<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 SEPTEMBER 30, 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
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
NOVEMBER 2, 1999: 27,496,301
<PAGE> 2
- --------------------------------------------------------------------------------
FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 1
and June 30, 1999
Condensed Consolidated Statements of Operations for the Three 2
Months Ended September 30, 1999 and September 30, 1998
Condensed Consolidated Statements of Cash Flows for the Three 3
Months Ended September 30, 1999 and September 30, 1998
Notes to Unaudited Condensed Consolidated Financial Statements 4-7
ITEM 2. Management's Discussion and Analysis of Financial 8-15
Condition and Results of Operations
ITEM 3. Qualitative and Quantitative Disclosures About Market Risks 16
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AUSPEX SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
- ---------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 19,739 $ 26,592
Short-term investments 14,841 16,045
Accounts receivable, net 22,028 20,374
Inventories 10,353 10,905
Income tax receivable 187 4,865
Prepaid expenses and other 4,565 5,054
-------- --------
Total current assets 71,713 83,835
-------- --------
Property and equipment, net 28,056 28,841
Other assets 2,354 2,372
-------- --------
Total assets $102,123 $115,048
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1999 1999
- ---------------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 11,372 $ 13,316
Accrued liabilities 12,359 11,975
Deferred revenue 7,829 9,276
-------- --------
Total current liabilities 31,560 34,567
-------- --------
Long Term Liabilities
Deferred revenue 1,520 1,304
-------- --------
Stockholders' equity 69,043 79,177
-------- --------
Total liabilities and stockholders' equity $102,123 $115,048
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 1
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AUSPEX SYSTEMS, INC.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 30, September 30,
1999 1998
- -------------------------------------------------------------------------------------
(In thousands, except per share amounts) (Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Product revenue $ 18,942 $ 22,030
Service revenue 7,230 8,027
-------- --------
Total revenues 26,172 30,057
-------- --------
Cost of Revenues
Cost of product revenue 10,111 10,453
Cost of service revenue 6,571 5,684
-------- --------
Total cost of revenues 16,682 16,137
-------- --------
Gross margin 9,490 13,920
-------- --------
Operating Expenses
Selling, general and administrative 13,775 12,553
Research and development 8,305 8,708
-------- --------
Total operating expenses 22,080 21,261
-------- --------
Income/(loss) from operations (12,590) (7,341)
Other income, net 419 596
-------- --------
Income/(loss) before provision
for income taxes (12,171) (6,745)
Provision for income taxes 50 44
-------- --------
Net income/(loss) $(12,221) $ (6,789)
======== ========
Net income/(loss) per share
Basic $ (0.45) $ (0.26)
======== ========
Diluted $ (0.45) $ (0.26)
======== ========
Number of shares used in per share computations
Basic 27,132 25,700
======== ========
Diluted 27,132 25,700
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
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AUSPEX SYSTEMS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
September 30, September 30,
Three Months Ended 1999 1998
- ---------------------------------------------------------------------------------------------------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income/(loss) $(12,221) $ (6,789)
Adjustments to reconcile net income/(loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 2,146 3,779
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,654) 273
(Increase) decrease in inventories 52 (4,348)
Decrease in income tax receivable 4,678 9,010
Decrease in prepaid expenses and other 507 1,429
Increase (decrease) in accounts payable (1,944) 208
Increase in accrued liabilities 384 1,504
Decrease in deferred revenue (1,231) (888)
-------- --------
Net cash (used in) provided by operating activities (9,283) 4,178
-------- --------
Cash Flows from Investing Activities
Purchases of available-for-sale short-term investments (2,803) (8,799)
Proceeds from sales/maturities of available-for-sale
short-term investments 3,981 24,834
Purchases of property and equipment (832) (3,328)
-------- --------
Net cash used in investing activities 346 12,707
-------- --------
Cash Flows from Financing Activities
Proceeds from sale of common stock, net 2,033 19
-------- --------
Net cash provided by financing activities 2,033 19
-------- --------
Effect of exchange rate changes on cash 51 156
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (6,853) 17,060
Cash and Cash Equivalents, Beginning of Period 26,592 23,312
-------- --------
Cash and Cash Equivalents, End of Period $ 19,739 $ 40,372
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
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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 fiscal 1999 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 estimates.
The results of operations for the three months ended September 30, 1999,
are not necessarily indicative of results for the entire fiscal year ending June
30, 2000. (See "Factors That May Affect Future Operating Performance" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.)
Prior to the first quarter of fiscal 2000, the Company's fiscal year
ended on the last day of the quarter within the year ended June 30. Beginning
fiscal year 2000, the Company will operate and report on a 52-53 week fiscal
year. Accordingly, the Company's fiscal year 2000 will end on July 1, 2000. The
Company's fiscal quarters end on the Saturday of the thirteenth week of the
quarter. For presentation purposes, the financial statements reflect the
calendar month-end date. The change in reporting periods did not have a material
effect on the accompanying financial statements for the first quarter of fiscal
2000.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Substantially all cash equivalents consist of investments in
certificates of deposits, money market deposits, commercial paper and U.S.
agency bonds with original maturities of three months or less. Substantially all
short-term investments consist of certificates of deposits, commercial paper and
U.S. agency bonds, which the Company intends to hold between three and twelve
months.
3. NON-CASH INVESTING ACTIVITIES
Net inventory capitalized into property and equipment was $500,000 and
$4,234,000 for the three months ended September 30, 1999 and 1998, respectively.
4. REVENUE RECOGNITION
Product revenue includes hardware sales and software license fees. The
Company generally recognizes system sales 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 generally recognized when the software has been shipped and there are
no significant obligations remaining.
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Service revenue includes installation, maintenance and training, and is
recognized ratably over the contractual period or as the services are provided.
5. NET INCOME PER SHARE
Basic net income per share is computed based only on the weighted
average number of common shares outstanding during the period and does not give
effect to the dilutive effect of common equivalent shares, such as stock
options. Diluted net income per share is computed based on the weighted average
number of common shares plus dilutive potential common shares calculated in
accordance with the treasury stock method.
<TABLE>
<CAPTION>
(In thousands)
September 30, September 30,
Three Months Ended 1999 1998
------------- -------------
<S> <C> <C>
Net income (loss) .......................................... $(12,221) $ (6,789)
======== ========
Basic Earnings Per Share
Income (loss) available to common stockholders ......... $(12,221) $ (6,789)
Weighted average common shares outstanding ............. 27,132 25,700
======== ========
Basic earnings (loss) per share ........................ $ (0.45) $ (0.26)
======== ========
Diluted Earnings Per Share
Income (loss) available to common stockholders ......... $(12,221) $ (6,789)
-------- --------
Weighted average common shares outstanding ............. 27,132 25,700
Dilutive potential common shares from stock options .... -- --
-------- --------
Weighted average common shares and dilutive
potential common shares .......................... 27,132 25,700
-------- --------
Diluted earnings (loss) per share ..................... $ (0.45) $ (0.26)
======== ========
</TABLE>
All stock options outstanding during the three months ended September
30, 1999 and 1998 of 4,233,501 and 4,574,919 shares, 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.
6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor, and manufacturing overhead costs.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
<S> <C> <C>
Purchased materials $ 3,387 $ 4,158
Systems in process 4,632 4,044
Finished goods 2,334 2,703
------- -------
Total inventories $10,353 $10,905
======= =======
</TABLE>
Inventories contained components and assemblies in excess of the
Company's current estimated requirements and were fully reserved at September
30, 1999 and June 30, 1999.
Page 5
<PAGE> 8
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.")
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130 "Reporting Comprehensive Income," in the first quarter of fiscal 1999.
SFAS No. 130 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's comprehensive income includes net income,
foreign currency translation adjustments and unrealized holding gains from
available-for-sale securities.
The following table sets forth the components of other comprehensive
income (loss) net of income tax (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
Three Months Ended 1999 1998
------------- -------------
<S> <C> <C>
Net income (loss) $(12,221) $ (6,789)
Other comprehensive income (loss):
Unrealized holding gains
on available-for-sale securities 3 22
Foreign currency translation adjustment 51 156
-------- --------
Comprehensive income (loss) $(12,167) $ (6,611)
======== ========
</TABLE>
8. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.
The Company, which operates in one reportable industry segment,
develops, manufactures, distributes and supports a line of multi-protocol high
performance network file servers and high availability enterprise data
management software solution for storing, serving and managing multiple
terabytes of network data for the technical network market.
Revenues and long-lived assets by geography (net of accumulated
depreciation) consisted of the following for the quarters ended (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------- -------------------------
Long Lived Long Lived
Revenue Assets Revenue Assets
------------------------- -------------------------
<S> <C> <C> <C> <C>
United States $ 14,689 $ 27,166 $ 17,001 $ 36,300
Europe 6,351 618 9,036 890
Pacific Rim 2,631 271 2,906 232
Canada 2,501 1 1,114 4
------------------------ ------------------------
Total $ 26,172 $ 28,056 $ 30,057 $ 37,426
======================== ========================
</TABLE>
Page 6
<PAGE> 9
No customers accounted for 10% or more of total revenues during three
months ended September 30, 1999. One customer accounted for 15% of total
revenues during three months ended September 30, 1998.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that a reporting entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133 in the first quarter of fiscal 2001. The impact of adopting
SFAS No. 133 to the Company has not been determined.
Page 7
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AUSPEX SYSTEMS, INC.
FORWARD-LOOKING STATEMENTS
FROM TIME TO TIME, THE COMPANY MAY PUBLISH STATEMENTS THAT ARE NOT HISTORICAL
FACTS BUT ARE FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED
FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW
PRODUCTS, RESEARCH AND DEVELOPMENT ACTIVITIES AND SIMILAR MATTERS. SUCH
STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS AND
PHRASES, SUCH AS "INTENDED," "EXPECTS," "ANTICIPATES" AND "IS (OR ARE) EXPECTED
(OR ANTICIPATED)." THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED
TO THOSE IDENTIFIED BELOW WITH AN ASTERISK (*) SYMBOL. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND
STOCKHOLDERS OF AUSPEX SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET
FORTH IN THIS FORM 10-Q, INCLUDING FACTORS THAT MAY AFFECT FUTURE RESULTS.
AUSPEX MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS, INCLUDING STATEMENTS CONTAINED IN AUSPEX'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO STOCKHOLDERS. AUSPEX
DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENTS THAT MAY BE MADE
FROM TIME TO TIME BY OR ON BEHALF OF AUSPEX.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the first quarter of fiscal 2000, ended September 30,
1999, were $26.2 million, as compared to total revenues of $30.1 million in the
first quarter of fiscal 1999, ended September 30, 1998.
Product revenues for the first quarter of fiscal 2000 were $18.9 million
or 72% of total revenues compared to $22.0 million or 73% of total revenues in
the first quarter of fiscal 1999. Revenues from system sales accounted for 54%
of total revenues during the first quarter of fiscal 2000 and 31% for the first
quarter of fiscal 1999, while revenues from upgrades, add-on options and
software license agreements comprised 18% of total revenues during the first
quarter of fiscal 2000 and 43% for the first quarter of fiscal 1999. Service
revenues for the first quarter of fiscal 2000 were $7.2 million or 28% of total
revenues compared to 27% in the first quarter of fiscal 1999. Geographically,
North America accounted for 66% and 60% of total revenues in the first quarters
of fiscal 2000 and 1999, respectively; the Pacific Rim accounted for 10% in the
first quarters of fiscal 2000 and 1999, respectively; and Europe accounted for
24% and 30% in the first quarters of fiscal 2000 and 1999, respectively. The
decrease in revenues in absolute dollars in North America, Europe and Pacific
Rim was primarily due to product transition issues, increased competitive
pressures, the reorganization of a major OEM partner and weakness in the
Japanese economy.
Gross margin was 36% of net revenues in the first quarter of fiscal 2000
compared with 46% in the first quarter of fiscal 1999. Product gross margin
decreased to 47% in the first quarter of fiscal 2000 from 53% in the first
quarter of fiscal 1999. The decrease in gross margins in the first quarter of
fiscal 2000 was due to lower mix in upgrade revenues combined with competitive
pressures, timing of new product introductions which contributed to below
break-even operations and higher investments made in the service organization.
Page 8
<PAGE> 11
Selling, general and administrative expenses during the first quarter of
fiscal 2000 totaled $13.8 million, an increase of 10% from $12.6 million in the
corresponding period of the prior fiscal year, and comprised 53% and 42% of
total revenues, respectively. The increase in selling, general and
administrative expenses as a percentage of revenues is a result of an expansion
of the North American direct sales operations, the growth of direct sales
operations of the Company's international subsidiaries, growth in marketing
operations and lower revenues in first quarter of fiscal 2000.
Research and development expenses incurred during the first quarter of
fiscal 2000 were $8.3 million, a decrease of 5% from $8.7 million in the
corresponding period of the prior fiscal year, and comprised 32% and 29% of
total revenues, respectively.
Loss from operations for the first quarter of fiscal 2000 was
$12.6 million, compared with loss from operations of $7.3 million in the first
quarter of fiscal year 1999. The decline in operating results was primarily due
to lower revenues and an increase in selling, general, and administrative
expenses.
The Company's effective tax rate for the first quarters of fiscal 2000
and 1999 was essentially 0%, respectively. The Company's tax provision includes
state and minimum statutory taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
decreased by $8.1 million to $34.6 million for the three months ended September
30, 1999. The Company used approximately $9.3 million in cash from operating
activities in the first quarter of fiscal 2000, which included loss from
operations before depreciation and amortization of $10.1 million, the decrease
in accounts payable and deferred revenue and the increase in accounts
receivable, partially offset by the collection of income tax refunds. The
Company's primary financing activity included proceeds from the sale of its
Common Stock pursuant to employee benefit plans of $2.0 million in the first
quarter of fiscal 2000. The Company's working capital decreased during the first
quarter of fiscal 2000 by $9.1 million to $40.2 million.
At September 30, 1999, the Company's principal sources of liquidity
included $34.6 million in cash, cash equivalents and short-term investments.
Based on its current operating plans, the Company believes that its
existing cash, cash equivalents and short-term investments will be adequate to
meet its working capital and capital expenditure requirements at least through
the next 12 months.*
* See "Forward-Looking Statements" on page 8.
Page 9
<PAGE> 12
FACTORS THAT MAY AFFECT FUTURE RESULTS
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly from quarter
to quarter due to a combination of factors. These factors include the timing of
orders, the timing of new product introductions by the Company or its
competitors, and the mix of distribution channels through which the Company's
products are sold. The Company generally realizes higher gross margins on sales
of systems to end users and on single-system sales than on systems sold through
distributors and OEMs and on multiple-system sales. In addition, given the
Company's focus on highly configured enterprise class systems, the loss or delay
in a given quarter of a relatively limited number of system sales could
adversely affect the Company's revenues.
Historically, the Company often has recognized a substantial portion of
its revenues in the last month of any given quarter. Because the Company's
operating expenses are based on anticipated revenue levels and because a high
percentage of the Company's expenses are relatively fixed, a small variation in
the timing of the recognition of revenues could cause significant variations in
operating results from quarter to quarter.
COMPETITIVE MARKET
The market for the Company's products is highly competitive. The Company
experiences substantial competition, principally from Sun Microsystems, Network
Appliance, EMC Corporation, Hewlett-Packard Company and SGI, among others. Some
companies have introduced proprietary products to provide network attached
storage. Most of the Company's competitors are better known and have
substantially greater financial, technological, production and marketing
resources than the Company. While the Company believes that the
price/performance characteristics of its products are competitive, price
competition in the markets for the Company's products is intense. Any material
reduction in the price of the Company's products without corresponding decreases
in manufacturing costs and increases in unit volume would negatively affect
gross margins, which could in turn have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also derives a significant portion of its revenues from sales of product
upgrades to its installed base of customers, including additional processors,
memory and disk. Increased competition for the Company's products that results
in lower product sales could also adversely impact the Company's upgrades sales.
In addition, decisions by customers not to increase capacity to their current
systems could adversely impact the Company's revenues and results of operations.
The Company's ability to maintain its competitive position will depend upon,
among other factors, its success in anticipating industry trends, investing in
product research and development, developing new products with improved
price/performance characteristics and effectively managing the introduction of
new products into targeted markets.
DEPENDENCE ON KEY PERSONNEL
Competition for employees with highly technical, management and other
skills is intense in the computer industry and is particularly intense in the
San Francisco Bay Area. The Company has 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.
Page 10
<PAGE> 13
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 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, Europe and Pacific Rim revenue in the first
quarter of fiscal 2000 and entire 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 ESTABLISHED STANDARDS
The rapid emergence of new or alternate standards, such as Windows NT
and Linux, which replace or diminish the market acceptance of UNIX operating
systems or Network File System (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 three months ended September 30, 1998, direct sales of products
and services to Intel Corporation ("Intel") represented approximately 15% 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.
* See "Forward-Looking Statements" on page 8.
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<PAGE> 14
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's business and results of operations.
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During the first three months ended September 30, 1999 and September 30,
1998, approximately 34% and 40%, 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.* Nonetheless, 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
three months ended September 30, 1999 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. Continued increases in the
value of the U.S. dollar relative to foreign currencies will make the Company's
products sold internationally less price competitive. The Company has offices in
a number of foreign countries, the operating expenses of which are also subject
to the effects of fluctuations in foreign exchange rates. Financial exposure may
result due to the timing of transactions and movement of exchange rates. The
Company's international business may further be affected by risks such as trade
restrictions, increase in tariff and freight rates and difficulties in obtaining
necessary export licenses and meeting appropriate local regulatory standards.
For example, the Company has had to modify its products in minor respects in
Japan to comply with local electromagnetic emissions standards, and must also
comply with corresponding European Economic Community standards. In marketing
its products to the European Economic Community, the Company also must face the
challenges posed by a fragmented market complicated by local distribution
channels and local cultural considerations. For international sales, the Company
has largely relied on distributors or OEMs, most of whom are entitled to carry
products of the Company's competitors. There can be no assurance that any of the
foregoing risks or issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
STOCK MARKET FLUCTUATIONS
In recent years, the stock market in general and the market for
technology stocks in particular, including the Company's Common Stock, have
experienced extreme price fluctuations. The market price of the Company's Common
Stock may be significantly affected by various factors such as quarterly
variations in the Company's operating results, changes in revenue growth rates
for the Company as a whole or for specific geographic areas or products, changes
in earning estimates by market analysts, the announcements of new products or
product enhancements by the Company or its competitors, speculation in the press
or analyst community, and general market conditions or market conditions
specific to particular industries. There can be no assurance that the market
price of the Company's Common Stock will not experience significant fluctuations
in the future.
* See "Forward-Looking Statements" on page 8.
Page 12
<PAGE> 15
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
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 fourteen 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.
YEAR 2000 READINESS DISCLOSURES
The Company is aware of the issues associated with the programming code
in existing computer systems, both customers and internal, 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 are being designed to be Year 2000 compliant (as the
Company has defined that term in its published statements).* Nonetheless, some
of the Company's older products will not be Year 2000 compliant and, as a
result, the Company's customers will be required to upgrade these products.
Although products have undergone, or will undergo, the Company's normal quality
testing procedures, there can be no assurance that the Company's products will
contain all necessary date code changes.* Any failure of the Company's products
to perform, including system malfunctions due to the onset of Year 2000, could
result in claims against the Company, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Moreover, the Company's customers could choose to convert to other Year 2000
compliant products or to develop their own products in order to avoid such
malfunctions, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has completed the audit of its core 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.
* See "Forward-Looking Statements" on page 8.
Page 13
<PAGE> 16
Suppliers
During fiscal year 1998 the Company sent out a Year 2000 Readiness
Letter/Questionnaire to its supply chain. 98% of the supply chain contacted has
responded to the inquiries and all responding have indicated they are, or will
be, fully compliant by December 31, 1999. The outstanding suppliers still
needing to respond were actively solicited for their position. This solicitation
was completed as of September 30, 1999. For any suppliers responding in the
negative, wherever possible, an alternate supplier who meets the Year 2000
requirements, will be identified and qualified.* 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 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 been received as of this filing
which state Year 2000 compliance of local fire departments and power companies.
The Company believes, in its judgment, that there will be no significant Year
2000 problem with its English, French, German and Japanese facilities.*
Information Technology Systems
Over the past several years, the Company has invested in a number of
Year 2000 compliant PBX and voice-mail systems. No effort has yet been spent on
verifying Year 2000 compliance of local telephone systems of most sales offices
and the Company does not expect to have verified such compliance as the Company
believes, in its judgment, that there will be no significant Year 2000 problem
with the local telephone systems of the sales offices.*
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 fiscal year. The Company's wide-area network requirements are
provided by a major national and 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. No
significant effort has been spent on verifying Year 2000 compliance for local
services that are provided by local carriers and the Company does not expect to
have verified such compliance as the Company believes, in its judgment, more
likely than not, there is no significant uncertainty.*
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 incorporates several
Year 2000 compliance related bug fixes. In September 1998, the Company installed
newer versions of its payroll and human resources system with vendor provided
Year 2000 compliant upgrades of their software applications. The Company's
customer call tracking system was upgraded to provide additional Year 2000
compliant functionality and stability during September 1999, as provided by the
vendor. During fiscal 1998, the Company invested in a desktop upgrade program.
Vendors have affirmed that standard personal computers and laptop computing
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 believes it has resolved all significant
issues.* Testing has confirmed that commonly used functions operate
satisfactorily.*
* See "Forward-Looking Statements" on page 8.
Page 14
<PAGE> 17
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 believes
it has resolved all significant issues.* Testing has affirmed that commonly used
functions operate satisfactorily.*
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company expects to incur total software-, hardware- and
systems-related costs of approximately $1.9 million and solutions providers'
costs of approximately $500,000 in connection with remediations of Year 2000
compliance issues, in addition to incurring payroll costs for our Information
Technology staff which the Company does not separately track.* There can be no
assurance that the cost estimates associated with the Company's Year 2000 issues
will prove to be accurate or that the actual costs will not have a material
adverse effect on the Company's results of operations and financial condition.
YEAR 2000 ISSUES
The Company's Technical Support representatives work closely with
customers to resolve problems, issues and questions. The Company's Customer
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 has a significant reliance on
communications, voice-mail, email, paging, Web and file transfer program
services and data communications. Given the number and variety of suppliers and
their inter-dependencies, the number and location of worldwide customers and the
number and locations of the various Technical Support offices, it is not
feasible to fully test whether the Company will be able to guarantee that each
customer will be able to contact and/or do business with Customer Service
without disruption on or about the beginning of 2000. The Company expects an
increase in calls on or about the beginning of Year 2000, which will likely
impact Customer Service responsiveness.
CONTINGENCY PLANS
The Company has completed the preparation of general contingency plans,
which includes staffing requirements to handle all inquiries, for the Year 2000
compliance issues areas noted above. There can be no assurance that such
staffing contingency plans will be able to handle and resolve all Year 2000
inquiries or the measures taken by the Company 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 first quarter of fiscal 2000
to the Company's exposure to market risk for changes in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
There were no material changes during the first quarter of fiscal 2000
to the Company's exposure to foreign currency exchange risk.
* See "Forward-Looking Statements" on page 8.
Page 15
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
27 Financial Data Schedule
b. Reports 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 November 12, 1999 /s/ R. Marshall Case
-------------------------- -----------------------------------
R. Marshall Case
Vice President of Finance and
Chief Financial Officer
Page 16
<PAGE> 19
AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Sequentially
Exhibit Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule 17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,739
<SECURITIES> 14,841
<RECEIVABLES> 23,130
<ALLOWANCES> 1,102
<INVENTORY> 10,353
<CURRENT-ASSETS> 71,713
<PP&E> 71,301
<DEPRECIATION> 43,245
<TOTAL-ASSETS> 102,123
<CURRENT-LIABILITIES> 31,560
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 69,016
<TOTAL-LIABILITY-AND-EQUITY> 102,123
<SALES> 18,942
<TOTAL-REVENUES> 26,172
<CGS> 10,111
<TOTAL-COSTS> 16,682
<OTHER-EXPENSES> 22,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,171)
<INCOME-TAX> 50
<INCOME-CONTINUING> (12,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,221)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
