Add
OVRL to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| OVRL > SEC Filings for OVRL > Form 10-K on 9-Sep-2009 | All Recent SEC Filings |
9-Sep-2009
Annual Report
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws. We urge you to carefully review our description and examples of forward-looking statements included in Part I, Item 1 of this report. 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. Actual events or results may differ materially from such statements. In evaluating such statements, we urge you to specifically consider various factors identified in this report, including the matters set forth above in Part I, 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® network attached storage solutions.
• The ULTAMUS® RAID family of nearline data protection appliances.
• The REO SERIES® of disk-based backup and recovery appliances.
• 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, distributed enterprise customers such as 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 including financial services, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development and many others. See the "Business" section in Part I, Item 1 of this report 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 has been made through our branded channel, which includes commercial distributors, direct market resellers (DMRs) and value added resellers (VARs). However, our strategy for the past three years has been to focus more on sales of new and expanded products to our branded channel, which historically has produced higher gross margins in comparison to OEM business.
Declining sales to Hewlett Packard (HP). In August 2005, we announced that our largest OEM customer, HP, 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, which decreased our sales to HP. However, in mid-2007 HP re-launched its tape automation products supplied by us with support for HP's new LTO-4 tape drives, which slowed the rate of replacement of our supplied products by the alternate supplier's product. Although we believe that our sales to HP will continue to decline, we recently extended our supply agreement with HP until July 2012 with automatic renewals for three successive one-year periods unless earlier terminated. Revenue from HP in fiscal 2009 decreased 30.2% compared with fiscal 2008, and decreased 39.0% in fiscal 2008 compared with fiscal 2007.
Due in large part to the overall decline in HP revenue, we reported net revenue of $105.6 million for fiscal 2009, compared with $127.7 million for fiscal 2008. The decline in net revenue resulted in a net loss of $18.0 million, or $1.41 per share, for fiscal 2009 compared with a net loss of $32.0 million, or $2.51 per share, for fiscal 2008.
Positive trends. During fiscal 2009, we have achieved a number of financial and operational objectives designed to further our efforts to regain profitability:
• Operating expenses in fiscal 2009 continued to decrease compared with fiscal 2008 and fiscal 2007 due to the completion of a number of material-intensive development projects and continued efforts to reduce costs. Operating expenses for fiscal 2009, 2008 and 2007 were $46.0 million, $58.5 million (including a $7.4 million impairment charge on long-lived assets) and $69.2 million, respectively.
• General and administrative (G&A) expense leveled off in fiscal 2009 through efforts to reduce costs. G&A expense totaled $10.4 million, $10.1 million and $13.4 million for fiscal 2009, 2008 and 2007, respectively.
• Research and development (R&D) expense was relatively unchanged at $9.3 million, compared with $9.3 million in fiscal 2008 (including the $1.3 million charge in the second quarter of fiscal 2008 for software code). R&D expense was $15.0 million in fiscal 2007.
• Sales and marketing expenses decreased to $26.3 million in fiscal 2009 from $31.6 million in fiscal 2008 and $32.4 million in fiscal 2007. The decrease is primarily attributed to reductions in marketing programs and reductions in headcount for sales and marketing departments.
• During fiscal 2009, we increased inventory turns while decreasing inventory levels. We continue to target lower inventory levels and higher inventory turns.
• Service revenue, including service revenue from Snap Server products, increased to $24.1 million for fiscal 2009, compared with $20.6 million for fiscal 2008 and $16.5 million for fiscal 2007. In addition, margins for service revenue increased to 53.9% for fiscal 2009, compared with 44.7% for fiscal 2008 and 38.8% for fiscal 2007.
• During fiscal 2009, Snap Server net revenue was $9.3 million. In June 2008, we acquired the Snap Server Network Attached Storage (NAS) business from Adaptec, Inc. The Snap Server product line broadens our capabilities by adding distributed NAS while also strengthening central and remote office data protection.
Liquidity and capital resources. Historically, our primary source of liquidity has been cash generated from operations. However, in fiscal 2009, we incurred a net loss of $18.0 million and the balance of cash, cash equivalents and short-term investments declined by $4.2 million. At June 30, 2009, we had $5.5 million of cash and cash equivalents compared with $9.7 million of cash, cash equivalents and short-term investments at June 30, 2008. We have no unused source of liquidity at this time. Cash management and preservation continues to be a top priority. We expect to incur negative operating cash flows during the remainder of calendar 2009 as we continue to revamp our business and introduce and market our new products.
Management has projected that cash on hand, along with funding available under our non-OEM accounts receivable financing agreements, will be sufficient to allow us to continue operations at current levels through fiscal 2010. However, a shortfall from projected sales levels and a consequent decrease in eligible non-OEM receivables or a change to the historical timing of receivables could have a material adverse effect on our ability to access the necessary level of funding to continue operations at current levels. In the event this was to happen,
As of June 30, 2009, we had negative working capital of $2.6 million, primarily reflecting a $13.1 million decrease in current assets and a $2.1 million increase in current liabilities. The decrease in current assets is primarily attributable to reduced sales and inventory. The increase in current liabilities is primarily attributable to the non-OEM accounts receivable financing arrangements we entered into during fiscal 2009 to help us manage our cash. Current liabilities associated with these arrangements, including accrued interest, totaled $4.2 million as of June 30, 2009. See "Liquidity and Capital Resources" below for a description of these arrangements. As of June 30, 2009, our other assets included $1.7 million of auction rate securities (ARS) that 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 may bring less than the carrying value of these securities as of June 30, 2009 due to the lack of a market for these securities.
Industry trends. 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. We have a market-leading position in mid-range tape automation with our flagship NEO® products. Sales of tape automation appliances represented more than 63.0% of our annual revenue for fiscal years 2005 through 2008. Sales of tape automation appliances represented 50.0% of our revenue during fiscal 2009. Although we expect that tape solutions will continue to be the foundation 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. We expect that tape will continue to be relegated to an archival role for less-frequently accessed data, and companies will increasingly focus more on disk-based solutions.
Recent Developments
• On July 7, 2009, we launched our new REO Business Continuity Application (BCA). The REO BCA provides enterprise-level backup, replication and recovery functionality to small and medium enterprises (SMEs).
• On July 22, 2009, we announced that we appointed Jillian Mansolf as our Vice President of Worldwide Sales and Marketing.
• On July 22, 2009, Ravi Pendekanti, became Vice President of Business Development and Solutions.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, available-for-sale securities, share-based compensation, bad debts, inventories, intangible and other long-lived assets, warranty obligations, income taxes and restructuring
Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. The footnotes to our consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our critical accounting policies and estimates that require the most significant judgment are discussed further below.
Revenue Recognition
Revenue from sales of products is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has occurred. Under this policy, revenue on direct product sales (excluding sales to distributors) is recognized upon shipment of products to our customers. These customers are not entitled to any specific right of return or price protection, except for any defective product that may be returned under our warranty policy. Generally, title and risk of loss transfer to the customer when the product leaves our dock. Product sales to distribution customers are subject to certain rights of return, stock rotation privileges and price protection. Because we are unable to estimate our exposure for returned product or price adjustments, revenue from shipments to these customers is not recognized until the related products are in turn sold to the ultimate customer by the distributor. For products in which software is more than incidental, we recognize revenue in accordance with Statement of Position (SOP) No. 97-2, Software Revenue Recognition (FASB ASC 985-605-25).
When there are multiple elements in an arrangement, we allocate revenue to the separate elements based on relative fair value, provided we have fair value for all elements of the arrangement. If in an arrangement we have fair value for undelivered elements but not the delivered element, we defer the fair value of the undelivered element(s) and the residual revenue is allocated to the delivered element(s). Undelivered elements typically include services. Revenue from extended warranty and product service contracts is initially deferred and recognized ratably over the contract period.
We have various royalty arrangements with independent service providers that sell our product and also sell and provide service on our product. These independent service providers pay a royalty fee for service contracts in place on our product. The royalty fee is calculated by us for the units covered in the quarter, and agreed to by the service provider, based upon the monthly fee for each unit covered by the independent service provider. In addition, we receive royalties from HP for licensing of our Protection OS software. Revenue is recognized based upon quarterly reporting from HP of the number of units sold.
We have various licensing agreements relating to our Variable Rate Randomizer (VR2®) technology with third parties. The licensees pay us a royalty fee for sales of their products that incorporate our VR2 technology. The licensees provide us with periodic reports that include the quantity of units, subject to royalty, sold to their end users. We record the royalty when reported to us by the licensee, generally in the period during which the licensee ships the products containing VR2 technology. Our Applications Specific Integrated Circuit (ASIC) chips embodying VR2 are priced to include the cost of the chip plus an embedded royalty fee. Revenue on ASIC chip sales is recorded as product revenue when earned, which under our FOB origin terms is upon shipment, of the underlying ASIC chip incorporating the VR2 technology to the customer.
Available-for-Sale Securities
Available-for-sale securities are recorded at fair value, and unrealized holding gains and temporary unrealized losses are recorded, net of tax, as a separate component of shareholders' (deficit) equity. Unrealized
As of June 30, 2009, our other assets included $1.7 million of ARS that have a par value of $5.0 million. These securities are collateralized by corporate debt obligations. As of June 30, 2009, these ARS are rated "BB" by Fitch Ratings. These ARS are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined intervals, usually every 30 days. Since July 2007, our ARS 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 failed 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 ARS is based on the probability weighted expected future cash flows associated with the investments. 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 may bring less than the carrying value of these securities, as of June 30, 2009, due to the lack of a market for these securities. It is possible that we may be required to record additional impairments to these investments in future periods.
Significant judgment is required in determining the fair value of investments
when no quoted prices exist. As allowed by Statement of Financial Standards
(SFAS) No. 115 (FASB ASC 320-10-35), we elected to estimate the fair value of
the ARS using a discounted cash flow analysis. Taking into consideration the
security terms the assumptions used by us included estimates of (i) when a
successful auction would occur or the securities would mature or be redeemed,
(ii) a discount rate commensurate with the implied risk associated with holding
the securities, including consideration of the recent ratings downgrades and the
lack of liquidity, 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.
In April 2009, the Financial Accounting Standards Board (FASB) issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FASB ASC 320-10-65-1), which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an other-than-temporary impairment charge to be recorded in earnings. Accordingly, effective April 1, 2009, the following factors are reviewed to determine if a loss is other-than-temporary: (i) whether we intend to sell the debt security or whether it is more likely than not that we will be required to sell the debt security prior to recovery of our amortized cost basis, (ii) the length of time a security is in an unrealized loss position, (iii) the extent to which fair value is less than cost, and (iv) the financial condition and near term prospects of the issuer. Upon adoption of FSP FAS 115-2 and FAS 124-2, in the fourth quarter of fiscal 2009, we determined that it was more likely than not that we may be required to sell the ARS prior to recovery of their amortized cost basis and, accordingly, no adjustment was made to our accumulated deficit as of the adoption date. As such, the adoption of FSP FAS 115-2 and FAS 124-2 had no impact on our results of operations, financial position or cash flows.
Share-Based Compensation
Share-based compensation expense can be significant to our results of operations, even though no cash is used for such expense. In determining period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We use the Black-Scholes option pricing model to determine the fair value of the award. This model requires the input of highly subjective assumptions, including the expected
A 10.0% change in our share-based compensation for the year ended June 30, 2009 would have affected our net loss by $25,000.
Allowance for Doubtful Accounts
We estimate our allowance for doubtful accounts based on an assessment of the collectability of specific accounts and the overall condition of the accounts receivable portfolio. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific trade and other receivables, historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customers' payment terms and/or patterns. If the financial condition of our customers were to deteriorate, impairing their ability to make additional payments, then we may need to make additional allowances. Likewise, if we determine that we could realize more of our receivables in the future than previously estimated, we would adjust the allowance to increase income in the period we made the determination. We review the allowance for doubtful accounts on a quarterly basis and record adjustments as considered necessary. Generally, our allowance for doubtful accounts is based on specific identification. If we fail to identify an account as doubtful, or if we identify an account as uncollectible that is later collected, our results could vary.
Inventory Valuation
We record inventories at the lower of cost or market. We assess the value of our inventories periodically based upon numerous factors including expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, we adjust our inventory for obsolete or unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated market value. If actual market conditions are less favorable than we project, we may need to record additional inventory adjustments and adverse purchase commitments.
Business Acquisitions and Intangible Assets
Our business acquisitions typically result in recognition of intangible assets (acquired technology) that affect the amount of current and future period charges and amortization expense. We amortize our definite-lived intangible assets using the straight-line method over their estimated useful lives.
The determination of the value of these components of a business combination, as well as associated asset useful lives, requires management to make estimates and assumptions. Critical estimates in valuing intangible assets may include, but are not limited to: future expected cash flows from product sales, services, maintenance agreements, acquired development technologies, patents or trademarks; the acquired company's brand awareness and market position; the period of time the acquired products and services will continue to be used in our product portfolio; and discount rates. Management estimates fair value and useful lives based upon assumptions that it believes to be reasonable, but which are inherently uncertain. Unanticipated events and circumstances may occur and assumptions may change. Estimates using different assumptions could produce significantly different results.
Impairment of Long-Lived Assets
We test for recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying value may not be recoverable. When the carrying value is not considered recoverable, an impairment loss is recognized for the amount by which the carrying value of a long-lived asset exceeds its fair value, with a corresponding reduction in the carrying value of the related assets. Such impairment charges may be material.
The assumptions supporting the cash flow analysis, including the discount rates, are determined using management's best estimates as of the date of the impairment review. If these estimates or their related assumptions change in the future, or if our future results are significantly different than forecasted, we may be required to further evaluate our long-lived assets for recoverability and record impairment charges for these assets that could adversely affect our results of operations.
During the fourth quarter of fiscal 2008, we recorded a $7.4 million impairment related to our property and equipment. See "Fiscal 2008 Compared with Fiscal 2007-Impairment of Long-Lived Assets" under the discussion of "Results of Operations," below. The estimated fair value of these assets was determined using the income approach, which is based on a discounted cash flow analysis, as well as consideration of the estimated value that could be realized upon sale. . . .
|
|