<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.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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)
5200 GREAT AMERICA PARKWAY
SANTA CLARA, CA 95054
(FORMER ADDRESS, CHANGED SINCE LAST REPORT) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (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 FEBRUARY 2,
1998: 25,319,882.
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- --------------------------------------------------------------------------------
FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <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 6-10
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information 12
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
EXHIBIT INDEX 13
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AUSPEX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, 1997 June 30, 1997
----------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 35,678 $ 25,056
Short-term investments 29,505 35,830
Trade receivables, net 38,860 43,130
Inventories 14,707 18,096
Prepaid expenses and other 16,637 12,158
-------- --------
Total current assets 135,387 134,270
Property and equipment, net 26,563 20,036
Other assets 2,508 2,846
-------- --------
Total assets $164,458 $157,152
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1997 June 30, 1997
----------------- -------------
(Unaudited)
Current Liabilities:
Current portion of capital lease obligations $ 61 $ 95
Accounts payable 16,046 6,906
Accrued liabilities 14,034 12,280
Income tax payable - 64
Deferred revenue 10,056 9,491
-------- --------
Total current liabilities 40,197 28,836
Stockholders' equity 124,261 128,316
-------- --------
Total liabilities and stockholders' equity $164,458 $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 Six Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 36,726 $ 44,485 $ 79,446 $ 82,954
Service revenue 6,716 4,597 12,584 9,140
-------- -------- -------- --------
Total revenues 43,442 49,082 92,030 92,094
-------- -------- -------- --------
Cost of Revenues:
Cost of product revenue 26,677 19,089 45,954 35,108
Cost of service revenue 4,250 3,348 8,299 6,429
-------- -------- -------- --------
Total cost of revenues 30,927 22,437 54,253 41,537
-------- -------- -------- --------
Gross profit 12,515 26,645 37,777 50,557
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative 16,502 13,471 32,162 26,093
Research and development 8,160 6,357 15,414 11,523
-------- -------- -------- --------
Total operating expenses 24,662 19,828 47,576 37,616
-------- -------- -------- --------
(Loss) / Income from operations (12,147) 6,817 (9,799) 12,941
Other Income, net 479 786 887 1,282
-------- -------- -------- --------
(Loss) / Income before provision
for income taxes (11,668) 7,603 (8,912) 14,223
Provision for (Benefit from) Income Taxes (4,084) 2,699 (3,119) 5,049
-------- -------- -------- --------
Net (Loss) / Income $ (7,584) $ 4,904 $ (5,793) $ 9,174
======== ======== ======== ========
Net (Loss) / Income per Share:
Basic $ (0.30) $ 0.20 $ (0.23) $ 0.37
======== ======== ======== ========
Diluted $ (0.30) $ 0.19 $ (0.23) $ 0.36
======== ======== ======== ========
Number of Shares used in per Share Computations:
Basic 25,283 24,539 25,163 24,480
======== ======== ======== ========
Diluted 25,283 25,541 25,163 25,614
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
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AUSPEX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
SIX MONTHS ENDED 1997 1996
------------ ------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss)/income $ (5,793) $ 9,174
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,895 6,008
Changes in assets and liabilities:
(Increase) decrease in trade receivables 4,270 (5,416)
(Increase) decrease in inventories 3,389 (2,120)
(Increase) decrease in prepaid expenses and other (4,479) 1,194
Increase (decrease) in accounts payable 9,140 (928)
Increase (decrease) in accrued liabilities 1,754 (1,552)
Increase (decrease) in income tax payable (64) 1,501
Increase in deferred revenue 565 1,303
-------- --------
Net cash provided by operating activities 15,677 9,164
-------- --------
Cash Flows from Investing Activities:
Purchases of available-for-sale short-term investments (15,587) (26,781)
Proceeds from sales of available-for-sale
short-term investments 21,938 20,404
Purchases of property and equipment (13,163) (5,988)
Decrease in other assets 79 90
-------- --------
Net cash used in investing activities (6,733) (12,275)
-------- --------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations (34) (105)
Proceeds from sale of common stock, net 1,932 2,193
-------- --------
Net cash provided by financing activities 1,898 2,088
-------- --------
Effect of Exchange Rate Changes on Cash (220) 76
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 10,622 (947)
Cash and Cash Equivalents, Beginning of Period 25,056 22,169
-------- --------
Cash and Cash Equivalents, End of Period $ 35,678 $ 21,222
======== ========
</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 three months ended December 31, 1997,
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. NET INCOME 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:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1997 June 30, 1997
----------------- -------------
<S> <C> <C>
Purchased materials $7,638 $6,382
Systems in process 5,826 7,885
Finished goods 1,243 3,829
------- -------
Total inventories $14,707 $18,096
======= =======
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were fully reserved at December 31, 1997 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.
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 second quarter of fiscal year 1998 were $43.4
million, a decrease of 11% compared to total revenues of $49.1 million for the
second quarter of fiscal year 1997. Total revenues for the six months ended
December 31, 1997 were $92.0 million, which is relatively flat compared to total
revenues of $92.1 million for the six months ended December 31, 1996.
Product revenues for the second quarter of fiscal year 1998 were $36.7
million or 85% of total revenues. Revenues from system sales accounted for 50%
of product revenues during the second quarter of fiscal year 1998 and 48% for
the second quarter of fiscal year 1997, while revenues from upgrades, add-on
options and software license agreements comprised 50% of product revenues during
the second quarter of fiscal year 1998 and 52% for the second quarter of fiscal
year 1997. Service revenues for the second quarter of fiscal year 1998 were $6.7
million or 15% of total revenues compared to 9% in the second quarter of fiscal
year 1997. Geographically, North America accounted for 66% and 75% of total
revenues in the second quarters of fiscal year 1998 and 1997, respectively; the
Pacific Rim accounted for 13% and 12% in the second quarters of fiscal year 1998
and 1997, respectively; and Europe accounted for 21% and 13% in the second
quarters of fiscal year 1998 and 1997, respectively. The North American
quarterly revenues are difficult to compare because a $9.4 million one-time
order from a large internet service provider customer that occurred during the
second quarter of fiscal year 1997. Additionally, the lower revenues in North
America was compounded by delayed new product introductions which in turn
caused several customers to delay their orders in the second quarter of fiscal
year 1998. The lower revenues from the Pacific Rim during the second quarter of
fiscal year 1998 were attributable to continued weakness in the Japanese
economy. The increase in revenues for Europe primarily relates to increased
system shipments during the second quarter of fiscal year 1998.
Gross margin was 29% of net revenues in the second quarter of fiscal
year 1998 as compared with 54% in the second quarter of fiscal year 1997. For
the six months ended December 31, 1997 and 1996, gross margins were 41% and 55%,
respectively. Product gross margin decreased to 27% in the second quarter of
fiscal year 1998 from 57% in the second quarter of fiscal year 1997. The
decline in margin was primarily due to $9.4 million of charges incurred for the
write-down of disk drive inventory to its realizable value as a result of rapid
price declines of 4 gigabyte drives coupled with an accelerated transition to 9
gigabyte drive technology and product obsolescence. Additionally, gross margins
declined on product revenues as a result of disposition of disk drives at
reduced selling prices in the second quarter of fiscal year 1998. The second
quarter of fiscal year 1997 had the benefit of a higher volume of software
revenues because of a one-time order from a large internet service provider
customer, which resulted in an increase in gross margins.
Selling, general and administrative expenses during the second quarter
of fiscal year 1998 totaled $16.5 million, an increase of 23% from $13.5 million
for the second quarter of fiscal year 1997, and were 38% and 27% of total
revenues for the second quarters of fiscal year 1998 and 1997, respectively. For
the six months ended December 31, 1997, selling, general and administrative
expenses totaled $32.2 million, an increase of 23% from $26.1 million for the
six months ended December 31, 1996, and were 35% and 28% of total revenues for
the first six months of fiscal year 1998 and 1997, respectively. The increase in
absolute dollars and as a percentage of revenues primarily relates to increased
staffing of the Company's U.S., Europe and Asia sales and support operations
during both the second fiscal quarter and the six months ended December 31,
1997, and to the lower total revenues in the second fiscal quarter ended
December 31, 1997.
Research and development expenses incurred during the second quarter of
fiscal year 1998 were $8.2 million, an increase of 28% from $6.4 million for the
second quarter of fiscal year 1997, and were 19% and 13% of total revenues for
the second quarters of fiscal year 1998 and 1997, respectively. For the six
months ended December 31, 1997, research and development expenses were $15.4
million, an increase of 34% from $11.5 million for the six months ended December
31, 1996, and were 17% and 13% of total revenues for the first six months of
fiscal year 1998 and 1997, respectively. The increase in absolute dollars and as
a percentage of revenues primarily relates to new product development efforts,
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
Alphatronix acquisition), and the lower total revenues in the second fiscal
quarter ended December 31, 1997.
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Loss from operations for the second quarter of fiscal year 1998 was
$12.1 million, compared with income of $6.8 million in the second quarter of
fiscal year 1997. The decline in operating profits relates to charges incurred
for the write-down of disk drive inventory and the disposition of disk drives at
reduced selling prices, an increase in staffing of the direct sales
operation, and research an development efforts -- reflecting the Company's
investment across the organization in support of new products and technologies
for the UNIX and NT markets.
The Company's tax benefit rate for the second and first six months of
fiscal year 1998 was 35.0% as compared with tax provision rates of 35.5% in the
second quarter and the first six months of fiscal year 1997. The tax benefit in
fiscal year 1998 primarily relates to the carry back of the current net
operating loss position.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
increased by $4.3 million to $65.2 million at December 31, 1997, as compared to
June 30, 1997. The Company's working capital decreased by $10.2 million to $95.2
million at December 31, 1997, as compared to June 30, 1997. The Company
currently expects to have significant cash needs during fiscal year 1998 in
connection with capital expenditures and leasehold improvements for a new
headquarter facility, which it expects to occupy 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
Each paragraph under the section entitled "Liquidity and Capital
Resources" contains a forward-looking statement. 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.
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
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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
With the release of its DriveGuard(TM) and FastBackup(TM) software
products, along with current software products, ServerGuard(TM) and
DataGuard(TM), the Company now markets software products in addition to its line
of network file servers. 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, several customers delayed their
orders in the second quarter of fiscal year 1998, which resulted in a decrease
in revenues for the quarter. 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 and achieve market acceptance. Any 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.
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DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS
For the six months ended December 31, 1997 and 1996, direct sales of
products and services to Intel Corporation ("Intel") represented approximately
17% and 8%, respectively, of the Company's revenues. Direct sales to America
Online represented approximately 14% of the Company's revenues for the six
months ended December 31, 1996. 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 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 adversely affect the Company's results
of operations. For instance, in the second quarter of fiscal year 1998, the
Company was dependent on a single disk drive manufacturer which was late in
introducing 9 gigabyte technology. This required procurement of expensive 4
gigabyte drives from other suppliers to meet customer demands which drives were
subject to rapid price declines towards the end of the quarter.
EXCESS OR OBSOLETE INVENTORY
Managing the Company's inventory of components and finished products is
a complex task. A number of factors - including 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 excess 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, in the second
quarter of fiscal year 1998, $9.4 million of charges were required for the
write-down of disk drive inventory as a result of rapid price declines of 4
gigabyte drives coupled with an accelerated transition to 9 gigabyte drive
technology, product obsolescence and disposition of disk drives at reduced
selling prices, which had a material adverse effect on the quarter's results of
operations.
RISK OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During the first six months of fiscal years 1998 and 1997, approximately
34% and 31%, 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 second quarter of fiscal year 1998 due to
continued weakness in the Japanese economy. 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. An increase in the value of the U.S. dollar relative
to foreign currencies could make the Company's products sold internationally
less 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.
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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 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
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1997 Annual Meeting of the Stockholders of Auspex
Systems, Inc. was held at the Santa Clara Convention Center, 5001 Great
America Parkway, Santa Clara, California 94054 on November 20, 1997 at
9:00 a.m. (the "Annual Meeting").
(b) At the Annual Meeting the following person was elected to the
Company's Board of Directors as the Class II director elected to serve
for a two-year term.
Nominee Cast for Withheld or Against Broker Non-Votes
------- -------- ------------------- ----------------
R. Stephen Cheheyl 21,986,649 521,580 0
The other directors continuing to serve on the Company's
Board of Directors are: W. Frank King, David Marquardt and Bruce N.
Moore.
(c) The following additional proposals were considered at the
Annual Meeting and were approved according to the respective vote of the
stockholders with the exception of (1) the 1997 Stock Plan which was not
approved.
(1) Adoption of the Company's 1997 Stock Plan and the
reservation of 2,000,000 shares of Common Stock for
issuance thereunder.
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
7,017,119 8,062,743 64,184 7,364,183
(2) Ratification and approval of a 500,000 share increase in
the Common Stock issuable under the Company's 1993
Employee Stock Purchase Plan.
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
13,193,694 2,981,359 98,753 6,234,423
(3) Ratification and approval of amendments to the Company's
1993 Director's Stock Option Plan that (i) amend the
vesting of initial and annual stock option grants
automatically awarded to the Company's directors
thereunder and (ii) provide for the acceleration of
vesting of such options upon the occurrence of certain
events.
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
18,311,907 3,664,646 139,068 392,608
(4) Ratification and approval of appointment of Arthur
Andersen LLP as the independent public accountants of
the Company for the year ending June 30, 1998.
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
22,238,537 204,008 65,684 0
Page 11
<PAGE> 14
ITEM 5. OTHER INFORMATION:
(a) Effective December 31, 1997, Kent L. Robertson, Vice President of
Finance and Chief Financial Officer, resigned from the Company.
(b) Effective January 26, 1998, Joseph G. Brown, Vice President of
Worldwide Field Operations, resigned from the Company.
(c) Effective January 26, 1998, Brian E. Ritchie was appointed Vice
President of Worldwide Sales of the Company.
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 February 13, 1998 /s/ Bruce Moore
-------------------------------------
Bruce Moore
Chief Executive Officer and
Acting Financial Officer
Page 12
<PAGE> 15
AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Sequentially
Exhibit # Description Numbered Page
- --------- ----------- -------------
27 Financial Data Schedule 14
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,678
<SECURITIES> 29,505
<RECEIVABLES> 40,313
<ALLOWANCES> 1,453
<INVENTORY> 14,707
<CURRENT-ASSETS> 135,387
<PP&E> 75,451
<DEPRECIATION> 48,888
<TOTAL-ASSETS> 164,458
<CURRENT-LIABILITIES> 40,197
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 124,236
<TOTAL-LIABILITY-AND-EQUITY> 164,458
<SALES> 36,726
<TOTAL-REVENUES> 43,442
<CGS> 26,677
<TOTAL-COSTS> 30,927
<OTHER-EXPENSES> 24,607
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (11,668)
<INCOME-TAX> (4,084)
<INCOME-CONTINUING> (7,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,584)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
