<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-21432
AUSPEX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-0963760
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
2300 CENTRAL EXPRESSWAY
SANTA CLARA, CA 95050
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE #: (408) 566-2000
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
requirement for the past 90 days.
YES [X]
NO [ ]
Number of shares of common stock, $.001 Par value, outstanding as of May 1,
1998: 25,537,228.
<PAGE> 2
FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
ITEM 1.
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Unaudited Consolidated Financial Statements 4-5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
EXHIBIT INDEX 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AUSPEX SYSTEMS, INC.
Condensed Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands) (Unaudited)
Current Assets:
Cash and cash equivalents $ 26,340 $ 25,056
Short-term investments 25,726 35,830
Trade receivables, net 36,386 43,130
Inventories, net 16,769 18,096
Prepaid expenses and other 16,650 12,158
---------------------------
Total current assets 121,871 134,270
Property and Equipment, net 36,177 20,036
Other Assets 2,490 2,846
---------------------------
Total assets $ 160,538 $ 157,152
===========================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Capital lease obligations $ 58 $ 95
Accounts payable 12,160 6,906
Accrued liabilities 14,533 12,280
Income tax payable - 64
Deferred revenue 11,130 9,491
---------------------------
Total current liabilities 37,881 28,836
Stockholders' Equity 122,657 128,316
---------------------------
Total liabilities and stockholders' equity $ 160,538 $ 157,152
===========================
</TABLE>
See notes to consolidated financial statements
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AUSPEX SYSTEMS, INC.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Product revenue $ 34,262 $ 50,463 $ 113,708 $ 133,417
Service revenue 6,124 5,139 18,708 14,279
--------------------------------------------------------
Total revenues 40,386 55,602 132,416 147,696
--------------------------------------------------------
Cost of Revenues:
Cost of product revenue 14,280 21,513 60,234 56,621
Cost of service revenue 4,601 3,631 12,900 10,060
--------------------------------------------------------
Total cost of revenues 18,881 25,144 73,134 66,681
--------------------------------------------------------
Gross profit 21,505 30,458 59,282 81,015
--------------------------------------------------------
Operating Expenses:
Selling, general and administrative 16,155 14,412 48,317 40,505
Research and development 9,294 6,388 24,708 17,911
--------------------------------------------------------
Total operating expenses 25,449 20,800 73,025 58,416
--------------------------------------------------------
(Loss) / income from operations (3,944) 9,658 (13,743) 22,599
Other Income, net 366 399 1,253 1,681
--------------------------------------------------------
(Loss) / Income before provision (3,578) 10,057 (12,490) 24,280
for income taxes
Provision for (Benefit from) Income Taxes (1,252) 3,570 (4,371) 8,619
--------------------------------------------------------
Net (Loss) / Income $ (2,326) $ 6,487 $ (8,119) $ 15,661
========================================================
Net (Loss) / Income per Share:
Basic $ (0.09) $ 0.26 $ (0.32) $ 0.64
========================================================
Diluted $ (0.09) $ 0.25 $ (0.32) $ 0.61
========================================================
Number of Shares used in per Share Computations
Basic 25,370 24,745 25,181 24,568
========================================================
Diluted 25,370 25,867 25,181 25,713
========================================================
</TABLE>
See notes to consolidated financial statements
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AUSPEX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 31, March 31,
Nine Months Ended 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands) (Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net (loss) / income $ (8,119) $ 15,661
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 10,813 9,066
Changes in assets and liabilities:
Decrease in trade receivables 6,744 1,560
(Increase) decrease in inventories 1,327 (6,626)
(Increase) decrease in prepaid expenses and other (4,492) 1,135
Increase in accounts payable 5,254 2,954
Increase (decrease) in accrued liabilities 2,253 (1,673)
Increase (decrease) in income tax payable (64) 4,122
Increase in deferred revenue 1,639 3,930
-----------------------
Net cash provided by operating activities 15,355 30,129
-----------------------
Cash Flows from Investing Activities:
Purchases of available-for-sale short-term investments (42,406) (36,287)
Proceeds from sales of available-for-sale short-term investments 52,550 24,574
Purchases of property and equipment (26,565) (10,666)
(Increase) decrease in other assets (33) 178
-----------------------
Net cash used in investing activities (16,454) (22,201)
-----------------------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations (37) (127)
Proceeds from sale of common stock, net 2,678 2,925
-----------------------
Net cash provided by financing activities 2,641 2,798
-----------------------
Effect of Exchange Rate Changes on Cash (258) (158)
-----------------------
Net Increase in Cash and Cash Equivalents 1,284 10,568
Cash and Cash Equivalents, Beginning of Period 25,056 22,169
-----------------------
Cash and Cash Equivalents, End of Period $ 26,340 $ 32,737
=======================
</TABLE>
See notes to consolidated financial statements
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AUSPEX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying interim consolidated financial statements and related
notes should be read in conjunction with the financial statements and related
notes included in the Company's 1997 Annual Report to Stockholders.
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as of the dates
and results of operations for the periods indicated.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Additionally, 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 at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. While
management makes its best effort to achieve its estimates, actual results could
differ from those estimates.
The results of operations for the nine months ended March 31, 1998, are
not necessarily indicative of the results for the entire fiscal year ending June
30, 1998. (See "Factors That May Affect Future Operating Performance" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Substantially all cash equivalents consist of investments in
certificates of deposit, 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.
3. 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 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.
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4. EARNINGS PER SHARE
The Company computes its net (loss)/income per share in accordance with
provisions of the Financial Accounting Standard No. 128 (FAS 128), "Earnings Per
Share."
FAS 128 requires disclosure of basic and diluted 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 and common stock equivalents outstanding during the period.
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead costs.
Inventories consist of the following:
(In thousands)
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Purchased materials $ 7,650 $ 6,382
Systems in process 7,668 7,885
Finished goods 1,451 3,829
------- -------
Total inventories $16,769 $18,096
======= =======
</TABLE>
Inventories contained components and assemblies in excess of the
Company's current estimated requirements and were fully reserved at March 31,
1998 and June 30, 1997.
Certain of the Company's products contain critical components supplied
by a single or limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products 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 adversely affect the Company's results of operations. (See "Factors
That May Affect Future Operating Performance-Dependence on Certain Suppliers.")
6. 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 the 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. 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.
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AUSPEX SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the third quarter of fiscal year 1998 were $40.4
million, a decrease of 27% compared to total revenues of $55.6 million for the
third quarter of fiscal year 1997. Total revenues for the nine months ended
March 31, 1998 were $132.4 million, a decrease of 10% compared to total revenues
of $147.7 million for the nine months ended March 31, 1997.
Product revenues for the third quarter of fiscal year 1998 were $34.3
million or 85% of total revenues compared to $50.5 million or 91% of total
revenues in the third quarter of fiscal year 1997. Revenues from system sales
accounted for 41% of product revenues during the third quarter of fiscal year
1998 and 49% for the third quarter of fiscal year 1997, while revenues from
upgrades, add-on options and software license agreements comprised 59% of
product revenues during the third quarter of fiscal year 1998 and 51% for the
third quarter of fiscal year 1997. Service revenues for the third quarter of
fiscal year 1998 were $6.1 million or 15% of total revenues compared to 9% in
the third quarter of fiscal year 1997. Geographically, North America accounted
for 73% and 76% of total revenues in the third quarters of fiscal year 1998 and
1997, respectively; the Pacific Rim accounted for 10% and 14% in the third
quarters of fiscal year 1998 and 1997, respectively; and Europe accounted for
17% and 10% in the third quarters of fiscal year 1998 and 1997, respectively.
The North American revenues for the third quarter of fiscal year 1997 included
an unusually large order from a large internet service provider customer. The
delay in new product availability had an adverse impact on North America revenue
in the third quarter of fiscal year 1998. In addition, increased competition for
mid-range products offset demand for enterprise - class systems. The lower
revenues from the Pacific Rim during the third quarter of fiscal year 1998 were
attributable to further weakness in the Japanese economy and from continual
organizational change at one of the Company's major Japanese distributors. The
increase in revenues for Europe primarily relates to increased system shipments
during the third quarter of fiscal year 1998.
Gross margin was 53% of net revenues in the third quarter of fiscal year
1998 compared with 55% in the third quarter of fiscal year 1997. For the nine
months ended March 31, 1998 and 1997, gross margins were 45% and 55% of net
revenues, respectively. Product gross margin increased to 58% of net revenues in
the third quarter of fiscal year 1998 from 57% in the third quarter of fiscal
year 1997. The slight increase in product gross margin during the third quarter
of fiscal year 1998 was due primarily to shift in the Company's product mix.
Selling, general and administrative expenses during the third quarter of
fiscal year 1998 totaled $16.2 million, an increase of 12% from $14.4 million
for the third quarter of fiscal year 1997, and were 40% and 26% of total
revenues for the third quarters of fiscal year 1998 and 1997, respectively. For
the nine months ended March 31, 1998, selling, general and administrative
expenses totaled $48.3 million, an increase of 19% from $40.5 million for the
nine months ended March 31, 1997. Such expense represented 36% and 27% of total
revenues for the first nine months of fiscal year 1998 and 1997, respectively.
The increase in selling, general and administrative expenses in absolute dollars
and as a percentage of revenues primarily relates to increased staffing of the
Company's U.S., European and Asian sales and support operations during both the
third fiscal quarter and the nine months ended March 31, 1998, and to the lower
total revenues in the third fiscal quarter ended March 31, 1998.
Research and development expenses during the third quarter of fiscal
year 1998 were $9.3 million, an increase of 45% from $6.4 million for the third
quarter of fiscal year 1997, and were 23% and 11% of total revenues for the
third quarters of fiscal year 1998 and 1997, respectively. For the nine months
ended March 31, 1998, research and development expenses were $24.7 million, an
increase of 38% from
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$17.9 million for the nine months ended March 31, 1997, and were 19% and 12% of
total revenues for the first nine months of fiscal year 1998 and 1997,
respectively. The increase in research and development expenses in absolute
dollars and as a percentage of revenues was primarily due to new product
development efforts, the funding of the Company's new research and development
facility acquired in the Alphatronix, Inc. acquisition (see the Company's 1997
Form 10-K for a discussion on the Alphatronix acquisition), and the lower total
revenues in the third fiscal quarter and nine months ended March 31, 1998.
Loss from operations for the third quarter of fiscal year 1998 was $3.9
million, compared with income from operations of $9.7 million in the third
quarter of fiscal year 1997. The decline in operating results was primarily due
to lower revenues, an increase in staffing of the direct sales operation, and
research and development efforts, reflecting the Company's investment across the
organization in support of new products and technologies for the UNIX and NT
markets.
See the second paragraph under "Potential Significant Fluctuations in
Quarterly Results" (below) regarding an expected change in the fourth quarter of
fiscal 1998.
The Company recognized a tax benefit for the third quarter and first
nine months of fiscal year 1998 due to the anticipated carry back of current net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
decreased by $8.8 million to $52.1 million at March 31, 1998, as compared to
June 30, 1997. The Company's working capital decreased by $21.4 million to $84.0
million at March 31, 1998, as compared to June 30, 1997. The Company disbursed
$13.0 million in connection with capital expenditures and leasehold improvements
for a new facility, which it occupied in February 1998.
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
expenditure requirements at least through the next 12 months.
FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
The second paragraph under the section entitled "Liquidity and Capital
Resources" and the second paragraph under "Potential Significant Fluctuations in
Quarterly Results" (below) contain forward-looking statements. The Company may
also make oral 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 has often
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.
The Company expects to incur a significant one-time charge in the fourth
quarter of fiscal 1998 associated with the restructuring of its engineering,
selling and marketing organizations. The charge would include severance payments
associated with employee reductions, facility consolidation expenses and various
asset valuation adjustments. The charge will consist of both cash and non-cash
items.
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INTENSELY COMPETITIVE MARKET
The market for the Company's products is intensely 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. In
addition, several companies have introduced products at the low end of the
Company's target markets. 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 or increases in unit volume would negatively affect gross
margins, which could in turn have a materially 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, including additional processors, memory and disk drives.
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 the capacity of 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 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 materially adverse effect on the
Company's business, financial condition and results of operations.
SOFTWARE PRODUCT RISKS
The Company markets software products in addition to its line of network
file servers. These software products include: DriveGuard(TM), FastBackup(TM),
ServerGuard(TM), ServerGuard Global(TM), DataGuard(TM) and NeTServices(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, a delay in new product availabilty
had an adverse impact on North America revenue in the third quarter of fiscal
year 1998. In addition, increased competition for mid-range products offset
demand for enterprise - class systems. 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
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prevent the successful development, introduction or marketing of these products
and enhancements or that these new products and enhancements will adequately
address market requirements and achieve market acceptance. Further delays in the
launch or availability of new products could have a materially 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 NT which
replace or diminish the market acceptance of UNIX operating systems or the
Network File System, on which the Company's products are currently based, could
materially 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 the nine months ended March 31, 1998 and 1997, direct sales of
products and services to Intel Corporation ("Intel") represented approximately
21% and 11%, respectively, of the Company's revenues. Direct sales to America
Online represented approximately 2% and 19% of the Company's revenues for the
nine months ended March 31, 1998 and 1997, respectively. In addition to direct
purchases from the Company, Intel or its affiliates have from time to time made
significant purchases of the Company's products through channels. A significant
reduction in product sales to Intel could adversely affect the Company's
business, financial condition and results of operations.
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 maintains an
inventory of these critical components, any significant or prolonged shortage of
such components or the failure of the third party suppliers to maintain or
enhance these components could materially adversely affect the Company's
business, financial condition and 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 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 instance, the
Company was forced to write down the value of certain disk drive inventories in
the second quarter of fiscal year 1998, and this write-down had an adverse
effect on margins and net profits.
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During the first nine months of fiscal years 1998 and 1997,
approximately 32% and 28%, 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 the third quarter of fiscal
year 1998 due to continuing weakness in the
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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, increases 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; 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 six U.S. patents and has filed applications for additional patents. The
Company also has filed applications for counterpart patents in various 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
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.
Page 10
<PAGE> 13
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium ("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 believes
that the majority of its existing products will be Year 2000 compliant by the
end of the fourth quarter of fiscal 1998, and the Company's new products are
being designed to be Year 2000 compliant. 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 the calendar 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 calendar 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 is also currently 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 are needed to mitigate, however, vulnerability to
problems caused by third party software and hardware suppliers. Such actions
include a review of vendors' contracts and formal communications with suppliers
requesting that they certify that products are Year 2000 compliant. The Company
is assessing the extent of the necessary modifications to its computer software,
but management does not currently anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
system improvements to be Year 2000 compliant. 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.
Page 11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1998 Special Meeting of the Stockholders of Auspex
Systems, Inc. was held at the Company's headquarters, 2300 Central
Expressway, Santa Clara, California 95050, on April 23, 1998, at 9:00
a.m. (the "Special Meeting").
(b) At the Special Meeting the following proposal was considered
and approved according to the respective vote of the stockholders.
(1) Ratification and approval of the Company's 1997 Stock
Option Plan and the reservation of 1,250,000 shares of Common Stock for
issuance thereunder.
<TABLE>
<CAPTION>
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
<S> <C> <C> <C>
12,974,770 9,712,776 212,671
</TABLE>
Page 12
<PAGE> 15
ITEM 5. OTHER INFORMATION:
(a) Effective February 23, 1998, R. Marshall Case was appointed Vice
President of Finance and Chief Financial Officer of the Company.
(b) Effective March 27, 1998, Paul Gifford, Vice President of Product
Development, resigned from the Company.
(c) Effective April 20, 1998, Raymond D. Hermo was appointed Vice
President of Worldwide Sales of the Company.
(d) Effective April 20, 1998, Brian E. Ritchie was appointed back to
President of Alphatronix, Inc. (a wholly owned subsidiary).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Report on Form 8-K
No report on Form 8-K was filed during the current period.
SIGNATURES
Pursuant to the requirements 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 May 14, 1998 /s/ R. Marshall Case
-------------------- ----------------------------------
R. Marshall Case
Vice President of Finance and
Chief Financial Officer
Page 13
<PAGE> 16
AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Sequentially
Exhibit # Description Numbered Page
- --------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule 14
</TABLE>
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,340
<SECURITIES> 25,726
<RECEIVABLES> 38,142
<ALLOWANCES> 1,756
<INVENTORY> 16,769
<CURRENT-ASSETS> 121,871
<PP&E> 86,745
<DEPRECIATION> 50,568
<TOTAL-ASSETS> 160,538
<CURRENT-LIABILITIES> 37,881
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 122,632
<TOTAL-LIABILITY-AND-EQUITY> 160,538
<SALES> 34,262
<TOTAL-REVENUES> 40,386
<CGS> 14,280
<TOTAL-COSTS> 18,881
<OTHER-EXPENSES> 25,439
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (3,578)
<INCOME-TAX> (1,252)
<INCOME-CONTINUING> (2,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,326)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
