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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________
Commission file number: 0-21432
AUSPEX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0963760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 Central Expressway
Santa Clara, California 95050
(Address of principal executive offices)
Registrant's telephone number, including area code:
(408) 566-2000/Web Site (www.auspex.com)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
YES NO X
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The aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $51,407,658 as of September
15, 1998, based upon the closing sale price on The Nasdaq National Market
reported for such date. Shares of Common Stock held by each officer and director
and by each person who owns 5% of more of the outstanding Common Stock have been
excluded because such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive for other purposes.
The number of shares of Registrant's Common Stock outstanding as of
September 15, 1998 was 25,703,829.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
proxy statement for the Annual Meeting of Stockholders scheduled to be held on
November 19, 1998.
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TABLE OF CONTENTS
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PART I ............................................................................... 4
ITEM 1. BUSINESS........................................................... 4
The Company........................................................ 4
Products........................................................... 5
Markets and Customers.............................................. 7
Distribution....................................................... 7
Customer Service and Support....................................... 8
Manufacturing...................................................... 8
Research and Development........................................... 9
Competition........................................................ 9
Intellectual Property and Licenses................................. 10
Employees.......................................................... 10
Executive Officers of the Company.................................. 11
ITEM 2. PROPERTIES......................................................... 12
ITEM 3. LEGAL PROCEEDINGS.................................................. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 12
PART II ............................................................................... 13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS............................................................ 13
ITEM 6. SELECTED FINANCIAL DATA............................................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 15
Results of Operations.............................................. 15
Revenues........................................................... 16
Gross Margin....................................................... 17
Operating Expenses................................................. 17
Other Income ...................................................... 18
Provision for Income Taxes......................................... 18
Quarterly Results of Operations.................................... 18
Liquidity and Capital Resources.................................... 20
Factors That May Affect Future Results............................. 20
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ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS......... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................... 27
PART III .............................................................................. 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 27
ITEM 11. EXECUTIVE COMPENSATION............................................. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 27
PART IV .............................................................................. 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.... 28
(A) 1. FINANCIAL STATEMENTS............................... 28
2. FINANCIAL STATEMENT SCHEDULES...................... 28
3. EXHIBITS........................................... 29
(B) REPORTS ON FORM 8-K...................................... 32
SIGNATURES .............................................................................. 32
POWER OF ATTORNEY.......................................................................... 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................... F-1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
SUPPLEMENTAL SCHEDULES..................................................................... S-1
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INTRODUCTORY STATEMENT
References made in this Annual Report on Form 10-K to "Auspex," the
"Company" or the "Registrant" refer to Auspex Systems, Inc. and its wholly owned
subsidiaries. AUSPEX and the Auspex logo design are registered trademarks and
service marks of the Company. Functional Multi-Processing, Functional
Multiprocessing, Functional Multi-Processor (FMP), Functional Multi-Processing
Kernel (FMK), DataGuard, DriveGuard, ServerGuard, ServerGuard Global,
FastBackup, NeTservices, NetServer, NS 3000, NS 5000, NS 5500, NS 6000, NS 7000
and NS 8000 are trademarks or registered trademarks of the Company.
PART I
ITEM 1. BUSINESS
THE COMPANY
Auspex is a Delaware Corporation which was incorporated in 1991.
Auspex develops, manufactures, distributes and supports a line of multi-protocol
(NFS1, CIFS(2) and FTP3) high performance network file servers known as
"NetServers" and high availability enterprise data management software solutions
for storing, serving and managing multiple terabytes of network data.
Historically, the Company has supplied UNIX multi-protocol network
file/data servers that enhance the performance of large multi-vendor
client/server networks. In fiscal 1997, the Company began a strategic
repositioning to take advantage of the growth in mixed UNIX/Windows NT
environments within its customer base and address the need for solutions to
manage increasingly complex network data. The Company believes that its strategy
of providing continuous data access ("CDA") is validated by technology trends
and the demands of its customers. As part of this strategy, in fiscal 1997, the
Company acquired Alphatronix, Inc. ("Alphatronix"), a developer of
open-systems-based, storage, management solutions.
As client/server computing has become increasingly widespread, the
inherent limitations of data servers based upon general purpose computer
architectures have come to be recognized as a serious impediment to overall
network performance and data availability. The network performance limitations
which the NetServer was designed to overcome are the direct result of applying
traditional, general-purpose computer servers to the ever increasing challenges
of storing, managing and delivering network data. These performance limitations
have become more acute as the volume of network data has increased from the
downsizing and offloading of mainframe data, the consolidation of local area
network data and the emergence of network data-intensive applications such as
the Internet. As the amount of data and number of users on a network increase,
data servers based on conventional workstation or minicomputer architectures
must support considerably more file/data and network and disk traffic than they
were originally designed to handle. Deterioration in network performance
results. The traditional solution has been to subdivide the network into
multiple subnetworks, each with its own data server which duplicates data files
and associated administrative costs.
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(1) NFS denotes the Network File System protocol, first promulgated by Sun
Microsystems, Inc. ("Sun Microsystems"), and since widely adopted by the
workstation market as a de facto standard for network file transfers.
(2) CIFS refers to the Common Internet File Service protocol developed by
Microsoft Corporation as a networking protocol for PC clients to access
files on a PC file server in a Local Area Network ("LAN") or Wide Area
Network ("WAN").
(3) FTP (File Transfer Protocol) is a standard protocol commonly used to
retrieve or store files on network file servers. FTP is supported on
UNIX, Windows, VMS, Macintosh and other popular desktop computers.
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In contrast to conventional architectures, the Company's proprietary
Functional Multi-Processing ("FMP") architecture, key aspects of which have been
patented by the Company, has been designed specifically to overcome these
limitations by optimizing the tasks which a network data server most commonly
executes - file/data transfer and disk operation. The performance advantages of
Auspex's FMP architecture enable a single NetServer to support large networks at
high data throughput rates. The NetServer's scalability permits customers to add
workstation clients to multiple data servers.
The Company believes that the importance of these benefits to
large-scale client/server systems is demonstrated by the fact that over 80% of
the approximately 2,500 data servers shipped support networks with 50-800 users
per server.
Auspex's FMP design offers an architectural solution to the network
performance gap through distribution of all performance-limiting NFS functions
to a specialized input/output ("I/O") subsystem of dedicated file/data, network
and disk processors. By isolating the host central processing unit ("CPU") and
UNIX/Windows NT operating system from the data server's principal activity, the
NetServer avoids the internal bottleneck which slows the throughput of
general-purpose computer architectures performing similar tasks. In addition,
the isolation of the UNIX operating system and application software from the
data delivery function of the server significantly increases the reliability of
the systems. More processors and disk capacity may be added to meet increasing
user demand as networks expand.
Auspex believes that the benefits of its FMP architecture - high
availability, scalability and performance - apply industry standard protocols
such as Hyper Text Transfer Protocol ("HTTP") and Common Internet File
System/Server Message Block ("CIFS/SMB"), and that this applicability continues
to open new market opportunities for the Company.
PRODUCTS
The Company's primary product line is known as NetServers. The NS
7000 NetServer line of products was introduced in fiscal 1996. In the third
quarter of fiscal 1998, the Company introduced a new high-end server, the NS
7000/800, which superseded the NS 7000/700. The NS 7000/150 NetServer is
designed to support up to 40 workstations and the NS 7000/250 NetServer is
designed to support 40 to 150 workstations. Both NetServers have a storage
capacity of 370 gigabytes. The NS 7000/700 or NS 7000/800 NetServer meets the
needs of large enterprise environments of up to 800 workstations with storage
capacity up to 1.8 terabytes on the NS 7000/700 and 3.6 terabytes on the NS
7000/800. Each product in the NS 7000 line of products can simultaneously
support applications such as high-speed, on-line system backup as well as NFS
I/O operations without one activity impairing the performance of the other. NS
5000, NS 5500 and NS 6000 NetServers, predecessors of the NS 7000 line of
products, can be upgraded on-site to an NS 7000. The Company's newest
NetServers, the NS 8000/850 and NS 8000/350 were introduced subsequent to the
close of fiscal 1998, in the first quarter of fiscal 1999, and will supersede
the NS 7000 line of products. By improving upon the strengths of the NS 7000,
the NS 8000/850 delivers competitive price/performance and new storage and
networking capabilities and provides a migration path for customers to the
Company's next-generation platform.
A significant portion of the Company's revenues is derived from
product upgrades, which consist primarily of additional processors (or upgrades
of existing processors), memory and disk and tape drives.
The Company's strategy is to introduce new products and offer
upgrades to existing products periodically. There can be no assurance that some
customers will not cancel orders for existing products or delay orders in
anticipation of new product availability, and should cancellations and delays
occur, the Company's revenues and operating results could be materially and
adversely affected.
The NS 7000 or NS 8000 NetServer configuration includes one
network processor, one storage processor and one CPU, plus I/O cache memory and
a rack for the first seven Small Computer Serial Interface ("SCSI") disk drives,
typically of 9 or 18 gigabyte capacity each. The NetServer can be scaled in
network attachments and storage capacity depending on customer usage
requirements by the addition of function-specific processors. The basic elements
of the architecture's hardware organization are described below:
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Network processor. The network processor performs three
functions. The first is the processing of network protocols up to
and including the Open Network Computing/NFS ("ONC/NFS") level. The
second is the processing of NFS file requests, using a UNIX file
system which has been separated from the UNIX operating system
kernel. In this way, NFS operations bypass the host processor
entirely. In addition, a very large disk buffer cache (I/O cache
memory) is implemented on the network processor. No processor
instructions are stored in or retrieved from this memory; the entire
memory and enhanced backplane bandwith of 110 megabytes per second
("MB/s") is devoted to I/O. Cache memory can be added to a maximum
of 256 MB per network processor. Each network processor provides up
to six 10/100 BaseT connections up to two Fibre Distributed Data
Interface/MLT3 ("FDDI/MLT3") connections or two Asynchronous
Transfer Mode ("ATM") (OC-3) connections.
Storage processor. The NetServer storage processor
operates up to six parallel SCSI I/O channels simultaneously. These
are attached to disk arrays, containing up to 203 18 gigabyte disk
drives, for a total storage of over 3.6 terabytes. The storage
processor is responsible for virtual partition management on the
storage devices, write acceleration, channel management, disk and
tape control and data transfers to I/O cache memory.
Host processor. The host processor used in the NetServer
is based on the Sun SPARC architecture, which is compliant with the
SunOS UNIX operating system and its application binary interface.
NetServer prices range from approximately $45,000 to $1,200,000,
depending on the configuration. While system price varies considerably according
to the configuration purchased, the average sales price per system in fiscal
year 1998 for North American direct sales was approximately $249,000, and for
distributor and international sales, approximately $164,000. Lower average sales
prices per system for international distributor sales are attributable to the
fact that most servers sold through these channels are sold in smaller
configurations and at higher discounts.
In 1995, Auspex commenced shipment of its first software product,
DataGuard(TM), which allows users to continuously access their data in the event
of a disruption associated with the UNIX host operating system. In March 1996,
the Company began shipping its second software product, ServerGuard(TM).
ServerGuard operates between multiple Auspex servers providing the industry's
first local and wide area network-based fail-over and disaster recovery system
for uninterrupted service. In fiscal 1997, the Company introduced FastBackup, a
software product that enables a customer to achieve DLT-based backup and restore
throughput of up to 100 gigabytes per hour cost-effectively. The Company also
introduced DriveGuard, an embedded RAID 5 solution for high-availability data
protection in fiscal 1997. DriveGuard provides mission-critical data security,
at a significantly lower cost than that of mirrored configurations. In fiscal
1998, the Company introduced NeTservices, a software product that allows UNIX
and Windows NT clients to share files on the same platform with reliability,
performance and scalability. Fiscal 1998 software licenses represented
approximately six percent of Company revenue.
In the second half of fiscal 1999, the Company intends to introduce
a next generation platform that incorporates the Company's strategic initiatives
for UNIX, Windows NT and Network Data Management solutions. The Company believes
that by leveraging its proven software-based FMP architecture onto commodity
hardware, the Company can improve price/performance at the high-end in markets
already served, and reduce the cost of entry-level products to expand mid-range
opportunities. There can be no assurance that the Company will succeed in
developing commercially viable products.
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MARKETS AND CUSTOMERS
The majority of the Company's sales currently are made to customers
in the scientific, technical and engineering fields, in which UNIX workstation
and NFS-based network penetration is the greatest and the need for
high-performance data/file servers is the most critical. In addition to this
large multi-vendor, technical computing market, commercial applications for
UNIX-based systems are also increasing (e.g. oil and gas, telecommunications,
financial services and Internet service providers). The Company believes that
its NetServer architecture is adaptable to commercial computing environments and
intends to pursue opportunities in these markets as they develop. There can be
no assurance, however, that the Company will be able to adapt its NetServers to
commercial computing markets, or that it will be able to penetrate such markets.
As of June 30, 1998, approximately 2,500 Netservers had been shipped
to over 500 customers worldwide, and these NetServers are managing more than 500
terabytes of data in aggregate. Reflecting the NetServer's particular
suitability to the performance requirements of large-scale client/server
systems, networks supporting more than 50 users account for more than 80% of
Auspex's installed base. NetServers are used most commonly for the following
applications: software development, electronic computer-aided design ("ECAD")
and electronic computer-aided engineering ("ECAE"), seismic and geophysical
modeling, scientific and academic research, mechanical computer-aided design
("MCAD"), technical publishing and financial services. Other customers and
applications include Internet service and on-line content providers, inventory
control and multimedia applications. Auspex focuses its sales and marketing
efforts in North America and Europe primarily through its direct sales force and
in the Pacific Rim through its relationships with Fuji Xerox Co., Ltd.
("Fuji Xerox") and Nissho Electronics Corporation ("Nissho").
Sales of products and services to the following customers accounted
for 10% or more of total revenues in the periods indicated: fiscal 1996 -Intel
Corporation ("Intel") (10%) and Fuji Xerox (13%); fiscal 1997 - Intel (10%) and
America Online ("AOL") (15%); and fiscal 1998 -- Intel (20%). Intel, AOL and
Fuji Xerox are not obligated to purchase any minimum level of products from the
Company. Accordingly, there can be no assurance that sales of products and
services to these customers will not decline, either in absolute dollar amounts
or as a percentage of total revenues, in future periods and that any such
declines will not have a material adverse effect on the Company's results of
operations.
DISTRIBUTION
The Company employs a multi-tiered distribution strategy which, in
fiscal 1998, has focused on product sales to end users in North America through
a direct sales force and to the Pacific Rim (primarily Japan) through a master
value-added reseller and a non-exclusive master reseller. The Company has a
direct sales force in the United Kingdom, France and Germany, and employs
distributors in other selected European markets. Revenue on system sales to end
users is recognized when the system has been shipped.
Because the success of the Company's direct sales efforts in North
America is dependent in part upon a sophisticated analysis of the customers'
networking requirements, the Company's system engineers work closely with the
Company's sales representatives.
The Company's Pacific Rim distribution strategy includes original
equipment manufacturer ("OEM") and distribution agreements with Fuji Xerox and
Nissho, respectively, in Japan. In fiscal 1997, the Company realigned its
channel distribution strategy in Japan. The Company signed a Master Value Added
Distributor Agreement ("MVAD") with Fuji Xerox, and redefined its relationship
with Nissho. Under the MVAD, Fuji Xerox, formerly the Company's OEM partner in
Japan acts as a non-exclusive supplier of the Company's products to resellers in
Japan. The Company's line of network file servers and high-availability software
are also now sold under the Auspex name by Fuji Xerox. The purchase prices of
products purchased by Fuji Xerox under the agreement are subject to certain
discounts. While Fuji Xerox is not subject to any minimum purchase requirements,
in the event that it fails to reach the purchase targets mutually agreed upon
each year, Auspex has the right to make additional OEM appointments in Japan.
The Company's relationship with Nissho, previously the exclusive distributor of
Auspex labeled products, has been changed to a non-exclusive relationship with
Nissho taking the role of a master reseller in fiscal 1997. Both Nissho and Fuji
Xerox have the right to sell products of the Company's competitors.
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Auspex believes that the large installed base of UNIX systems in
Europe represents a significant opportunity for future NetServer sales. To
address this opportunity, the Company has direct sales and support facilities in
the United Kingdom, France and Germany. The Company also has entered into
agreements with distributors covering other selected markets in Europe. The
Company has continued to invest in sales and marketing efforts in Europe.
CUSTOMER SERVICE AND SUPPORT
Auspex's corporate policies are based on a commitment to customer
satisfaction and product quality.
The Company provides customer training and installs, maintains and
supports systems sold directly in North America and Europe. End-user customers
purchasing through indirect channels are generally serviced by the Company's
distributors or OEMs. In all cases, however, customers have direct access to
Auspex service and support through a toll-free telephone hotline available to
customers, distributors and service partners. All customer service call
management and software support is handled directly by Auspex through its
technical support centers twenty-four (24) hours a day, three hundred sixty-five
(365) days a year, by highly trained and experienced technical support
engineers.
In addition to the technical support center located in Santa Clara,
California, the Company has established a second U.S. support center in Cary,
North Carolina and a European technical support center in the United Kingdom to
handle service calls from its European customers. In fiscal 1998, the Company
shifted 60 percent of service personnel into the field in order to increase
responsiveness and enhance customer support. To supplement direct service and
support and to ensure the highest quality service while containing costs, Auspex
has entered into strategic service agreements with Digital Equipment Corporation
(a wholly owned subsidiary of Compaq Computer Corporation) and NCR Corporation
for on-site hardware support. The Company's contracts provide end users with a
warranty for parts and labor on its products, generally for ninety (90) days.
The Company's warranty policy for product sales other than to end users depends
on the requirements of the particular distribution channel. The Company offers
its customers service agreements of varying duration. Service revenue is
recognized ratably over the contractual period as service is provided.
MANUFACTURING
Auspex's manufacturing operations, located in Santa Clara,
California, consists of product assurance, quality control and final product
assembly and test. The Company relies principally on contract manufacturers for
sub-assembly and testing of certain key NetServer components. These
manufacturers have continued to operate under the terms of their business
relationships with the Company on a month-to-month basis. The Company's
manufacturing strategy has been to develop close relationships with its
suppliers, exchange critical information and implement joint quality training
programs. This manufacturing strategy minimizes capital investment and overhead
expenditures and creates flexibility by providing the capacity for rapid
expansion. Although the Company to date has not experienced any significant
production difficulties resulting from its reliance on these manufacturers, it
is possible that production difficulties, including capacity constraints and
quality control issues, could arise in the future, which could materially and
adversely affect the Company's results of operations.
Although the Company generally uses standard parts and components
for its products, a number of key components used in the Company's NetServer
products currently are available or purchased from sole or single sources. These
components include disk and tape drives, microprocessors, connectors, printed
circuit boards, cable assemblies, power supplies and ASICs. Some of the
suppliers of these components have divisions which compete with the Company.
(See "Business--Competition.") The Company generally has agreements with its
sole source suppliers with terms ranging from one to five years and believes
that alternative sources of supply and assembly for most of its sole-source
components could be obtained within a commercially practicable period. As a
precaution, the Company carries extra inventory of some of its sole-source
components to provide additional time to develop an alternate supply source or
redesign the component. However, the lack of sufficient quantities of sole or
single source components, or the inability to develop alternative sources for
these items, could result in delays or reductions in product shipments which
would materially and adversely affect the Company's results of operations.
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RESEARCH AND DEVELOPMENT
The market for high-performance network data servers has been
characterized by rapid technological advances in both hardware and software
development. The Company believes that the speed of technological advancement in
its industry requires it to invest significant amounts in research and
development, and that in order to maintain its competitive position, the Company
must continue to enhance and improve its existing products as well as to develop
and successfully introduce new products. During fiscal 1998, the Company
introduced the new flagship NetServer NS7000/800, which is an enterprise-class
network data server that nearly doubles the number of network connections and
increases NFS throughput versus previous models. Additionally, the Company
introduced a new software release, NeTservices, which allows UNIX and Windows NT
clients to share files on the same platform to provide CDA in mission-critical
network data environments. During fiscal 1998, the Company's product development
organization also delivered a next-generation storage subsystem with a capacity
of up to 3.6 terabytes and new software that provides customers with Year 2000
support. During fiscal 1998, as part of the restructuring of its engineering
organization, the Company made the decision to discontinue development of a
dedicated Window NT product and focus all its research and development efforts
on solutions for UNIX/Window NT.
By continuing to introduce new product features, the Company
believes it has maintained a leadership position in the network data server
market. However, there can be no assurance that the Company's products will
continue to be successful commercially. Furthermore, there can be no assurance
that the Company will be able to develop or introduce other new products in the
future in a timely manner, or that such products will be a commercial success.
The Company intends to continue to invest substantially in product development.
Current research and development efforts are focused on delivering additional
optional software products and increasing the functionality, client protocol
support, performance, capacity, scalability and availability of its products.
As of June 30, 1998, 145 employees were engaged in research and
development activities. The Company's research and development expenses during
fiscal years 1996, 1997 and 1998 were approximately $17.8 million, $24.4 million
and $34.0 million, respectively.
COMPETITION
The data/file server market is very competitive. Within the
NFS-compatible, UNIX data server market segment, manufacturers of
general-purpose multiprocessor servers represent the Company's primary source of
competition. These manufacturers include Sun Microsystems, Hewlett-Packard
Company, Silicon Graphics, Inc. and IBM. Traditional storage vendors, such as
EMC Corporation, are also attempting to expand into network attached storage.
Sun Microsystems is the Company's main competitor. All of these competitors
possess substantially greater financial, technical and marketing resources than
Auspex, as well as substantially larger product installed bases. In addition,
certain manufacturers of PC-based file servers have introduced products that
compete in certain of the Company's target markets. While the Company believes
that the price/performance characteristics of its products are competitive,
increased competition created pricing pressures in fiscal 1998, which materially
and adversely affected the Company's results of operations. The Company took
action in the first quarter of fiscal 1999 to enhance the price/performance of
its products in order to improve unit volume.
The Company derives a significant portion of its revenues from sales
of product upgrades to its installed base, including additional processors (or
upgrades to existing processors), memory, disk and tape drive and software.
Although the Company has to date experienced limited competition in the sale of
upgrades, increased competition against these products may occur in the future
which could materially and adversely affect the Company's revenues and operating
result.
Auspex believes that an important competitive factor is hardware and
software solutions for data availability and network data server performance,
measured in terms of overall system throughput and expressed as a function of
NFS input/output operations per second. Other important factors include product
reliability, availability, scalability, upgradeability, price, overall cost of
ownership and technical service and support. The Company's ability to maintain
its competitive position will depend, in addition to these factors, upon its
success in
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anticipating industry trends, investing in product research and development and
effectively managing the introduction of new products into targeted markets.
INTELLECTUAL PROPERTY AND LICENSES
The Company relies on a combination of patent, copyright, trademark
and trade secret laws, employee and third-party non-disclosure agreements and
other intellectual property protection methods to protect its proprietary
hardware, software and technological expertise. The Company believes, however,
that its continued success will depend principally on continuing innovation,
technological expertise, knowledge of networking, storage and applications,
distribution strength and, to a lesser extent, on its ability to protect its
proprietary technology. Furthermore, there can be no assurance that the
Company's current or future competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
Auspex currently holds seven United States patents for certain
fundamental aspects of its FMP data server architecture and has related foreign
patents and foreign patent applications for proprietary Auspex technologies.
The Company's NetServer host processors and network processors
operate in conjunction with software licensed to the Company by Sun
Microsystems. Although the license is perpetual, or automatically renewable
unless cancelled, there can be no assurance that the Company will be able to
continue such license renewals with Sun Microsystems on favorable terms, or at
all. The Company also licenses software and hardware from several other
companies, among them AT&T, and these licenses are also perpetual unless
cancelled or subject to periodic renewal, which cannot be assured. The Company's
next generation products will incorporate software under license from a key
software vendor and developed in coordination with this vendor. There can be no
assurance that this vendor will continue in business until the product is
released, or that the licenses will continue to be available on favorable terms
in the future, or at all.
EMPLOYEES
As of June 30, 1998, the Company employed 612 people, including 149
in sales, 18 in marketing, 145 in research and development, 122 in customer
service, 122 in manufacturing and 56 in finance and administration. The
recruitment of experienced, highly-skilled individuals is a top priority in an
exceptionally competitive recruiting environment. Equally important in this
environment is the retention of key talent. The Company has significantly
increased its recruiting activities and is reviewing all employee programs to
ensure the retention and continued development of its employees. Hiring and
retaining employees in the Silicon Valley employment market has been a
challenge, and there can be no assurance that the Company will be successful in
hiring and retaining qualified employees in the future. None of the Company's
employees are represented by a labor union. The Company believes that its
relations with its employees are good.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the
executive officers of the Company as of September 15, 1998:
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---- --- --------
<S> <C> <C>
Bruce N. Moore(1) 47 Chief Executive Officer, President and Director
Russell M. Lait 36 Vice President of Operations
R. Marshall Case 40 Vice President of Finance and Chief Financial Officer
Fred J. Wiele 59 Vice President of Marketing
John S. Coviello 52 Vice President of Research and Development
R. Stephen Cheheyl(2)(3) 52 Director
W. Frank King(2)(3) 58 Director
David F. Marquardt(3) 49 Director
</TABLE>
- --------
(1) Member of the Stock Option Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Mr. Bruce N. Moore joined the Company in June 1995 as President,
Chief Operating Officer and a member of the Board of Directors. In January 1996,
Mr. Moore assumed the additional role of Chief Executive Officer and
relinquished the role of Chief Operating Officer. Mr. Moore joined Auspex from
Diasonics Ultrasound, Inc., a provider of diagnostic ultrasound equipment, where
he held the position of President and Chief Executive Officer from December 1993
to December 1994. His eleven-year career at Diasonics included various senior
management positions in marketing and business development. Mr. Moore started
his career as a sales representative in IBM's Data Processing Division in 1976.
Mr. Russell M. Lait joined the Company in March 1988 as a member of
the Company's first design team. During his ten-year tenure with Auspex, Mr.
Lait has held various positions, including Director of Production and Test. He
was appointed Vice President of Operations in August 1996.
Mr. R. Marshall Case joined the Company in February 1998 as Vice
President of Finance and Chief Financial Officer. From September 1997 to
February 1998, Mr. Case served as Vice President, Finance and Administration at
Viking Freight, Inc., a subsidiary of FDX Corporation, a provider of express
transportation. Prior to that, Mr. Case was Vice President of Financial Planning
and Analysis at Amdahl Corporation, (a subsidiary of Fujitsu Limited), a
provider of information technology products, from November 1995 to September
1997. Mr. Case previously served as Executive Vice President, Martin Marietta
Overseas Corporation and held a variety of financial management positions while
at General Electric Corporation for 12 years.
Mr. Fred J. Wiele joined the Company in August 1998 as Vice
President of Marketing. From June 1996 to June 1998, Mr. Wiele served as Senior
Vice President of Sales and Marketing at Komag Corporation, a provider of
thin-film disks. Prior to that, Mr. Wiele was with IBM for 31 years in various
senior sales and marketing capacities, including General Manager and Vice
President of Worldwide Sales and Marketing for the IBM Storage Products Company.
Also, during his tenure at IBM, Mr. Wiele was U.S. Director of Marketing and
Support for the IBM AS/400, and spent 13 years with IBM Europe.
11
<PAGE> 12
Mr. John S. Coviello joined the Company in March 1998 as Senior
Director of Product Engineering. In September 1998, Mr. Coviello was appointed
as Vice President of Research and Development. Prior to that, Mr. Coviello
served as Vice President of Engineering at Primix Solutions (formerly OneWave,
Inc.), a provider of consulting and system integration solutions, from July 1996
to September 1997. Prior to that, Mr. Coviello served as Vice President of
Technology, Planning & Architecture for SABRE at American Airlines/The SABRE
Group from March 1994 to July 1996. Prior to that, Mr. Coviello was with Amdahl
Corporation for six years in various senior management positions, including
Director of Open Systems Marketing and Director of Open Systems Development.
Prior to that, Mr. Coviello was with Bank of America for two years as Director
and Vice President. Mr. Coviello also held a variety of engineering management
positions while at IBM for 17 years.
Mr. R. Stephen Cheheyl has served as a Director of the Company since
April 1995. From October 1994 until he retired in December 1995, Mr. Cheheyl
served as an Executive Vice President of Bay Networks, Inc., which was formed
through the merger of Wellfleet Communications, Inc. ("Wellfleet") and Synoptics
Communications Inc. From December 1990 to October 1994, Mr. Cheheyl served as
Senior Vice President of Finance and Administration at Wellfleet. He also serves
as a director of MCMS, Inc., Infinium Software, Inc. and Sapient Corporation.
Dr. W. Frank King has served as a Director of the Company since
October 1994. Dr. King has served as President, Chief Executive Officer and a
Director of PSW Technologies, Inc., a software services firm, since October
1996. From 1992 to October 1996, Dr. King served as President of Pencom
Software, a division of Pencom Systems, Inc. From 1988 to 1992, Dr. King was
Senior Vice President of the Software Business group of Lotus, a software
publishing company. Prior to joining Lotus, Dr. King was with IBM, a technology
company, for 19 years, where his last position was Vice President of Development
for the Personal Computing Division. Dr. King earned a doctorate in electrical
engineering from Princeton University, a master's degree in electrical
engineering from Stanford University and a bachelor's degree in electrical
engineering from the University of Florida. He serves on the Boards of Directors
of Best Software, Inc., Excalibur Technologies Corporation, SystemSoft and
Natural Microsystems, Inc.
Mr. David F. Marquardt has served as a Director of the Company since
April 1989. Since August 1995, Mr. Marquardt has been a general partner at
August Capital which is a private venture capital partnership. Since August
1980, Mr. Marquardt has been a general partner of various Technology Venture
Investors entities which are private venture capital limited partnerships. Mr.
Marquardt is also a Director of Microsoft Corporation, Farallon Communication,
Inc., Visioneer, Inc. and several privately held companies.
ITEM 2. PROPERTIES
The Company is headquartered in Santa Clara, California, where it
leases an aggregate of approximately 269,000 square feet of space which houses
administrative, finance, sales and marketing, manufacturing, customer service
and product development activities. The lease for these facilities expires in
February 2010. In addition, the lease agreement contain three successive options
to extend the lease term for sixty months each. The Company leases additional
sales and support offices located in the United States, Canada, the United
Kingdom, France, Germany and Japan. The Company believes that its facilities are
adequate to meet the Company's current business requirements, and that suitable
additional space will be available as needed to accommodate further physical
expansion of corporate operations and for additional sales and support offices.
See also Note 5 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings
incidental to the conduct of its business. The Company believes that the
litigation, individually or in the aggregate, to which it is currently a party,
is not likely to have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been approved for quotation on The
Nasdaq National Market under the symbol ASPX since the Company's initial public
offering in May 1993. The following table sets forth, for the periods indicated,
the range of high and low sales prices on the Nasdaq Composite, as reported in
The Wall Street Journal.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fourth Quarter of 1998 $ 9.25 $ 4.25
Third Quarter of 1998 $10.6875 $ 7.75
Second Quarter of 1998 $12.625 $ 9.1875
First Quarter of 1998 $13.125 $ 7.50
Fourth Quarter of 1997 $13.125 $ 7.50
Third Quarter of 1997 $14.75 $10.625
Second Quarter of 1997 $15.50 $10.125
First Quarter of 1997 $17.00 $10.00
</TABLE>
The Company believes that a number of factors including, but not limited to,
quarterly fluctuations in results of operations may cause the market price of
its common stock to fluctuate significantly. See "Management's Discussion and
Analysis - Factors That May Affect Future Results."
As of September 15, 1998, the approximate number of common
stockholders of record was 667.
The Company has not, to date, paid cash dividends on its capital
stock. The Company currently intends to retain earnings for use within its
business and does not anticipate paying cash dividends in the foreseeable
future.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------
(In thousands, except per share amounts)
June 30, June 30, June 30, June 30, June 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues ................................ $168,912 $202,486 $162,640 $115,625 $83,280
Income (loss) before income taxes ...... (26,668) 24,362 29,597 15,912 9,786
Net income (loss) ....................... (17,334) 13,420 19,830 12,411 8,318
Net income (loss) per share
Basic ............................ $ (0.69) $ 0.54 $ 0.84 $ 0.54 $ 0.36
Diluted .......................... $ (0.69)(1) $ 0.52(2) $ 0.77 $ 0.51 $ 0.34
Shares used for net income
(loss) per share
Basic ............................ 25,268 24,641 23,701 23,029 23,219
Diluted .......................... 25,268 25,268 25,702 24,371 24,694
Total assets ............................ 147,193 157,152 135,844 106,526 85,433
Long-term obligations ................... -- -- -- 159 399
</TABLE>
(1) Includes the costs associated with write-down of disk drive inventory to
its net realizable value as a result of rapid price declines of 4
gigabyte disk drives and restructuring charges. Exclusive of these
charges, diluted net loss per share for fiscal 1998 would have been
$0.26.
(2) Includes the costs associated with the acquisition of Alphatronix, Inc.
in the fourth quarter of fiscal 1997. Exclusive of these acquisition
costs, diluted net earnings per share for fiscal 1997 would have been
$0.81.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the fiscal year ended June 30, 1998 of $168.9 million
decreased 16.6% over fiscal year 1997 revenues of $202.5 million. To date, the
Company has shipped approximately 2,500 data servers.
The following table sets forth for the fiscal years indicated the
percentage of total revenues represented by certain line items in the Company's
Statement of Operations:
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues ...................................... 100% 100% 100%
Cost of revenues .............................. 55 46 44
---- ---- ----
Gross margin .......................... 45 54 56
---- ---- ----
Operating Expenses
Marketing and sales ....................... 32 24 23
Research and development .................. 20 12 11
General and administrative ................ 6 4 5
Restructuring charges ..................... 4 -- --
In-process research and development ....... -- 3 --
---- ---- ----
Income (loss) from operations ....... (17) 11 17
Other income .................................. 1 1 1
---- ---- ----
Income (loss) before income taxes ... (16) 12 18
(Benefit) provision for income taxes .......... (6) 5 6
---- ---- ----
Net income (loss) ............................. (10%) 7% 12%
==== ==== ====
</TABLE>
15
<PAGE> 16
REVENUES
Product revenue includes hardware sales and software license fees.
Effective July 1, 1997, the Company changed its revenue recognition policy on
system sales to end users such that revenues from system sales are generally
recognized upon shipment. Previously, the Company generally recognized system
sales to end users when the equipment had been shipped, installed and accepted
by the end user. The reason for this change was to better conform the Company's
policy with industry practices. The installation of the Company's systems is not
considered a significant obligation and acceptance by the customer is not
considered a significant uncertainty. Revenues from upgrade sales are generally
recognized at the time the equipment is shipped. Provisions for product sales
returns and allowances are recorded in the same period as the related revenue.
Revenue earned under software license agreements with end users are generally
recognized when the software has been shipped and there are no significant
obligations remaining.
Service revenue includes installation, maintenance and training and
is recognized ratably over the contractual period or as the services are
provided.
The following table sets forth the principal components of the
Company's revenues:
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Product revenue .......... $142,812 $182,533 $146,913
Service revenue .......... 26,100 19,953 15,727
-------- -------- --------
Total revenues $168,912 $202,486 $162,640
======== ======== ========
</TABLE>
Product revenue decreased $39.7 million or 22% in fiscal 1998 as
compared to fiscal 1997 after growth of $35.6 million, or 24% in fiscal 1997 as
compared to fiscal 1996. The fiscal 1998 decrease was due to a $30.5 million
one-time order from a large internet service provider in fiscal 1997 and a $10.1
million decrease in revenue from Japan, which made revenue comparisons
difficult, compounded by product transition issues and increased competitive
pressures. The fiscal 1997 increases were attributable to the $30.5 million
one-time order, higher average system prices and increased sales of upgrades to
the Company's installed base. Revenue from product upgrades, which primarily
consist of additional processors (or upgrades of existing processors), memory
disk and tape drives, remained relatively stable as a percentage of total
revenue in fiscal 1998. Revenue from product upgrades increased to 43% in fiscal
1997 and 39% in fiscal 1996. The fiscal 1997 increase in product upgrade revenue
as a percentage of total revenues compared to fiscal 1996 was primarily due to
the expansion of the installed base of customers, demand from customers for
increased storage capacity and the Company's periodic product enhancements.
The Company provides ongoing support and maintenance to its end-user
customers, distributors and OEMs, generally under annual service agreements.
Service revenue as a percentage of total revenues increased to 16% in fiscal
1998 from 10% in fiscal 1997 and 1996. The increase in service revenue as a
percentage of total revenues compared to fiscal 1997 was primarily due to the
expansion of the installed base of customers and the Company's investment in
expanding its Customer Service organization.
The following table sets forth the Company's revenue by geographic
area (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
--------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
North America ............... $116,835 69% $142,536 70% $110,163 68%
Pacific Rim ................. 23,388 14% 31,759 16% 36,229 22%
Europe ...................... 28,689 17% 28,191 14% 16,248 10%
-------- -------- -------- -------- -------- --------
Total revenues $168,912 100% $202,486 100% $162,640 100%
======== ======== ======== ======== ======== ========
</TABLE>
Revenue from North America decreased $25.7 million in fiscal 1998
compared to fiscal 1997 and increased $32.4 million in fiscal 1997 compared to
fiscal 1996. The fiscal 1998 decrease was due to a $30.5 million one-time
16
<PAGE> 17
order from a large internet service provider in fiscal 1997. Revenue from the
Pacific Rim decreased $8.4 million in fiscal 1998 compared to fiscal 1997 and
decreased $4.5 million in fiscal 1997 compared to fiscal 1996. The decrease in
Pacific Rim revenue as a percentage of total revenue and in absolute dollars in
fiscal 1998, 1997 and 1996 was primarily due to the reorganization of a major
OEM partner and weakness in the Japanese economy.
Sales of products and services to Intel accounted for 20%, 10% and
10% of total revenues for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. Sales to AOL accounted for 15% of total revenues for the fiscal
year ended June 30, 1997. Additionally, sales to Fuji Xerox accounted for 13% of
total revenues for the fiscal year ended June 30, 1996. No other customer
accounted for 10% or more of total revenues for any of the three years in the
period ended June 30, 1998. Intel is not obligated to purchase any minimum level
of products from the Company. Accordingly, there can be no assurance that sales
of products and services to Intel will not decline, either in absolute dollar
amounts or as a percentage of total revenues, in future periods and that any
such declines will not have a material adverse effect on the Company's results
of operations.
GROSS MARGIN
The Company's gross margin was 45%, 54% and 56% in fiscal 1998, 1997
and 1996, respectively. Costs of revenues include material costs, manufacturing
and service overhead costs, installation and warranty expenses, obsolescence,
the cost of spare parts and other related costs. The decrease in gross margins
in fiscal 1998 compared to fiscal 1997 was primarily due to $9.4 million of
charges incurred for the write-down of disk drive inventory to its net
realizable value as a result of rapid price declines of four-gigabyte drives
coupled with an accelerated transition by the Company to nine-gigabyte drive
technology and product obsolescence. The decrease in gross margins in fiscal
1997 compared to fiscal 1996 was due to pricing on systems sales and lower
margins on service. This was partially offset by a significant increase in
software revenue.
OPERATING EXPENSES
Marketing and sales expenses increased $6.4 million in fiscal 1998
compared to fiscal 1997 and increased $10.4 million in fiscal 1997 compared to
fiscal 1996, and were 32%, 24% and 23% of total revenue in fiscal 1998, 1997 and
1996, respectively. The increase in absolute dollars and as a percentage of
sales was the result of an expansion of the North American direct sales
operations, the growth of direct sales operations of the Company's international
subsidiaries and lower total revenues in fiscal 1998.
Research and development expenses increased $9.6 million in fiscal
1998 compared to fiscal 1997 and increased $6.6 million in fiscal 1997 compared
to fiscal 1996, and represented 20%, 12% and 11% of total revenues in fiscal
1998, 1997 and 1996, respectively. The increase in research and development
expenses both in absolute dollars and as a percentage of total revenue in fiscal
1998 compared to fiscal 1997 was primarily due to new product development
efforts, the funding of the Company's new research and development facility
acquired in the Alphatronix acquisition and the lower total revenue in fiscal
1998. The Company believes that in order to remain competitive, it will need to
continue to make substantial investments in new and enhanced products, and it
anticipates that research and development expenses may increase in both absolute
amounts and/or as a percentage of total revenue from current levels.
General and administrative expenses increased $1.4 million in fiscal
1998 compared to fiscal 1997 and increased $200,000 in fiscal 1997 compared to
fiscal 1996. Such expenses represented approximately 5% of total revenue in each
of fiscal 1998, 1997 and 1996. General and administrative expenses increased in
fiscal 1998 compared to fiscal 1997 primarily due to the cost of expanding new
facilities occupied in February 1998. General and administrative expenses
remained generally flat in absolute dollars in fiscal 1997 compared to fiscal
1996.
In the fourth quarter of fiscal 1998, the Company recorded a $7.3
million restructuring charge to cover the planned costs of reducing certain
sectors of its workforce, scaling back its facilities and writing-down equipment
and other assets. These charges reflect steps the Company is taking to improve
its product development efforts, streamline operations and reduce overall costs.
17
<PAGE> 18
On June 30, 1997, the Company acquired all of the outstanding shares
of Alphatronix for a total purchase price of $7.7 million. The acquisition was
accounted for using the purchase method of accounting. A portion of the purchase
price was allocated to assets acquired and liabilities assumed based on their
estimated fair value. The fair value of tangible assets acquired and liabilities
assumed was $300,000 and $300,000, respectively. In addition, $7.4 million of
the purchase price was allocated to in-process research and development projects
that had not reached technological feasibility and had no probable alternative
future uses, which the Company expensed in fiscal 1997 as a non-recurring
charge. The remainder of the purchase price, $300,000, was allocated to goodwill
and is being amortized over five years on a straight-line basis. See Note 3 of
Notes to the Consolidated Financial Statements. Alphatronix's R&D projects
relate primarily to developing a suite of network data management software
applications. There can be no assurance that the Company will succeed in making
commercially viable products from the Alphatronix research and development.
OTHER INCOME
Other income and expense resulted in income of $1.7 million, $2.4
million and $1.8 million in fiscal 1998, 1997 and 1996, respectively. Other
income and expense includes interest income, interest expense and foreign
exchange gains and losses. Interest income was $2.4 million, $2.3 million and
$1.8 million in fiscal 1998, 1997 and 1996, respectively. The increase in
interest income in fiscal 1998 and 1997 as compared to fiscal 1996 primarily
relates to an increase in the cash and short-term investments balances.
PROVISION FOR INCOME TAXES
As of June 30, 1998, the Company had gross deferred tax assets of
approximately $9.0 million. Management has determined, based on the Company's
history of prior operating earnings, the ability to carry back net operating
losses to prior periods and its expectations for future years, that it is more
likely than not that the deferred tax asset is realizable. However, no
assurances can be given that sufficient taxable income will be generated in
future years for the utilization of the deferred tax asset.
The Company recognized a tax benefit of approximately $9.3 million
for fiscal 1998, which will be realized in fiscal 1999, due to the anticipated
carryback of current net operating losses to prior periods. The provision for
income taxes was approximately $10.9 million in fiscal 1997 and $9.8 million in
fiscal 1996, representing effective tax rates of approximately 45% and 33%,
respectively. The increase in the effective tax rate in fiscal 1997 compared to
fiscal 1996 was attributable to the fact that the Company had not provided any
tax benefits related to the write-off of in-process research and development
expenses of approximately $7.4 million resulting from the acquisition of
Alphatronix in fiscal 1997. Excluding the write-off of in-process research and
development expenses, which accounts for an increase of 10.5% in the effective
tax rate in fiscal 1997, the Company's effective tax rate would have been 34.5%.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly
financial information for the Company's last eight quarters. This unaudited
information has been prepared on the same basis as the audited information and
in management's opinion reflects all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the information
for the periods presented. Based on the Company's operating history and factors
that may cause fluctuations in the quarterly results, quarter-to-quarter
comparisons should not be relied upon as indicators of future performance.
Although the Company's revenues are not generally seasonal in nature, the
Company has experienced decreases in first quarter revenue versus the preceding
fourth quarter which are believed to result primarily from the capital asset
purchase cycle of the Company's customers.
The level of the Company's operating expenses is partially based on
its expectations of future revenue. The Company's results of operations may be
adversely affected if revenue does not materialize in a period as expected.
Since expense levels are usually committed in advance of revenue and because
only a small portion of expenses vary
18
<PAGE> 19
with revenue, the Company's net income may be impacted significantly by lower
revenue. The Company's revenue decreased each quarter in fiscal 1998 compared to
the corresponding quarter in the prior year. This decrease was due principally
to lower sales volume or lower average selling prices of the Company's products
as a result of product transition issues, increased competitive pressures and
weakness in Japan.
<TABLE>
<CAPTION>
1998 SUMMARY BY QUARTER
(In thousands, except per share amounts) First Second Third Fourth Year
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Revenues $48,588 $ 43,442 $40,386 $ 36,496 $168,912
Gross margin 25,262 12,515 21,505 17,251 76,533
Income (loss) before taxes 2,756 (11,668) (3,578) (14,178) (26,668)
Net income (loss) 1,791 (7,584) (2,326) (9,215) (17,334)
Net income (loss) per share
Basic $ 0.07 $ (0.30) $ (0.09) $ (0.36) $ (0.69)
Diluted $ 0.07 $ (0.30)(1) $ (0.09) $ (0.36)(2) $ (0.69)(3)
</TABLE>
<TABLE>
<CAPTION>
1997 SUMMARY BY QUARTER
(In thousands, except per share amounts) First Second Third Fourth Year
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues $43,012 $49,082 $55,602 $54,790 $202,486
Gross margin 23,912 26,645 30,458 28,463 109,478
Income before taxes 6,620 7,603 10,057 82 24,362
Net income (loss) 4,270 4,904 6,487 (2,241) 13,420
Net income (loss) per share
Basic $ 0.17 $0.20 $ 0.26 $ (0.09) $ 0.54
Diluted $ 0.17 $0.19 $ 0.25 $ (0.09) $ 0.52(4)
</TABLE>
19
<PAGE> 20
(1) Includes the costs associated with write-down of disk drive inventory to
its net realizable value as a result of rapid price declines of 4-
gigabyte disk drive of $9,389,000. Exclusive of this charge, net diluted
loss per share for second quarter 1998 would have been $0.06.
(2) Includes the costs associated with restructuring charges of $7,349,000.
Exclusive of this charge, net diluted loss per share for fourth quarter
1998 would have been $0.17.
(3) Includes the costs associated with write-down of disk drive inventory to
its net realizable value as a result of rapid price declines of 4-
gigabyte disk drives and restructuring charges. Exclusive of these
charges, net diluted loss per share for fiscal 1998 would have been
$0.26.
(4) Includes the costs associated with the acquisition of Alphatronix in the
fourth quarter of fiscal 1997. Exclusive of these acquisition costs, net
diluted earnings per share for fiscal 1997 would have been $0.81.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
decreased $10.1 million as of June 30, 1998, compared to June 30, 1997. The
Company generated approximately $14.6 million, $28.6 million and $16.9 million
in cash from operating activities in fiscal 1998, 1997 and 1996, respectively.
The decrease in net cash from operating activities in fiscal 1998 compared to
fiscal 1997 was primarily due to the Company's net loss for the year and the
increase in the income tax refund receivable which was offset by a reduction in
accounts receivable.
The Company's principal investing activities consisted of the
purchase of property and equipment amounting to $28.9 million, $16.4 million and
$15.4 million in fiscal 1998, 1997 and 1996, respectively. These expenditures
were for leasehold improvements, equipment for research and development,
manufacturing test equipment, office equipment and spare parts to support
customer service contracts. Additionally, the Company disbursed $17.2 million in
connection with capital expenditures and leasehold improvements for a new
facility, which it occupied in February 1998. Purchases of short-term
investments represent reinvestment of the proceeds from sale and maturities of
short-term investments and investment of cash and cash equivalents into
short-term investments. The Company also used net cash of $5.6 million for the
acquisition of Alphatronix in fiscal 1997.
The Company's primary financing activities included proceeds from
the sale of its Common Stock pursuant to employee benefit plans of $4.3 million,
$4.1 million and $5.0 million in fiscal 1998, 1997 and 1996, respectively.
As of June 30, 1998, working capital was $79.4 million as compared
with $105.4 million as of June 30, 1997. Based on its current operating plans,
the Company believes that its existing cash, cash equivalents and short-term
investments and cash flow from operations will be sufficient to meet its working
capital and capital expenditures requirements at least through the next 12
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The seventh paragraph of the section entitled "The Company" in Part
I; the seventh paragraph of the section entitled "Products" in Part I; the first
sentence in the fourth paragraph of the section entitled "Distribution" in Part
I; the fourth sentence of the second paragraph of the section entitled "Research
and Development" in Part I; the last sentence in the second paragraph of the
section entitled "Operating Expenses" in Part II; the second sentence of the
first paragraph of the section entitled "Provision for Income Taxes" in Part II;
the last sentence of the fourth paragraph under the section entitled "Liquidity
and Capital Resources" in Part II; the third sentence of the risk factor
entitled "Software Product Risks" in "Factors That May Affect Future
Performance" in Part II; the third sentence of the risk factor entitled "New
Products" in "Factors That May Affect Future Performance"; the second sentence
of the risk factors entitled "Risks of International Sales" in "Factors That May
Affect Future Performance"; the fifth, sixth and seventh sentence of the first
paragraph, the second sentence of the fourth paragraph, the entire eighth
paragraph, the last sentence of the ninth paragraph, the last sentence of the
tenth paragraph and the entire eleventh paragraph of the section entitled "Year
2000 Compliance" in "Factors That May Affect Future Performance" contain forward
looking statements as defined in the
20
<PAGE> 21
Private Securities Litigation Reform Act of 1995. The Company may also make oral
and written forward-looking statements from time to time. Actual results may
differ materially from those projected in any such forward-looking statements
due to a number of factors, including those set forth below. The Company
undertakes no obligation to update such information.
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly from
quarter to quarter due to a combination of factors. These factors include the
timing of orders, the timing of new product introductions by the Company or its
competitors, and the mix of distribution channels through which the Company's
products are sold. The Company generally realizes higher gross margins on sales
of systems to end users and on single-system sales than on systems sold through
distributors and OEMs and on multiple-system sales. In addition, given the
Company's focus on highly configured enterprise class systems, the loss or delay
in a given quarter of a relatively limited number of system sales could
adversely affect the Company's revenues. Historically, the Company often has
recognized a substantial portion of its revenues in the last month of any given
quarter. Because the Company's operating expenses are based on anticipated
revenue levels and because a high percentage of the Company's expenses are
relatively fixed, a small variation in the timing of the recognition of revenues
could cause significant variations in operating results from quarter to quarter.
COMPETITIVE MARKET
The market for the Company's products is highly competitive. The
Company experiences substantial competition, principally from Sun Microsystems,
Hewlett-Packard Company and Silicon Graphics, Inc., among others. Some companies
have introduced proprietary products to provide network attached storage. Most
of the Company's competitors are better known and have substantially greater
financial, technological, production and marketing resources than the Company.
While the Company believes that the price/performance characteristics of its
products are competitive, price competition in the markets for the Company's
products is intense. Any material reduction in the price of the Company's
products without corresponding decreases in manufacturing costs and increases in
unit volume would negatively affect gross margins, which could in turn have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also derives a significant portion of its
revenues from sales of product upgrades to its installed base of customers,
including additional processors, memory and disk. Increased competition for the
Company's products that results in lower product sales could also adversely
impact the Company's upgrades sales. In addition, decisions by customers not to
increase capacity to their current systems could adversely impact the Company's
revenues and results of operations. The Company's ability to maintain its
competitive position will depend upon, among other factors, its success in
anticipating industry trends, investing in product research and development,
developing new products with improved price/performance characteristics and
effectively managing the introduction of new products into targeted markets.
DEPENDENCE ON KEY PERSONNEL
Competition for employees with highly technical, management and
other skills is intense in the computer industry and is particularly intense in
the San Francisco Bay Area. The Company has in the recent past encountered some
difficulties in fulfilling its hiring needs and retaining key employees in this
employment market, and there can be no assurance that the Company will be
successful in hiring and retaining qualified employees in the future. The
Company's failure to retain the services of key personnel or to attract
additional qualified employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
21
<PAGE> 22
SOFTWARE PRODUCT RISKS
The Company markets optional software products in addition to its
line of network file servers. These software products include: NeTservices(TM),
DriveGuard(TM), FastBackup(TM), ServerGuard(TM), ServerGuard Global(TM) and
DataGuard(TM). The Company also expects to release enhancements and new features
for these products from time to time. Although the Company performs extensive
testing prior to releasing software products, such products may contain
undetected errors or bugs when first released. These may not be discovered until
the product has been used by customers in different application environments.
Failure to discover product deficiencies or bugs could delay product
introductions, require design modifications to previously shipped products,
cause unfavorable publicity or negatively impact system shipments; any of which
could result in a materially adverse effect on the Company's business, financial
condition and results of operations.
NEW PRODUCTS
New product introductions by the Company or its competitors carry
the risk that customers could delay or cancel orders for existing products
pending shipment of the new products. For instance, product transition issues
had an adverse impact on North America revenue in fiscal 1998. The Company's
strategy is to continue to introduce new products and upgrades to existing
products on an ongoing basis. There can be no assurance that the Company will
not experience difficulties that delay or prevent the successful development,
introduction or marketing of these products and enhancements or that these new
products and enhancements will adequately address market requirements, achieve
market acceptance or generate substantial sales. Additionally, delays in the
launch or lack of availability of new products could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON ESTABLISHED STANDARDS
The rapid emergence of new or alternate standards such as Windows NT
which replace or diminish the market acceptance of UNIX operating systems or
NFS, on which the Company's products are currently based, could materially and
adversely affect the Company's results of operations unless the Company is able
to incorporate any such standards in the Company's products in a timely manner.
DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS
For fiscal 1998 and 1997, direct sales of products and services to
Intel represented approximately 20% and 10%, respectively, of the Company's
revenues. Also in fiscal 1997, direct sales of products and services to AOL
represented approximately 15% of the Company's revenues. For fiscal year 1996,
sales to Fuji Xerox, the Company's non-exclusive master value-added distributor
in Japan, represented approximately 13% of the Company's revenues. Intel, AOL
and Fuji Xerox are not obligated to purchase any minimum level of products from
the Company. Additional significant reductions in product sales to Intel, AOL or
Fuji Xerox would materially and adversely affect the Company's business,
financial condition and results of operations. For example, the reduced
purchases by AOL and Fuji Xerox contributed to lower revenue in fiscal 1998.
DEPENDENCE ON CERTAIN SUPPLIERS
Certain of the Company's products contain critical components
supplied by a single or limited number of third parties. While the Company has
an inventory of these critical components, any significant or prolonged shortage
of these components or the failure of the third-party suppliers to maintain or
enhance these components could materially and adversely affect the Company's
results of operations.
EXCESS OR OBSOLETE INVENTORY
Managing the Company's inventory of components and finished products
is a complex task. A number of factors, including but not limited to, the need
to maintain a significant inventory of certain components which are in short
supply or which must be purchased in bulk to obtain favorable pricing, the
general unpredictability of demand for specific products and customer requests
for quick delivery schedules, may result in the Company maintaining
22
<PAGE> 23
large amounts of inventory. Other factors, including changes in market demand
and technology, may cause inventory to become obsolete. Any excess or obsolete
inventory could result in price reductions and/or inventory write-downs, which
in turn could adversely affect the Company and its results of operations. For
example, the Company wrote-down $9.4 million of certain disk drive inventories
in the second quarter of fiscal 1998, and this write-down had an adverse effect
on gross margins.
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During fiscal 1998 and 1997, approximately 31% and 30%,
respectively, of the Company's total revenues were derived from markets outside
of North America. The Company expects that sales to the Pacific Rim and Europe
will continue to represent a significant portion of its business. However, there
can be no assurance that the Company's Pacific Rim or European operations will
continue to be successful. The Company's international business may be affected
by changes in demand resulting from localized economic and market conditions.
For example, the Company experienced a decrease in revenues from the Pacific Rim
during fiscal 1998 due to further weakness in the Japanese economy and effects
from continuing organizational change at one of the Company's major Japanese
distributors. In addition, the Company's international business may be affected
by fluctuations in currency exchange rates and currency restrictions. The
Company purchases the majority of its materials and services in U.S. dollars,
and most of its foreign sales are transacted in U.S. dollars. Continued
increases in the value of the U.S. dollar relative to foreign currencies will
make the Company's products sold internationally less price competitive. The
Company has offices in a number of foreign countries, the operating expenses of
which are also subject to the effects of fluctuations in foreign exchange rates.
Financial exposure may result due to the timing of transactions and movement of
exchange rates. The Company's international business may further be affected by
risks such as trade restrictions, increase in tariff and freight rates and
difficulties in obtaining necessary export licenses and meeting appropriate
local regulatory standards. For example, the Company has had to modify its
products in minor respects in Japan to comply with local electromagnetic
emissions standards, and must also comply with corresponding European Economic
Community standards. In marketing its products to the European Economic
Community, the Company also must face the challenges posed by a fragmented
market complicated by local distribution channels and local cultural
considerations. For international sales, the Company has largely relied on
distributors or OEMs, most of whom are entitled to carry products of the
Company's competitors. There can be no assurance that any of the foregoing risks
or issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
STOCK MARKET FLUCTUATIONS
In recent years, the stock market in general and the market for
technology stocks in particular, including the Company's Common Stock, have
experienced extreme price fluctuations. The market price of the Company's Common
Stock may be significantly affected by various factors such as quarterly
variations in the Company's operating results, changes in revenue growth rates
for the Company as a whole or for specific geographic areas or products, changes
in earning estimates by market analysts, the announcements of new products or
product enhancements by the Company or its competitors, speculation in the press
or analyst community, and general market conditions or market conditions
specific to particular industries. There can be no assurance that the market
price of the Company's Common Stock will not experience significant fluctuations
in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; PENDING LITIGATION
The Company currently relies on a combination of patent, copyright,
trademark and trade secret laws and contractual provisions to protect its
proprietary rights in its hardware and software products. The Company currently
holds seven United States patents and has filed applications for additional
patents. The Company also has filed applications for counterpart patents in
foreign countries, including Japan. There can be no assurance that the Company's
present or future competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Further,
there can be no assurance that the Company's patent applications will result in
issued patents, or that the Company's issued patents will be upheld if
challenged. Additionally, there can be no assurance that third parties will not
assert intellectual property infringement claims against the Company in the
future with respect to current or future projects or that any such assertions
may not
23
<PAGE> 24
require the Company to refrain from the sale of its products, enter into royalty
arrangements or undertake costly litigation.
The Company's adherence to industry standards with respect to its
products limits the Company's opportunities to provide proprietary features
which may be protected. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
The Company is subject to various claims which arise in the normal
course of business. The Company believes that the litigation, individually or
in the aggregate, to which it is currently a party, is not likely to have a
material adverse effect on the Company's results of operations or financial
condition.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming
code in existing computer systems as the Year 2000 approaches. The Year 2000
problem is pervasive and complex, as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. Systems
that do not properly recognize date-sensitive information when the year changes
to 2000 could generate erroneous data or cause a system to fail. Significant
uncertainty exists in the software industry concerning the potential effects
associated with the Year 2000 problem. The Company's new products, as of fiscal
1998, are being designed to be Year 2000 compliant (as the Company has defined
that term in its published statements). However, some of the Company's older
products will not be Year 2000 compliant and, as a result, the Company's
customers will be required to upgrade these products. Although products have
undergone, or will undergo, the Company's normal quality testing procedures,
there can be no assurance that the Company's products will contain all necessary
date code changes. Any failure of the Company's products to perform, including
system malfunctions due to the onset of Year 2000, could result in claims
against the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the Company's
customers could choose to convert to other Year 2000 compliant products or to
develop their own products in order to avoid such malfunctions, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company currently is in the process of auditing its own
information technology infrastructure for Year 2000 compliance, including
reviewing what actions are required to make all software systems Year 2000
compliant as well as actions needed to mitigate the risks of Year 2000. Such
actions include a review of vendors' contracts, attention to Year 2000 issues in
future contracts with vendors and formal communications with suppliers
requesting that they certify that their products are Year 2000 compliant.
STATE OF READINESS
The Company has been actively addressing the Year 2000 issues since
fiscal 1997. The following sections broadly address Year 2000 matters with
respect to the Company's (a) suppliers, (b) facilities and infrastructure, (c)
information technology systems, (d) engineering infrastructure, and (e)
manufacturing operation Year 2000 compliance assessment.
Suppliers
During fiscal 1998, the Company sent a Year 2000 Readiness
Letter/Questionaire to its suppliers. Very few responses to this letter were
received and, as a result, the Company is undertaking the following: (1) a new
Readiness Letter/Questionaire is being generated and will be mailed to all
suppliers by the end of October 1998; (2) the Company is in the process of
identifying and devoting resources to ensure the Year 2000 compliance of
significant and/or critical suppliers; (3) supplier response to the new Year
2000 Readiness Letter/Questionaire will be closely monitored; and (4) follow-up
communication will be initiated with significant and/or critical suppliers who
do not respond to the Year 2000 Readiness Letter/Questionaire. Based on their
responses and results of the Readiness Letter/Questionaire, alternate suppliers
may need to be identified by the Company. There can be no assurance that the
Company will be
24
<PAGE> 25
able to find suitable alternate suppliers and contract with them on reasonable
terms, or at all, and such inability could have a material and adverse impact on
the Company's business and results of operations.
Facilities and Infrastructure
The Company's new headquarters facility in Santa Clara and domestic
remote sites are Year 2000 compliant with respect to building automation systems
and electronic security systems. The Company has presented formal queries to
landlords, local fire departments and utility providers with regard to Year 2000
compliance/readiness. Formal responses have not been received as of this filing.
The Company believes that its English and French facilities are Year 2000
compliant; however, the German and Japanese facilities have not responded
formally to the Company's inquiries as of this filing.
Information Technology Systems
Over the past several years, the Company has invested in a number of
Year 2000 compliant PBXs and voice-mail systems. The one current non-compliant
Year 2000 PBX system resides in Alphatronix. Plans are in place to migrate this
system to a Year 2000 compliant PBX system by the end of calendar year 1998. No
effort has yet been spent on verifying Year 2000 compliance of local telephone
systems of most sales offices, and the Company expects to have verified such
compliance by the end of fiscal 1999.
The Company believes that its internal production data communication
network is Year 2000 compliant. A majority of the key components of the network,
which the Company believes to be Year 2000 compliant, were installed within the
past nine months. The Company's wide-area network requirements are provided by a
major national and international carrier, and the Company expects this carrier
to be Year 2000 compliant. For local services that are provided by local
carriers, the Company has not yet invested a significant amount of time to
verify their Year 2000 readiness, but intends to verify compliance by the end of
fiscal 1999.
The Company has replaced or upgraded, or is in the process of
replacing/upgrading, many of its core applications systems. A new Year 2000
compliant enterprise resource planning package was installed in the first
calendar quarter of 1998. An upgrade to a newer version of this package is
planned for the fourth calendar quarter of 1998 which incorporates several Year
2000 compliance -- related bug fixes. An active project is underway to upgrade
the Company's payroll and human resources systems to Year 2000 compliant systems
by the end of September 1998. The Company's customer call tracking system is
being upgraded to provide additional functionality and stability. Part of the
project plan for this upgrade will be to confirm the vendor's assertion that the
product is Year 2000 compliant. During fiscal 1998, the Company invested in a
desktop upgrade program. The standard personal computers and laptop computers
installed during this period are Year 2000 compliant to the extent the vendors
have affirmed. Testing has confirmed the commonly used functions operate
satisfactorily. Not every desktop application has been fully tested.
Engineering Infrastructure
The Company's engineering infrastructure is in a continual state of
change due to the dynamic nature of the Company's business and focus on new
products. As older products are retired and new products developed, the tools,
equipment and laboratory environments change. The Company is in the process of
assessing the Year 2000 issues of its engineering infrastructure and will
complete such assessment by the end of September 1998.
Manufacturing Operations
The Company is primarily an assemble-to-order manufacturing
operation. There is no significant automated assembly equipment on its
manufacturing shop floor. The Company is in the process of reviewing its
manufacturing operations for potential Year 2000 issues and will complete such
assessment by the end of September 1998.
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<PAGE> 26
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company expects to incur total software-, hardware- and systems-
related costs of approximately $1.9 million and solutions providers costs of
approximately $500,000 in connection with remediations of Year 2000 compliance
issues. There can be no assurance that the cost estimates associated with the
Company's Year 2000 issues will prove to be accurate or that the actual costs
will not have a material adverse effect on the Company's results of operations
and financial condition.
YEAR 2000 ISSUES
The Company's Technical Support representatives work closely with
customers to resolve problems, issues and questions. The Company's Customer
Satisfaction organization uses several toll free phone numbers to address
customer problems, issues and questions. These calls are logged and tracked
using a call management system. Customer Satisfaction has a significant reliance
on communications, voice-mail, email, paging, Web and file transfer program
services and data communications. Given the number and variety of suppliers and
their inter-dependencies, the number and location of worldwide customers and
the number and locations of the various Technical Support offices, it is not
feasible to fully test whether the Company will be able to guarantee that each
customer will be able to contact and/or do business with Customer Satisfaction
without disruption. The Company expects an increase in calls during the period
of the Year 2000 transition, which will likely impact Customer Satisfaction
responsiveness.
CONTINGENCY PLANS
The Company currently is in the process of preparing contingency
plans for the Year 2000 compliance issues areas noted above and the Company
anticipates completing those plans by September 1999. There can be no assurance
that such measures will prevent the occurrence of Year 2000 problems, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company ensures
the safety and preservation of its invested principal funds by limiting default
risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in safe and high-
credit quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer, guarantor or depository. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
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<PAGE> 27
The table below presents principal amounts and related weighted
average interest rates by year of maturity for the Company's investment
portfolio.
<TABLE>
<CAPTION>
Years Ended June 30
----------------------------------------------------------------------
(In Thousands) 1999 2000 2001 2002 2003 Thereafter Total
- -------------- ---- ---- ---- ---- ---- ---------- -----
Cash equivalents and short-term investments
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate short-term investments $21,358 $14,920 - - - - $36,278
Average interest rate 3.96% 3.56% - - - - 3.76%
</TABLE>
FOREIGN CURRENCY EXCHANGE RISK
The Company transacts business in various foreign countries. Its
primary foreign currency cash flows are in certain European countries. During
fiscal 1998, 1997, and 1996, the Company employed a foreign currency hedging
program utilizing foreign currency forward exchange contracts to hedge local
currency cash flows for payroll and other operating expenditures in these
European countries. Under this program, increases or decreases in the Company's
local currency operating expenses and other cash outflows, as translated into
U.S. dollars, are partially offset by realized gains and losses on the hedging
instruments. The goal of this hedging program is to economically guarantee or
lock in the exchange rates on the Company's foreign currency cash outflows
rather than to eliminate the possibility of short-term earnings volatility. As
of June 30, 1998, the Company's foreign currency forward exchange contracts were
comprised of $5.8 million in British Pounds and $2.0 million in German Marks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are incorporated by
reference herein from Part IV Item 14(a)1 and 2. The selected quarterly
supplementary data is included as part of Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 28
PART III
Certain information required by Part III is omitted from this Annual
Report on Form 10-K because the Registrant will file a definitive proxy
statement within one hundred twenty (120) days after the end of its fiscal year
pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of
Stockholders currently scheduled for November 19, 1998, and the information
included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated
by reference to the information under the heading "Election of Directors " in
the Registrant's Proxy Statement.
Information regarding the executive officers of the Company is
incorporated by reference to the section of Part I of this Annual Report on Form
10-K entitled "Item 1 - Business - Executive Officers of the Company".
Information regarding compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the
information under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of executive officers and
directors of the Company is incorporated by reference to the information under
the heading "Executive Compensation" and "Certain Transactions with Management"
in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the caption
"Certain Transactions with Management" in the Registrant's Proxy Statement.
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<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Annual
Report on Form 10-K.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of
Auspex Systems, Inc. are filed as part of this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants F-1
Consolidated Statements of Operations for the years ended June 30, 1998, F-2
1997 and 1996
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the years ended June F-4
30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended June 30, 1998, F-5
1997 and 1996
Notes to Consolidated Financial Statements F-6
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules for each of the
three years in the period ending June 30, 1998, 1997 and 1996 are
submitted herewith:
Page
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
(All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or notes thereto.)
</TABLE>
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<PAGE> 30
3. EXHIBITS
The following exhibits are included in this Annual Report on Form
10-K (numbered in accordance with Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1(1) Certificate of Incorporation of Registrant as amended and
restated to date.
3.2(1) By-laws of Registrant as amended to date.
4.1(2) Preferred Shares Rights Agreement between the Registrant and The
First National Bank of Boston as Rights Agent dated April 19,
1995.
10.1(1)(3) 1988 Stock Option Plan and forms of Incentive Stock Option
Agreements and Nonstatutory Stock Option Agreements, as amended
to date.
10.2(1)(3)(4) 1993 Directors' Stock Option Plan and forms of Option Agreements,
as amended to date.
10.3(1)(3)(4) 1993 Employee Stock Purchase Plan and forms of Agreements, as
amended to date.
10.4(1)(3) 401(k) Plan, as amended to date.
10.5(1)(3) Summary of Executive Bonus Program.
10.6(1)(3) Form of Directors' and Officers' Indemnification Agreement.
10.7(1) Registration and Information Rights Agreement dated January 31,
1992.
10.8(1) Lease Agreement between the Registrant and The Prudential
Insurance Company of America dated October 20, 1992.
10.9(1)(5) OEM Agreement dated March 9, 1993 between the Registrant and Fuji
Xerox Company, Ltd.
10.10(1)(5) Distributor Agreement dated June 6, 1990 between the Registrant
and Nissho Electronics Corporation, as amended on August 1, 1997.
10.11(1)(5) Agreement between the Registrant and Solectron Corporation dated
May 20, 1991, as amended on November 18, 1992.
10.12(1) U.S. OEM Discount Agreement between the Registrant and Sun
Microsystems, Inc. effective as of August 18, 1988, as amended by
Addendum dated September 8, 1988 and Addendum dated September 14,
1989.
10.13(1) Source Code License between the Registrant and Sun Microsystems,
Inc. dated August 31, 1988, as amended on April 30, 1991,
February 11, 1992 and March 18, 1992.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.14(1) NFS Software Agreement between the Registrant and Sun
Microsystems, Inc. dated September 29, 1988.
10.15(6,7) Software Agreement between the Registrant and AT&T Information
Systems Inc. dated June 2, 1988, as amended by Supplement Number
1, Supplement Number 2 dated August 5, 1988 and Supplement Number
3 dated August 10, 1990, as amended on June 28, 1993.
10.16(6,7) Sublicensing Agreement between the Registrant and AT&T
Information Systems Inc. dated August 30, 1988, as amended on
June 28, 1993.
10.17(1) Software Agreement between the Registrant and UNIX System
Laboratories, Inc. dated April 29, 1992.
10.18(1) License Agreement with the Regents of the University of
California dated June 9, 1988, as amended by Addendum dated
October 21, 1988.
10.19(8,9) Intel Corporation Purchase Agreement between Intel Corporation
and the Registrant dated March 22, 1994.
10.20(10) Warranty and Service Provider Agreement between the Registrant
and AT&T Global Information Systems dated April 15, 1994.
10.21(10) SunSoft Technology License and Distribution Agreement between the
Registrant and SunSoft, Inc. dated December 17, 1993.
10.22(10) Amendment No. 1 to Lease Agreement between the Registrant and
WHC-SIX Real Estate dated June 8, 1995.
10.23(10) Amendment No. 2 to Lease Agreement between the Registrant and
WHC-SIX Real Estate dated February 28, 1996.
10.24(10) Interactive SPARC Software and Sublicensing Agreement between
Auspex Systems, Inc. and Interactive systems Corporation, dated
November 15, 1991.
10.25(11) Lease Agreement by and Between South Bay/San Tomas Associates and
Auspex Systems, Inc. dated January 14, 1997.
10.26(11) Lease Agreement by and Between South Bay/San Tomas Associates and
Auspex Systems, Inc. dated January 14, 1997.
10.27(3,12) 1997 Stock Option Plan and Forms of Incentive Stock Option
Agreements and Nonstatutory Stock Option Agreements, as amended
to date.
10.28(3) 1998 Non-Statutory Stock Plan and Form of Option Agreements.
21.1 Subsidiaries of Registrant.
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1 Power of Attorney (See Page 31).
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-60052), which was declared effective on May 11,
1993.
(2) Incorporated by reference to Exhibit 1 filed in connection with the
Registrant's Form 8-A which was filed on April 20, 1995.
(3) Designates management contract or compensatory plan arrangements
required to be filed as an exhibit of this Annual Report on Form 10-K
pursuant to Item 14(c).
(4) Incorporated by reference to exhibits filed in connection with
Registrants' Proxy Statement for the 1997 Annual Meeting of
Stockholders, which was filed on October 14, 1997.
(5) Confidential treatment granted by order effective May 11, 1993.
(6) Incorporated by reference to identically numbered exhibits filed in
connection with Registrant's Form 10-K for the fiscal year ended June
25, 1993 (File No. 33-60052).
(7) Confidential treatment granted by order effective January 14, 1994.
(8) Incorporated by reference to Exhibit 10.1 filed in connection with
Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No.
0-21432), which was filed on May 16, 1994.
(9) Confidential treatment granted by order effective July 7, 1994.
(10) Incorporated by reference to exhibits filed in connection with the
Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File
No. 0-21432), which was filed on September 28, 1994 and confidential
treatment granted by order effective December 5, 1994.
(11) Incorporated by reference to exhibits filed in connection with
Registrant's Form 10-K for the fiscal year ended June 30, 1997 (File
No. 0-21432), which was filed on September 24, 1997.
(12) Incorporated by reference to exhibits filed in connection with
Registrants' Proxy Statement for the Special Meeting of Stockholders
held on April 23, 1998 which was filed on March 20, 1998.
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<PAGE> 33
(B) REPORTS ON FORM 8-K:
No report on Report Form 8-K was filed during the last quarter of
the fiscal year ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AUSPEX SYSTEMS, INC.
Date: September 24, 1998 By:
------------------------------
Bruce N. Moore, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bruce N. Moore and R. Marshall Case,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of these
attorneys-in-fact, or his or her substitute or substitutes may do, or cause to
be done, by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President and Chief Executive Officer and September 24, 1998
- -------------------------------- Director
(Bruce N. Moore)
Vice President of Finance and September 24, 1998
- -------------------------------- Chief Financial Officer
(R. Marshall Case)
Director September 24, 1998
- --------------------------------
(R. Stephen Cheheyl)
Director September 24, 1998
- --------------------------------
(W. Frank King)
Director September 24, 1998
- --------------------------------
(David F. Marquardt)
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Auspex Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Auspex Systems,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Auspex Systems, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(A) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements, and in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
July 28, 1998
San Jose, California
F-1
<PAGE> 35
AUSPEX SYSTEMS, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Product revenue $ 142,812 $ 182,533 $ 146,913
Service revenue 26,100 19,953 15,727
--------- --------- ---------
Total revenues 168,912 202,486 162,640
--------- --------- ---------
Cost of Revenues
Cost of product revenue 74,407 79,062 62,126
Cost of service revenue 17,972 13,946 9,840
--------- --------- ---------
Total cost of revenues 92,379 93,008 71,966
--------- --------- ---------
Gross margin 76,533 109,478 90,674
--------- --------- ---------
Operating Expenses
Marketing and sales 54,483 48,047 37,647
Research and development 34,000 24,449 17,843
General and administrative 9,110 7,672 7,431
Restructuring charges 7,349 -- --
In-process research and development -- 7,354 --
--------- --------- ---------
Total operating expenses 104,942 87,522 62,921
--------- --------- ---------
Income (loss) from operations (28,409) 21,956 27,753
--------- --------- ---------
Other Income
Interest income 2,430 2,265 1,813
Interest expense (38) (20) (81)
Other income (expense) (651) 161 112
--------- --------- ---------
Total other income 1,741 2,406 1,844
--------- --------- ---------
Income (loss) before provision for income taxes (26,668) 24,362 29,597
Provision for (benefit from) income taxes (9,334) 10,942 9,767
--------- --------- ---------
Net income (loss) $ (17,334) $ 13,420 $ 19,830
========= ========= =========
Net income (loss) per share
Basic $ (0.69) $ 0.54 $ 0.84
========= ========= =========
Diluted $ (0.69) $ 0.52 $ 0.77
========= ========= =========
Number of shares used in per share computations
Basic 25,268 24,641 23,701
========= ========= =========
Diluted 25,268 25,658 25,702
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 36
AUSPEX SYSTEMS, INC
Consolidated Balance Sheets
(In thousand, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 23,312 $ 25,056
Short-term investments 27,449 35,830
Accounts receivable, net of allowances
of $1,709 and $1,193,
respectively 25,642 43,130
Inventories 12,208 18,096
Income tax receivable 9,010 --
Deferred tax assets and other 13,819 12,158
--------- ---------
Total current assets 111,440 134,270
Property and Equipment
Computer and manufacturing equipment 38,624 37,893
System spares 17,391 17,465
Furniture and fixtures 6,248 4,624
Leasehold improvements 13,100 3,006
--------- ---------
75,363 62,988
Less - accumulated depreciation and amortization (41,746) (42,952)
--------- ---------
Total property and equipment, net 33,617 20,036
--------- ---------
Other Assets 2,136 2,846
--------- ---------
Total assets $ 147,193 $ 157,152
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Current Liabilities
Accounts payable $ 10,066 $ 6,906
Accrued liabilities 12,434 12,344
Deferred revenue 9,450 9,491
Current portion of capital lease obligations 54 95
--------- ---------
Total current liabilities 32,004 28,836
Stockholders' Equity
Common stock, $.001 par value - 50,000,000
shares authorized; 25,694,040 and
25,004,965 shares issued and outstanding,
respectively 26 25
Additional paid-in capital 82,756 78,435
Accumulated earnings 32,927 50,261
Unrealized gain (loss) from available-
for-sale securities 38 (5)
Cumulative translation adjustment (558) (400)
--------- ---------
Total stockholders' equity 115,189 128,316
--------- ---------
Total liabilities and stockholders' equity $ 147,193 $ 157,152
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 37
AUSPEX SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Unrealized
(loss)
Common Stock gain from
------------------------ Additional Available- Cumulative
For the Three Years Ended Paid-in Notes Accumulated For-Sale Translation
June 30, 1998 Shares Amount Capital Receivable Earnings Securities Adjustment Total
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE as of JUNE 30, 1995 23,301,126 $ 23 $ 63,929 $ (267) $ 17,011 $ -- $ 3 $ 80,699
Issuance of common stock
to employees 1,065,632 1 4,829 -- -- -- -- 4,830
Repayment of notes receivable -- -- -- 218 -- -- -- 218
Repurchase of previously
exercised stock options (6,251) -- (4) -- -- -- -- (4)
Tax benefits related
to exercise of stock options -- -- 4,415 -- -- -- -- 4,415
Translation adjustment -- -- -- -- -- -- (175) (175)
Net income -- -- -- -- 19,830 -- -- 19,830
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996 24,360,507 24 73,169 (49) 36,841 -- (172) 109,813
Issuance of common stock
to employees 652,859 1 4,097 -- -- -- -- 4,098
Repayment of notes receivable -- -- -- 49 -- -- -- 49
Repurchase of previously
exercised stock options (8,401) -- (10) -- -- -- -- (10)
Tax benefits related to
exercise of stock options -- -- 1,179 -- -- -- -- 1,179
Unrealized loss on
available-for-sale
securities -- -- -- -- -- (5) -- (5)
Translation adjustment -- -- -- -- -- -- (228) (228)
Net income -- -- -- -- 13,420 -- -- 13,420
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1997 25,004,965 25 78,435 -- 50,261 (5) (400) 128,316
Issuance of common stock
to employees 689,075 1 3,715 -- -- -- -- 3,716
Tax benefits related to
exercise of -- -- 606 -- -- -- -- 606
stock options
Unrealized gain on
available-for- -- -- -- -- -- 43 -- 43
sale securities
Translation adjustment -- -- -- -- -- -- (158) (158)
Net loss -- -- -- -- (17,334) -- -- (17,334)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1998 25,694,040 $ 26 $ 82,756 $ -- $ 32,927 $ 38 $ (558) $ 115,189
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompany notes are integral part of these financial statements.
F-4
<PAGE> 38
AUSPEX SYSTEMS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
June 30, June 30, June 30,
Years Ended 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(17,334) $ 13,420 $ 19,830
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 14,378 12,435 8,885
Restructuring charges 5,903 -- --
In-process research and development -- 7,354 --
Changes in assets and liabilities
(Increase) decrease in accounts receivable 17,488 (5,282) (10,295)
(Increase) decrease in inventories 2,188 (1,966) 1,014
Increase in income tax receivable (9,010) -- --
(Increase) decrease in deferred tax assets and other (1,661) 289 (8,174)
(Increase) decrease in other assets 157 (1,687) 579
Increase (decrease) in accounts payable 3,160 741 (1,248)
Increase (decrease) in accrued liabilities (625) 371 4,989
Increase (decrease) in deferred revenue (41) 2,913 1,285
-------- -------- --------
Net cash provided by operating activities 14,603 28,588 16,865
-------- -------- --------
Cash Flows from Investing Activities
Purchases of held-to-maturity short-term investments -- -- (37,818)
Purchases of available-for-sale short-term investments (25,096) (38,220) --
Proceeds from maturities of held-to-maturity short-term investments -- -- 30,858
Proceeds from sales of held-to-maturity short-term investments -- -- 4,591
Proceeds from sales/maturities of available-for-sale short-term investments 33,520 30,734 1,048
Payment for Alphatronix,Inc. acquisiton, net of cash acquired -- (5,600) --
Purchases of property and equipment (28,894) (16,385) (15,405)
-------- -------- --------
Net cash used in investing activities (20,470) (29,471) (16,726)
-------- -------- --------
Cash Flows from Financing Activities
Principal payments on capital lease obligations (41) (139) (407)
Proceeds from sale of common stock 4,322 4,147 5,048
Repurchase of common stock -- (10) (4)
-------- -------- --------
Net cash provided by financing activities 4,281 3,998 4,637
-------- -------- --------
Effect of Exchange Rate Changes on Cash (158) (228) (175)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (1,744) 2,887 4,601
Cash and Cash Equivalents, Beginning of Year 25,056 22,169 17,568
-------- -------- --------
Cash and Cash Equivalents, End of Year $ 23,312 $ 25,056 $ 22,169
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Auspex Systems, Inc. (the "Company") was incorporated in 1987 in California and
reincorporated in Delaware in 1991. The Company develops, manufactures, markets,
sells and supports a line of high-performance UNIX/Windows NT multi-protocol
network file/data servers for the technical workstation market. The Company's
markets are principally in North America, Pacific Rim and Europe and include
customers in the technical and commercial computing market. See Note 9 for
information on revenues by geographic area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.
ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATIONS The functional currency of the Company's foreign
subsidiaries is the local currency. Accordingly, gains and losses resulting from
the translation of the subsidiaries' financial statements are reported as a
separate component of stockholders' equity.
REVENUE RECOGNITION Product revenue includes hardware sales and software license
fees. Effective July 1, 1997, the Company changed its revenue recognition policy
on system sales to end users such that revenues from system sales are generally
recognized upon shipment. Previously, the Company generally recognized system
sales to end users when the equipment had been shipped, installed and accepted
by the end user. The reason for this change was to better conform the Company's
policy with industry practices. The impact of this change did not have a
material effect on the Company's financial statements. The installation of the
Company's systems is not considered a significant obligation and acceptance by
the customer is not considered a significant uncertainty. Revenues from upgrade
sales are generally recognized at the time the equipment is shipped. Provisions
for product sales returns and allowances are recorded in the same period as the
related revenue. Revenues earned under software license agreements with end
users are generally recognized when the software has been shipped and there are
no significant obligations remaining.
Service revenue includes installation, maintenance and training, and is
recognized ratably over the contractual period or as the services are provided.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Substantially all cash
equivalents consist of investments in certificates of deposits, money market
deposits, and municipal bonds with original maturities of three months or less.
Substantially all short-term investments consist of municipal bonds which the
Company intends to hold between three and twelve months.
The Company classifies its investments in debt and equity securities as
available-for-sale in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Securities classified as available-for-sale are reported at fair
market value with the related
F-6
<PAGE> 40
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary are included in other income.
At June 30, 1998, the Company's available-for-sale securities had contractual
maturities that expire at various dates through April 2000. The fair value of
available-for-sale securities was determined based on quoted market prices at
the reporting date for those securities. At June 30, 1998 and 1997, the
amortized cost basis, aggregate fair value and gross unrealized holding gains
(losses) by major security type are as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Aggregate Unrealized
June 30, 1998 Cost Fair Value Gains (Losses)
--------- ---------- --------------
<S> <C> <C> <C>
Available-for-Sale Securities
Municipal bonds $34,861 $34,899 $ 38
Commercial paper 1,417 1,417 --
------- ------- -------
Total Investment in Securities $36,278 $36,316 $ 38
======= ======= =======
June 30, 1997
Available-for-Sale Securities
Municipal bonds $48,653 $48,648 $ (5)
======= ======= =======
</TABLE>
In fiscal year 1998, there were no significant gains or losses realized on the
Company's cash equivalents or short-term investments. Five available-for-sale
securities were sold in fiscal year 1998 generating proceeds of $6,038,000 and
providing a realized gain of $3,000 (the realized gain was calculated using the
`specific identification' method).
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURES Cash paid for interest during
fiscal 1998, 1997 and 1996 was approximately $38,000, $20,000 and $81,000,
respectively. Cash paid for income taxes during fiscal 1998, 1997 and 1996 was
approximately $1,621,000, $6,052,000 and $15,256,000, respectively. In fiscal
1998 and 1997, non-cash activity consisted of $606,000 and $1,179,000,
respectively from tax benefits related to exercise of stock options.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments and accounts receivables. The Company's cash investment policy
limits the amount of credit exposure to any one issuer and restricts purchase of
these investments to issuers evaluated as creditworthy. Concentrations of credit
risk in trade receivables is limited as a result of the large number of
customers comprising the Company's customer base and their dispersion across
many different industries and geographies.
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead costs.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Purchased materials.... $ 5,615 $ 6,382
Systems in process..... 4,041 7,885
Finished goods ........ 2,552 3,829
------- -------
$12,208 $18,096
======= =======
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were fully reserved at June 30, 1998 and
1997.
Certain of the Company's products contain critical components supplied by a
single or a limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products
F-7
<PAGE> 41
for its customers. Any significant shortage of these components or the failure
of the third-party suppliers to maintain or enhance these components could
materially and adversely affect the Company's results of operations. (See
"Factors That May Affect Future Operating Performance -- Dependence on Certain
Suppliers.")
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation
and amortization are computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer and manufacturing equipment 1.5 to 5 years
System spares 2 to 3 years
Furniture and fixtures 3 years
Leasehold improvements Shorter of the lease term or
estimated useful life
</TABLE>
SOFTWARE DEVELOPMENT COSTS The Company capitalized software development costs in
compliance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" during fiscal 1996. Capitalization of software development costs
begins upon the determination of technological feasibility. The determination of
technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors including anticipated future gross product revenues, estimated
economic life and changes in hardware and software technology. Software
development costs capitalized during fiscal 1996 amounted to $274,000. No
amounts were capitalized in fiscal 1998 and 1997.
Amortization of capitalized software development costs begins when the products
are available for general release to customers and is computed on an individual
product basis and is the greater of the amount computed on a units-sold basis or
straight-line basis over the estimated economic life of the product.
Amortization of software development costs amounted to $343,000, $411,000, and
$220,000 for the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
ACCRUED LIABILITIES Accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Payroll, bonus and vacation..... $ 5,901 $ 5,439
Other .......................... 6,533 6,905
------- -------
$12,434 $12,344
======= =======
</TABLE>
F-8
<PAGE> 42
NET INCOME PER SHARE Basic net income per share is computed based only on the
weighted average number of common shares outstanding during the period and does
not give effect to the dilutive effect of common equivalent shares, such as
stock options. Diluted net income per share is computed based on the weighted
average number of common shares plus dilutive potential common shares calculated
in accordance with the treasury stock method.
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $(17,334) $ 13,420 $ 19,830
======== ======== ========
Basic Earnings Per Share
Income (loss) available to common stockholders ........ $(17,334) $ 13,420 $ 19,830
Weighted average common shares outstanding ............ 25,268 24,641 23,701
-------- -------- --------
Basic earnings (loss) per share ....................... ($ 0.69) $ 0.54 $ 0.84
======== ======== ========
Diluted Earnings Per Share
Income (loss) available to common stockholders ........ $(17,334) $ 13,420 $ 19,830
-------- -------- --------
Weighted average common shares outstanding ............ 25,268 24,641 23,701
Dilutive potential common shares from stock options ... -- 1,017 2,001
-------- -------- --------
Weighted average common shares and dilutive
potential common shares ......................... 25,268 25,658 25,702
-------- -------- --------
Diluted earnings (loss) per share ..................... $ (0.69) $ 0.52 $ 0.77
======== ======== ========
</TABLE>
Options to purchase 639,051 and 152,222 weighted shares outstanding during 1997
and 1996, respectively, were excluded from the computation of diluted earnings
per share because the options exercise prices were greater than the average
market price of the Company's common stock during those years. All options
outstanding during fiscal 1998, approximately 3,1711,152 shares, were excluded
from the computation of diluted earnings per share since their inclusion would
have been anti-dilutive due to the loss available to common stockholders.
EMPLOYEE STOCK PLANS In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion No. 25 and related interpretations to account for
its employee stock option and stock purchase plans, and accordingly, does not
recognize compensation expense. Note 7 of the Consolidated Financial Statements
contains a summary of the pro forma effects to reported net income and earnings
per share as if the Company had elected to recognize compensation expense based
on the fair value of the options granted at grant date as prescribed by SFAS No.
123.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for disclosure and financial statement display for reporting total
comprehensive income and its individual components. Comprehensive income as
defined includes all changes in equity during a period from non-owner sources.
The Company is required to adopt SFAS No. 130 in its first quarter of fiscal
1999. At that time, reclassification of financial statements for earlier periods
for comparative purposes is required. The Company does not expect the adoption
of SFAS No. 130 to have a material effect on its consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers.
F-9
<PAGE> 43
The Company is required to adopt SFAS No. 131 in fiscal 1999 and does not expect
such adoption to have a material effect on the consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that a reporting entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133 in the first quarter of fiscal 2000. The impact of adopting
SFAS No. 133 to the Company has not been determined.
3. ALPHATRONIX, INC. ACQUISITION
On June 30, 1997, the Company acquired all of the outstanding shares of
Alphatronix, Inc. ("Alphatronix"), a developer and marketer of open-systems-
based storage management solutions, for a total purchase price of $7.7 million.
The acquisition was accounted for using the purchase method of accounting. A
portion of the purchase price was allocated to assets acquired and liabilities
assumed based on their estimated fair value. The fair value of tangible assets
acquired and liabilities assumed was $300,000 and $300,000, respectively. In
addition, $7.4 million of the purchase price was allocated to in-process
research and development projects that had not reached technological feasibility
and had no probable alternative future uses, which the Company expensed at the
date of the acquisition as a non-recurring charge. The remainder of the purchase
price, $300,000, was allocated to goodwill and is being amortized over five
years on a straight-line basis. Comparative pro forma information has not been
presented, as the results of operations for Alphatronix are not material to the
Company's financial statements.
4. LINE OF CREDIT
In December 1997, the Company entered into a revolving line of credit agreement
with a bank under which it can borrow up to $15,000,000. The line of credit
bears interest at LIBOR plus 1.5% (7.2% at June 30, 1998) for increments in
excess of $250,000 and at the bank's reference rate on all other borrowings
(8.5% at June 30, 1998) and expires on October 31, 1998. At June 30, 1998 there
were no borrowings outstanding under the line of credit agreement. The line of
credit agreement contains certain financial covenants determined on a quarterly
basis.
5. COMMITMENTS AND CONTINGENCIES
Facilities and equipment are leased under various capital and operating leases.
Rent expense was approximately $4,720,000, $3,197,000 and $2,564,000, for fiscal
1998, 1997 and 1996, respectively. The Company did not enter into any capital
leases in fiscal 1998, 1997 and 1996. During 1997, the Company entered into
lease agreements for four buildings in Santa Clara, California. The leases for
these facilities commenced in March 1998 and expire in February 2010. In
addition, the lease agreements contain three successive options to extend the
lease terms for sixty months each.
F-10
<PAGE> 44
As of June 30, 1998, future minimum lease payments under non-cancelable leases
were as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Years Ending June 30, Leases Leases
------- -------
<S> <C> <C>
1999 .......... $ 54 $ 6,025
2000 .......... -- 5,724
2001 .......... -- 5,135
2002 .......... -- 4,970
2003 .......... -- 4,920
Thereafter .... -- 31,094
------- -------
Total minimum lease payments $ 54 $57,868
======= =======
</TABLE>
As of both June 30, 1998 and 1997, the cost of leased equipment was
approximately $1,401,000 and was fully amortized.
The Company is a defendant in various lawsuits and is subject to
various claims which arise in the normal course of business. In the opinion of
management, the ultimate dispositions of these claims will not have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
Subsequent to June 30, 1998, the Company entered into a sub-lease
agreement for one building in its Santa Clara facility. This agreement commenced
on July 6, 1998, and covers a period four years.
6. RESTRUCTURING COSTS
In the quarter ended June 30, 1998, the Company recorded restructuring charges
totaling $7,349,000. These charges reflect steps the Company is taking to
improve its product development efforts, streamline operations and reduce
overall costs. The restructuring charges comprised $1,100,000 for reduction of
personnel due to consolidation of certain operations, $1,200,000 for
rearrangement and consolidation of excess facilities and $5,049,000 to write-off
or write-down equipment and other assets related to operations and activities
that the Company has exited. In connection with the restructuring charges taken
in the quarter ended June 30, 1998, the Company terminated 84 employees as of
fiscal year ended June 30, 1998. The employee groups affected by the reduction
in force include engineering, sales, marketing, customer service and operations.
The Company anticipates that the implementation of the restructuring plan will
be substantially complete by the end of September 1998. The following table
summarizes the Company's restructuring activity for the fiscal year ended June
30, 1998 (in thousands):
<TABLE>
<CAPTION>
Excess
Equipment
Severance Excess and
and Facil- Other
Benefits ities Assets Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Restructuring charges.... $ 1,100 $ 1,200 $ 5,049 $ 7,349
Cash charges ............ (1,100) (800) -- (1,900)
Non-Cash charges ........ -- -- (4,034) (4,034)
Reserve balances,
------- ------- ------- -------
June 30, 1998 ........... $- $ 400 $ 1,015 $ 1,415
======= ======= ======= =======
</TABLE>
7. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has three stock option plans, the 1988 Employee Stock Option Plan
("1988 Plan"), the 1997 Stock Plan ("1997 Plan") and the Directors' Stock Option
Plan ("Directors' Plan"), and an employee stock purchase plan ("The 1993
Employee Stock Purchase Plan"). The Company accounts for these plans under APB
Opinion No. 25, under which no compensation cost has been recognized.
F-11
<PAGE> 45
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income (loss) and diluted earnings (loss) per share would
have been adjusted to the following pro forma amounts (in thousands, except per
share data):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss): As reported $ (17,334) $ 13,420 $ 19,830
Pro forma $ (22,301) $ 6,165 $ 16,904
Diluted earnings (loss) per share: As reported ($ 0.69) $ 0.52 $ 0.77
Pro forma ($ 0.88) $ 0.24 $ 0.66
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.5%, 6.0% and 5.8%, respectively; expected volatility of 68%,
69% and 66%, respectively; no expected dividends, and an expected life of 0.4
years beyond the vest date for each year's vesting increment of an option.
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
In fiscal 1997, the Company offered its employees the option of exchanging and
canceling stock options granted from June 1995 through October 1996 for new
options priced as of November 1, 1996. As a result, the Company canceled
1,933,592 options at prices ranging from $10.75 to $23.125 per share and
reissued the same number of options at the then current fair market value of
$10.25 per share. Employees who submitted their option grants for repricing had
their vesting schedules amended by moving their vesting back three months or
restarting the vesting as of the new grant date, depending on the date of the
grant.
The Company may sell up to 1,300,000 shares of stock to its full-time employees
under the 1993 Employee Stock Purchase Plan. The Company has sold 282,337,
218,684, and 146,175 shares in 1998, 1997 and 1996, respectively, and has sold
934,340 shares through June 30, 1998. The Company sells shares at 85% of the
lower of the stock's closing market price on the first or last day of the six-
month offering period. The weighted-average fair value of shares sold in 1998,
1997 and 1996, respectively, was $6.00, $9.00 and $11.70, respectively.
The Company may grant options for up to 10,000,000 shares under the 1988 Plan.
The Company has granted options on 9,035,929 shares (net of lapsed and
terminated options) through June 30, 1998. The option exercise price is not less
than 100% of the fair value of the shares on the date of grant, except that
non-statutory options may be granted at 85% of such fair value. The 1988 Plan
options are fully vested after five years and expire after ten years. For
options granted after November 20, 1997, options are fully vested after four
years and expire after ten years.
Stockholders approved the 1997 Plan in April 1998. The Company may grant options
for up to 1,250,000 shares under the 1997 Plan. The Company has granted options
on 42,500 shares through June 30, 1998. The option exercise price is not less
than 100% of the fair value of the shares on the date of grant, except that
non-statutory options may be granted at 85% of such fair value. The 1997 Plan
options are fully vested after four years and expire after ten years.
The Company may grant options for up to 175,000 shares under the Directors'
Plan. The Company granted options on 100,000 shares (net of lapsed and
terminated options) through June 30, 1998. The option exercise price equals
the closing price of the stock on the day of the grant. The options are fully
vested after four years and expire after ten years.
F-12
<PAGE> 46
A summary of the status of the Company's two stock option plans at June 30,
1998, 1997 and 1996 incorporating changes during the years then ended is
presented in the table and narrative below (share amounts in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------- ----------------------- -----------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ......... 4,080 $ 9.07 4,088 $10.56 3,914 $ 5.86
Granted .................................. 2,565 $ 9.71 3,574 $10.86 1,679 $16.83
Exercised ................................ (410) $ 4.89 (434) $ 4.85 (918) $ 3.28
Cancelled ................................ (1,652) $10.04 (3,148) $13.66 (587) $ 8.47
------ ------ ------
Outstanding at end of year ............... 4,583 $ 9.45 4,080 $ 9.07 4,088 $10.56
====== ====== ======
Exercisable end of year .................. 1,303 $ 8.91 1,145 $ 7.21 1,101 $ 5.31
====== ====== ======
Weighted fair value per option granted ... $ 4.71 $ 3.50 $ 8.46
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Prices Number Years Exercise Price Number Exercise Price
- --------------- ------ ------------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$0.25 - $8.00 871 7.13 $6.60 427 $5.75
$8.69 - $9.56 1,215 9.53 $8.86 49 $8.78
$9.63 - $10.25 1,315 8.43 $10.10 458 $10.15
$10.38 - $18.25 1,182 7.47 $11.43 369 $11.04
----- -----
$0.25 - $18.25 4,583 8.23 $9.45 1,303 $8.91
===== =====
</TABLE>
NOTES RECEIVABLE FROM EMPLOYEES The Company had received as consideration from
certain officers of the Company promissory notes in connection with the exercise
of stock options. These notes bore interest at rates between 5.57% and 6.69% and
matured at various dates through April 1998. As of June 30, 1998, all
outstanding notes were repaid.
STOCKHOLDER RIGHTS PLAN During 1995, the Company established a stock purchase
rights plan ("the Rights Plan"), under which stockholders may be entitled to
purchase stock in the Company, or in an acquirer of the Company at a discounted
price in the event of certain efforts to acquire control of the Company. The
rights expire on the earliest of (a) April 19, 2005, (b) exchange or redemption
of the rights pursuant to the Rights Plan, or (c) consummation of a merger or
consolidation.
F-13
<PAGE> 47
8. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ (6,992) $ 8,371 $ 10,319
State (68) 1,297 1,739
Foreign 1,049 -- --
-------- -------- --------
(6,011) 9,668 12,058
-------- -------- --------
Deferred (benefit):
Federal (3,278) 1,083 (2,039)
State (45) 191 (252)
-------- -------- --------
(3,323) 1,274 (2,291)
-------- -------- --------
Net tax (benefit) provision $ (9,334) $ 10,942 $ 9,767
======== ======== ========
</TABLE>
The provision for (benefit from) income taxes is reconciled with the Federal
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Provision computed at Federal statutory rate ... $ (9,334) $ 8,526 $ 10,359
State taxes, net of Federal tax benefit ........ (113) 1,078 1,487
Research and development and other credits ..... (1,300) (650) (700)
In-process research and development write-off .. -- 2,180 --
FSC commission ................................. -- (746) (871)
Foreign taxes and other ........................ 1,413 554 (508)
-------- -------- --------
Net tax provision (benefit) .................... $ (9,334) $ 10,942 $ 9,767
======== ======== ========
Net effective tax rate ......................... (35%) 45% 33%
======== ======== ========
</TABLE>
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------- -------
<S> <C> <C>
Depreciation and asset basis differences ........................ $ 1,496 $ 1,739
Accrued vacation ................................................ 563 728
Inventory reserve ............................................... 4,625 1,806
Other reserves and accruals, not currently deductible for tax
purposes .................................................. 2,338 1,559
State taxes, not currently deductible for Federal tax purposes .. -- 409
Other ........................................................... (52) (337)
------- -------
Net deferred tax asset .......................................... $ 8,970 $ 5,904
======= =======
</TABLE>
F-14
<PAGE> 48
9. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in a dual industry segment, the design and manufacture of
high-performance multi-protocol network file/data servers for the technical
workstation market.
Export revenues consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Pacific Rim................................. $23,388 $31,759 $36,229
Europe...................................... 28,689 28,191 16,248
Canada...................................... 6,035 6,790 5,986
------- ------- -------
Total export revenues $58,112 $66,740 $58,463
======= ======= =======
Percentage of total revenues 34% 33% 36%
======= ======= =======
</TABLE>
One customer accounted for 20%, 10% and 10% of total revenues in fiscal 1998,
1997 and 1996, respectively. One other customer accounted for 15% of total
revenues in fiscal 1997. Another customer accounted for 13% of total revenues in
fiscal 1996. No other customers accounted for 10% or more of total revenues in
these years.
F-15
<PAGE> 49
AUSPEX SYSTEMS, INC.
Schedule II
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO AGAINST END
DESCRIPTION OF PERIOD EXPENSE REVENUES DEDUCTIONS OF PERIOD
- -------------------------------- ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Allowances:
Year ended June 30, 1996 $ 786 $ 89 $ 1,300 $ (640) $ 1,535
Year ended June 30, 1997 1,535 109 582 (1,033) 1,193
Year ended June 30, 1998 1,193 220 556 (260) 1,709
Restructuring Reserve:
Year ended June 30, 1996 $ -- $ -- $ -- $ -- $ --
Year ended June 30, 1997 -- -- -- -- --
Year ended June 30, 1998 -- 7,349 -- (5,934) 1,415
</TABLE>
S-1
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1(1) Certificate of Incorporation of Registrant as amended and
restated to date.
3.2(1) By-laws of Registrant as amended to date.
4.1(2) Preferred Shares Rights Agreement between the Registrant and The
First National Bank of Boston as Rights Agent dated April 19,
1995.
10.1(1,3) 1988 Stock Option Plan and forms of Incentive Stock Option
Agreements and Nonstatutory Stock Option Agreements, as amended
to date.
10.2(1,3) 1993 Directors' Stock Option Plan and forms of Option Agreements,
as amended to date.
10.3(1,3) 1993 Employee Stock Purchase Plan and forms of Agreements, as
amended to date.
10.4(1,3) 401(k) Plan, as amended to date.
10.5(1,3) Summary of Executive Bonus Program.
10.6(1,3) Form of Directors' and Officers' Indemnification Agreement.
10.7(1) Registration and Information Rights Agreement dated January 31,
1992.
10.8(1) Lease Agreement between the Registrant and The Prudential
Insurance Company of America dated October 20, 1992.
10.9(1,5) OEM Agreement dated March 9, 1993 between the Registrant and Fuji
Xerox Company, Ltd.
10.10(1,5) Distributor Agreement dated June 6, 1990 between the Registrant
and Nissho Electronics Corporation, as amended on August 1, 1997.
10.11(1,5) Agreement between the Registrant and Solectron Corporation dated
May 20, 1991, as amended on November 18, 1992.
10.12(1) U.S. OEM Discount Agreement between the Registrant and Sun
Microsystems, Inc. effective as of August 18, 1988, as amended by
Addendum dated September 8, 1988 and Addendum dated September 14,
1989.
10.13(1) Source Code License between the Registrant and Sun Microsystems,
Inc. dated August 31, 1988, as amended on April 30, 1991,
February 11, 1992 and March 18, 1992.
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.14(1) NFS Software Agreement between the Registrant and Sun
Microsystems, Inc. dated September 29, 1988.
10.15(6,7) Software Agreement between the Registrant and AT&T Information
Systems Inc. dated June 2, 1988, as amended by Supplement Number
1, Supplement Number 2 dated August 5, 1988 and Supplement Number
3 dated August 10, 1990, as amended on June 28, 1993.
10.16(6,7) Sublicensing Agreement between the Registrant and AT&T
Information Systems Inc. dated August 30, 1988, as amended on
June 28, 1993.
10.17(1) Software Agreement between the Registrant and UNIX System
Laboratories, Inc. dated April 29, 1992.
10.18(1) License Agreement with the Regents of the University of
California dated June 9, 1988, as amended by Addendum dated
October 21, 1988.
10.19(8,9) Intel Corporation Purchase Agreement between Intel Corporation
and the Registrant dated March 22, 1994.
10.20(10) Warranty and Service Provider Agreement between the Registrant
and AT&T Global Information Systems dated April 15, 1994.
10.21(10) SunSoft Technology License and Distribution Agreement between the
Registrant and SunSoft, Inc. dated December 17, 1993.
10.22(10) Amendment No. 1 to Lease Agreement between the Registrant and
WHC-SIX Real Estate dated June 8, 1995.
10.23(10) Amendment No. 2 to Lease Agreement between the Registrant and
WHC-SIX Real Estate dated February 28, 1996.
10.24(10) Interactive SPARC Software and Sublicensing Agreement between
Auspex Systems, Inc. and Interactive systems Corporation, dated
November 15, 1991.
10.25(11) Lease Agreement by and Between South Bay/San Tomas Associates and
Auspex Systems, Inc. dated January 14, 1997.
10.26(11) Lease Agreement by and Between South Bay/San Tomas Associates and
Auspex Systems, Inc. dated January 14, 1997.
10.27(3,12) 1997 Stock Option Plan and Forms of Incentive Stock Option
Agreements and Nonstatutory Stock Option Agreements, as amended
to date.
10.28(3) 1998 Non-Statutory Stock Plan and Form of Option Agreements.
21.1 Subsidiaries of Registrant.
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1 Power of Attorney (See Page 31).
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-60052), which was declared effective on May 11,
1993.
(2) Incorporated by reference to Exhibit 1 filed in connection with the
Registrant's Form 8-A which was filedon April 20, 1995.
(3) Designates management contract or compensatory plan arrangements
required to be filed as an exhibit of this Annual Report on Form 10-K
pursuant to Item 14(c).
(4) Incorporated by reference to exhibits filed in connection with
Registrants' Proxy Statement for the 1997 Annual Meeting of
Stockholders, which was filed on October 14, 1997.
(5) Confidential treatment granted by order effective May 11, 1993.
(6) Incorporated by reference to identically numbered exhibits filed in
connection with Registrant's Form 10-K for the fiscal year ended June
25, 1993 (File No. 33-60052).
(7) Confidential treatment granted by order effective January 14, 1994.
(8) Incorporated by reference to Exhibit 10.1 filed in connection with
Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No.
0-21432), which was filed on May 16, 1994.
(9) Confidential treatment granted by order effective July 7, 1994.
(10) Incorporated by reference to exhibits filed in connection with the
Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File
No. 0-21432), which was filed on September 28, 1994 and confidential
treatment granted by order effective December 5, 1994.
(11) Incorporated by reference to exhibits filed in connection with
Registrant's Form 10-K for the fiscal year ended June 30, 1997 (File
No. 0-21432), which was filed on September 24, 1997.
(12) Incorporated by reference to exhibits filed in connection with
Registrants' Proxy Statement for the Special Meeting of Stockholders
held on April 23, 1998 which was filed on March 20, 1998.
<PAGE> 1
EXHIBIT 21.1
AUSPEX SYSTEMS, INC.
(As of June 30, 1998)
<TABLE>
<CAPTION>
Date of
Name Incorporation Place of Incorporation
- ------------------------------- ------------- ----------------------
<S> <C> <C>
Auspex Systems, Inc. 05/18/93 Delaware, USA
Auspex International, Inc. 07/19/93 California, USA
Systems Auspex, Inc. 07/02/93 Quebec, Canada
Auspex Systems Limited 08/23/93 Reading, United Kingdom
Auspex Systems GmbH 09/24/93 Munich, Germany
Auspex Systems S.A. 12/23/93 Paris, France
Auspex Foreign Sales Corporation 08/03/92 Barbados
Alphatronix, Inc. 08/24/87 North Carolina, USA
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements No 33-67100, No. 33-76640, No. 333-00886, No. 333-56305
and No. 333-56307 on Form S-8.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
San Jose, California
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1998
<CASH> 23,312
<SECURITIES> 27,449
<RECEIVABLES> 27,351
<ALLOWANCES> 1,709
<INVENTORY> 12,208
<CURRENT-ASSETS> 111,440
<PP&E> 75,363
<DEPRECIATION> 41,746
<TOTAL-ASSETS> 147,193
<CURRENT-LIABILITIES> 32,004
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 115,163
<TOTAL-LIABILITY-AND-EQUITY> 147,193
<SALES> 142,812
<TOTAL-REVENUES> 168,912
<CGS> 74,407
<TOTAL-COSTS> 92,379
<OTHER-EXPENSES> 104,802
<LOSS-PROVISION> 140
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (26,668)
<INCOME-TAX> (9,334)
<INCOME-CONTINUING> (17,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,334)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
