OVERLAND STORAGE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1
—
Basis of Presentation
The accompanying consolidated condensed financial
statements of Overland Storage, Inc. and its subsidiaries (the Company)
have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission for Form 10-Q. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
of America have been condensed or omitted pursuant to such rules and
regulations. The Company operates its business in one operating segment.
The Company operates and reports using a 52-53 week
fiscal year with each quarter ending on the Sunday closest to the calendar
quarter. The Company’s last fiscal year is considered to have ended June 30,
2007. The Company’s second quarter of fiscal 2008 ended December 30, 2007;
however, for ease of presentation it is considered to have ended December 31,
2007. For example, references to the second quarter of fiscal 2008, the three
months ended December 31, 2007, the first half of 2008 and the six months
ended December 31, 2007 refer to the fiscal period ended December 30,
2007. The Company’s second quarter of fiscal 2007 ended December 31, 2006.
The second quarter of fiscal 2008 and the second quarter of fiscal 2007 each
contained 13 weeks.
In the opinion of
management, these statements include all the normal recurring adjustments necessary
to state fairly our consolidated condensed results of operations, financial
position and cash flows as of December 31, 2007 and for all periods
presented. These consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company’s annual report on Form 10-K for the year ended July 1, 2007.
The results reported in these consolidated condensed financial statements for
the three and six months ended December 31, 2007 are not necessarily
indicative of the results that may be expected for the full fiscal year.
The year end
consolidated condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting principles
generally accepted in the United States of America.
Reclassification
Since the third
quarter of fiscal 2007, service revenue has exceeded 10% of total net revenue.
Consequently, the Company is now required to separately disclose service
revenue in a separate line item in its consolidated condensed statement of
operations. Prior year revenue has been reclassified for consistency with
current period presentation. This reclassification had no impact on reported
results of operations, financial position or cash flows.
Due to the
other-than temporary impairment charge of $492,000 on the Company’s auction
rate securities in the second quarter of fiscal 2008, losses on short-term
investments are now disclosed in a separate line item in the consolidated condensed
statement of cash flows. Consequently, prior year realized losses on short-term
investments have been reclassified for consistency with current period
presentation. This reclassification had no impact on reported results of
operations, financial position or cash flows.
Note 2 — Asset Impairment and
Restructuring
Asset Impairment
In August 2005, the
Company acquired all of the outstanding stock of Zetta Systems, Inc.
(Zetta). Zetta developed data protection software that was incorporated into
the Company’s ULTAMUS
®
Pro storage appliance which was launched
in the first quarter of fiscal 2007. ULTAMUS Pro did not generate revenue
subsequent to its launch. On October 25, 2006, the Company’s Board of
Directors approved the closure of the Zetta-related software development office
near Seattle, Washington and the elimination of the ULTAMUS Pro product from
future forecasts and sales commission goals.
In accordance with
Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
, the Company evaluated the acquired technology
intangible asset for impairment as of
6
Note 7 — Income Taxes
FIN No. 48 Implementation
In July 2006, the
FASB issued Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes — An Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with
FASB Statement No. 109,
Accounting for Income
Taxes
, and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN No. 48, the impact of an
uncertain income tax position must be recognized at the largest amount that is “more
likely than not” to be sustained upon audit by the relevant taxing authority.
An uncertain income tax position will not be recognized if it has less than a
50% likelihood of being sustained. Additionally, FIN No. 48 provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
The Company adopted the
provisions of FIN No. 48 on June 30, 2007. The total liability,
including a reduction for income tax receivables, for unrecognized tax benefits
as of the date of adoption was $402,000. As a result of the implementation of
FIN No. 48, the Company recognized an increase in the liability for
unrecognized tax benefits in the amount of $82,000, with a corresponding
increase in its accumulated deficit. In addition, the Company reduced its gross
deferred tax assets by $80,000 for unrecognized tax benefits, which was offset
by a reduction in its valuation allowance by the same amount.
Included in the balance
of unrecognized tax benefits at December 31, 2007, are $742,000 of tax
benefits that may affect the effective tax rate, if recognized. Of this amount,
$332,000 of tax benefit may also be impacted by an increase in the valuation
allowance with no net affect on the effective tax rate, depending upon the
Company’s financial condition at the time the benefits are recognized.
The Company believes that
it is reasonably possible that in the next twelve months, the amount of
unrecognized tax benefits may be reduced by up to $205,000. The reduction in
unrecognized tax benefits would relate to the settlement of pending claims for
refund and the expiration of statute of limitations for certain years.
The Company recognizes
interest and penalties related to unrecognized tax benefits in its provision
for income taxes. Upon adoption of FIN No. 48 on June 30, 2007, 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 Company’s tax returns for fiscal 2004 and forward are subject to
examination by the U. S. federal tax authorities and fiscal 2003 and forward
are subject to examination by state tax authorities.
During the first half of
fiscal 2008, the Company’s liability for unrecognized tax benefits did not
materially change.
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 Company’s
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
10
Amortization expense of intangible assets was $866,000 and $1.6 million
during the first half of fiscal 2008 and 2007, respectively. The technology
acquired from Okapi is being amortized over five years. The technology acquired from Zetta was being amortized over four years
before its impairment in the first quarter of fiscal 2007. The remaining
amortization expense for the Okapi intangible asset, approximately
$865,000, will be amortized through the remainder of fiscal 2008.
Note 11 — Common Stock
Share repurchase program
In October 2005, the
Company’s Board of Directors expanded the Company’s share repurchase program to
allow for the purchase of up to 2.5 million shares of its common stock with no
fixed dollar amount. In October 2006, the Company’s Board of Directors
terminated the share repurchase program. There were no share repurchases after
the first quarter of fiscal 2007. During the first half of fiscal 2007, an
aggregate of approximately 373,000 shares were repurchased at a cost of
approximately $2.7 million pursuant to the repurchase program.
Stock Options and Employee Stock
Purchase Plan
During the first half of
fiscal 2008 and fiscal 2007, respectively, the Company issued approximately
8,000 and 10,000, shares of common stock purchased through the Company’s
Employee Stock Purchase Plan.
Note 12 — Recent Accounting
Pronouncements
In September 2006,
the FASB issued SFAS No. 157,
Fair
Value Measurements
, which defines fair value, establishes a
framework for measuring fair value in accounting principles generally accepted
in the United States of America and expands disclosure about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15,
2007 (fiscal 2009 for the Company). Management is currently evaluating the
impact, if any, SFAS No. 157 will have on its consolidated financial
position, results of operations and cash flows.
In February 2007,
the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115,
which
permits an entity to choose to elect irrevocably fair value on a contract-by-contract
basis as the initial and subsequent measurement attribute for many financial
assets and liabilities and certain other items including insurance contracts.
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
the item for which the fair value option is elected. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15,
2007 (fiscal 2009 for the Company). Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No. 157.
Management is currently evaluating the impact, if any, SFAS No. 159 will
have on its consolidated financial position, results of operations and cash
flows.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
Business
Combinations
(SFAS No. 141(R)), which replaces SFAS No. 141.
SFAS No. 141(R) establishes principles and
requirements for how an acquirer in a business combination: recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is to be applied
prospectively to business combinations for which the acquisition date is on or
after an entity’s fiscal year that begins after December 15, 2008 (the
Company’s fiscal year ending July 4, 2010). Management is currently
evaluating the impact, if any, SFAS
No. 141(R) will have
on its consolidated financial position, results of operations and cash flows.
From
time to time, new accounting pronouncements are issued by the FASB that are
adopted by the Company as of the specified effective date. Unless otherwise
discussed, management believes that the impact of recently issued standards,
which are not yet effective, will not have a material impact on the Company’s
consolidated financial statements upon adoption.
12
Item 2. — Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
The
discussion in this section contains statements of a forward-looking nature
relating to future events or our future performance. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the only means of identifying forward-looking statements. Such
statements are only predictions and actual events or results may differ
materially. In evaluating such statements, you should specifically consider
various factors identified in this report, including the matters set forth in Part II,
Item 1A. — Risk Factors, which
could cause actual results to differ materially from those indicated by such
forward-looking statements.
We are a market leader
and innovative provider of data protection appliances that help small and
medium-sized businesses and distributed enterprises ensure their data is “constantly
protected, readily available and always there.”
Our portfolio of data protection appliances includes the following:
·
the ULTAMUS
SERIES
TM
of nearline data protection appliances;
·
the REO SERIES
®
of disk-based backup and recovery appliances; and
·
the NEO SERIES
®
and ARCVault
®
family of tape backup and archive appliances.
Our products enable us to
offer our customers end-to-end data protection solutions. End-users of our
products include small and medium-size businesses, as well as distributed
enterprise customers represented by divisions and operating units of large
multi-national corporations, governmental organizations, universities and other
non-profit institutions operating in a broad range of industry sectors. See the
“Business” section in Part I, Item 1 of our annual report on Form 10-K
for more information about our business, products and operations.
Overview
This
overview discusses matters on which our management primarily focuses in
evaluating our financial condition and operating performance.
Generation
of revenue
. We generate the vast majority of our revenue from
sales of our data protection appliances. The balance of our revenue is provided
by selling spare parts, rendering services to our customers and earning
royalties on our licensed technology. Historically, a large share of our
product sales have been made through private label arrangements with original
equipment manufactures (OEMs), and the remainder have been made through
commercial distributors, direct market resellers (DMRs) and value added
resellers (VARs) in our branded channel. However, our strategy moving forward
is to focus heavily on the delivery of new products to our branded channel,
which historically has produced higher gross margins in comparison to OEM
business.
Declining
sales to HP.
In August 2005, our largest OEM customer,
Hewlett Packard Company (HP), notified us that it had selected an alternate
supplier for its next-generation mid-range tape automation products. HP began
purchasing the first product of this new line from the alternate supplier
during the first quarter of calendar year 2006. Although HP will continue to
purchase the tape automation products currently supplied by us for some time,
the alternate supplier’s product has replaced a significant portion of those
purchases. Although we believe that sales to HP will continue to decline
through fiscal 2008, HP has recently relaunched the tape automation products
supplied by us with support for HP’s new LTO4 tape drives, which may slow the
rate of replacement of our supplied products by the alternate supplier’s
product. Revenue from HP in the second quarter of fiscal 2008 grew in 8.1%
higher compared to the first quarter of fiscal 2008.
Recent
setbacks.
During fiscal 2007, we experienced significant
setbacks related to the outsourcing of our manufacturing to Sanmina-SCI Corporation (Sanmina), our
supply contract with Dell Computer (Dell), and the commercialization of the
technology we acquired from Zetta Systems, Inc. (Zetta):
·
In September 2004, we announced a plan to
outsource all of our manufacturing to Sanmina, a U.S. third party manufacturer.
We completed this transfer in August 2005. During fiscal 2006, however, we failed to
achieve the customer service levels, product quality and cost reductions we
expected from the outsourcing. Additionally, we incurred a significant amount
of redundant costs to support the outsourcing, which eroded our gross margins
during the year. Consequently, we decided to bring manufacturing back to our
San Diego facility and entered into a transition agreement with Sanmina
effective September 2006. In February 2007,
13
we completed the transfer of all production lines
back to San Diego. In the first quarter of fiscal 2008, we completed the
purchase of the remaining inventory under the transition agreement.
·
In October 2005,
we announced that we would supply Dell with our next generation tape library
that was under development (ARCVault). We spent considerable resources during
the ensuing year to complete the development of this tape library and to meet
Dell’s specifications and other requirements. In October 2006, we were
notified by Dell of its intent to terminate the supply agreement. Shipments of
the tape libraries had not yet commenced at that date but were expected to
begin shortly.
·
In August 2006,
after a year of development, we launched our ULTAMUS Pro product which
incorporated the technology we acquired from Zetta. We had planned to
facilitate our entry into the primary protected disk market with ULTAMUS Pro,
but this product failed to achieve market acceptance. In October 2006, we
discontinued our research and development efforts on the Zetta technology, and
recorded an impairment charge of $8.4 million in the first quarter of fiscal
2007.
Related in large part to the overall decline in HP
revenue, we reported net revenue of $67.0 million for the first half of fiscal
2008, compared with $88.6 million for the first half of fiscal 2007. The
decline in net revenue resulted in a net
loss of $11.0
million, or $0.86
per share,
for the first half of fiscal 2008 compared to a net loss of $28.9
million, or $2.25
per share, for the first half of fiscal 2007.
Positive trends.
Despite the
disappointing financial results in recent quarters, we continue to achieve a
number of financial and operational objectives some of which we believe will
assist us in our efforts to regain profitability:
·
Excluding a $1.3
million charge for software code which we expect to incorporate into a new
product currently under development, operating expenses, excluding sales and
marketing expenses, continued to decrease compared to the first quarter of
fiscal 2008 through
continued strict expense control efforts. Sales and marketing expenses
increased 18.5% compared to the first quarter of fiscal 2008 as we launched new
products and began rebuilding our sales force. Operating expenses for the
quarter ended December 31, 2007 were $13.9 million compared to $17.1
million for the quarter ended December 31, 2006 and $11.1 million for the
quarter ended September 30, 2007. Operating expenses for the six months
ended December 31, 2006 included an $8.4 million impairment of the
technology, acquired from Zetta.
·
For the third
consecutive quarter we have reduced inventory levels from the record high
levels reached during the second and third quarters of fiscal 2007. We continue to target aggressively inventory
levels and push toward higher inventory turns. Our turn rate has increased
during the last two quarters.
·
Having completed
the transfer of manufacturing back to our headquarters in San Diego in February 2007,
our product lead times have been reduced to target levels and we believe that
we have regained our reputation for timely delivery of quality products. We
also have resolved the backlog issues that arose during the outsourced period.
·
In the first
half of fiscal 2008, we have launched three new products: the REO
®
4500c, in late September 2007, the REO 9100c, in October 2007, and
the REO 9500D, in November 2007. We have additional REO products scheduled
for launch in the second half of fiscal 2008. We expect these new REO products
to contribute to an improvement in branded sales in future periods.
Liquidity
and capital resources.
Historically, our primary source of
liquidity has been cash generated from operations. Despite incurring a net loss
of $6.5 million during the second quarter of fiscal 2008, we only used $1.4
million in cash to fund our operating activities. Our cash, cash equivalents
and short-term investments balance decreased by $3.3 million compared to the
balance at September 30, 2007 and $2.2 million at June 30, 2007. At December 31,
2007, we had $20.6 million of cash, cash equivalents and short-term
investments, compared to $22.8 million at June 30, 2007. We have no other
unused sources of liquidity at this time. Cash management and preservation will
continue to be a top priority: however, we expect to incur negative operating
cash flows during the remainder of fiscal 2008 as we introduce and market our
new products.
Industry trends.
Historically,
magnetic tape has been used for all forms of data backup and recovery, because
magnetic tape was, and still is, the only cost-effective, “removable,” high
capacity storage media that can be taken off-site to
14
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 65% of our revenue for all periods
presented. In the fourth quarter of fiscal 2005, we commenced development of
ARCVault, our new tape automation platform. The first two products in the
ARCVault family were launched in July 2006 with the final product launched
in April 2007. Net revenue from ARCVault products represented 9.7% and
6.6%, respectively, during the fiscal quarters ended December 31, 2007 and
December 31, 2006, respectively. Although we expect that tape solutions
will continue to be the anchor of the data protection strategy at most
companies for some time, tape backup is time consuming and often unreliable and
inefficient. The process of recovering data from tape is also time consuming
and inefficient. Ultimately, we expect that tape will be relegated to an
archival role for infrequently accessed data, and that companies will focus
more on disk-based solutions moving forward to protect data that needs to be
accessed.
Recent
Developments
As noted in our annual
report on Form 10-K, we have also been working to complete the update of
all of our REO products with new hardware platforms that we believe will (i) boost
the speed, performance and capacity of this product set, and (ii) be
compliant with the European Union directive on the Restriction of the use of
Certain Hazardous substances in Electrical and Electronic Equipment (RoHS). In October 2007
and November 2007, we launched two more of these new products, the REO
9100c and the REO 9500D, respectively.
Critical Accounting Policies and Estimates
We describe our
significant accounting policies in Note 1,
Operations and
Summary of Significant Accounting Policies
,
of the Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the fiscal year ended July 1, 2007. We discuss our
critical accounting policies and estimates in Item 7,
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
, in our Annual Report on Form 10-K
for the fiscal year ended July 1, 2007. Unless otherwise described below,
there have been no significant changes in our critical accounting policies and
estimates.
Business Acquisitions and Intangible Assets
Our business acquisitions
typically result in recognition of intangible assets (acquired technology),
which affect the amount of current and future period charges and amortization
expenses, and in certain cases non-recurring charges associated with in-process
research and development (IPR&D). We amortize our definite-lived intangible
assets using the straight-line method over their estimated useful lives, while
IPR&D is recorded as a non-recurring charge on the acquisition date.
The determination of the
value of these components of a business combination, as well as associated
asset useful lives, requires management to make various estimates and
assumptions. Critical estimates in valuing intangible assets may include but are
not limited to: future expected cash flows from product sales and services,
maintenance agreements, and acquired development technologies and patents or
trademarks; expected costs to develop the IPR&D into commercially viable
products and estimated cash flows from projects when completed; the acquired
company’s brand awareness and market position, as well as assumptions about the
period of time the acquired products and services will continue to be used in
our product portfolio; and discount rates. Management’s estimates of fair value
and useful lives are based upon assumptions believed to be reasonable, but
which are inherently uncertain and unpredictable. Unanticipated events and
circumstances may occur and assumptions may change. Estimates using different
assumptions could also produce significantly different results.
During the first quarter
of fiscal 2007, we recorded an $8.4 million impairment charge related to
acquired technology. See Impairment of
Acquired Technology under the discussion of Results of Operations below.
Income
Tax Provision and Uncertain Tax Positions
Significant judgment is
required in determining our consolidated income tax provision and evaluating
our U.S. and foreign tax positions. In July 2006, the FASB issued
Interpretation 48,
Accounting for
Uncertainty in Income Taxes
(FIN No. 48), which became
effective for us beginning July 2, 2007. FIN No. 48 addressed the
determination of how tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN No. 48,
we must recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained
15
on examination by the taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from
such a position are measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate resolution (audit). The
impact of our reassessment of tax positions in accordance with FIN No. 48
did not have a material impact on our results of operations, financial position
or liquidity. If we are unable to uphold our position upon audit, it may impact
our results of operations, financial position or liquidity.
Available-for-Sale Securities
Available-for-sale
securities are recorded at fair value, and temporary unrealized holding gains
and losses are recorded, net of tax, as a separate component of accumulated
other comprehensive income. Unrealized losses are charged against net earnings
when a decline in fair value is determined to be other-than-temporary. In
accordance with Emerging Issues Task Force Issue No. 03-1 and FSP
FAS 115-1 and 124-1,
The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
we
review several factors to determine whether a loss is other-than-temporary.
These factors include but are not limited to (i) the length of time a
security is in an unrealized loss position, (ii) the extent to which fair
value is less than cost, (iii) the financial condition and near term
prospects of the issuer and, (iv) our intent and ability to hold the
security for a period of time sufficient to allow for any anticipated recovery
in fair value. Realized gains and losses are accounted for on the specific
identification method.
We
hold two auction-rate securities (ARS) which are collateralized by corporate
debt obligations. These ARS are intended to provide liquidity via an auction
process that resets the applicable interest rate at predetermined calendar intervals,
usually every 30 days. As of December 30, 2007, our auction-rate
securities had experienced failed auctions and were considered to have
experienced an other-than-temporary decline in fair value.
Significant
judgment is required in determining the fair value of investments, when no
quoted prices exist. As allowed by SFAS No. 115, we elected to estimate
the fair value of the auction rate securities using a probability-weighted
discounted cash flow analysis. Assumptions used by us included estimates
of (i) when a successful auction
would occur or the securities would be redeemed, (ii) a discount rate
commensurate with the implied risk associated with holding the securities and (iii) cash
flow streams. If the auctions continue to fail, or we determine that one or
more of the assumptions used in the estimate needs to be revised, we may be
required to record an additional impairment on these securities in the future.
If the discount rate used in our assumptions increased or decreased all other
assumptions remaining constant, by 100 basis points, the fair value of the ARS
at December 30, 2007, would have decreased or increased by approximately
$0.2 million with a corresponding increase or decrease in the impairment loss.
Alternatively, if an increase or decrease of approximately one year in the
probability-weighted average length of time to a successful auction or
redemption occurred, all other assumptions remaining constant, the fair value
of the ARS would have decreased or increased by approximately $0.1 million with
a corresponding increase or decrease in the impairment loss.
16
Results of Operations
The following tables set
forth certain financial data as a percentage of net revenue:
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
Cost of revenue
|
|
77.2
|
|
83.2
|
|
78.7
|
|
85.1
|
|
|
Gross profit
|
|
22.8
|
|
16.8
|
|
21.3
|
|
14.9
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing
|
|
23.2
|
|
20.3
|
|
21.7
|
|
20.6
|
|
|
Research and
development
|
|
9.7
|
|
8.9
|
|
7.9
|
|
10.2
|
|
|
General and
administrative
|
|
7.8
|
|
7.3
|
|
7.7
|
|
8.2
|
|
|
Impairment of
acquired technology
|
|
—
|
|
—
|
|
—
|
|
9.5
|
|
|
|
|
40.7
|
|
36.5
|
|
37.3
|
|
48.5
|
|
|
Loss from
operations
|
|
(17.9
|
)
|
(19.7
|
)
|
(16.0
|
)
|
(33.6
|
)
|
|
Other income,
net
|
|
(0.7
|
)
|
0.5
|
|
(0.2
|
)
|
0.9
|
|
|
Loss before
income taxes
|
|
(18.6
|
)
|
(19.2
|
)
|
(16.2
|
)
|
(32.7
|
)
|
|
Provision for
(benefit from) income taxes
|
|
0.5
|
|
(0.2
|
)
|
0.3
|
|
(0.1
|
)
|
|
Net loss
|
|
(19.1
|
)%
|
(19.0
|
)%
|
(16.5
|
)%
|
(32.6
|
)%
|
A summary of the sales
mix by product follows:
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Tape based
products:
|
|
|
|
|
|
|
|
|
|
|
NEO Series
|
|
57.6
|
%
|
71.0
|
%
|
57.2
|
%
|
70.3
|
%
|
|
ARCVault Series
|
|
9.7
|
|
6.6
|
|
9.2
|
|
6.0
|
|
|
Other
|
|
0.1
|
|
0.6
|
|
0.1
|
|
2.2
|
|
|
|
|
67.4
|
|
78.2
|
|
66.5
|
|
78.5
|
|
|
Service
|
|
13.6
|
|
8.6
|
|
14.3
|
|
8.7
|
|
|
Spare parts and other
|
|
9.6
|
|
6.5
|
|
9.3
|
|
6.1
|
|
|
Disk based
products (1)
|
|
8.8
|
|
5.5
|
|
9.3
|
|
5.8
|
|
|
VR(2)
|
|
0.6
|
|
1.2
|
|
0.6
|
|
0.9
|
|
|
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
(1) Includes REO
SERIES and ULTAMUS SERIES products.
The second quarter of fiscal 2008 compared to
the second quarter of fiscal 2007
Net
revenue.
Net revenue decreased to $34.1 million during
the second quarter of fiscal 2008 from $46.8 million during the second quarter
of fiscal 2007, a decrease of approximately $12.7 million, or 27.1%. This
decrease was primarily the result of anticipated lower OEM revenue,
specifically from HP and reflecting the previously announced transition by HP
to an alternate supplier. In our branded channel, by geographic area, the
majority of the decrease in net revenue was attributable to our Asia Pacific
(APAC) and Europe, Middle East and Africa (EMEA) regions. This decrease was
partially offset by increases in net revenue in our Americas region.
17
Product
revenue
Net product revenue from
OEM customers decreased from $22.2 million in the second quarter of fiscal 2007
to $12.9 million in the second quarter of fiscal 2008. The decrease of
$9.3 million, or 41.9%, was primarily a result of decreased volumes. Sales to
HP represented approximately 36.9% of net revenue in the second quarter of
fiscal 2008 compared to 45.7% of net revenue in the second quarter of fiscal
2007.
Net revenue from Overland
branded products, excluding service revenue, decreased from $20.0 million
during the second quarter of fiscal 2007 to $16.4 million during the second
quarter of fiscal 2008. The decrease of $3.6 million, or 18.0%, was due
primarily to a decrease in revenue from NEO products of $4.2 million partially
offset by an increase in revenue from ULTAMUS products of $0.7 million. The
sales of our ULTAMUS products have not yet achieved expected sales volumes. In
addition, many of our new sales personnel joined us in the middle of the
quarter and our sales team therefore was not at full capacity for the period.
The lack of personnel in our sales force during the early part of the quarter
affected negatively our sales in the Americas region, in particular.
Service
Service revenue increased
to $4.6 million during the second quarter of fiscal 2008 from $4.0 million
during the second quarter of fiscal 2007. The increase of $0.6 million, or
15.0%, was due primarily to an increase in the number of warranty contracts
sold during the second quarter of fiscal 2008 compared to the second quarter of
fiscal 2007.
Royalty
fees
Royalty revenue during
the second quarter of fiscal 2008 decreased to $0.3 million from $0.6 million
during the second quarter of fiscal 2007. This decrease of $0.3 million, or
50.0%, was primarily the result of a decrease in VR(2)
®
royalties,
partially offset by an increase in other royalty fees which we began receiving
in the second quarter of fiscal 2007. VR(2) royalties during the second
quarter of fiscal 2008 totaled approximately $0.2 million compared to $0.6
million during the second quarter of fiscal 2007.
Gross
profit.
Gross profit in the second quarter of fiscal 2008
was $7.8 million which nearly equaled the $7.9 million in gross profit reported
in the second quarter of fiscal 2007, despite the 27.2% decline in net revenue.
The improvement in gross margin (22.8% compared to 16.8%) over the prior year
primarily reflects the elimination of charges and redundant costs associated
with our terminated outsourced manufacturing arrangement.
Product
revenue
Gross profit on product
revenue was relatively flat at $5.5 million for the second quarter of fiscal
2008 compared to $5.7 million for the second quarter of fiscal 2007. The
completion of the transition of manufacturing back to our San Diego
headquarters and a more favorable sales mix by product (reflecting a reduction
in net revenue from our OEM customers and a 12.6% increase in net revenue from
our branded channel, excluding service, as a percentage of total revenue) each
positively affected our gross profit on product revenue for the second quarter
of fiscal 2008.
Service
Gross profit on service
increased to $2.0 million during the second quarter of fiscal 2008 from $1.7
million during the second quarter of fiscal 2007. The increase of $0.3 million,
or 17.6%, was due to revenue from warranty contracts recognized in the second
quarter of fiscal 2008 (which increased 38.4% compared to the second quarter of
fiscal 2007), while the related costs decreased slightly. This increase in
revenue from warranty contracts was slightly offset by a decrease in out of
warranty services provided.
Share-based
compensation
.
During the second quarter of fiscal 2008,
we recorded share-based compensation expense of approximately $0.3 million
compared to a net reversal of $0.2 million of expense during the second quarter
of fiscal 2007. Share-based compensation expense increased in the second
quarter of fiscal 2008 due to a one-time grant of options in August 2007
for a total of approximately 1.5 million shares to executive officers and key
employees as a retention tool. These
options vest monthly for one year and are expected to result in increased
share-based compensation expense through the first quarter of fiscal 2009. The
net reversal of share-based compensation expense in the second quarter of
fiscal 2007 resulted in the reversal of previously recognized share-based
compensation expense, due to pre-vesting forfeitures (in
18
excess of amounts previously estimated), and such reversal exceeded the
amount of expense recorded for other awards in the second quarter of fiscal
2007. Share-based compensation expense for the second half of fiscal 2008 is
expected to be approximately $0.3 million.
We allocated share-based
compensation as follows (in thousands):
|
|
|
Three months ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
Cost of product
revenue
|
|
$
|
42
|
|
$
|
1
|
|
$
|
41
|
|
|
Sales and
marketing
|
|
64
|
|
37
|
|
27
|
|
|
Research and
development
|
|
53
|
|
(25
|
)
|
78
|
|
|
General and
administrative
|
|
143
|
|
(240
|
)
|
383
|
|
|
|
|
$
|
302
|
|
$
|
(227
|
)
|
$
|
529
|
|
Sales
and marketing expense.
Sales and marketing expense
decreased to $7.9 million during the second quarter of fiscal 2008 from $9.5
million during the second quarter of fiscal 2007. The decrease of approximately
$1.6 million, or 16.8%, is primarily due to (i) a decrease of
approximately $0.5 million in employee and related expenses (including travel
and sales commissions) (from a decrease in average headcount by 10 employees)
related to the fiscal 2007 restructurings and the realignment of our sales
force, (ii) a $0.8 million reduction in severance primarily associated
with the October 2006 restructuring, and (iii) a $0.4 million
reduction in development expense and related public relations due to the launch
of fewer new products. These reductions were offset by an increase of $0.2
million in trade shows and direct marketing expense.
Research
and development expense.
Research and development expense
decreased to $3.3 million during the second quarter of fiscal 2008 from $4.2
million during the second quarter of fiscal 2007. The decrease of approximately
$0.9 million, or 21.4%, is primarily due to (i) a decrease of
approximately $1.2 million in employee and related expenses (from a decrease in
average headcount by 23 employees) associated with our fiscal 2007
restructurings and closing of our software development office near Seattle,
Washington, and (ii) a decrease of $1.1 million in new product development
expenses due to the completion of scheduled R&D projects. These reductions
were offset by a $1.3 million charge for software code that we expect to
incorporate into a new product currently under development.
General
and administrative expense
. General and administrative
expense decreased to $2.7 million during the second quarter of fiscal 2008 from
$3.4 million during the second quarter of fiscal 2007. The decrease of
approximately $0.7 million, or 20.6%, is primarily due to (i) a decrease
of approximately $0.5 million in severance expense, which expense was higher in
the second quarter of fiscal 2007 due to the termination of our former
president and chief executive officer, (ii) a decrease of $0.4 million in
employee and related expenses (from a decrease in average headcount by 13
employees) associated with our fiscal 2007 restructurings, and (iii) a
decrease of $0.1 million in audit, tax and consulting fees, half of which
expense for the second quarter of fiscal 2007 was related to consulting
services provided by our former president and chief executive officer. These
reductions were offset by an increase of $0.4 million in share-based
compensation expense associated with options granted in August 2007
(compared to a net reversal of share-based compensation expense in the second
quarter of fiscal 2007) that was associated with awards canceled prior to
vesting and a reduction of related expense under FIN No. 28 associated
with our accelerated amortization methodology.
Interest
income
. Interest income decreased to $0.2 million during
the second quarter of fiscal 2008 from $0.5 million during the second quarter
of fiscal 2007. The decrease of approximately $0.3 million, or 60.0%, is due to
lower cash and investment balances, when compared to the second quarter of
fiscal 2007.
Other
expense, net.
Other expense, net, increased to $0.5
million during the second quarter of fiscal 2008 from $0.2 million during the
second quarter of fiscal 2007. During the quarter ended December 31, 2007,
we recorded an other-than-temporary impairment loss of $0.5 million, pre-tax,
associated with our auction rate securities due to failed auctions. For the
quarter ended December 31, 2006, other expense, net, primarily related to
changes in foreign currency exchange rates.
The
first half of fiscal 2008 compared to the first half of fiscal 2007
Net revenue
.
Net revenue decreased to $67.0 million during the first
half of fiscal 2008 from $88.6 million during the first half of fiscal 2007, a
decrease of approximately $21.6 million, or 24.4%. This decrease was primarily
the result of anticipated lower OEM revenue, specifically from HP and
reflecting the previously announced transition by HP to an
19
alternate supplier. In our branded channel, by geographic area, the
majority of the decrease in net revenue was attributable to our Asia Pacific
(APAC) and Europe, Middle East and Africa (EMEA) regions. This decrease was
partially offset by increases in net revenue in our Americas region.
Product
revenue
Net product revenue from
OEM customers decreased to $25.0 million in the first half of fiscal 2008 from
$44.3 million in the first half of fiscal 2007. The decrease of $19.3 million,
or 43.6%, was primarily a result of decreased volumes. Sales to HP represented
approximately 36.1% of net total revenue in the first half of fiscal 2008 compared
to 48.0% of net total revenue in the first half of fiscal 2007.
Net revenue from Overland
branded products, excluding service revenue, decreased to $32.0 million in the
first half of fiscal 2008 from $35.8 million during the first half of
fiscal 2007. The decrease of $3.8 million, or 10.6%, was due primarily to a
decrease in revenue from NEO products of $4.3 million off-set by an increase in
revenue from ULTAMUS products of $1.5 million. The sales of our ULTAMUS
products have not yet achieved expected sales volumes. In addition, many of our
new sales personnel joined in the middle of the second quarter of fiscal 2008
and our sales force was not at full capacity for the period. The lack of
personnel in our sales force during most of the first half of fiscal 2008
affected negatively our sales in the Americas region.
Service
Service revenue increased
to $9.6 million during the first half of fiscal 2008 from $7.7 million during
the first half of fiscal 2007. The increase of $1.9 million, or 24.7%, was primarily
due to an increase in the number of warranty contracts sold during the first
half of fiscal 2008 compared to the second half of fiscal 2007 and a slight
increase in the amount of service performed on out of warranty product.
Royalty
fees
Royalty revenue during
the first half of fiscal 2008 decreased to $0.6 million from $0.8 million
during the first half of fiscal 2007. This decrease of approximately $0.2
million, or 25.0%, was primarily the result of a decrease in VR(2) royalties,
partially offset by an increase in other royalty fees, which we began receiving
in the second quarter of fiscal 2007. VR(2) royalties during the first
half of fiscal 2008 totaled approximately $0.4 million compared to $0.8 million during the first
half of fiscal 2007.
Gross profit.
Gross profit in the
first half of fiscal 2008 of $14.3 million increased by $1.1 million, or 8.3%,
from $13.2 million in the first half of fiscal 2007, despite the 24.4% percent
decline in net revenue. The improvement in gross margin (21.3% compared to
14.9%) over the prior year primarily reflects the elimination of charges and
redundant costs associated with our terminated outsourced manufacturing
arrangement.
Product
revenue
Gross profit on
product revenue was essentially flat at $9.3 million for the first half of
fiscal 2008 compared to $9.4 million for the first half of fiscal 2007, despite
a 29.1% decrease in product revenue during the same period. Gross profit for
the first half of fiscal 2007 was reduced by (i) a $1.3 million increase in
inventory reserves associated with obsolete inventories and components
originally acquired for the Dell contract, and (ii) $0.7 million in
amortization expense related to the technology we acquired from Zetta, which
amortization expense was eliminated upon the impairment of that technology in
the first quarter of fiscal 2007.
Service
Gross profit on service
increased to $4.4 million during the first half of fiscal 2008 from $2.9
million during the first half of fiscal 2007. The increase of $1.5 million, or
51.7%, was primarily due to the increase in warranty contracts recognized in
the first half of fiscal 2008 (which costs increased by 38.8% compared to the
first half of fiscal 2007), while related costs decreased slightly.
Share-based
compensation
.
During the first half of fiscal 2008, we
recorded share-based compensation expense of approximately $0.7 million
compared to a net reversal of $0.5 million of expense during the first half of
fiscal 2007. Share-based
20
compensation expense increased in the first half of fiscal 2008 due to
a one-time grant of options in August 2007 for a total of approximately
1.5 million shares to executive officers and key employees as a retention
tool. These options vest monthly for one
year and are expected to result in increased share-based compensation expense
through the first quarter of fiscal 2009. In the first half of fiscal 2007, the
net reversal resulted from significant pre-vesting forfeitures (in excess of
amounts previously estimated) related to the forfeiture of shares previously
granted to two executives and individuals terminated as part of the fiscal 2007
restructuring. The pre-vesting forfeitures resulted in the reversal of
previously recognized share-based compensation expense and such reversal
exceeded the amount of expense recorded for other awards in the first half of
fiscal 2007.
We allocated share-based
compensation as follows (in thousands):
|
|
|
Six months ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
Cost of revenue
|
|
$
|
86
|
|
$
|
3
|
|
$
|
83
|
|
|
Sales and
marketing
|
|
225
|
|
(303
|
)
|
528
|
|
|
Research and
development
|
|
106
|
|
(89
|
)
|
195
|
|
|
General and
administrative
|
|
264
|
|
(75
|
)
|
339
|
|
|
|
|
$
|
681
|
|
$
|
(464
|
)
|
$
|
1,145
|
|
Sales and marketing expense
.
Sales and marketing expense was $14.6
million during the first half of fiscal 2008 compared to $18.2 million during
the first half of fiscal 2007. The decrease of approximately $3.6 million, or
19.8%, is primarily due to (i) a decrease of approximately $2.6 million in
employee and related expenses (including travel and sales commissions) (from a
decrease in average headcount by 22 employees) related to our fiscal 2007
restructurings and the realignment of our sales force, (ii) a $0.9 million
reduction in severance primarily associated with the fiscal 2007 restructuring,
and (iii) a $0.8 million reduction in new product sales development
expense and related public relations due to decreased product launch activities
in the current year. These decreases were offset by (i) an increase of
$0.5 million in share-based compensation expense associated with options
granted in August 2007 compared to a net reversal of share-based
compensation expense in the second quarter of fiscal 2007 that was associated
with awards canceled prior to vesting and a reduction of related expense under
FIN No. 28 associated with our accelerated amortization methodology, and (ii) an
increase of $0.3 million in advertising expense due to the launch of new
products.
Research and development expense
.
Research and development expense was
$5.3 million during the first half of fiscal 2008, compared to $9.0 million
during the first half of fiscal 2007. The decrease of approximately $3.7
million, or 41.1%, is primarily due to (i) a decrease of approximately
$2.9 million in employee and related expenses (from a decrease in average
headcount by 32 employees) related to our fiscal 2007 restructurings, and (ii) a
decrease of $1.8 million in new product development expenses due to the
completion of scheduled R&D projects. These increases were offset by (i) a
$1.3 million charge for software code that we expect to incorporate into a new
product that is currently under development, and (ii) an increase of $0.2
million in share-based compensation expense associated with options granted in August 2007
(compared to a net reversal of share-based compensation expense in the first
half of fiscal 2007) that was associated with awards canceled prior to vesting
and a reduction of related expense under FIN No. 28 associated with our
accelerated amortization methodology.
General and administrative expense
.
General and administrative expense of
$5.2 million during the first half of fiscal 2008 decreased from $7.3 million
during the first half of fiscal 2007. The decrease of approximately $2.1
million, or 28.8%, is primarily due to (i) a decrease of $0.8 million in
employee and related expenses (from a decrease in average headcount by 13
employees) related to our fiscal 2007 restructurings, (ii) a decrease of
approximately $0.5 million in severance expense which expense was higher in the
second half of fiscal 2007 due to the termination of our former president and
chief executive officer, (iii) a decrease of $0.6 million in legal fees
which were significantly higher in the first half of fiscal 2007 due to the
termination of our former president and chief executive office and the
termination of our agreement with our third party manufacturer and (iv) a
decrease of $0.3 in audit, tax and consulting fees related to the material
weakness we reported at the end of fiscal 2006. These reductions were offset by
an increase of $0.3 million in share-based compensation expense associated with
options granted in August 2007 (compared to a net reversal of share-based
compensation expense in the first half of fiscal 2007) that was associated with
awards canceled prior to vesting and a reduction of related expense under FIN No. 28
associated with our accelerated amortization methodology.
Impairment
of acquired technology.
In the first quarter of fiscal
2007, we recorded an impairment charge of $8.4 million related to the
technology acquired from Zetta in August 2005. As more fully discussed in
Note 2 in the accompanying
21
unaudited consolidated condensed financial statements, management
performed an impairment analysis of the technology acquired from Zetta, in
accordance with SFAS No. 144, and concluded that the asset was not
recoverable and that an impairment loss of the full remaining intangible asset
should be recognized as of September 30, 2006.
Interest income
.
During the first half of fiscal 2008, we
generated net interest income of $0.5 million compared to $1.2 million during
the same period of the prior fiscal year. The decrease of approximately $0.7
million or 58.3% is due to lower cash and investment balances when compared to
the same period in fiscal 2007.
Other
expense, net.
Other expense, net, increased to $0.6
million during the first half of fiscal 2008 from $0.3 million during the first
half of fiscal 2007. As previously stated, during the quarter ended December 31,
2007, we recorded an other-than-temporary impairment loss of $0.5 million,
pre-tax, associated with our auction rate securities due to failed auctions.
For the first half of fiscal 2007, other expense, net, primarily related to
changes in foreign currency exchange rates.
Liquidity and Capital Resources.
At December 31, 2007, we had $20.6 million of
cash, cash equivalents and short-term investments, compared to $22.8 million at June 30, 2007. We have no
other unused sources of liquidity at this time.
Historically, our primary source
of liquidity has been cash generated from operations. However, we have incurred
losses since the fourth quarter of fiscal 2005, and negative cash flows from operating
activities from the fourth quarter of fiscal 2005 through the second quarter of
fiscal 2008, with the exception of the fourth quarter of fiscal 2007 and first
quarter of fiscal 2008, in which we generated cash from operating activities.
For the six months ended December 31, 2007, we incurred a net loss of
$11.0 million and the balance of cash and short-term investments declined by
$2.2 million compared to the balance at June 30, 2007
.
We operate in a highly
competitive market characterized by rapidly changing technology. During fiscal
2008, we expect negative cash flows from operating activities and to continue
to incur losses as we rebuild our sales force and introduce and market our new
products. However, we expect to increase inventory turns and further reduce our
inventory levels. Management expects that this reduction in inventory levels,
our current balance of cash, cash equivalents and short-term investments, and
anticipated funds from operations
will be sufficient to fund our
operations for the next twelve months. We need to generate additional revenue,
continue to improve our gross profit margins and reduce operating expenses to
be profitable in future periods. Our recent history of net losses could cause
current or potential customers to defer new orders with us or select other
vendors, and may cause suppliers to require terms that are unfavorable to us.
Failure to achieve profitability, or maintain profitability if achieved, may
require us to raise additional funding which (i) could have a material
adverse effect on the market value of our common stock, (ii) we may not be
able to obtain in the necessary time frame to avoid disruptions to our business
or on terms favorable to us, if at all, or (iii) may be inadequate to
enable us to continue to conduct business. If needed, failure to raise such
additional funding may adversely affect our ability to achieve our longer term
business objectives.
We hold two auction rate securities (ARS)
that represent interests in pools of collateralized debt obligations. These ARS
are intended to provide liquidity via an auction process that resets the
applicable interest rate at predetermined calendar intervals, allowing
investors to either roll over their holdings or gain immediate liquidity by
selling such interests at par. As a result of current negative conditions in
the global credit markets, auctions for our $5.0 million investment (at
par) in these securities have recently failed to settle on their respective
settlement dates. As of December 30, 2007, we have recorded an
other-than-temporary impairment loss, of $0.5 million, on our auction rate
securities.
To our knowledge, none of
our ARS investments have been downgraded. As of December 30, 2007 all of
the ARS investments continue to be investment grade quality.
During
the first half of fiscal 2008, we used $1.4 million in cash for operating
activities compared to $27.9 million used during the first half of fiscal 2007
.
The change of $26.5 million was
primarily due to the improvement in gross profit between periods excluding the
one-time non-cash impairment charge for the technology, we acquired from Zetta,
in the first quarter of fiscal 2007. Also contributing to the
improvement was a $14.1 million change in cash provided by operating activities
related to inventories due to a $3.4
million reduction in inventory balances during the first half of fiscal 2008,
compared to $10.7 million in cash used for the purchase of inventories during
the first half of fiscal 2007. The decrease in
22
inventories in fiscal 2008 was due to cost
savings measures we implemented during the second half of fiscal 2007. The
increase in inventories during the first half of fiscal 2007 was due to our
transition back to in-house manufacturing.
Cash used in
investing activities was $2.8 million for the first half of fiscal 2008,
compared to cash provided by investing activities of $16.6 million during the
first half of fiscal 2007. During the first half of fiscal 2008, we used net
cash of approximately $2.4 million for the purchase of short-term investments,
net of proceeds from the maturities and sales of investments. During the first
half of fiscal 2007, we liquidated some of our investments to support our
operations. Capital expenditures during the first half of fiscal 2008 and 2007
totaled $0.4 million and $2.9 million, respectively. During the first half of
fiscal 2008, such expenditures were primarily associated with tooling to
support new product development. During the first half of fiscal 2007, such
expenditures were primarily associated with computers, machinery and equipment
to support new product development and the transition of manufacturing back
in-house.
We generated cash from
our financing activities of $17,000 during the first half of fiscal 2008 in
comparison to cash used in financing activities of $2.6 million during the
first half of fiscal 2007. During the first half of fiscal 2008, cash provided
by financing activities was primarily the result of the purchase of shares of
our common stock through our 2006 Employee Stock Purchase Plan (ESPP). During
the first half of fiscal year 2007, cash used in financing activities was
primarily the result of the repurchase of 373,000 shares of our stock under our
repurchase program for $2.7 million. This use of cash was slightly offset by
the exercise of options and the purchase of shares of our common stock under
our ESPP for aggregate proceeds of $0.1 million.
Inflation
Inflation has not had a
significant impact on our operations during the periods presented. Historically
we have been able to pass on to our customers any increases in raw material
prices caused by inflation. If at any time we cannot pass on such increases,
our margins could suffer. Our exposure to the effects of inflation could be
magnified by the concentration of OEM business, where our margins tend to be
lower.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements or significant guarantees to third parties that are not
fully recorded in our consolidated condensed balance sheets (unaudited) or
fully disclosed in the notes to our consolidated condensed financial statements
(unaudited).
Recent Accounting Pronouncements
See Note 12 to our
consolidated condensed financial statements (unaudited) for information about
recent accounting pronouncements.
Item 3. —
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may
impact our financial position, results of operations 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. See further discussion of market rate risk in Note 3 to the
Notes to the Consolidated Condensed Financial Statements.
Interest Rate Risk.
All
of our fixed income investments are classified as available-for-sale and
therefore reported on the balance sheet at market value. Changes in the overall
level of interest rates affect our interest income that is generated from our
investments. For the first half of fiscal 2008, total interest income was $0.5
million with investments yielding an annual average of 5.0% on a worldwide
basis. The interest rate level was down approximately 20 basis points from 5.2%
in the first half of fiscal 2007. Assuming consistent investment levels, if
interest rates were to fluctuate (increase or decrease) by 10%, or 50 basis
points, we could expect a corresponding fluctuation in interest income of
approximately $0.1 million.
The table below presents the cash, cash equivalents
and short-term investment balances and related weighted-average interest rates
at the end of the half of fiscal 2008. The cash, cash equivalents and
short-term investment balances approximate fair value (in thousands):
23
|
|
|
Approximate
Market Value
|
|
Weighted- Average
Interest Rate
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
13,393
|
|
4.2
|
%
|
|
Short-term
investments:
|
|
|
|
|
|
|
Due in 2 – 5
years
|
|
260
|
|
4.0
|
|
|
Due after 5
years
|
|
6,936
|
|
5.3
|
|
|
|
|
$
|
20,589
|
|
4.6
|
|
The table above includes the U.S. dollar equivalent of
cash, cash equivalents and short-term investments, including $1.6 million and
$590,000 equivalents denominated in the British pound and the euro,
respectively.
Foreign Currency Risk.
We
conduct business on a global basis and essentially all of our products sold and
services provided in international markets are denominated in U.S. dollars.
Historically, export sales have represented a significant portion of our
revenue and are expected to continue to represent a significant portion of
revenue.
Our wholly-owned subsidiaries in the United Kingdom,
France and Germany incur costs which are denominated in local currencies. As
exchange rates vary, these results when translated into U.S. dollars may vary
from expectations and adversely impact overall expected results. The effect of
exchange rate fluctuations on our results during the first half of fiscal 2008
and the first half of fiscal 2007 resulted in losses of approximately $0.1 million
and $0.3 million, respectively.
Item 4. — Controls and Procedures
Not applicable
Item 4T. — Controls and
Procedures
Disclosure
Controls and Procedures
Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Based on this evaluation, our principal
executive officer and our principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this quarterly report.
Changes in Internal Control over
Financial Reporting
There were no
changes in our internal control over financial reporting during the fiscal
quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II — OTHER INFORMATION
Item 1. —
Legal Proceedings
We are from time to time
involved in various lawsuits, legal proceedings or claims that arise in the
ordinary course of business. We do not believe any such legal proceedings or
claims will have, individually or in the aggregate, a material adverse effect
on our business, liquidity, results of operations or financial position.
Litigation, however, is subject to inherent uncertainties, and an adverse
result in these or other matters may arise from time to time that may harm our
business.
Item 1A. — Risk Factors
An
investment in our company involves a high degree of risk. In addition to the
other information included in this report, you should carefully consider the
following risk factor and the risk factors set forth in our annual report on Form 10-K
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.
24
We recorded an impairment charge during the quarter ended December 30,
2007 to reduce the carrying value of our auction rate securities and we may
incur additional impairment charges with respect to auction rate securities in the
future.
Credit
concerns in the capital markets have significantly reduced our ability to
liquidate auction rate securities (ARS) that we classify as short-term
investments on our balance sheet. As of December 30, 2007, we held two ARS
with a par value of $5.0 million. These securities are collateralized by
corporate debt obligations. In the second quarter of fiscal 2008, we
recorded an other-than-temporary impairment charge of $0.5 million to reduce
the value of our ARS to their estimated fair value of $4.5 million as of December 30,
2007.
To our
knowledge, none of our ARS investments have been downgraded. As of December 30,
2007 all of the ARS investments continue to be investment grade quality and are
in compliance with our investment policy at the end of the period. If the
auctions continue to fail, or we determine that one or more of the assumptions
used in estimating the fair value of the ARS needs to be revised, we may be
required to record an additional impairment on these securities in the future.
Item 4. —
Submission of Matters to a Vote of Security
Holders
On November 13,
2007, we held our Annual Meeting of Shareholders in San Diego, California. At
the meeting the shareholders elected management’s slate of directors and
approved two additional proposals with the following vote distribution:
|
Item
|
|
Affirmative
|
|
Negative
|
|
Withheld
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Election
of Board Members
|
|
|
|
|
|
|
|
|
|
|
Robert A Degan
|
|
10,667,845
|
|
—
|
|
589,295
|
|
—
|
|
|
Vernon A.
LoForti
|
|
10,650,945
|
|
—
|
|
606,195
|
|
—
|
|
|
Scott McClendon
|
|
10,957,138
|
|
—
|
|
300,002
|
|
—
|
|
|
William J.
Miller
|
|
10,669,545
|
|
—
|
|
587,595
|
|
—
|
|
|
Michael Norkus
|
|
10,689,890
|
|
—
|
|
567,250
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Matters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approve the
Amendment and Restatement of our 2003 Equity Incentive Plan, including an increase
in authorized shares and the cancellation of certain outstanding options held
by our executive officers and directors.
|
|
6,432,626
|
|
1,270,359
|
|
24,804
|
|
3,529,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reappoint
PricewaterhouseCoopers LLP as our Independent Registered Public Accounting
Firm for fiscal 2008
|
|
11,102,105
|
|
142,175
|
|
12,860
|
|
—
|
|
Item 6. —
Exhibits
|
10.1*
|
|
Amended and Restated 2003
Equity Incentive Plan (incorporated by reference from Exhibit 99.1 to
the Company’s Form 8-K filed with the Commission on November 16,
2007).
|
|
|
|
|
|
10.2*
|
|
Form of Stock Option
Cancellation Agreement dated September 27, 2007 entered into with each
of Robert Degan, Robert Farkaly, W. Michael Gawarecki, Kurt L. Kalbfleisch,
Vernon A. LoForti, Scott McClendon, Michael Norkus and Robert Scroop.
|
|
|
|
|
|
10.3*
|
|
Summary Sheet of Director
and Executive Officer Compensation.
|
|
|
|
|
|
31.1
|
|
Certification of Vernon A.
LoForti, President and Chief Executive Officer, pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
25
|
31.2
|
|
Certification of Kurt L.
Kalbfleisch, Vice President of Finance and Interim Chief Financial Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Vernon A. LoForti, President and
Chief Executive Officer, and Kurt L. Kalbfleisch, Vice President of Finance
and Interim Chief Financial Officer.
|
*
Management contract or compensation plan or arrangement.
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: January 31, 2008
|
By:
|
/s/
|
Kurt L. Kalbfleisch
|
|
|
|
|
|
Kurt L. Kalbfleisch
|
|
|
|
|
Vice President of Finance,
Interim Chief Financial Officer
(Principal financial officer and duly
authorized to sign on behalf of
registrant)
|
26
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