stock, no par value, 1,000 shares authorized; no shares issued and outstanding as of December 31, 2008 and June 30, 2008,
respectively
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Common stock, no par value, 45,000 shares authorized; 12,771 and 12,764 shares issued and outstanding as of December 31, 2008 and
June 30, 2008, respectively
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69,047
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68,915
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Accumulated other comprehensive (loss) income
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(723
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197
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Accumulated deficit
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(62,987
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(50,929
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Total shareholders equity
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5,337
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18,183
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Total liabilities and shareholders equity
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$
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53,265
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$
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62,590
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See accompanying notes to consolidated condensed financial statements.
3
Overland Storage, Inc.
Consolidated Condensed Statement of Cash Flows (Unaudited)
(In thousands)
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Six months ended
December 31,
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2008
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2007
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Operating activities:
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Net loss
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$
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(12,058
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$
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(11,025
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Adjustments to reconcile net loss to cash used in operating activities:
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Depreciation and amortization
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805
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2,409
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Share-based compensation
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124
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681
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Other-than-temporary impairment on investments
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1,616
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Loss on short-term investments
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76
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528
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Changes in operating assets and liabilities:
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Accounts receivable
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33
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992
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Accounts receivable pledged as collateral
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(1,235
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)
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Inventories
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1,091
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3,356
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Accounts payable and accrued liabilities
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2,392
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1,267
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Accrued interest expense on note payable
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27
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Accrued payroll and employee compensation
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(200
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)
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(62
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Other assets and liabilities, net
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650
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438
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Net cash used in operating activities
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(6,679
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(1,416
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)
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Investing activities:
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Purchases of short-term investments
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(8,100
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)
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Proceeds from maturities of short-term investments
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4,496
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Proceeds from sales of short-term investments
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1,120
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1,243
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Capital expenditures
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(607
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)
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(414
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)
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Net cash provided by (used in) investing activities
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513
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(2,775
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)
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Financing activities:
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Proceeds from the sale of stock under the 2006 employee stock purchase plan
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7
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17
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Proceeds from accounts receivable pledged as collateral
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864
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Net cash provided by financing activities
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871
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17
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Effect of exchange rate changes on cash
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(109
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)
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64
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Net decrease in cash and cash equivalents
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(5,404
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)
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(4,110
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Cash and cash equivalents, beginning of period
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8,437
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17,503
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Cash and cash equivalents, end of period
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$
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3,033
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$
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13,393
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See accompanying notes to consolidated condensed financial statements.
4
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 accounting principles
generally accepted 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 end. For ease of
presentation, the Companys last fiscal year is considered to have ended June 30, 2008 and the Companys second quarter of fiscal 2009 is considered to have ended December 31, 2008. For example, references to the quarter ended
December 31, 2008, the three months ended December 31, 2008, the first half of fiscal 2009 and the six months ended December 31, 2008 refer to the fiscal period ended December 28, 2008. The second quarter of fiscal 2009 and 2008
each included 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 December 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 June 29, 2008. The results reported in these consolidated condensed financial statements for the three and six months ended
December 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.
We have incurred losses for our last three fiscal years and negative cash flows for our last two fiscal years. As of December 31, 2008, we had an
accumulated deficit of $63.0 million. During the first half of fiscal 2009, we incurred a net loss of $12.1 million and our cash balance declined by $6.7 million compared to cash, cash equivalents and short-term investments balance of $9.7 million
at June 30, 2008. We operate in a highly competitive market characterized by rapidly changing technology. During the remainder of fiscal 2009, we expect to continue to improve the operating plan as we focus on (i) generating additional revenue,
(ii) improving our gross profit margins and (iii) improving operational efficiencies.
In November 2008, the Company entered into
a domestic non-OEM accounts receivable financing agreement (the Financing Agreement) with Marquette Commercial Finance (MCF). Under the terms of the Financing Agreement, the Company may offer to sell its accounts receivable to MCF each month during
the term of the Financing Agreement, up to a maximum amount outstanding at any time of $9.0 million, in gross receivables submitted (or $6.3 million in net amounts funded based upon a 70.0% advance rate). The Financing Agreement may be terminated by
either party with 30 days written notice. The Company is not obligated to offer accounts in any month, and MCF has the option to decline to purchase any accounts. During December 2008, MCF did not decline to purchase any submitted accounts and
funded $864,000 (Note 13).
The Company continues to pursue additional funding, either through debt or equity financings. The Company
currently has no additional funding commitments. Management has projected that cash on hand, along with the funding available under the Financing Agreement, which is limited to domestic non-OEM receivables, will be sufficient to allow the Company to
continue its operations at current levels through fiscal 2009. However, a decrease in domestic non-OEM receivables or a change to the historical timing of receivables within the quarter could have a material adverse affect on its ability to access
the necessary level of funding to continue to fund operations at current levels.
The Companys recurring losses from operations,
negative cash flows, accumulated deficit and need for additional financing raise substantial doubt about its ability to continue as a going concern. The Companys consolidated financial statements for fiscal 2008 and the first half of fiscal
2009 were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may never return to profitability, or if it does, the Company may not be able
to sustain profitability on a quarterly or annual basis.
5
As of December 31, 2008, other assets included $1.5 million of auction rate securities (ARS), which
have a par value of $5.0 million. The auctions for these securities have failed since July 2007, which limits the Companys ability to liquidate these securities and recover their carrying value in the near term. Management estimated of
the fair value of the auction rate securities is based on the probability weighted expected future cash flows associated with the investments. Management may nonetheless attempt to liquidate these securities to meet cash needs. The Company cannot
predict whether it will be able to liquidate these securities, and the Company expects that any liquidation in the near term will bring less than the estimated fair value of these securities as of December 31, 2008. During the quarter ended
December 31, 2008, indicative bids (one measure of estimated liquidation value) on the Companys auction rate securities (ARS) ranged from a high of $1.4 million on October 1, 2008 to a low of $40,000 on December 3, 2008. In
early December 2008, Deutsche Bank ceased providing such indicative bids on its ARS. Indicative bids are not based on active markets or orderly transactions between market participants. As such, the Company does not believe that the estimated
liquidation value, based upon indicative bids, represents the estimated fair value of the instruments. It is possible that the Company may be required to record additional impairments to these investments in future periods.
Fair Value Measurements
Effective July 1, 2008,
the Company implemented Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurement
, or SFAS No. 157, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting
period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. As allowed under the provisions of Financial Accounting Standards Board (FASB) Staff Position No. FAS 157-2,
Effective
Date of FASB Statement No. 157 (FSP No. FAS 157-2),
the Company has elected to defer implementation, until July 1, 2009, of SFAS No. 157 as it relates to its non-financial assets and non-financial liabilities that are recognized
and disclosed at fair value in the financial statements on a nonrecurring basis. Management is evaluating the impact, if any, these remaining provisions of the standard will have on the Companys results of operations, financial position or
cash flows.
In October 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market For
That Asset Is Not Active
(FSP FAS 157-3), with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends SFAS No. 157 to clarify the application of fair value in inactive
markets and allows for the use of managements internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of SFAS No. 157 has not changed
and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 in fiscal 2009 did not have a material
effect on the Companys results of operations, financial position or cash flows.
Fair Value Option for Financial Assets and Financial Liabilities
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
(SFAS No. 159). SFAS No. 159 permits an entity to irrevocably elect fair value on a contract-by-contract basis for new assets or liabilities within the scope of SFAS
No. 159 as the initial and subsequent measurement attribute for those financial assets and liabilities and certain other items including property and casualty insurance contracts. Entities electing the fair value option would be required
(i) to recognize changes in fair value in earnings and (ii) to expense up-front costs and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the
face of the statement of financial position the fair value of assets and liabilities for which the fair value option has been elected, and similar assets and liabilities measured using another measurement attribute. An entity can accomplish this by
either reporting the fair value and non-fair-value carrying amounts as separate line items or aggregating those amounts and disclosing parenthetically the amount of fair value included in the aggregate amount.
The Company adopted SFAS No. 159 on July 1, 2008 but did not elect the fair value option for any existing asset or liability held at the
adoption date. Retrospective application is not permitted; therefore, SFAS No. 159 did not have an impact on the Companys results of operations, financial position or cash flows upon adoption.
6
Note 2 Company Restructurings
Restructurings
August 2008 Cost Reductions and Restructuring of Workforce
In August 2008, the Company reduced its employee workforce by 13.0% worldwide, or 53 employees, in accordance with the Companys initiatives to
reduce costs and restructure its workforce. Severance costs, including COBRA, related to the terminated employees were $352,000, which was recorded in the first quarter of fiscal 2009. Severance charges are included in sales and marketing expense,
research and development expense and general and administrative expense in the consolidated condensed statement of operations.
December 2008 Cost
Reductions and Restructuring of Workforce
In December 2008, the Company reduced its employee workforce by 3.4% worldwide, or by 11
employees, in connection with the termination of a research and development program. Severance costs, including COBRA, related to the terminated employees were $52,000, which was recorded in the second quarter of fiscal 2009. Severance charges are
included in sales and marketing expense and research and development expense.
The following table summarizes the activity and balance of
accrued restructuring charges included in accrued liabilities through December 31, 2008 (in thousands):
|
|
|
|
|
|
|
Employee
Related
|
|
Balance at June 30, 2008
|
|
$
|
|
|
Accrued restructuring charges
|
|
|
404
|
|
Cash payments
|
|
|
(387
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
17
|
|
|
|
|
|
|
Note 3 Acquisition
On June 27, 2008, the Company acquired the Snap Server
®
network attached storage (NAS) business (Snap Server) from Adaptec, Inc., including the brand and all assets related to the Snap Server networked and desktop storage appliances. The net purchase price was $3.9
million (including $349,000 in direct acquisition costs but excluding the $95,000 working capital adjustment discussed below), with approximately $2.2 million paid in cash upon the closing of the transaction, and the remaining $1.4 million to be
paid in cash 12 months following the closing of the transaction. The acquisition was made principally to broaden the Companys capabilities by adding distributed NAS while also strengthening central and remote office data protection. The
acquisition added 47 employees to the Companys headcount.
The purchase agreement, pursuant to which the Company acquired Snap Server
included a working capital adjustment to the purchase price based on the final value of acquired inventory and fixed assets as of the closing of the acquisition. Management finalized the working capital adjustment ($95,000) with Adaptec, Inc, which
adjustment was applied as a reduction of the promissory note the Company issued to Adaptec, Inc and the acquired intangible assets. The purchase price is subject to adjustment pending final inventory valuations. The Company expects the final
allocation to be completed within fiscal 2009.
The purchase consideration was preliminarily allocated as follows (in thousands):
|
|
|
|
|
Inventories
|
|
$
|
1,582
|
|
Property and equipment
|
|
|
262
|
|
Customer contracts and related relationships
|
|
|
2,458
|
|
Acquired technology (core and existing)
|
|
|
1,701
|
|
Trade names and trade marks
|
|
|
1,229
|
|
Accrued liabilities
|
|
|
(1,789
|
)
|
Warranty reserve
|
|
|
(465
|
)
|
Other long-term liabilities
|
|
|
(1,145
|
)
|
|
|
|
|
|
Total consideration
|
|
$
|
3,833
|
|
|
|
|
|
|
7
Assuming the acquisition of Snap Server had occurred on July 1, 2007, the pro forma unaudited
combined results of operations for the three and six months ended December 31, 2007 would have been as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31
|
|
|
Six months ended
December 31
|
|
Revenue
|
|
$
|
40,360
|
|
|
$
|
79,561
|
|
Loss from Operations
|
|
|
(7,142
|
)
|
|
|
(12,346
|
)
|
Net Loss
|
|
|
(7,555
|
)
|
|
|
(12,626
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.59
|
)
|
|
$
|
(0.99
|
)
|
The pro forma unaudited combined results of operations set forth above, do not include pro forma
adjustments relating to costs of integration or post-integration cost reductions that may be incurred or realized by the Company in excess of actual amounts incurred or realized through December 31, 2008.
Note 4 Fair Value of Financial Instruments
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. SFAS No. 157 also establishes the following hierarchy, which prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions:
Level 1
Quoted market prices for identical assets or liabilities.
Level 2
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Inputs reflecting managements best estimate of what market participants would use in pricing the asset or
liability at the measurement date. The inputs are unobservable in the market and are significant to the instruments valuation.
The
following table presents the Companys hierarchy for financial assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At fair value as of December 31, 2008
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Auction rate securities (ARS)
|
|
$
|
|
|
$
|
|
|
$
|
1,505
|
|
$
|
1,505
|
Due to the auction process having failed since July 2007, market data for identical financial
assets has been unavailable for the Company to fair value ARS as of December 31, 2008. Also, there were no similar financial assets identified in active or inactive markets and the Company did not identify similar assets with other inputs that
could be observable or corroborated by observable market data for substantially the full term of the similar financial asset. As such, the Company did not utilize assumptions to fair value the ARS under level 1 and level 2 inputs. Therefore, as of
December 31, 2008, the Company, on a recurring basis, determines the fair value of its ARS using level 3 unobservable inputs.
Auction-rate securities are long-term variable rate bonds tied to short-term interest rates. After the initial issuance of the securities, the interest rate on the securities is reset periodically, at intervals established at the time of
issuance (generally every 28 days), based on market demand for a reset period. Auction-rate securities are bought and sold in the marketplace through a competitive bidding process referred to as an auction. If there is insufficient interest in the
securities at the time of an auction, the auction may not be completed and the rates may be reset to predetermined penalty or maximum rates.
As of December 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. The securities are now both rated as A by Fitch Ratings. 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. In fiscal 2008, the Company recognized other-than-temporary impairment losses of approximately $1.9 million, pre-tax, on these investments (in accordance with SFAS No. 115) to reduce the value to an estimated $3.1 million as of
June 30, 2008. The impairment losses were recorded in other expense, net, in the
8
consolidated statement of operations for the period ended June 30, 2008. In the first half of fiscal 2009, the Company estimated the fair value of the
auction rate securities to be $1.5 million using a probability weighted expected future cash flow analysis and recognized an impairment loss of approximately $1.6 million, of which approximately $1.2 million was recorded in the second quarter of
fiscal 2009. Taking into consideration the terms of the securities, the assumptions used by the Company included estimates of (i) when a successful auction would occur or the securities would be redeemed or mature, (ii) a discount rate
commensurate with the implied risk associated with holding the securities, including consideration of the recent ratings downgrades, and (iii) future expected 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.
The Companys estimates of the fair value of the auction rate securities are based on probability weighted expected future cash flows associated with the investments as indicated above. The Company may attempt to
liquidate these securities to meet cash needs. The Company cannot predict whether it will be able to liquidate these securities, and the Company expects that any liquidation in the near term will bring less than the value of these securities as of
December 31, 2008. During the quarter ended December 31, 2008, indicative bids (one measure of estimated liquidation value) on our ARS ranged from a high of $1.4 million on October 1, 2008 to a low of $40,000 on December 3, 2008.
In early December 2008, Deutsche Bank ceased providing such indicative bids on our ARS. Indicative bids are not based on active markets or orderly transactions between market participants. As such, the Company does not believe that the estimated
liquidation value, based upon indicative bids, represents the estimated fair value of the instruments. It is possible that the Company may be required to record additional impairments to these investments in future periods.
The following table summarizes the change in the balances for the six-month period ended December 31, 2008 (in thousands):
|
|
|
|
|
|
|
Level 3 Auction-
Rate Securities
|
|
Balance at June 30, 2008
|
|
$
|
3,118
|
|
Other than temporary impairment
|
|
|
(1,613
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,505
|
|
|
|
|
|
|
Note 5 Short-Term Investments
In September 2008, the Company liquidated its short-term investments. Therefore, as of December 31, 2008, the Company no longer holds any short-term
investments.
The following table summarizes short-term investments by security type as of June 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Estimated
Fair Value
|
Asset-backed securities
|
|
$
|
1,200
|
|
$
|
14
|
|
$
|
1,214
|
The following table summarizes the contractual maturities of the Companys short-term
investments as of June 30, 2008 (in thousands):
|
|
|
|
Due in one to two years
|
|
$
|
258
|
Due after five years
|
|
|
956
|
|
|
|
|
|
|
$
|
1,214
|
|
|
|
|
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 consolidated condensed statement of operations.
There were no realized gains on the Companys short-term investments for all periods presented and there were no realized losses on the
Companys short-term investments during the three month periods ended December 31, 2008 and 2007.
9
The following table summarizes gross realized losses on the Companys short-term investments for the
six month periods ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Realized from sale of short-term investments
|
|
$
|
(76
|
)
|
|
$
|
(16
|
)
|
Note 6 Composition of Certain Financial Statement Captions
The following table summarizes inventories (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
June 30,
2008
|
|
Raw materials
|
|
$
|
7,421
|
|
$
|
9,383
|
|
Work in process
|
|
|
1,057
|
|
|
710
|
|
Finished goods
|
|
|
7,557
|
|
|
7,033
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,035
|
|
$
|
17,126
|
|
|
|
|
|
|
|
|
|
The following table summarizes other current assets (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
June 30,
2008
|
|
Prepaid third-party service contracts
|
|
$
|
5,700
|
|
$
|
5,988
|
|
Prepaid insurance and services
|
|
|
555
|
|
|
977
|
|
Other
|
|
|
583
|
|
|
304
|
|
VAT & sales tax receivable
|
|
|
348
|
|
|
602
|
|
Income tax receivable
|
|
|
|
|
|
523
|
|
Non-trade accounts receivable
|
|
|
141
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,327
|
|
$
|
8,566
|
|
|
|
|
|
|
|
|
|
The following table summarizes intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
June 30,
2008
|
|
Acquired technology (1)
|
|
$
|
1,701
|
|
|
$
|
1,731
|
|
Customer contracts and trade names (1)
|
|
|
3,687
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,388
|
|
|
|
5,483
|
|
Less: Accumulated amortization
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,869
|
|
|
$
|
5,483
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Balance as of December 31, 2008, has been adjusted for a working capital adjustment (Note 3).
|
The following table summarizes other assets (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
June 30,
2008
|
|
Prepaid third party service contracts
|
|
$
|
1,893
|
|
$
|
1,608
|
|
Auction rate securities
|
|
|
1,505
|
|
|
3,118
|
|
Other
|
|
|
183
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,581
|
|
$
|
4,811
|
|
|
|
|
|
|
|
|
|
10
The following table summarizes accrued liabilities (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
June 30,
2008
|
Deferred revenue Service contracts
|
|
$
|
12,281
|
|
$
|
13,066
|
Accrued expenses
|
|
|
3,921
|
|
|
3,196
|
Third-party service contracts payable
|
|
|
1,652
|
|
|
1,708
|
Deferred revenue Distributors
|
|
|
914
|
|
|
1,446
|
Accrued market development funds
|
|
|
677
|
|
|
641
|
Other
|
|
|
123
|
|
|
93
|
|
|
|
|
|
|
|
|
|
$
|
19,568
|
|
$
|
20,150
|
|
|
|
|
|
|
|
The following table summarizes other liabilities (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
June 30,
2008
|
Deferred revenue Service contracts
|
|
$
|
5,314
|
|
$
|
4,340
|
Deferred rent
|
|
|
1,252
|
|
|
1,283
|
Other
|
|
|
176
|
|
|
212
|
|
|
|
|
|
|
|
|
|
$
|
6,742
|
|
$
|
5,835
|
|
|
|
|
|
|
|
Note 7 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 common stock equivalents are comprised of options granted 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
December 31,
|
|
Six months ended
December 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Options outstanding and ESPP share purchase rights
|
|
2,659
|
|
2,326
|
|
2,667
|
|
2,434
|
Note 8 Comprehensive Loss
Comprehensive loss for the Company includes net loss, foreign currency translation adjustments and unrealized gains (losses) on available-for-sale
securities, which are charged or credited to accumulated other comprehensive (loss) income within shareholders equity. Comprehensive loss was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net loss
|
|
$
|
(5,152
|
)
|
|
$
|
(6,504
|
)
|
|
$
|
(12,058
|
)
|
|
$
|
(11,025
|
)
|
Change in foreign currency translation
|
|
|
(653
|
)
|
|
|
(2
|
)
|
|
|
(906
|
)
|
|
|
64
|
|
Change in unrealized gain on short-term investments
|
|
|
|
|
|
|
9
|
|
|
|
(14
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(5,805
|
)
|
|
$
|
(6,497
|
)
|
|
$
|
(12,978
|
)
|
|
$
|
(10,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Note 9 Income Taxes
Uncertain Tax Positions
As of December 31, 2008, the total unrecognized tax benefit was
$362,000, of which (i) $44,000 was recorded in current liabilities, (ii) $153,000 was recorded in other long-term liabilities and (iii) $165,000 was recorded against the deferred tax asset for which there is a full valuation
allowance.
The Company believes it is reasonably possible within the next twelve months that the amount of unrecognized tax benefits may
be reduced by up to $44,000. The reduction in unrecognized tax benefits would relate to 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 FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN No. 48), and
through December 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 years for fiscal 2005 and forward are subject to examination by the U.S. federal tax authorities, and the Companys tax years for
fiscal 2004 and forward are subject to examination by U.S. state tax authorities.
During the first half of fiscal 2009, the Companys
liability for unrecognized tax benefits decreased by $147,000 due to settlement of pending claims for refund.
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 10 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 for 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, respectively, over the period of the service agreement.
12
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, 2008
|
|
$
|
5,928
|
|
|
$
|
17,248
|
|
Settlements made during the period
|
|
|
(1,810
|
)
|
|
|
(9,056
|
)
|
Change in liability for warranties issued during the period
|
|
|
909
|
|
|
|
8,949
|
|
Change in liability for preexisting warranties
|
|
|
(401
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Liability at December 31, 2008
|
|
$
|
4,626
|
|
|
$
|
17,138
|
|
|
|
|
|
|
|
|
|
|
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
December 31, 2008 will have, individually or in the aggregate, a material adverse effect on its business, results of operations, financial position or cash flows. 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 11 Intangible Assets
Intangible assets as of December 31, 2008 consist solely of the intangible assets acquired in the June 2008 acquisition of
Snap Server. The identifiable intangible assets acquired in the Snap Server acquisition consist of existing and core technology (acquired technology), which has been assigned an estimated useful life of four years, and customer contracts and trade
names, which have been assigned an estimated useful life of six years. As described in Note 3, during the first half of fiscal 2009 the Company recorded a working capital adjustment of $95,000. The adjustment was recorded proportionately as a
reduction to the acquired intangible assets. The intangible assets are being amortized on a straight-line basis over the estimated useful lives of the assets. Estimated amortization expense for intangible assets will be approximately $520,000 during
the remainder of fiscal 2009 and $1.0 million, $1.0 million, $1.1 million, $614,000 and $614,000 in fiscal 2010, 2011, 2012, 2013 and thereafter, respectively.
Amortization expense of intangible assets was $519,000 and $866,000 during the first half of fiscal 2009 and 2008, respectively. Amortization expense in fiscal 2008 related to the technology the Company acquired from
Okapi Software, Inc. in June 2003, which became fully amortized in June 2008.
Note 12 Common Stock
Stock Options and Employee Stock Purchase Plan
During
the first half of fiscal 2009, the Company issued approximately 7,000 shares of common stock purchased through the Companys 2006 Employee Stock Purchase Plan.
Note 13 Debt
Debt consists of the following (in thousands):
|
|
|
|
Note payable to Adaptec, including accrued interest
|
|
$
|
1,364
|
Obligation under Marquette financing agreement
|
|
|
864
|
|
|
|
|
|
|
$
|
2,228
|
|
|
|
|
Note Payable to Adaptec
In connection with the Snap Server acquisition in June 2008, the Company issued a $1.4 million promissory note in favor of Adaptec, Inc. which accrues interest at the rate of 4.0% per annum and is secured by
intellectual property related to the SNAP Server business. Principal and interest under such note are due in one installment on June 27, 2009. As described in Note 3, there was a $95,000 working capital adjustment under the Snap Server purchase
agreement, which was applied as a reduction of the principal amount due under such note, effective as of the date of the Snap Server acquisition (June 27, 2008). As of December 31, 2008, the promissory note had an outstanding balance of
principal and interest of $1.4 million.
13
Marquette Financing Agreement
In November 2008, the Company entered into a domestic non-OEM accounts receivable financing agreement (the Financing Agreement) with Marquette Commercial Finance (MCF). Under the terms of the Financing Agreement, the
Company may offer to sell its accounts receivable to MCF each month during the term of the Financing Agreement, up to a maximum amount outstanding at any time of $9.0 million, in gross receivables submitted (or $6.3 million in net amounts funded
based upon a 70.0% advance rate). The Financing Agreement may be terminated by either party with 30 days written notice. The Company is not obligated to offer accounts in any month, and MCF has the option to decline to purchase any offered accounts.
During December 2008, MCF did not decline to purchase any submitted accounts and funded $864,000.
The Financing Agreement provides for the
sale, on a revolving basis, of accounts receivable generated by specified debtors. The purchase price paid by MCF reflects a discount which is generally 2.5%, but can be increased in certain circumstances, including situations when the time elapsed
between placement of the account with MCF and receipt of payment from the debtor exceeds certain thresholds. The Company continues to be responsible for the servicing and administration of the receivables purchased.
The Company accounts for the sale of receivables under the Financing Agreement as a secured borrowing with a pledge of the subject receivables as
collateral, in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
. The caption Accounts receivable pledged as collateral on the accompanying
consolidated condensed balance sheets in the amount of $1.2 million as of December 31, 2008, represents the pool of receivables that have been designated as sold and serve as collateral for short-term debt in the amount of $864,000
as of December 31, 2008.
The Company was in compliance with the terms of the Financing Agreement at December 31, 2008.
Management continues to monitor the Companys compliance with the dilution covenant, which is calculated based on the aggregate amount of credit memoranda, discounts and other downward adjustments to the original invoiced price divided by gross
collections. Based upon the Companys current operating assumptions, the Company expects to remain in compliance with the permissible dilution covenant throughout fiscal 2009. However, a decrease in domestic non-OEM receivables or a significant
increase in rebates claimed could materially affect our ability to remain in compliance with the dilution covenant of the Financing Agreement, potentially causing us to have to seek an amendment or waiver from MCF. While the Company believes it has
a good relationship with MCF, given the adverse conditions currently present in the global credit markets, the Company can provide no assurance that such a request would be likely to result in a modified or replacement agreement on reasonable terms,
if at all.
Note 14 Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS No. 141R). This statement establishes principles and requirements for the reporting entity in a business combination,
including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This statement also establishes disclosure requirements to enable
financial statement users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years. Management is currently evaluating the impact, if any, SFAS No. 141(R) will have on its results of operations, financial position
or cash flows.
In April 2008, the FASB issued FASB Staff Position SFAS 142-3 (FSP 142-3),
Determination of the Useful Life of
Intangible Assets
(FSP 142-3). FSP 142-3 requires additional footnote disclosures about the impact of the Companys ability or intent to renew or extend agreements related to existing intangible assets or expected future cash flows from
those intangible assets, how the Company accounts for costs incurred to renew or extend such agreements, the time until the next renewal or extension period by asset class, and the amount of renewal or extension costs capitalized, if any. For any
intangible assets acquired after December 31, 2008, FSP 142-3 requires that the Company consider its experience regarding renewal and extensions of similar arrangements in determining the useful life. If the Company does not have experience
with similar arrangements, FSP 142-3 requires that the Company use the assumptions of a market participant putting the intangible assets to its highest and best use in determining the useful life. FSP 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption of FSP 142-3 is not permitted. The Company is currently evaluating the impact, if any, FSP 142-3 will have on its results of operations, financial position or cash
flows.
14
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.
Note 15 Subsequent Events
Restructuring
In January 2009, the Company announced a restructuring that included a reduction of our worldwide workforce
by 17.0%, or 53 employees. Severance charges related to the terminated employees are estimated to be $599,000, which are expected to be paid in the third quarter of fiscal 2009. In addition, all remaining employees received a 10.0% pay-cut, the
Company reduced planned spending and took other cost savings initiatives in an effort to accelerate its return to profitability.
Changes in management
and board committees
On January 27, 2009, the Companys board of directors appointed Eric L. Kelly as chief executive officer
following the transition of Vernon A. LoForti to the role of president. Mr. Kelly has served as a director of the Company since November 2007. In connection with his appointment as chief executive officer, Mr. Kelly resigned as a member of
the audit committee and the nominating and governance committee. In February 2009, the Companys board of directors re-constituted the board committees whereby Ms. Denzel replaced Mr. Kelly on the audit committee, at which time she
resigned her position on the nominating and governance committee, and Mr. McClendon replaced Mr. Kelly on the nominating and governance committee. Mr. LoForti resigned from the Companys board of directors and the number of
authorized directors was reduced to six.
Stock option grants to management and to chairman
At the time of Mr. Kellys appointment as chief executive officer, the compensation committee granted Mr. Kelly an option to purchase
900,000 shares of the Companys common stock at $0.26 per share. The compensation committee also awarded each of the Companys officers an option to purchase 100,000 shares of the Companys common stock at $0.26 per share. In
addition, Mr. McClendon, the Companys chairman of the board of directors, was awarded an option to purchase 15,000 shares of the Companys common stock at $0.26 per share, in consideration for his service on the strategy committee.
15
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains certain statements of a forward-looking nature that involve risks, uncertainties and
assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as believes, hopes, intends,
estimates, expects, projects, plans, anticipates and variations thereof, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such
forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include: the performance of
Mr. Kelly as CEO; our ability to obtain sufficient funding for us to execute our business strategy; customers perceptions of our continued viability; possible delays in new product introductions and shipments; failure to achieve desired
benefits from cost-cutting measures, including the January 2009 restructurings; market acceptance of new product offerings; the ability to maintain strong relationships with branded channel partners; the timing and market acceptance of new product
introductions by competitors; worldwide information technology spending levels; unexpected shortages of critical components; our ability to penetrate the video surveillance market successfully; rescheduling or cancellation of customer orders; loss
of a major customer; general competition and price measures in the market place; our ability to control costs and expenses; and general economic conditions. These forward-looking statements speak only as of the date of this report and we undertake
no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this report. You are cautioned that such statements are only predictions and actual events or results may differ
materially. In evaluating such statements, you are urged to specifically consider various factors identified in this report, including the matters set forth below under the caption Risk Factors, in Part II, Item 1A of this
report, any of which could cause actual results to differ materially from those indicated by such forward-looking statements.
We are
an innovative provider of smart, affordable data protection appliances that help mid-range businesses and distributed enterprises ensure their business-critical data is constantly protected, readily available and always there. Our
award winning products include the following:
|
|
|
the Snap Server
®
networked and desktop storage
appliances;
|
|
|
|
the ULTAMUS
®
RAID family 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
span all three tiers of data storage (nearline data protection appliances, disk-based backup and recovery and tape automation) and enable us to offer our customers an end-to-end data protection solution. End-users of our products include mid-range
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 position 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, selling maintenance contracts and rendering related services and earning royalties on our licensed technology. Historically, the majority of our sales have
been generated through private label arrangements with original equipment manufacturers (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 we believe that sales to HP will
continue to decline, HP relaunched its tape automation products supplied by us with support for HPs new LTO-4 tape drives, which has slowed the rate of replacement of our supplied products by the alternate suppliers product. We had
expected that HP would be discontinuing the product later this calendar year. However HP, has recently indicated to us, that contrary to the original plan, it has no immediate plans to discontinue the product and will continue to offer it as part of
their tape automation portfolio. Revenue from HP during the second quarter of fiscal 2009 decreased less than 1.0% compared to the first quarter of fiscal 2009, but decreased 11.1% compared to the second quarter of fiscal 2008.
16
Impairment of long-lived assets.
In the fourth quarter of fiscal 2008, we recorded an impairment
charge of $7.4 million related to property and equipment. As discussed in Note 2 to the consolidated financial statements included in our annual report on Form 10-K, management performed an impairment analysis of its long-lived assets, excluding the
long-lived assets from the recently completed Snap Server, as of June 30, 2008, due to our continued operating and cash flow losses in fiscal 2008 and our forecasts for fiscal 2009 and beyond. We concluded that the carrying amount of the asset
group was not recoverable and an impairment loss should be recognized. As of December 31, 2008, management noted no additional impairment triggering events and, as such, no additional charges were recorded.
Recent setbacks.
During the first half of fiscal 2009, we experienced lower than anticipated revenue. In particular, customers delayed purchases
for a number of reasons including (i) the uncertainty of the economy and a general decrease in IT spending, and (ii) a reluctance to purchase our products due to uncertainty regarding our ability to continue as a going concern and the
uncertainty of our ability to raise additional working capital. In addition, during the first half of fiscal 2009, sales personnel may have been apprehensive about their continued employment after the August 2008 restructuring.
Related in large part to the overall decline in HP revenue, we reported net revenue of $61.3 million for the first half of fiscal 2009, compared with
$67.0 million for the first half of fiscal 2008. The decline in net revenue resulted in a net loss of $12.1 million, or $0.94 per share, for the first half of fiscal 2009 compared to a net loss of $11.0 million, or $0.86 per share, for the first
half of fiscal 2008.
Positive developments.
Despite the disappointing financial results in recent quarters, we have achieved a
number of financial and operational objectives some of which we believe will assist us in our efforts to regain profitability:
|
|
|
In June 2008, we acquired the Snap Server NAS business from Adaptec, Inc., including the brand and all assets related to the Snap Server networked and
desktop storage appliances. The purchase price, excluding transaction costs, was $3.5 million, as adjusted, with approximately $2.2 million paid in cash upon the closing of the transaction, the remainder to be paid 12 months following the closing of
the transaction. The Snap Server product line broadens our capabilities by adding distributed NAS while also strengthening central and remote office data protection. We believe the acquisition will enable us to address the $1.4 billion small and
medium business (SMB) NAS market, which according to IDC continues to grow by at least 15.0% annually. During the six months ended December 31, 2008, Snap Server net revenue was $5.7 million.
|
|
|
|
The addition of Snap Server products, which provide margins equal to or better than our legacy products, added to our channel revenue base, resulting in margins of
26.7% for the second quarter of fiscal 2009 compared to 22.8% in the second quarter of fiscal 2008, and margins of 26.8% for the first half of fiscal 2009 compared to 21.3% for the same period of fiscal 2008.
|
|
|
|
Service revenue, including service revenue from SNAP Server products, increased to $5.8 million for the second quarter of fiscal 2009 compared to $4.6 million for
the second quarter of fiscal 2008, and increased to $11.6 million for the first half of fiscal 2009 compared to $9.6 million for the first half of fiscal 2008. In addition, margins for service revenue increased to 50.0% for the second quarter of
fiscal 2009 compared to 43.0% for the second quarter of fiscal 2008 and increased to 51.4% for the first half of fiscal 2009 compared to 45.8% for the first half of fiscal 2008.
|
Liquidity and capital resources.
Historically, our primary source of liquidity has been cash generated from operations. However, we incurred a net
loss of $12.1 million during the first half of fiscal 2009 and used $6.7 million in cash to fund our operating activities, which includes the addition of Snap Server operations. Our cash balance has decreased by $17.6 million compared to our cash,
cash equivalents and short-term investments balance at December 31, 2007, and by $6.7 million compared to our cash, cash equivalents and short-term investments balance at June 30, 2008. At December 31, 2008, we had a cash balance of
$3.0 million, compared to $9.7 million of cash, cash equivalents and short-term investments at June 30, 2008. Cash management and preservation will continue to be a top priority. However, to achieve positive operating cash flows during the
remainder of fiscal 2009, we must focus on generating additional revenue, improving our gross profit margins and continuing to improve operational efficiencies.
As a result of our need for additional financing and other factors, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30,
2008 included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
17
In November 2008, we entered into a domestic non-OEM accounts receivable financing agreement (the
Financing Agreement) with Marquette Commercial Finance (MCF). Under the terms of the Financing Agreement, we may offer to sell our accounts receivable to MCF each month during the term of the Financing Agreement, up to a maximum amount outstanding
at any time of $9.0 million in gross receivables submitted (or $6.3 million in net amounts funded based upon a 70.0% advance rate).The Financing Agreement may be terminated by either party with 30 days written notice. We are not obligated to offer
accounts in any month, and MCF has the option to decline to purchase any offered accounts. During December 2008, MCF did not decline to purchase any submitted accounts and funded $864,000.
We continue to pursue additional funding, either through debt or equity financings. We currently have no additional funding commitments. Management has
projected that cash on hand, along with the funding available under the Financing Agreement, which is limited to domestic non-OEM receivables, will be sufficient to allow us to continue our operations at current levels through fiscal 2009. However,
a decrease in domestic non-OEM receivables or a change to the historical timing of receivables within the quarter could have a material adverse affect on our ability to access the necessary level of funding to continue to fund operations at current
levels.
Our plans to raise additional working capital are first to pursue bank and assetbased financing options; however, we may not
be able to obtain such financing on favorable terms, or at all. If we are unable to obtain such financing, our plans are to pursue equity or equity-based financing, including convertible debt, which also may not be available on terms favorable to us
or at all. If we raise additional funds by selling additional shares of our capital stock, the ownership interest of our shareholders will be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other
dilutive characteristics, such as anti-dilution clauses or price resets.
As of December 31, 2008, our other assets included $1.5
million of auction rate securities, which have a par value of $5.0 million. The auctions for these securities have failed since July 2007, which limits our ability to liquidate these securities and recover their carrying value in the near term. We
may nonetheless attempt to liquidate these securities to meet cash needs. We cannot predict whether we will be able to liquidate these securities, and we expect that any liquidation in the near term will bring less than the value of these securities
as of December 31, 2008. During the quarter ended December 31, 2008, indicative bids (one measure of estimated liquidation value) on our ARS ranged from a high of $1.4 million on October 1, 2008 to a low of $40,000 on December 3,
2008. In early December 2008, Deutsche Bank ceased providing such indicative bids on our ARS. We do not believe that the estimated liquidation value, based upon indicative bids, represents the estimated fair value of the instruments. Indicative bids
are not based on active markets or orderly transactions between market participants. It is possible that we may be required to record additional impairments to these investments in future periods.
Industry trends.
Historically, magnetic tape has been used for all forms of data backup and recovery, because magnetic tape was, and still is, the
most 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 63.0% of our revenue for each of the last three fiscal years. Revenue from ARCvault products represented 8.3% and 9.2% of total net revenue during the
first half of fiscal years 2009 and 2008, respectively. Although we expect that tape solutions will continue to be the anchor of the data protection strategy at most companies, 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 less-frequently accessed data, and that companies will focus more on disk-based solutions moving
forward.
Beginning in fiscal 2009, we began shipping Snap Servers product, to customers. The Snap Server product line broadens our
capabilities by adding distributed network attached storage (NAS) while also strengthening central and remote office data protection. We believe that Snap Server products will enable us to address the $1.4 billion small and medium business (SMB) NAS
market, which according to IDC continues to grow by at least 15.0% annually. For the three and six months ended December 31, 2008, Snap Server product revenue represented approximately 10.7% and 9.2% of net revenue, respectively.
Despite the global economic conditions, IDC estimates growth in aggregate storage capacity at 60
percent annually. We believe that global demand will continue for end-to-end data protection solutions that offer storage tiering, thin provisioning, data deduplication and enterprise file-based storage delivered at an optimal value
proposition. We are committed to offering both tape- and disk-based solutions that address storage needs for both structured and unstructured data in the SMB and distributed enterprise markets.
18
Recent Developments
|
|
|
In December 2008, we reduced our employee workforce by 3.4% worldwide, or by 11 employees, in accordance with our initiatives to reduce costs and restructure our
workforce. Severance costs, including COBRA, related to the terminated employees were $52,000, which was recorded in the second quarter of fiscal 2009.
|
|
|
|
In January 2009, we reduced our employee workforce by 17% worldwide, or by 53 employees, in accordance with our initiatives to reduce costs and restructure our
workforce. Severance costs, including COBRA, related to the terminated employees are estimated to be $599,000, which is expected to be recorded in the third quarter of fiscal 2009.
|
|
|
|
On January 27, 2009, our board of directors appointed Eric L. Kelly as chief executive officer following the transition of Vernon A. LoForti to the role of
president. Mr. Kelly has served as a director of the Company since November 2007. In connection with his appointment as chief executive officer, Mr. Kelly resigned as a member of the audit committee and the nominating and governance
committee. In February 2009, our board of directors re-constituted the board committees whereby Ms. Denzel replaced Mr. Kelly on the audit committee, at which time she resigned her position on the nominating and governance committee, and
Mr. McClendon replaced Mr. Kelly on the nominating and governance committee. Mr. LoForti resigned from our board of directors and the number of authorized directors was reduced to six.
|
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
June 29, 2008; and we discuss our critical accounting policies and estimates in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations
, of such report. Unless otherwise described below,
there have been no material changes in our critical accounting policies and estimates.
Available-for-Sale Securities
We hold two auction rate securities (ARS) which are collateralized by corporate debt obligations. These auction rate securities are intended to provide
liquidity via an auction process that resets the applicable interest rate at predetermined intervals, usually every 28 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. The ARS are now both rated as A by Fitch Ratings.
During the first quarter of fiscal 2009, we implemented SFAS No. 157. Under SFAS No. 157, we elected to estimate the fair value of the auction
rate securities using probability weighted expected future cash flow analysis. Taking into consideration the securities terms, our assumptions included estimates of (i) when a successful auction would occur or the securities would be redeemed
or mature, (ii) a discount rate commensurate with the implied risk associated with holding the securities, including consideration of the recent ratings downgrades, and (iii) future expected 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.
Prior to the implementation of SFAS No. 157, our ARS were fair valued in accordance with SFAS No. 115. Under SFAS No. 115, we elected to
estimate the fair value of our ARS using a discounted cash flow analysis. Taking into consideration the terms of the securities the 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, including consideration of the recent ratings downgrades, and (iii) future expected cash flow streams.
As of December 31, 2008, our other assets included $1.5 million of auction rate securities, which have a par value of $5.0 million. The auctions for
these securities have failed since July 2007, which limits our ability to liquidate these securities and recover their carrying value in the near term. Our estimate of the fair value of the auction rate securities is based on probability
weighted expected future cash flows associated with the investments, as indicated above. We may attempt to liquidate these securities to meet cash needs. We cannot predict whether we will be able to liquidate these securities, and we expect that any
liquidation in the near term will bring less than the value of these securities as of December 31, 2008. During the quarter ended December 31, 2008, indicative bids (one measure of estimated liquidation value) on our ARS ranged from a high
of $1.4 million on October 1, 2008 to a low of $40,000 on December 3, 2008. In early December 2008, Deutsche Bank ceased providing such indicative bids on our ARS. Indicative bids are not based on active markets or orderly transactions
between market participants. As such, we do not believe that the estimated liquidation value, based upon indicative bids, represents the estimated fair value of the instruments. For the first half of fiscal 2009, we recorded impairment charges of
$1.6 million related to the write down of our ARS.
19
Results of Operations
The following tables set forth certain financial data as a percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
73.3
|
|
|
77.2
|
|
|
73.2
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
26.7
|
|
|
22.8
|
|
|
26.8
|
|
|
21.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
25.5
|
|
|
23.2
|
|
|
27.4
|
|
|
21.7
|
|
Research and development
|
|
9.7
|
|
|
9.7
|
|
|
9.8
|
|
|
7.9
|
|
General and administrative
|
|
8.4
|
|
|
7.8
|
|
|
8.9
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.6
|
|
|
40.7
|
|
|
46.1
|
|
|
37.3
|
|
Loss from operations
|
|
(16.9
|
)
|
|
(17.9
|
)
|
|
(19.3
|
)
|
|
(16.0
|
)
|
Other expense, net
|
|
(0.8
|
)
|
|
(0.7
|
)
|
|
(0.6
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(17.7
|
)
|
|
(18.6
|
)
|
|
(19.9
|
)
|
|
(16.2
|
)
|
Provision for (benefit from) income taxes
|
|
0.1
|
|
|
0.5
|
|
|
(0.2
|
)
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(17.8
|
) %
|
|
(19.1
|
) %
|
|
(19.7
|
) %
|
|
(16.5
|
) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the sales mix by product follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Tape based products:
|
|
|
|
|
|
|
|
|
|
|
|
|
NEO Series
|
|
46.0
|
%
|
|
57.6
|
%
|
|
44.9
|
%
|
|
57.2
|
%
|
ARCVault
|
|
8.4
|
|
|
9.7
|
|
|
8.4
|
|
|
9.2
|
|
Others
|
|
|
|
|
0.1
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.4
|
|
|
67.4
|
|
|
53.3
|
|
|
66.5
|
|
Disk based products:
|
|
|
|
|
|
|
|
|
|
|
|
|
REO
|
|
6.7
|
|
|
6.6
|
|
|
6.8
|
|
|
7.0
|
|
ULTAMUS
|
|
1.9
|
|
|
2.1
|
|
|
2.0
|
|
|
2.3
|
|
Snap Server
|
|
7.6
|
|
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.2
|
|
|
8.7
|
|
|
18.0
|
|
|
9.3
|
|
Service
|
|
20.0
|
|
|
13.6
|
|
|
19.0
|
|
|
14.3
|
|
Spare parts and other
|
|
8.7
|
|
|
9.7
|
|
|
9.1
|
|
|
9.3
|
|
VR
2
|
|
0.7
|
|
|
0.6
|
|
|
0.6
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The second quarter of fiscal 2009 compared to the second quarter of fiscal 2008
Net Revenue.
Net revenue decreased to $28.9 million during the second quarter of fiscal 2009 from $34.1 million during the second quarter of
fiscal 2008. The decrease of $5.2 million, or 15.2%, was primarily the result of anticipated lower OEM revenue from HP. The decrease related to OEM revenues was partially offset by $2.2 million in revenue from Snap Server products, which we began
recognizing in the first quarter of fiscal 2009. Branded revenue in all geographic regions, Americas, Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA), showed a reduction in net revenue in the second quarter of fiscal 2009 compared to
the first quarter of fiscal 2009. Compared to the second quarter of fiscal 2008, net revenue in APAC and EMEA regions also declined in the second quarter of fiscal 2009. International net revenue during the second quarter of fiscal 2009 represented
44.9% of total net revenue compared to 53.4% of total net revenue for the second quarter of fiscal 2008.
20
Product Sales
Net product revenue from OEM customers decreased to $8.1 million in the second quarter of fiscal 2009 from $12.9 million in the second quarter of fiscal 2008. The decrease of $4.8 million, or 37.2%, was primarily
a result of decreased sales volumes. Sales to HP represented approximately 25.8% of net revenue in the second quarter of fiscal 2009 compared to 36.9% of net revenue in the second quarter of fiscal 2008.
Net product revenue from Overland branded products, excluding service revenue, decreased to $14.9 million during the second quarter of fiscal 2009 from
$16.4 million during the second quarter of fiscal 2008, a decrease of $1.5 million, or 9.1%. The decrease reflects an overall decrease in sales volume for certain branded products partially offset by $2.2 million for revenue from Snap Server
products, which we began recognizing in the first quarter of fiscal 2009.
Service
Service revenue, including service revenue from SNAP Server products, increased to $5.8 million during the second quarter of fiscal 2009 from $4.6 million
during the second quarter of fiscal 2008. The increase of $1.2 million, or 26.1%, was due primarily to an increase in the quantity and value of warranty contracts recognized during the second quarter of fiscal 2009 compared to the second quarter of
fiscal 2008.
Royalty fees
Royalty revenue was relatively flat at $0.2 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008.
Gross Profit.
Despite the 15.0% decline in net revenue, gross profit in the second quarter of fiscal 2009 decreased only to $7.7 million from $7.8 million in the second quarter of fiscal 2008. The improvement in gross margin
(26.7% compared to 22.8%) over the prior year period primarily reflects our shift in focus from OEM products to branded products. Also contributing to the improved margins is Snap Server, which we began selling in the first quarter of fiscal 2009.
In addition, improvements to the service margins contributed to the increase in gross profit.
Product Sales
Gross profit on product revenue was $4.6 million for the second quarter of fiscal 2009 compared to $5.5 million for the second quarter of fiscal 2008. The
decrease of $0.9 million, or 16.4%, was due to a reduction in OEM sales for the second quarter of fiscal 2009, which was partially offset by revenue from Snap Server products that we introduced to the market in the first quarter of fiscal 2009. As a
result of the decrease in OEM sales and the addition of Snap Server revenue, the overall gross margin percentage for product sales increased to 19.9% for the second quarter of fiscal 2009 from 19.0% for the second quarter of fiscal 2008.
Service
Gross profit on service
revenue, including gross profit from service revenue on SNAP Server products, increased to $2.9 million during the second quarter of fiscal 2009 from $2.0 million during the second quarter of fiscal 2008. The increase of $0.9 million, or 45.0%, was
due to an increase in revenue from warranty contracts recognized in the second quarter of fiscal 2009 (which increased 24.4% compared to the second quarter of fiscal 2008), while the related costs decreased slightly.
Share-Based Compensation.
During the second quarter of fiscal 2009, we recorded share-based compensation expense of approximately $0.1
million compared to $0.3 million of expense during the second quarter of fiscal 2008. In August 2007, we issued options for the purchase of approximately 1.5 million shares of our common stock. These options vested over one-year and became
fully vested in the first quarter of fiscal 2009. No similar grants have been made since August 2007.
The following table summarizes
share-based compensation by income statement caption (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Cost of product sales
|
|
$
|
2
|
|
$
|
42
|
|
$
|
(40
|
)
|
Sales and marketing
|
|
|
27
|
|
|
64
|
|
|
(37
|
)
|
Research and development
|
|
|
12
|
|
|
53
|
|
|
(41
|
)
|
General and administrative
|
|
|
10
|
|
|
143
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51
|
|
$
|
302
|
|
$
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
21
Sales and Marketing Expenses.
Sales and marketing expenses decreased to $7.4 million during
the second quarter of fiscal 2009 from $7.9 million during the second quarter of fiscal 2008. The decrease of approximately $0.5 million, or 6.3%, was primarily due to a decrease of $0.3 million in travel related expenses, due to continued efforts
to reduce overall operating expenditures and $0.2 million decrease in contractor related expenses and the August 2008 restructuring.
Research and Development Expenses.
Research and development expenses decreased to $2.8 million during the second quarter of fiscal 2009 from $3.3 million during the second quarter of fiscal 2008. The decrease of approximately
$0.5 million, or 15.2%, was primarily a result of a decrease of approximately $1.5 million in development related expenses. This decrease is primarily due to our efforts to decrease research and development activities to conserve cash for
operations. This decrease is partially offset by increases of (i) $0.6 million for employee-related costs due to increased headcount resulting from our acquisition of Snap Server in June 2008 and (ii) $0.3 million for contractor expenses.
General and Administrative Expenses
. General and administrative expenses decreased to $2.4 million during the second quarter
of fiscal 2009 from $2.7 million for the second quarter of fiscal 2008. The decrease of approximately $0.3 million, or 11.1%, was primarily due to (i) a decrease of $0.4 million for in employee related costs (including travel expenses), which
was due to our efforts to reduce overall operating expenditures for the second quarter of fiscal 2009, and (ii) a decrease of $0.1 million for stock based compensation expense. These decreases were offset by an increase of $0.2 million related
to amortization expense for intangible assets acquired from our acquisition of Snap Server in June 2008.
Interest Income,
net
. Interest income, net, totaled less than $0.1 million during the second quarter of fiscal 2009 compared to $0.2 million during the second quarter of fiscal 2008. The decrease is primarily due to our liquidation of investment securities
during the first quarter of fiscal 2009.
Other expense, net
.
Other expense, net, decreased to $0.3 million during the
second quarter of fiscal 2009 from $0.5 million during the second quarter of fiscal 2008. The decrease is primarily due to (i) the strengthening of the U.S. dollar compared to the British pound and the euro, resulting in a gain in foreign
currency transactions of $0.9 million for the second quarter of fiscal 2009 compared to a loss of $0.1 million for the second quarter of fiscal 2008, and (ii) an other-than-temporary impairment loss of $1.2 million for the second quarter of
fiscal 2009 associated with a decline in the fair value of our ARS, as compared to a loss of $0.5 million for an other-than-temporary impairment loss for our ARS in the second quarter of fiscal 2008.
The first half of fiscal 2009 compared to the first half of fiscal 2008
Net Revenue.
Net revenue decreased to $61.3 million during the first half of fiscal 2009 from $67.0 million during the first half of fiscal 2008. The decrease of $5.7 million, or 8.5%, was primarily the
result of anticipated lower OEM revenue from HP. The decrease related to OEM revenues was partially offset by an increase in revenue from Snap Server products, which we began recognizing in the first quarter of fiscal 2009. Net revenue in our APAC
and EMEA regions decreased during the first half of fiscal 2009 compared to the first half of fiscal 2008. International net revenue totaled 44.5% of total net revenue during the first half of fiscal 2009, compared to 51.4% of total net revenue for
the first half of fiscal 2008.
Product Sales
Net product revenue from OEM customers decreased to $17.2 million in the first half of fiscal 2009 from $25.0 million in the first half of fiscal 2008. The decrease of $7.8 million, or 31.2%, was primarily a result of
decreased sales volumes. Sales to HP represented approximately 26.3% of net revenue in the first half of fiscal 2009 compared to 36.1% of net revenue in the first half of fiscal 2008.
Net product revenue from Overland branded products, excluding service revenue, was essentially flat at $32.1 million during the first half of fiscal 2009
and $32.0 million during the first half of fiscal 2008. This increase reflects an overall decrease in sales volume for branded products offset by $5.7 million in revenue from Snap Server products, which we began recognizing in the first quarter of
fiscal 2009.
22
Service
Service revenue, including service revenue from SNAP Server products, increased to $11.6 million during the first half of fiscal 2009 from $9.6 million during the first half of fiscal 2008. The increase of $2.0
million, or 20.8%, was primarily due to an increase in the quantity and value of warranty contracts recognized during the first half of fiscal 2009 compared to the first half of fiscal 2008.
Royalty fees
Royalty revenue decreased to $0.5 million during the first half of fiscal 2009 from $0.6 million during the first half of fiscal 2009. The decrease was primarily the result of a decrease of $0.1 million in other
royalty fees while VR
2
®
royalties remained relatively flat at $0.2 million for both
periods of fiscal 2009 and fiscal 2008.
Gross Profit.
Despite the 8.5% decline in net revenue, gross profit in the first
half of fiscal 2009 increased to $16.5 million from $14.3 million in the first half of fiscal 2008. The improvement in gross margin (26.8% compared to 21.3%) over the prior year period primarily reflects our shift in focus from OEM products to
branded products. Also contributing to the improved margins is Snap Server, which we began selling in the first quarter of fiscal 2009. In addition, improvements to the service margins contributed to the overall increase in gross profit.
Product Sales
Gross profit on
product revenue was $10.0 million for the first half of fiscal 2009 compared to $9.3 million for the first half of fiscal 2008. The increase of $0.7 million, or 7.5%, was due to a more favorable sales mix by channel (reflecting a reduction in net
revenue from our OEM customers), which positively affected our gross profit on product revenue for the first half of fiscal 2009. Also contributing to the increase was the result of Snap Server product revenue generated in the first half of fiscal
2009.
Service
Gross
profit on service revenue, including service revenue from SNAP Server products, increased to $6.0 million during the first half of fiscal 2009 from $4.4 million during the first half of fiscal 2008. The increase of $1.6 million, or 36.4%, was due to
revenue from warranty contracts recognized in the first half of fiscal 2009 (which increased 21.3% compared to the first half of fiscal 2008), while the related costs decreased slightly.
Share-Based Compensation.
During the first half of fiscal 2009, we recorded share-based compensation expense of approximately $0.1 million
compared to $0.7 million during the first half of fiscal 2008. In August 2007, we issued options for the purchase of approximately 1.5 million shares of our common stock. These options vested over one year and became fully vested in the first
quarter of fiscal 2009.
The following table summarizes share-based compensation by income statement caption (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Cost of product sales
|
|
$
|
7
|
|
$
|
86
|
|
$
|
(79
|
)
|
Sales and marketing
|
|
|
62
|
|
|
225
|
|
|
(163
|
)
|
Research and development
|
|
|
24
|
|
|
106
|
|
|
(82
|
)
|
General and administrative
|
|
|
32
|
|
|
264
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125
|
|
$
|
681
|
|
$
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing Expenses.
Sales and marketing expenses increased to $16.8
million during the first half of fiscal 2009 from $14.6 million during the first half of fiscal 2008. The increase of approximately $2.2 million, or 15.1%, was primarily due to an increase of $2.4 million in employee related expenses (including
travel expenses), as a result of an increase in the average headcount by 35 employees in the first half of fiscal 2009 compared to the first half fiscal 2008. The increase in headcount is attributable to (i) the rebuilding of our sales force
during the last half of fiscal 2008, (ii) the addition of a call center in the second quarter of fiscal 2008 and (iii) to our acquisition of Snap Server in June 2008. The average employee headcount for the call center increased to ten employees
for the first half of fiscal year 2009 from one employee during the first half of fiscal 2008.
23
Research and Development Expenses.
Research and development expenses increased to $6.0
million during the first half of fiscal 2009 from $5.3 million during the first half of fiscal 2008. The increase of approximately $0.7 million, or 13.2%, was primarily a result of (i) an increase of approximately $1.8 million in employee
related expenses (including travel costs) associated with an increase in average headcount by 16 employees associated with our acquisition of Snap Server in June 2008, (ii) an increase of $0.3 million for contractors expense and (iii) an
increase of $0.1 million in severance costs associated with the August 2008 restructuring. This increase was partially offset by a decrease of $1.5 million related to development expenses due to our efforts to decrease research and development costs
to conserve cash for operations.
General and Administrative Expenses
. General and administrative expenses increased to $5.5
million during the first half of fiscal 2009 from $5.2 million for the first half of fiscal 2008. The increase of approximately $0.3 million, or 5.8%, was primarily due to amortization expense of $0.3 million related to Snap Server intangible assets
which we acquired in June 2008.
Interest Income, net
. Interest income, net, decreased to $0.1 million during the first half
of fiscal 2009 compared to $0.5 million during the first half of fiscal 2008. The decrease of $0.4 million, or 80%, is primarily due to the liquidation of investment securities during the first quarter of fiscal 2009.
Other expense, net
.
Other expense, net, decreased to $0.5 million during the first half of fiscal 2009 from $0.6 million
during the first half of fiscal 2008. The decrease is primarily due to (i) the strengthening of the U.S. dollar as compared to the British pound and euro, resulting in a gain in foreign currency transactions of $1.2 million in the first half of
fiscal 2009 compared to a loss of $0.1 million in the first half of fiscal year 2008, and (ii) an other-than-temporary impairment loss of $1.6 million for the first half of fiscal 2009 associated with a decline in the fair market value of our
ARS, as compared to a loss of $0.5 million for an other-than-temporary impairment loss for our ARS in the first half quarter of fiscal 2008.
Liquidity and Capital Resources.
At December 31, 2008, we had $3.0 million of cash compared to $9.7 million of cash, cash equivalents and short-term investments at June 30, 2008. In November 2008, we entered into a
domestic non-OEM accounts receivable financing agreement (the Financing Agreement) with Marquette Commercial Finance (MCF). Under the terms of the Financing Agreement, we may offer to sell our accounts receivable to MCF each month during the term of
the Financing Agreement, up to a maximum amount outstanding at any time of $9.0 million. The Financing Agreement may be terminated by either party with 30 days written notice. We are not obligated to offer accounts in any month, and MCF has the
option to decline to purchase any offered accounts. During December 2008, MCF did not decline to purchase any submitted accounts and funded $864,000.
We continue to pursue additional funding, either through debt or equity financings. We currently have no additional funding commitments. Management has projected that cash on hand, along with the funding available
under the Financing Agreement, which is limited to domestic non-OEM receivables, will be sufficient to allow us to continue our operations at current levels through fiscal 2009. However, a decrease in domestic non-OEM receivables or a change to the
historical timing of receivables within the quarter could have a material adverse affect on our ability to access the necessary level of funding to continue to fund operations at current levels.
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 second quarter of fiscal 2009, 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 six months ended December 31, 2008, we incurred a net loss of $12.1 million and our cash balance declined by $6.7 million compared to the cash, cash equivalents and investment balance at
June 30, 2008.
As a result of our need for additional financing and other factors at the time of our filing of our Form 10-K for the
year ended June 30, 2008, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2008 included an explanatory paragraph expressing substantial doubt about
our ability to continue as a going concern.
Our plans to raise additional working capital are first to pursue bank and asset-based
financing options; however, we may not be able to obtain such financing on favorable terms, or at all. If we are unable to obtain such financing, our plans are to pursue equity or equity-based financing, including convertible debt, which also may
not be available on terms favorable to us or at all. If we raise additional funds by selling additional shares of our capital stock, the ownership interest of our shareholders will be diluted. The amount of dilution could be increased by the
issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.
24
As of December 31, 2008, our other assets included $1.5 million of auction rate securities, which
have a par value of $5.0 million. The auctions for these securities have failed since July 2007, which limits our ability to liquidate these securities and recover their carrying value in the near term. We may nonetheless attempt to liquidate
these securities to meet cash needs. We cannot predict whether we will be able to liquidate these securities, and we expect that any liquidation in the near term will bring less than the value of these securities, as of December 31, 2008.
During the quarter ended December 31, 2008, indicative bids (one measure of estimated liquidation value) on our auction rate securities ranged from a high of $1.4 million on October 1, 2008 to a low of $40,000 on December 3, 2008. In
early December 2008, Deutsche Bank ceased providing such indicative bids on our auction rate securities Indicative bids are not based on active markets or orderly transactions between market participants. As such, we do not believe that the
estimated liquidation value, based upon indicative bids, represents the estimated fair value of the instruments. It is possible that we may be required to record additional impairments to these investments in future periods.
During the first half of fiscal 2009, we used $6.7 million in cash for operating activities compared to $1.4 million during the first half of fiscal
2008. The change of $5.3 million was primarily due to (i) a $1.0 million increase in the net loss in the first half of fiscal 2009 compared to the first half of fiscal 2008, and (ii) a $1.2 million increase in accounts receivable,
including accounts receivable pledged, which is primarily attributable to Snap Server sales and timing of other sales during the quarter, compared to a decrease of $1.0 million for the first half of fiscal 2008, and (iii) reduced increases in
operating assets and liabilities compared to the prior year period.
During the first half of fiscal 2009, we generated cash from investing
activities of approximately $0.5 million primarily through proceeds of $1.1 million from the liquidation of our short-term investments, net of capital expenditures. During the first half of fiscal 2008, we used net cash of approximately $2.8 million
for the purchase of short-term investments, net of proceeds from the maturities and sales of investments. Capital expenditures during the first half of fiscal 2009 and 2008 totaled $0.6 million and $0.4 million, respectively. During the first half
of fiscal 2009, such expenditures were primarily associated with computers, software, and tooling to support manufacturing.
We generated
cash from our financing activities of $0.9 million during the first half of fiscal 2009 compared to $17,000 during the first half of fiscal 2008. Cash generated from financing activities for the first half of fiscal 2009 primarily relates to funding
received from MCF for accounts receivable sold under the Financing Agreement. During the first half of fiscal 2009 and the first half of fiscal 2008, proceeds from the purchase of shares of our common stock through our 2006 Employee Stock Purchase
Plan (ESPP) were $7,000 and $17,000 respectively.
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).
Recent Accounting Pronouncements
See Note 14 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.
25
Interest Rate Risk.
All of our interest income is derived from our cash and auction rate
securities. Short-term investments classified as available-for-sale were sold in September 2008. Changes in the overall level of interest rates affect our interest income that is generated from our cash accounts and auction rate securities. In the
fourth quarter of fiscal 2008, the estimated fair value of our auction rate securities of $3.1 million was reclassified to other assets in the accompanying consolidated condensed balance sheets. 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.
Auction
rate securities During the first half of fiscal 2009, interest income was $0.1 with auction rate securities yielding an annual average of 3.8% on a worldwide basis. The interest rate level was down approximately 170 basis points from 5.5% for
the first half of fiscal 2008. Assuming consistent investment levels, if interest rates were to fluctuate (increase or decrease) by 10% or 38 basis points, we would expect a corresponding fluctuation in our interest income of approximately $19,000
during the remainder of fiscal 2009.
Cash During the first half of fiscal 2009, total interest income was $34,000 with investments
yielding an annual average of 1.6% on a worldwide basis. The interest rate level was down approximately 330 basis points from 4.9% in the first half of fiscal 2008. Assuming consistent investment levels, if interest rates were to fluctuate (increase
or decrease) by 10% or 16 basis points, we would expect a corresponding fluctuation in our interest income of approximately $7,000 during the remainder of fiscal 2009.
The table below presents our cash balance and related weighted-average interest rates at the end of the second quarter of fiscal 2009.
|
|
|
|
|
|
|
|
|
December, 31
2008
|
|
Weighted-
Average
Interest Rate
|
|
Cash
|
|
$
|
3,033
|
|
0.7
|
%
|
The table above includes the U.S. dollar equivalent of cash, including $0.1 million in equivalents
denominated in each the British pound and the euro.
Foreign Currency Risk.
We conduct business on a global basis and
essentially all of our products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of our sales and are expected to continue to represent a significant portion of sales.
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 half of fiscal 2009 and 2008 resulted in a
gain of $1.2 million and loss of $0.1 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 report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 28, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
26
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, results of operations, financial position or cash flows. 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 factors and the risk factors set forth in
our annual report on Form 10-K for the year ended June 30, 2008 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.
Our cash and other sources of liquidity are expected to fund our operations at current levels through fiscal 2009. However, a decrease in non-OEM
receivables or a change to the historical timing of receivables within the quarter could have a material adverse affect on our ability to access the necessary level of funding to continue to fund operations at current levels.
We continue to pursue additional funding, either through debt or equity financings. We currently have no additional funding commitments. Management has
projected that cash on hand, together with the funding available under our financing agreement, which is limited to domestic non-OEM receivables, with Marquette Commercial Finance (MCF), will be sufficient to allow us to continue our operations at
current levels through fiscal 2009. However, a decrease in non-OEM receivables or a change to the historical timing of receivables within the quarter could have a material adverse affect on our ability to access the necessary level of funding to
continue to fund operations at current levels.
As a result of our need for additional financing and other factors, the report from our
independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2008 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
In November 2008, we entered into a domestic non-OEM accounts receivable financing agreement with MCF. Under the terms of the financing
agreement, we may offer to sell our accounts receivable to MCF each month during the term of the financing agreement, up to a maximum amount outstanding at any time of $9.0 million, in gross receivables, submitted or $6.3 million in net amounts
funded based upon a 70% advance rate. The Financing Agreement may be terminated by either party with 30 days written notice. We are not obligated to offer accounts in any month, and MCF has the option to decline to purchase any purchased accounts.
During December 2008, MCF did not decline to purchase any submitted accounts and funded $864,000. A decrease in our domestic non-OEM receivables or a change to the historical timing of receivables within the quarter would restrict our ability to
access funding under the Financing Agreement, which would impair our ability to fund operations at current levels.
We continue to pursue
additional funding, either through debt or equity financings. We currently have no additional funding commitments. Our plans to raise additional working capital are first to pursue bank and assetbased financing options; however, we may not be
able to obtain such financing on favorable terms, or at all. If we are unable to obtain such financing, our plans are to pursue equity or equity-based financing, including convertible debt, which also may not be available on terms favorable to us or
at all. If we raise additional funds by selling additional shares of our capital stock, the ownership interest of our shareholders will be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other
dilutive characteristics, such as anti-dilution clauses or price resets.
As of December 31, 2008, our other assets included $1.5
million of auction rate securities, which have a par value of $5.0 million. The auctions for these securities have failed since July 2007, which limits our ability to liquidate these securities and recover their carrying value in the near term. We
may nonetheless attempt to liquidate these securities to meet cash needs. We cannot predict whether we will be able to liquidate these securities, and we expect that any liquidation in the near term will bring less than the value of these securities
as of December 31, 2008. During the quarter ended December 31, 2008, indicative bids (one measure of estimated liquidation value) on our ARS ranged from a high of $1.4 million on October 1, 2008 to a low of $40,000 on December 3,
2008. In early December 2008, Deutsche Bank ceased providing such indicative bids on our ARS. We do not believe that the estimated liquidation value, based upon indicative bids, represents the estimated fair value of the instruments. Indicative bids
are not based on active markets or orderly transactions between market participants. It is possible that we may be required to record additional impairments to these investments in future periods.
27
If we cease to continue as a going concern, due to lack of available capital or otherwise, you may lose
your entire investment in our company.
We face risks related to the current economic crisis.
The current economic crisis in the U.S. and global financial markets has had and may continue to have a material and adverse impact on our business and
our financial condition. Uncertainty about current economic conditions poses a risk as businesses may further reduce or postpone spending (particularly spending on IT infrastructure) in response to tighter credit, negative financial news and
declines in income or asset values, which has had and may continue to have a material negative effect on the demand for our products. We cannot predict the ultimate severity or length of the current economic crisis or the timing or severity of
future economic or industry downturns. Any economic downturn could have a material adverse effect on our results of operations and financial condition. In addition, our ability to access the capital markets may be severely restricted at a time when
we would like, or need, to do so, which could have an impact on our flexibility to react to changing economic and business conditions. A prolonged recession or further decline in the global economy will materially adversely affect our results of
operations and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
On December 9, 2008, we held our Annual Meeting of Shareholders in San Diego, California. At the meeting the shareholders elected managements
slate of directors and approved three additional proposals with the following vote distribution:
|
|
|
|
|
|
|
|
|
Item
|
|
For
|
|
|
|
Withheld
|
|
|
Election of Board Members
|
|
|
|
|
|
|
|
|
Robert A Degan
|
|
10,611,094
|
|
|
|
1,166,651
|
|
|
Nora M. Denzel
|
|
10,599,294
|
|
|
|
1,178,451
|
|
|
Eric L. Kelly
|
|
10,744,939
|
|
|
|
1,032,806
|
|
|
Vernon A. LoForti
|
|
10,690,836
|
|
|
|
1,086,909
|
|
|
Scott McClendon
|
|
10,733,139
|
|
|
|
1,044,606
|
|
|
William J. Miller
|
|
10,611,094
|
|
|
|
1,166,651
|
|
|
Michael Norkus
|
|
10,733,139
|
|
|
|
1,044,606
|
|
|
|
|
Affirmative
|
|
Negative
|
|
Abstention
|
|
Broker
Non-vote
|
Other Matters
|
|
|
|
|
|
|
|
|
Approve the Amendment to our Articles of Incorporation to authorize a class of preferred stock with limited voting rights and not for use for
anti-takeover purposes
|
|
6,742,964
|
|
454,142
|
|
16,587
|
|
4,564,052
|
Approve an Amendment to our Articles of Incorporation to effect a reverse stock split in a specific ratio ranging from one-for-two to
one-for-ten to be determined by the Board of Directors and effected, if at all, within one year from the date of the annual meeting
|
|
11,030,937
|
|
730,981
|
|
15,827
|
|
|
Ratify the appointment of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm for the fiscal year ending
June 28, 2009
|
|
11,701,331
|
|
61,207
|
|
15,207
|
|
|
28
Item 6. Exhibits
|
|
|
3.1
|
|
Certificate of Amendment of Articles of Incorporation filed with the California Secretary of State on December 12, 2008.
|
|
|
10.1
|
|
Account Transfer and Purchase Agreement dated November 26, 2008 between the Company and Marquette Commercial Finance, a division of Marquette Business Credit, Inc. (incorporated by
reference to the Companys Form 8-K filed December 3, 2008).
|
|
|
31.1
|
|
Certification of Eric L. Kelly, 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 Eric L. Kelly, Chief Executive Officer, and Kurt L.
Kalbfleisch, Vice President of Finance and Chief Financial Officer.
|
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: February 11, 2009
|
|
|
|
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)
|
29
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