<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
[ ] 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 NUMBER: (408) 566-2000
WEB SITE: WWW.AUSPEX.COM
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 [ ]
NUMBER OF SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF MAY
3, 1999: 26,321,901
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FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of March 31, 1999
and June 30, 1998 1
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 1999 and March
31, 1998 2
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1999 and March 31, 1998 3
Notes to Condensed Consolidated Financial Statements 4-6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
Item 3. Qualitative and Quantitative Disclosures about Market Risks 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AUSPEX SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
March 31, 1999 June 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
(Unaudited)
Current Assets
Cash and cash equivalents $ 26,641 $ 23,312
Short-term investments 18,897 27,449
Accounts receivable, net 24,470 25,642
Inventories 10,756 12,208
Income tax receivable -- 9,010
Deferred tax assets and other 10,220 13,819
-------- --------
Total current assets 90,984 111,440
-------- --------
Property and equipment, net 31,317 33,617
Other assets 2,064 2,136
-------- --------
Total assets $124,365 $147,193
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1999 June 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 12,094 $ 10,066
Accrued liabilities 12,709 12,488
Deferred revenue 8,238 9,450
-------- --------
Total current liabilities 33,041 32,004
-------- --------
Stockholders' equity 91,324 115,189
-------- --------
Total liabilities and stockholders' equity $124,365 $147,193
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 1
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AUSPEX SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts) (unaudited) (unaudited) (unaudited) (unaudited)
Revenues
Product revenue $ 18,551 $ 34,262 $ 62,934 $ 113,708
Service revenue 8,218 6,124 24,456 18,708
------------ ------------ ------------ ------------
Total revenues 26,769 40,386 87,390 132,416
------------ ------------ ------------ ------------
Cost of Revenues
Cost of product revenue 9,987 14,280 32,465 60,233
Cost of service revenue 5,598 5,582 17,067 15,221
------------ ------------ ------------ ------------
Total cost of revenues 15,585 19,862 49,532 75,454
------------ ------------ ------------ ------------
Gross margin 11,184 20,524 37,858 56,962
------------ ------------ ------------ ------------
Operating Expenses
Selling, general and administrative 13,701 15,174 38,730 45,997
Research and development 9,026 9,294 26,125 24,708
------------ ------------ ------------ ------------
Total operating expenses 22,727 24,468 64,855 70,705
------------ ------------ ------------ ------------
Loss from operations (11,543) (3,944) (26,997) (13,743)
Other income, net 652 366 1,569 1,253
------------ ------------ ------------ ------------
Loss before provision for
(benefit from) income taxes (10,891) (3,578) (25,428) (12,490)
Provision for (benefit from) income taxes 40 (1,252) 107 (4,371)
------------ ------------ ------------ ------------
Net income (loss) $ (10,931) $ (2,326) $ (25,535) $ (8,119)
============ ============ ============ ============
Earnings (loss) per share
Basic $ (0.42) $ (0.09) $ (0.99) $ (0.32)
============ ============ ============ ============
Diluted $ (0.42) $ (0.09) $ (0.99) $ (0.32)
============ ============ ============ ============
Shares used for earnings (loss) per share
Basic 26,077 25,370 25,833 25,181
============ ============ ============ ============
Diluted 26,077 25,370 25,833 25,181
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUSPEX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 31, March 31,
Nine Months Ended 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands) (unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $ (25,535) $ (8,119)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization 10,885 10,813
Changes in assets and liabilities
Decrease in trade receivables 1,172 6,744
(Increase) decrease in inventories (2,782) 1,327
(Increase) decrease in income tax receivable,
deferred tax assets and other 12,618 (4,589)
Increase in accounts payable 2,028 5,254
Increase in accrued liabilities 234 2,253
Increase (decrease) in deferred revenue (1,212) 1,639
---------- ----------
Net cash (used in) provided by operating activities (2,592) 15,322
---------- ----------
Cash flows from investing activities
Purchases of available-for-sale short-term investments (30,969) (42,406)
Proceeds from sales/maturities of available-for-sale short-term investments 39,485 52,550
Purchases of property and equipment (9,538) (26,565)
---------- ----------
Net cash used in investing activities (1,022) (16,421)
---------- ----------
Cash flows from financing activities
Principal payments on capital lease obligations (13) (37)
Proceeds from sale and lease back of equipment 5,250 --
Proceeds from sale of common stock 1,633 2,678
---------- ----------
Net cash provided by financing activities 6,870 2,641
---------- ----------
Effect of exchange rate changes on cash 73 (258)
---------- ----------
Net increase in cash and cash equivalents 3,329 1,284
Cash and cash equivalents, beginning of period 23,312 25,056
---------- ----------
Cash and cash equivalents, end of period $ 26,641 $ 26,340
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUSPEX SYSTEMS, INC. AND SUBSIDIARIES
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 fiscal 1998 Annual Report to Stockholders.
1. BASIS OF PRESENTATION
The accompanying unaudited 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 these estimates.
The results of operations for the three months ended March 31, 1999, are
not necessarily indicative of results for the entire fiscal year ending June 30,
1999. (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 deposits, money market deposits and municipal bonds with
original maturities of three months or less. Substantially all short-term
investments consist of municipal bonds, commercial paper and U.S. agency bonds,
which the Company intends to hold between three and 12 months.
3. REVENUE RECOGNITION
Product revenue includes hardware sales and software license fees. The
Company recognizes system sales to end-users upon shipment. 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 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
Basic earnings 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 earnings 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. All amounts in the following table are in
thousands, except per share data.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) ........................................ $ (10,931) $ (2,326) $ (25,535) $ (8,119)
========== ========== ========== ==========
Basic Earnings Per Share
Income (loss) available to common stockholders ......... $ (10,931) $ (2,326) $ (25,535) $ (8,119)
Weighted average common shares outstanding ............. 26,077 25,370 25,833 25,181
---------- ---------- ---------- ----------
Basic earnings (loss) per share .......................... $ (0.42) $ (0.09) $ (0.99) $ (0.32)
========== ========== ========== ==========
Diluted Earnings Per Share
Income (loss) available to common stockholders ......... $ (10,931) $ (2,326) $ (25,535) $ (8,119)
========== ========== ========== ==========
Weighted average common shares outstanding ............. 26,077 25,370 25,833 25,181
Dilutive potential common shares from stock options .... -- -- -- --
---------- ---------- ---------- ----------
Weighted average common shares and dilutive potential
common shares ........................................ 26,077 25,370 25,833 25,181
---------- ---------- ---------- ----------
Diluted earnings (loss) per share ........................ $ (0.42) $ (0.09) $ (0.99) $ (0.32)
========== ========== ========== ==========
</TABLE>
Weighted average options outstanding to purchase 4,049,795 and 1,284,776
shares during the three months ended March 31, 1999 and 1998, respectively, were
excluded from the computation of diluted earnings per share because the effect
of including them would have been antidilutive due to the loss available to
common stockholders. Weighted average options outstanding to purchase 4,177,791
and 3,216,426 shares during the nine months ended March 31, 1999 and 1998
respectively, were excluded from the computation of diluted earnings per share
because the effect of including them would have been antidilutive due to the
loss available to common stockholders.
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)
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Purchased materials $ 5,602 $ 5,615
Systems in process 2,828 4,041
Finished goods 2,326 2,552
------------ ------------
Total inventories $ 10,756 $ 12,208
============ ============
</TABLE>
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Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were fully reserved at March 31, 1999 and
June 30, 1998.
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. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130") effective for fiscal years
beginning after December 15, 1997 and has restated information for all prior
periods reported below to conform to this standard. The following table sets
forth the components of other comprehensive income (loss) as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (10,931) $ (2,326) $ (25,535) $ (8,119)
Other comprehensive income (loss):
Unrealized holding gains (losses)
on available-for-sale securities 6 14 (36) 39
Foreign currency translation adjustments (240) (38) 73 (258)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (11,165) $ (2,350) $ (25,498) $ (8,338)
========== ========== ========== ==========
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
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.
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 market value. The Company is
required to adopt SFAS No. 133 in the first quarter of fiscal 2000 and does not
expect such adoption to have a material effect on the consolidated financial
statements.
8. RECLASSIFICATION
The Company has reclassified certain prior year balances from selling,
general and administrative expenses to cost of service revenues to reflect costs
associated with service revenue to conform to the current year presentation. The
amount of reclassification for the three months and nine months ended March 31,
1998 was $981,000 and $2,320,000, respectively.
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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 1999, ended March 31,
1999, were $26.8 million, a decrease of 34% compared to total revenues of $40.4
million in the third quarter of fiscal 1998. Total revenues for the nine months
ended March 31, 1999 were $87.4 million, a decrease of 34% compared to total
revenues of $132.4 million for the nine months ended March 31, 1999. The
decrease in total revenues primarily relates to the timing of new product
introductions and increased competitive pressures.
Product revenues for the third quarter of fiscal 1999 were $18.6 million
or 69% of total revenues compared to $34.3 million or 85% of total revenues in
the third quarter of fiscal 1998. Revenues from system sales accounted for 42%
of total revenues during the third quarter of fiscal 1999 and 35% for the third
quarter of fiscal 1998, while revenues from upgrades, add-on options and
software license agreements comprised 27% of total revenues during the third
quarter of fiscal 1999 and 50% for the third quarter of fiscal 1998. Service
revenues for the third quarter of fiscal 1999 were $8.2 million or 31% of total
revenues compared to 15% in the third quarter of fiscal 1998. Geographically,
North America accounted for 71% and 73% of total revenues in the third quarters
of fiscal 1999 and 1998, respectively; the Pacific Rim accounted for 13% and 10%
in the third quarters of fiscal 1999 and 1998; and Europe accounted for 16% and
17% in the third quarters of fiscal 1999 and 1998, respectively. The decrease in
revenues in the Company's main geographic markets primarily related to the
timing of new product introductions and increased competitive pressures.
Gross margin was 42% of net revenues in the third quarter of fiscal 1999
compared with 51% in the third quarter of fiscal 1998. For the nine months ended
March 31, 1999 and 1998, gross margins were 43%. Product gross margin decreased
to 46% in the third quarter of fiscal year 1999 from 58% in the third quarter of
fiscal year 1998. The decline in gross margin was due to lower pricing on system
sales which are entering end of life cycle. The higher gross margins in the
third quarter of fiscal 1998 were primarily due to the sale at favorable gross
margins of disk drives previously written off.
Selling, general and administrative expenses during the third quarter of
fiscal 1999 totaled $13.7 million, a decrease of 10% from $15.2 million in the
corresponding period of the prior fiscal year, and comprised 51% and 38% of
total revenues, respectively. For the nine months ended March 31, 1999, selling,
general and administrative expenses totaled $38.7 million, a decrease of 16%
from $46 million for the nine months ended March 31, 1998 and were 44% and 35%
of total revenues for the first nine months of fiscal years 1999 and 1998,
respectively. The decrease in absolute dollars for the comparison periods
reflects steps the Company has taken to streamline operations and reduce overall
costs. The increase in selling, general and administrative expenses as a
percentage of revenues for the comparison periods is a result of lower revenues
in the third quarter and the first nine months of fiscal 1999.
Research and development expenses incurred during the third quarter of
fiscal 1999 were $9.0 million, a decrease of 3% from $9.3 million in the
corresponding period of the prior fiscal year, and comprised 34% and 23% of
total revenues, respectively. For the nine months ended March 31, 1999, research
and development expenses were $26.1 million, an increase of 6% from $24.7
million for the nine months ended March 31, 1998, and were 30% and 19% of total
revenues for the first nine months of fiscal years 1999 and 1998, respectively.
This increase in absolute dollars and as a percentage of revenues was primarily
due to the continued development of the Auspex 4Front(TM) series of products and
lower revenues in the third quarter and the first nine months of fiscal 1999.
Loss from operations for the third quarter of fiscal 1999 was $11.5
million, compared with $3.9 million in the third quarter of fiscal year 1998.
These operating losses were primarily due to lower revenues and increased
research and development, reflecting the Company's investment across the
organization in support of new network attached storage products and
technologies for UNIX and Windows NT markets.
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The Company's income tax rate for the first nine months of fiscal 1999
was 0% compared with income tax benefit rate for the first nine months of fiscal
1998 of 35%. The income tax benefit in fiscal 1998 primarily related to the
carry back of the Company's net operating loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
decreased by $5.2 million to $45.5 million for the nine months ended March 31,
1999. The Company used approximately $2.6 million in cash from operating
activities in the first nine months of fiscal 1999, which included loss from
operations after depreciation and amortization of $14.7 million partially offset
by the collection of $10.4 million of income tax refunds. The Company used
approximately $1.0 million in cash from investing activities in the first nine
months of fiscal 1999, which included $8.5 million proceeds from sale/maturities
of available-for-sale short-term investments partially offset by $9.5 million
purchases of property and equipment. The Company also generated approximately
$6.9 million in cash from financing activities, which included proceeds of $5.3
million from the sale and leaseback of equipment and proceeds of $1.6 million
from the sale of Common Stock. The Company's working capital decreased during
the first nine months of fiscal 1999 by $21.5 million to $57.9 million.
Based on its current operating plans, the Company believes that its
existing cash, cash equivalents and short-term investments will be sufficient to
meet its working capital and capital expenditure requirements at least through
the next 12 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The entire second paragraph under the section entitled "Liquidity and
Capital Resources"; the third sentence of the risk factor entitled "Software
Product Risks" in "Factors That May Affect Future Performance"; the third
sentence of the risk factor entitled "New Products" in "Factors That May Affect
Future Performance"; the second sentence of the risk factor entitled "Risks of
International Sales" in "Factors That May Affect Future Performance"; and the
fifth, sixth and seventh sentence of the first paragraph, the second sentence of
the fourth paragraph, the entire seventh paragraph, the fifth and sixth
sentences of the eight paragraph, the last sentence of the ninth paragraph, the
last sentence of the tenth paragraph, the entire eleventh paragraph, the last
sentence of the twelfth paragraph and the first sentence of the thirteenth
paragraph of the section entitled "Year 2000 Compliance" in "Factors That May
Affect Future Performance" contain forward looking statements as defined in the
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.
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COMPETITIVE MARKET
The market for the Company's products is highly competitive. The Company
experiences substantial competition, principally from Sun Microsystems, Network
Appliance, EMC Corporation, 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 drives. Increased competition for the Company's products that
results in lower product sales could also adversely impact the Company's sales
of upgrades. In addition, decisions by customers not to increase 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.
SOFTWARE PRODUCT RISKS
The Company markets 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 software
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 and the first nine months
of fiscal 1999. 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 KEY PERSONNEL
Competition for employees with technical, management and other skills is
intense in the computer industry and is particularly intense in the San
Francisco Bay Area. The Company has recently 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.
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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 the first nine months ended March 31, 1999 and 1998, direct sales of
products and services to Intel Corporation ("Intel") represented approximately
19% and 20%, respectively, of the Company's revenues. Intel is not obligated to
purchase any minimum level of products from the Company. Significant reductions
in product sales to Intel would materially and 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 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 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.
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During nine months ended March 31, 1999 and 1998, approximately 32% 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
first nine months ended March 31, 1999 due to continued 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, 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 the Company must also comply with
corresponding European Economic Community standards. In marketing its products
to the European Economic Community, the Company
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<PAGE> 13
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 eight 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 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 operation 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
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<PAGE> 14
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/Questionnaire to its suppliers. However, as a result of a low response
rate, the Company has undertaken or is undertaking the following: (1) a new
Readiness Letter/Questionnaire was generated and mailed to all suppliers during
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/Questionnaire 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/Questionnaire or certify Year 2000 compliance.
Based on their responses and results of the Readiness Letter/Questionnaire,
alternate suppliers may need to be identified by the Company. There can be no
assurance that the Company will be 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 believed to be Year 2000 compliant with respect to building
automation systems, electronic security systems and utilities. The Company has
presented formal queries to local fire departments with regard to Year 2000
compliance/readiness. Formal responses have not been received as of the date of
this filing. The Company believes that its English, French and Japanese
facilities are Year 2000 compliant; however, the lessor of the Company's German
facility has 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. No effort has yet been spent on
verifying Year 2000 compliance of local telephone systems of most sales offices,
but 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, which the
Company believes to be Year 2000 compliant, of the network were installed within
the past twelve months. The Company's wide-area network requirements are
provided by major national carriers and an international carrier. The Company
believes there is some uncertainty between these carriers due to the fact
testing between carriers cannot commence until each carrier is 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 it intends to verify compliance by the end of fiscal 1999.
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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 was
completed during the fourth calendar quarter of 1998 which incorporated several
Year 2000 compliance--related bug fixes. The upgrade to a newer version of the
Company's payroll and human resources systems to Year 2000 compliant systems was
completed during September 1998. The Company's customer call tracking system is
being upgraded to provide additional functionality and stability and the Company
will complete such upgrade by the end of fiscal 1999. 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. Vendors have affirmed that the standard personal computers and
laptop computers installed during 1998 are Year 2000 compliant. Testing has
confirmed that commonly used functions operate satisfactorily.
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 completed the
assessment of Year 2000 issues of its engineering infrastructure during the
fourth calendar quarter of 1998, and intends to resolve all significant issues
will be resolved by the end of fiscal 1999.
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 completed the assessment of Year 2000 issues of its
manufacturing operations during the fourth calendar quarter of 1998, and intends
to resolve all significant issues by the end of fiscal 1999.
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 the remediation of Year 2000
compliance issues. There can be no assurance that these 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
Service 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 Service relies 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 Service without disruption on or about the beginning of
2000. The Company expects an increase in calls on or about the beginning of
2000, which will likely impact Customer Service responsiveness.
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CONTINGENCY PLANS
The Company currently is in the process of preparing general 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 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
There were no material changes during the third quarter of fiscal 1999
to the Company's exposure to market risk for changes in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
There were no material changes during the third quarter of fiscal 1999
to the Company's foreign currency hedging programs.
PART II. OTHER INFORMATION
ITEM 4.
ITEM 5. OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
10.29 Form of Change of Control Severance Agreement entered
into the form of the Company and each of:
- Steve Aleshire, Vice President of World Wide Customer
Services
- R. Marshall Case, Vice President of Finance and
Chief Financial Officer
- John S. Coviello, Vice President of Research and
Development
- Dorothy Krier, Vice President of Human Resources
- John P. Livingston, Vice President of Operations
- Fred J. Wiele, Vice President of Marketing
27 Financial Data Schedule
b. Reports on Form 8-K
No report on Form 8-K was filed during the current period
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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.
.
Date: May 12, 1999 /s/ R. Marshall Case
--------------------------- --------------------------------
R. Marshall Case,
Vice President of Finance and
Chief Financial Officer
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<PAGE> 18
AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Sequentially
Exhibit Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.29 Change of Control Severance Agreement 17-24
27 Financial Data Schedule 25
</TABLE>
Page 16
<PAGE> 1
Exhibit 10.29
AUSPEX SYSTEMS, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and
entered into by and between _________________________ (the "Employee") and
Auspex Systems, Inc., a Delaware corporation (the "Company"), effective as
_______________, 199_ (the "Effective Date").
R E C I T A L S
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon Employee's termination of employment following a
Change of Control which provides the Employee with enhanced financial security
and provides incentive and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the date that
all obligations of the parties hereto with respect to this Agreement have been
satisfied.
2. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
<PAGE> 2
3. Severance Benefits.
(a) Involuntary Termination Other than for Cause; Voluntary
Termination for Good Reason; Death; Permanent and Total Disability. If the
Employee's employment is (i) involuntarily terminated by the Company other than
for Cause (as defined herein), (ii) voluntarily terminated by Employee for Good
Reason (as defined herein), (iii) terminates due to Employee's death or
"permanent and total disability" (as such term is defined under Internal Revenue
Code Section 22(e)(3) or its successor provision), in any case within twelve
(12) months following a Change of Control (as defined herein), then, subject
Section 3(e) below, the Employee shall receive the following severance benefits
from the Company:
(1) Severance Payments. Twelve equal monthly payments yielding
in aggregate an amount equal to one hundred percent (100%) of the Employee's
Annual Compensation (as defined herein);
(2) Medical Benefits. Payment of Employee's Consolidated Budget
Reconciliation Act of 1985 ("COBRA") premiums (the "Company-Paid Coverage"). If
Employee's health insurance coverage included Employee's dependents immediately
prior to the Change-in-Control, such dependents shall also be covered at
Company's expense. Company-Paid Coverage shall continue until the earlier of (a)
twelve (12) months after the date of termination of Employee's employment or (b)
the date Employee becomes eligible for coverage under another employer's health
insurance plan. For purposes of Title X of COBRA, the date of the "qualifying
event" for Employee and his or her dependents shall be the date upon which
Employee's employment terminates.
(b) Timing of Severance Payments. Any severance payments to which
Employee is entitled under Section 3(a)(1) shall be paid by the Company to the
Employee (or to the Employee's successors in interest, pursuant to Section 7(b))
in cash installments with each installment being paid on or before the end of
month-long period following the Termination Date (e.g. on each monthly
"anniversary" of the Termination Date).
(c) Voluntary Resignation other than for Good Reason; Termination For
Cause. If the Employee's employment terminates by reason of the Employee's
voluntary resignation other than for Good Reason, or if the Employee is
terminated involuntarily by the Company for Cause, then the Employee shall not
be entitled to receive severance or other benefits except for those (if any) as
may then be established under the Company's then existing severance and benefits
plans and practices or pursuant to other agreements with the Company.
(d) Termination Apart from Change of Control. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the eighteen (18) month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.
2
<PAGE> 3
(e) Contingent Obligations. The Company's obligation to pay the
severance payments, or any portion thereof remaining unpaid, set forth in
Section 3(a)(1) above and pay the Company-paid Coverage, set forth in Section
3(a)(2) above, shall terminate immediately in the event that Employee breaches
either of Employee's obligations set forth in Section 9 below.
4. Attorney Fees, Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.
5. Limitation on Payments. In the event that the severance and other
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G (as it may be
amended or replaced) of the Internal Revenue Code of 1986, as amended or
replaced (the "Code") and (ii) but for this Section 5, would be subject to the
excise tax imposed by Section 4999 (as it may be amended or replaced) of the
Code (the "Excise Tax"), then the Employee's severance benefits hereunder
Section 3 shall be either
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to the Excise
Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by the
Employee on an after-tax basis, of the greatest amount of severance benefits,
notwithstanding that all or some portion of such severance benefits may be
taxable under the Excise Tax. Unless the Company and the Employee otherwise
agree in writing, any determination required under this Section 5 shall be made
in writing in good faith by the accounting firm serving as the Company's
independent public accountants immediately prior to the Change of Control (the
"Accountants"). In the event of a reduction in benefits hereunder, the Employee
shall be given the choice of which benefits to reduce. For purposes of making
the calculations required by this Section 5, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of the Code.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Annual Compensation. "Annual Compensation" means an amount equal
to the sum of Employee's (i) annual Company salary at the highest rate in effect
in the twelve months immediately preceding the Change of Control, and (ii) 100%
of the Employee's annual target bonus as in effect immediately prior to the
Change of Control.
3
<PAGE> 4
(b) Cause. "Cause" shall mean either (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) Employee's conviction of a felony, (iii) a willful act by the
Employee which constitutes gross misconduct and which is injurious to the
Company, or (iv) following delivery to the Employee of a written demand for
performance from the Company which describes the basis for the Company's belief
that the Employee has not substantially performed his duties, continued
substantial violations by the Employee of the Employee's obligations to the
Company which are demonstrably willful and deliberate on the Employee's part.
(c) Change of Control. "Change of Control" means the occurrence of
any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act) ("Beneficial
Owner"), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities;
(ii) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative vote of at least a
majority of the Incumbent Directors at the time of such election or nomination;
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or the entity
that controls the Company or controls such surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity or the entity that controls the Company or
controls such surviving entity outstanding immediately after such merger or
consolidation; or
(iv) The consummation of the sale or disposition by the Company
at least fifty percent (50%) of the Company's assets.
(d) Good Reason. "Good Reason" shall mean (i) without the Employee's
express written consent, a material reduction of the Employee's duties, title,
authority or responsibilities, relative to the Employee's duties, title,
authority or responsibilities as in effect immediately prior to such reduction,
or the assignment to Employee of such reduced duties, title, authority or
responsibilities; provided, however, that a reduction in duties, title,
authority or responsibilities solely by virtue of the Company being acquired and
made part of a larger entity (as, for example, when the Chief Financial Officer
of Auspex remains as such following a Change of Control and is not made the
Chief Financial Officer of the acquiring corporation) shall not constitute "Good
4
<PAGE> 5
Reason;" (ii) without the Employee's express written consent, a material
reduction, without good business reasons, of the facilities and perquisites
(including office space and location) available to the Employee immediately
prior to such reduction; (iii) a reduction by the Company in the base salary of
the Employee as in effect immediately prior to such reduction; (iv) a material
reduction by the Company in the kind or level of employee benefits, including
bonuses, to which the Employee was entitled immediately prior to such reduction
with the result that the Employee's overall benefits package is materially
reduced; (v) the relocation of the Employee to a facility or a location more
than thirty (30) miles from the Employee's then present location, without the
Employee's express written consent; (vi) any purported termination of the
Employee by the Company which is not effected for Disability or for Cause, or
any purported termination for which the grounds relied upon are not valid; (vii)
the failure of the Company to obtain the assumption of this agreement by any
successors contemplated in Section 7(a) below; or (viii) any act or set of facts
or circumstances which would, under California case law or statute constitute a
constructive termination of the Employee.
(e) Termination Date. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30)-day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within thirty (30) days after the Company
gives the Employee notice of termination, the Employee notifies the Company that
a dispute exists concerning the termination or the benefits due pursuant to this
Agreement, then the Termination Date shall be the date on which such dispute is
finally determined, either by mutual written agreement of the parties, or a by
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected), or
(iii) if the Agreement is terminated by the Employee, the date on which the
Employee delivers the notice of termination to the Company.
7. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
5
<PAGE> 6
8. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Employee to include in the notice any
fact or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of the Employee hereunder or preclude the Employee
from asserting such fact or circumstance in enforcing his rights hereunder.
9. Employee Obligations. Notwithstanding any other obligations of
Employee to Company following his or her termination from the Company and
pursuant to any other agreements, Employee hereby agrees that he or she shall be
bound by the following restrictions for a period of one (1) year from the
Termination Date:
(a) Non-Solicitation. Employee agrees that he shall not either
directly or indirectly solicit, induce, attempt to hire, recruit, encourage,
take away, hire any employee of the Company or cause an employee to leave their
employment either for Employee or for any other entity; and
(b) Non Disparagement. The Employee agrees to refrain from any
defamation, libel or slander of the Company, or tortious interference with the
contracts and relationships of the Company.
10. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by
6
<PAGE> 7
either party of any breach of, or of compliance with, any condition or provision
of this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement represents the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior arrangements and understandings regarding same.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Withholding. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes to the extent
required by law.
(g) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
7
<PAGE> 8
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year set
forth above.
COMPANY AUSPEX SYSTEMS, INC.
-----------------------------------------
Bruce N. Moore, Chief Executive Officer
EMPLOYEE
-----------------------------------------
8
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 26,641
<SECURITIES> 18,897
<RECEIVABLES> 26,057
<ALLOWANCES> 1,587
<INVENTORY> 10,756
<CURRENT-ASSETS> 90,984
<PP&E> 81,300
<DEPRECIATION> 49,983
<TOTAL-ASSETS> 124,365
<CURRENT-LIABILITIES> 33,041
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 91,298
<TOTAL-LIABILITY-AND-EQUITY> 124,365
<SALES> 18,551
<TOTAL-REVENUES> 26,769
<CGS> 9,987
<TOTAL-COSTS> 15,585
<OTHER-EXPENSES> 22,707
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (10,891)
<INCOME-TAX> 40
<INCOME-CONTINUING> (10,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,931)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
