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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-21432
AUSPEX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 93-0963760
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2800 SCOTT BOULEVARD
SANTA CLARA, CALIFORNIA 95050
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 566-2000
WEB SITE (WWW.AUSPEX.COM)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X]
As of September 15, 2000, 32,935,287 shares of Common Stock of Registrant
were outstanding. The aggregate market value of the shares held by
non-affiliates of the Registrant (based upon the closing price of the
Registrant's Common Stock on September 15, 2000 of $8.19 per share) was
approximately $146,441,142.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders scheduled to be held on
November 14, 2000.
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TABLE OF CONTENTS
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PART I
Item 1. BUSINESS.................................................... 1
The Company................................................. 1
Markets and Customers....................................... 2
Products.................................................... 2
Optional NS2000 Software.................................... 4
Technology.................................................. 5
Legacy models............................................... 6
Distribution................................................ 6
Customer Service and Support................................ 6
Manufacturing............................................... 7
Engineering and Development................................. 7
Competition................................................. 8
Intellectual Property and Licenses.......................... 8
Employees................................................... 8
Executive Officers of the Company........................... 9
Item 2. PROPERTIES.................................................. 10
Item 3. LEGAL PROCEEDINGS........................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS......................................... 12
Item 6. SELECTED FINANCIAL DATA..................................... 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
Results of Operations....................................... 14
Revenues.................................................... 14
Gross Margin................................................ 15
Operating Expenses.......................................... 15
Other Income................................................ 16
Provision for Income Taxes.................................. 16
Quarterly Results of Operations............................. 17
Liquidity and Capital Resources............................. 17
Factors That May Affect Future Results...................... 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS....................................................... 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 23
Item 11. EXECUTIVE COMPENSATION...................................... 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 23
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 24
(a) 1. FINANCIAL STATEMENTS................................. 24
2. FINANCIAL STATEMENT SCHEDULES............................ 24
3. EXHIBITS................................................. 24
(b) REPORTS ON FORM 8-K..................................... 27
SIGNATURES............................................................ 28
POWER OF ATTORNEY..................................................... 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................. 29
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS............................. 47
SUPPLEMENTAL SCHEDULES................................................ 48
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INTRODUCTORY STATEMENT
References made in this Annual Report on Form 10-K to "Auspex," the
"Company," or the "Registrant" refer to Auspex Systems, Inc. and its wholly
owned subsidiaries. AUSPEX, the Auspex logo design, DataGuard, DriveGuard, FMK,
FMP, Functional Multi-Processing, Functional Multi-Processing Kernel, Functional
Multi-Processor, Functional Multiprocessor NS5000 and ServerGuard are registered
trademarks of the Company. Auspex 4Front, Auspex Control Points, All the Data
All the Time, ClusterGuard, Continuous Data Access, Data Xcelerator Engines,
DataXpress, DataXpress kernel, FastFlo File System, NetOS, NetServer,
NeTservices, Playground, ServerGuard Global, Thrive Carefully, TurboCopy,
Web-Attached Storage logos and XceleRAID are trademarks of the Company.
FORWARD-LOOKING STATEMENT
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, ENGINEERING 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 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-K, 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.
PART I
ITEM 1. BUSINESS
THE COMPANY
Auspex was formed in 1987 and was incorporated in Delaware in 1991. The
Company develops, manufactures, distributes and supports a line of
multi-protocol (NFS(1), CIFS(2) and FTP(3)) Network Attached Storage devices,
also referred to as network file servers, which include specialized software for
storing, serving and managing network data.
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(1) NFS denotes the Network File System protocol, first promulgated by Sun
Microsystems, Inc. ("Sun Microsystems"), and since widely adopted by the
workstation market as a de facto standard for network file transfers.
(2) CIFS refers to the Common Internet File Service protocol developed by
Microsoft Corporation as a networking protocol for PC clients to access
files on a PC file server in a Local Area Network ("LAN") or Wide Area
Network ("WAN").
(3) FTP ("File Transfer Protocol") is a standard protocol commonly used to
retrieve or store files on network file servers. FTP is supported on UNIX,
Windows, VMS, Macintosh and other popular desktop computers. Storage devices
also referred to as network file servers which include specialized software
for storing, serving and managing network data.
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In fiscal 2000, the Company's product revenue shifted from its legacy
products to its newly introduced 4Front(TM) NS2000 Network Attached Server
family of products. Because of the lower than expected market acceptance of
these new products, the Company reorganized and restructured in order to focus
on increasing their acceptance while operating at a substantially reduced
expense rate. By fiscal 2000 year end, the restructuring of the Company was
essentially complete and the operating expenses run rate was reduced by over $40
million per year. The Company has retained the services of Regent Pacific
Management, Inc. to provide management consulting services including the
services of Gary J. Sbona, as Chief Executive Officer and the Chairman of the
Board of Directors, and the services of a number of other senior executives.
Additional strengthening of the organization is continuing, particularly in the
areas of sales, marketing and engineering.
The Company's objective is to deliver mission-critical network data-access
solutions across heterogeneous platforms (UNIX, Windows NT). The Company
characterizes its new and broader vision as "All the data, All the time"(TM),
which reflects Auspex's key business objectives of reliability, scalability,
network input/output ("I/O") performance and customer support.
The Company's heritage is based on the creation of a specialized
device -- the industry's first "thin" server or specialized file server -- which
utilizes highly efficient software to optimize I/O performance. The primary
market for the Company's product was known as the file server market, which
today is known as the Network Attached Storage (NAS) market. A leading
independent industry analyst projects that the segment of the NAS market served
by Auspex will grow from $1.2 billion in calendar year 2000 to almost $6 billion
by the calendar year 2004 (Source: Gartner Group, June 2000).*
MARKETS AND CUSTOMERS
Historically, the Company's customer base has been largely comprised of
Fortune 1000 customers in the enterprise technical computing market. Auspex has
gained twelve years of networking expertise in this market by delivering
enterprise class data availability and scalability solutions. Auspex believes
this experience is a key competitive differentiator compared to mid-range NAS
appliance and general-purpose server companies that may be looking to establish
a position in the high-growth NAS market.
As of June 30, 2000, approximately 2,954 Auspex NetServers had been shipped
to over 517 customers worldwide. As a reflection of the NetServer's particular
suitability to the performance requirements of large-scale client/server
systems, networks supporting more than 50 users account for more than 80% of the
Company's installed base. Within the NAS market, NetServers are used most
commonly for the following applications: software development, electronic design
analysis ("EDA"), seismic and geophysical modeling, scientific and academic
research, product design management ("PDM") and mechanical computer-aided design
("MCAD"), technical publishing, financial services and streaming video.
Sales of products and services to the following customers accounted for 10%
or more of total revenues in the periods indicated: fiscal 1998 -- Intel (20%);
and fiscal year 1999 -- Intel (20%); in fiscal 2000, there were no customers
that accounted for 10% or more of total revenues. There can be no assurance that
sales of products and services to these customers will not decline, either in
absolute dollar amounts or as a percentage of total revenues, in future periods
and that any such declines will not have a material adverse effect on the
Company's results of operations.*
PRODUCTS
At the end of fiscal 1999, the Company introduced its new generation of NAS
products, the 4Front(TM) NS2000. By the end of fiscal 2000, 254 systems had been
shipped to 113 customers. The new system architecture is designed to store,
manage and deliver data to network clients with a continual focus on
reliability, scalability, UNIX/Windows NT file sharing and price/performance.
The new 4Front(TM) NS2000 hardware design is based on industry standard hardware
integrated into a simple, yet powerful storage area
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*See "Forward-Looking Statement" on page 1.
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network consisting of an UltraSPARC Host Processor Node and one or more I/O
Nodes interconnected thru a Scalable Coherent Interface ("SCI") bus. This
storage area network architecture scales to provide large amounts of storage and
network connectivity. Each I/O Node supports multiple network connections --
including all common network interfaces -- and connects directly to more than
three terabytes of disk storage. A two-node system will support six terabytes,
and a three-node system will support nine and one-half terabytes. Auspex has
shipped systems with up to three-nodes and tested systems with up to five nodes.
NetServer NS2000 list prices range from approximately $93,000 to $1.6
million, depending on the configuration. While system price varies considerably
according to the configuration purchased and competitive discounting, the
average sales price per system in fiscal year 2000 for North American direct
sales was approximately $226,500, and for distributor and international sales,
approximately $106,300. Lower average sales prices per system for international
distributor sales are attributable to the fact that most servers sold through
these channels are sold in smaller configurations and at higher discounts.
The Company's strategy is to introduce new products and offer upgrades to
existing products periodically.* There can be no assurance that some customers
will not cancel orders for existing products or delay orders in anticipation of
new product availability, and should cancellations and delays occur, the
Company's revenues and operating results could be materially and adversely
affected.
The NS2000 is based on the Company's patented Functional Multi-Processing
architecture embodied in the NetOS kernel, which underpins its NAS architecture.
NetOS separates network processing from storage processing, thereby facilitating
scaling networks and/or storage. It also offers multi-protocol support and
provides parallel backup paths for rapid data archiving. This architecture
utilizes Functional Multi-Processing, which dedicates processors to specific
tasks, such as network protocol processing -- Network File System ("NFS") and
Common Internet File System ("CIFS") -- file system management and storage
management and control.
The File and Storage Processing ("FSP") kernel incorporates the FastFLO
File System, that provides reliability and performance using advanced journaling
technology. The FSP also supports File and Block level Snapshots for consistent
system backup and data protection. Full support is provided on the host Node for
the Network Data Management Protocol ("NDMP"). NDMP-compliant backup software
executing on the host or another network system can be used to direct each I/0
Node to backup its data at high speeds by streaming data directly from disk to
tape using Data Xcelerator Engines.
The Company has implemented a hardware RAID subsystem leveraging IBM Mylex
technology with Auspex's XceleRAID firmware controllers to connect directly into
the high-density disk array ("HDDA"). The HDDA provides a very large amount of
storage in a package that has the same form factor as the I/O Node itself. All
drives in the array are hot-plugable to ensure rapid, on-line replacement in the
event of a problem. A single I/O Node maximally configured with three XceleRAID
controllers and three HDDAs will support a total of three terabytes of storage,
based on using 36-gigabyte drives. A two-node system will support six terabytes,
and a three-node system will support nine and one-half terabytes. The Company
believes it has one of the highest storage density per footprint in the
industry.
Using this system architecture delivers three key benefits: first, higher
reliability, since there is no operating system in the data path; second,
seamless growth for networking and storage as users add I/O Nodes to their
system configuration; and third, because it appears as a single system image,
the system administrator can cost effectively configure for maximum performance
based on the application environment.
The Company believes that the importance of the benefits of its new product
to large-scale client/server systems is demonstrated by the fact that over 80%
of the approximately 2,954 servers shipped support networks with between 50 and
800 users per server.
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*See "Forward-Looking Statement" on page 1.
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OPTIONAL NS2000 SOFTWARE
There are five software options (DataGuard, NeTservices, NetGuard,
TurboCopy, TurboReplicator) that can be purchased with the NS2000. In fiscal
2000, software licenses represented approximately 5% of the Company's revenues.
The first, DataGuard(TM), allows users to continuously access data in the
event of a disruption associated with the host operating system. Because the
data movement function is isolated from the Solaris operating system on the host
node, file services can continue in the event of a Solaris outage, and total
system availability improves.
The second product, NetServices, delivers seamless and fully secure file
sharing between UNIX and Windows NT by strictly adhering to the permissions
schemes of both the NFS and CIFS remote file system software. This allows users
on NT and UNIX clients and/or applications to access the same files with full
locking protection. Sold with over 75% of Auspex servers, NetServices reduces
the total cost of ownership relative to replicating data on separate UNIX and
Windows NT servers with software that either emulates Windows on UNIX servers or
clients or vice versa. While UNIX continues to dominate the back-end, enterprise
environments are evolving to include Windows NT clients. Thus, the requirement
to integrate Windows (including NT, 98, 95 and Windows for Workgroups)
seamlessly into the enterprise has assumed a critical position. Combining
Windows and UNIX environments poses the very important data services challenge
of having separate, distributed data servers for Windows data, as opposed to
consolidating both types of data on a single platform. Significant benefits in
the area of performance, data management, availability and file sharing can be
obtained by consolidating UNIX and Windows data on a single, enterprise-class
file server platform.
NetServices delivers the Windows NT 4.0 networking environment including
directory services, file security and remote administration, that is essential
for enterprise-level deployment of Windows-based networks. NetServices is
compatible with Windows 2000 clients.
Auspex believes that NetServices is also the fastest Windows NT server
available today, based on independent industry standard benchmarks. The
product's ZD NetBench 5.01 test results exceeded 58 megabytes per second
throughout. NetServices allows administrators to manage just one physical copy
of the shared data, with transparent, secure sharing of individual files by UNIX
and Windows NT clients. Because no client software is required, NetServices does
not create the additional overhead of per-client administration. Locking
mechanisms provide data protection while UNIX and Windows NT clients
concurrently access files.
The third software product, NetGuard, provides for Network Interface Card
Failover for the NS2000. Failover in computer systems refers to the ability of
one component to seamlessly take over the workload of a failed component of a
similar type. The NS2000 design allows for multiple redundant network
connections to provide protection in the event of a failed network adapter card.
This feature requires support for Cisco Fast EtherChannel, which not only
provides port failover but also balances port workloads to the switch.
The fourth and fifth software products, Turbo Copy and Turbo Replicator,
provide for bi-directional transfers between remote NS2000 systems across TCP/IP
LAN and WAN network connections. These products allow file systems to be
replicated to remote NS2000 servers for disaster recovery and business
continuity planning and implementation. TurboCopy software runs on top of
optimized NDMP compliant Turbo Replicator software and is managed by a Solaris
or NS2000 host Node. Remote replication of file and metadata to remote disks is
possible from remote geographies across WANS.
TurboCopy can also be used to optimize data replication windows. Data can
be replicated in parallel on each of three I/O Nodes for a total data
replication performance of 270 GB+ per hour when the feature is enabled.
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TECHNOLOGY
Underpinning the NS2000 product line are unique software technologies that
are dedicated to optimizing performance at each step of the data delivery chain,
including:
System Management System management for the NS2000 is accomplished through
a simple but powerful browser interface, Control Point. Key functions of the
file server can be managed locally from the host console or remotely from any
compatible browser. Multiple servers can be monitored and managed from the same
console if desired. Control Point is implemented entirely in Java, providing for
advanced features beyond the abilities of simple HTML management tools, while
ensuring portability and ease of use. Command line equivalents are also
available for all Control Point functions.
Data Management The DataXcelerator Engines are a unique data transfer
facility that use two data-moving engines, the Block DataXcelerator ("BDX") and
the File DataXcelerator ("FDX"), to provide acceleration for system backup and
data movement. The Block DataXcelerator provides the capability to stream blocks
of data from disk to tape, tape to disk, or disk to disk. BDX provides the
foundation for extremely rapid image backup. The File DataXcelerator provides a
similar interface that acts at the level of individual files, streaming file
data from file to file, from file to tape, or from tape to file. FDX provides
the basis for rapid file by file backup to direct-attached tape. The
DataXcelerator Engines provide the basis for advanced data management, allowing
data to be easily migrated between file systems, between disk volumes, or
between Nodes.
Network Processing The DataXpress Kernel is a very efficient software
kernel that interfaces to the network client and acts as the manager of all data
requests. DataXpress provides greater software reliability and improved
performance. Unlike conventional operating systems, the DataXpress kernel does
not use virtual memory. All necessary code is stored in local memory so that it
can be immediately executed when needed. Because the kernel working set is
typically small, processors get the greatest possible advantage from their
built-in instruction caches, typically finding needed code already cached.
Therefore, not only does DataXpress avoid disk accesses to retrieve
instructions, but it often avoids memory accesses.
File System Processing The file system plays a critical role in data
management. As the demand for disk storage continues to grow, the file system
must scale to handle huge file systems, very large files, and very large numbers
of files, single directories with thousands of entries and the file semantics
and attributes of both UNIX and Windows NT environments. At the same time, the
file system must be able to maintain its internal accounting and recover quickly
in the event of an unexpected power outage or other failure. Auspex licensed
file system technology from PLC and integrated it with the Company's patented
NetOS system software for performance, scalability and reliability. Auspex's
file system software, FastFLO, uses journaling technology to ensure the file
system's structural integrity. It also incorporates advanced software for File
Layout Optimization and writes clustering techniques to minimize file
fragmentation and enhance read operations. FastFLO supports both UNIX and
NT/Windows security and access control natively in the file system. This
protects files access security attributes for UNIX and Windows NT files during
backup and restore because the attributes are not stored in a separate file, a
feature not shared by some NT/Windows emulation software solutions currently on
the market.
In addition, FastFLO includes a very large disk buffers cache (I/O cache
memory) on the network and file processing element, which gives users the
flexibility to configure the amount of memory to meet their application
performance needs.
Storage Processing Auspex's XceleRAID firmware acts as the interface to
storage and provides multiple high-speed RAID controllers to deliver high
availability and protect data from disk failure. Supported RAID levels include:
RAID 0, RAID 1, RAID 5 and RAID 7 (JBOD). XceleRAID is responsible for virtual
partition management on the storage devices, write acceleration, channel
management, disk and tape control and data transfers to I/O cache memory.
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LEGACY MODELS
The NS8000 NetServer line of products was introduced in the first quarter
of fiscal 1999. The NS8000 delivered improved price/performance, higher density
disk packaging and new networking capabilities over previous generations. In
addition, high-density disk packaging provided a migration path for customers to
the Company's next-generation platform, the NS2000. Predecessors of the NS8000
line of products were the NS5000, NS5500, NS6000 and NS7000 NetServers.
The Company also offers a number of software products in conjunction with
these legacy models of NetServers, including, DataGuard,(TM) ServerGuard,(TM)
and NeTservices 1.0.
End of life of the above legacy models of NetServer was announced in fiscal
year 2000 and manufacturing of new systems subsequently ceased. Manufacturing of
new upgrade hardware will cease in fiscal year 2001. The Company is obligated to
provide maintenance services on these products through at least fiscal year
2005. In addition, the Company is currently offering limited upgrade services on
these products and may continue to do so depending upon availability of
components and other factors.
DISTRIBUTION
In fiscal 2000, product sales to end users in North America were primarily
through a direct sales force. Since the success of the Company's direct sales
efforts in North America is dependent in part upon a sophisticated analysis of
the customers' networking requirements, resulting in the Company's system
engineers working closely with the Company's sales representatives. The Company
has a direct sales organization in the United Kingdom, France and Germany, and
employs distributors in other selected European markets. In the Pacific Rim, the
Company has a sales team to support an indirect sales model.
In the Pacific Rim, the Company acts primarily through national
distributors. For example, in Japan, its major distributors are Fuji Xerox and
Nissho. The Company is currently establishing new distributors in Japan,
Singapore, Korea, and other Asian countries.
Auspex believes that the large installed base of UNIX systems in Europe
represents a significant opportunity for future NetServer sales.* To address
this opportunity, the Company has direct sales and support facilities in the
United Kingdom, France and Germany. The Company also has entered into agreements
with distributors covering other selected markets in Europe, and has continued
to invest in sales and marketing efforts in Europe.
CUSTOMER SERVICE AND SUPPORT
Auspex's corporate policies are based on a commitment to customer
satisfaction and product quality.
The Company provides customer training, and installs, maintains and
supports systems sold directly in North America and Europe. End-user customers
purchasing through indirect channels are generally serviced by the Company's
distributors or OEMs. In all cases, however, customers have direct access to
Auspex service and support through a toll-free telephone hotline available to
customers, distributors and service partners. Auspex handles all customer
service call management and software support directly through its technical
support centers, which are available twenty-four (24) hours a day, three hundred
sixty-five (365) days a year, and are staffed by highly trained and experienced
technical support engineers.
Technical support centers are located in Durham, North Carolina and
Aldermaston, UK. To supplement direct service and support and to ensure the
highest quality service while containing costs, Auspex has entered into a
strategic service agreement with NCR Corporation for on-site hardware support in
the US and with local service providers in selected geographic areas. The
Company's contract provides end users with a warranty for parts and labor on its
products, which generally range from ninety (90) days to one year. The Company's
warranty policy for product sales other than to end-users depends on the
requirements of the
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*See "Forward-Looking Statement" on page 1.
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particular distribution channel. The Company offers customers service agreements
of varying duration. Service revenue is recognized ratably over the contractual
period as service is provided.
MANUFACTURING
Auspex's manufacturing operations, located in Santa Clara, California,
consists of product assurance, quality control and final product assembly and
testing. The Company relies principally on contract manufacturers for
sub-assembly and testing of certain key NetServer components. The Company's
manufacturing strategy has been to develop close relationships with its
suppliers, exchange critical information and implement joint quality training
programs. This manufacturing strategy minimizes capital investment and overhead
expenditures and creates flexibility by providing the capacity for rapid
expansion. Although the Company to date has not experienced any significant
production difficulties resulting from its reliance on these manufacturers, it
is possible that production difficulties, including capacity constraints and
quality control issues, could arise in the future, which could materially and
adversely affect the Company's results of operations.
Although the Company generally uses standard parts and components for its
products, a number of key components used in the Company's NetServer products
currently are available or purchased from single sources. These components
include disk and tape drives, microprocessors, connectors, printed circuit
boards, cable assemblies, power supplies and ASICs. Some of the suppliers of
these components have divisions which compete with the Company. (See
"Business -- Competition.") The Company generally has agreements with its sole
source suppliers with terms ranging from one to five years and believes that
alternative sources of supply and assembly for most of its sole-source
components could be obtained within a commercially practicable period.* As a
precaution, the Company carries extra inventory of some of its sole-source
components in order to provide additional time to develop an alternate supply
source or redesign the component. However, the lack of sufficient quantities of
sole or single source components, or the Company's inability to develop
alternative sources for these items, could result in delays or reductions in
product shipments which would materially and adversely affect the Company's
results of operations.
ENGINEERING AND DEVELOPMENT
The market for high-performance network data servers has been characterized
by rapid technological advances in both hardware and software development. The
Company believes that the speed of technological advancement in its industry
requires it to invest significant amounts in research and development, and that
in order to maintain its competitive position, the Company must continue to
enhance and improve its existing products as well as to develop and successfully
introduce new products. During fiscal 2000, the Company continued to refine
4Front(TM) NS2000, significantly improving its performance and adding
value-added software features such as TurboCopy -- an asynchronous file
replication facility particularly useful to customers for data distribution,
back up and disaster recovery.
By continuing to introduce new product features, the Company believes it
has maintained a leadership position in the network attached storage market.
However, there can be no assurance that the Company's products will continue to
be successful commercially. Furthermore, there can be no assurance that the
Company will be able to develop or introduce other new products in the future in
a timely manner, or that such products will be a commercial success. The Company
intends to continue to invest substantially in product development.* Current
research and development efforts are focused on delivering additional optional
software products and increasing the functionality, client protocol support,
performance, capacity, scalability and availability of its products.
The Company's engineering and development expenses during fiscal years
2000, 1999 and 1998 were approximately $30.6 million, $35.3 million and $34.0
million, respectively.
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*See "Forward-Looking Statement" on page 1.
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<PAGE> 11
COMPETITION
The network attached storage market is very competitive. The Company
principally competes in the enterprise segment of this market against products
offered both by manufacturers of general-purpose computers (e.g., Sun
Microsystems, Hewlett-Packard Company and IBM) and by specialized manufacturers
of NAS products (e.g., EMC Corp. and Network Appliance). All of these
competitors possess substantially greater financial, technical and marketing
resources than Auspex, as well as substantially larger product installed bases.
While the Company believes that the price/performance characteristics of its
products are competitive, increased competition created pricing pressures in
fiscal 2000, which materially and adversely affected the Company's results of
operations.
The Company derives a significant portion of its revenues from sales of
product upgrades to its installed base, including additional processors (or
upgrades to existing processors), memory, disk and tape drive and software.
Although the Company has to date experienced limited competition in the sale of
upgrades, increased competition against these products may occur in the future
which could materially and adversely affect the Company's revenues and results
of operations.
Auspex believes that an important competitive factor is hardware and
software solutions for data availability and network data server performance.
Other important factors include product reliability, availability, scalability,
upgradeability, price, and overall cost of ownership and technical service and
support. The Company's ability to maintain its competitive position will depend,
in addition to these factors, upon its success anticipating industry trends,
investing in product research and development and effectively managing the
introduction of new products into targeted markets.*
INTELLECTUAL PROPERTY AND LICENSES
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, employee and third-party non-disclosure agreements and other
intellectual property protection methods to protect its proprietary hardware,
software and technological expertise. The Company believes, however, that its
continued success will depend principally on continuing innovation,
technological expertise, knowledge of networking, storage and applications,
distribution strength and, to a lesser extent, on its ability to protect its
proprietary technology.* Furthermore, there can be no assurance that the
Company's current or future competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
Auspex currently holds fourteen United States patents for certain
fundamental aspects of its FMP data server architecture and has related foreign
patents and foreign patent applications for proprietary Auspex technologies.
The Company's NetServer host processors and network processors operate in
conjunction with software licensed to the Company by Sun Microsystems. Although
the license is automatically renewable unless cancelled, there can be no
assurance that the Company will be able to continue such license renewals with
Sun Microsystems on favorable terms, or at all. The Company also licenses
software and hardware from several other companies and these licenses are also
perpetual unless cancelled or subject to periodic renewal which cannot be
assured. There can be no assurance that these vendors will continue in business
or that the licenses will continue to be available on favorable terms in the
future, or at all.
EMPLOYEES
As of June 30, 2000, the Company employed 314 people. The recruitment of
experienced, highly-skilled individuals is a top priority in an exceptionally
competitive recruiting environment. Equally important in this environment is the
retention of key talent. The Company has significantly increased its recruiting
activities and is reviewing all employee programs to ensure the retention and
continued development of its employees. Hiring and retaining key employees in
the Silicon Valley employment market has been a challenge, and there
---------------
*See "Forward-Looking Statement" on page 1.
8
<PAGE> 12
can be no assurance that the Company will be successful in hiring and retaining
qualified employees in the future. None of the Company's employees are
represented by a labor union.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth-certain information with respect to the executive
officers of the Company as of September 15, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary J. Sbona(1).................. 56 Chief Executive Officer and Chairman
Dennis J. Dunnigan................ 44 Chief Operating Officer
Peter R. Simpson.................. 51 Chief Financial Officer
Stephen L. Aleshire(4)............ 47 Vice President of Worldwide Sales and Customer Service
Michael S. Worhach................ 50 President
Karl C. Powell(2)(3).............. 57 Director
John E. McNulty(2)(3)............. 54 Director
Richard E. Chapman(2)(3).......... 52 Director
</TABLE>
---------------
(1) Member of the Stock Option Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Mr. Aleshire was appointed as an executive of the company on June 16, 1999.
Mr. Aleshire will terminate his employment with the Company on October 2,
2000.
Mr. Gary J. Sbona, joined the Company in February 2000 as Chairman and
Chief Executive Officer. Mr. Sbona also serves as Chairman, President and Chief
Executive Officer of Verity, Inc., a publicly traded software company,
specializing in knowledge retrieval software. Since 1999, Mr. Sbona has served
as a Director of 3 D Systems Corporation, a publicly traded mass customization
equipment manufacturer. Since 1974, Mr. Sbona has also served as the Chairman
and Chief Executive Officer of Regent Pacific Management Corporation, a
professional services company that is currently providing our company with
management services. Mr. Sbona has held positions as an officer and/or director
of numerous publicly and privately held companies.
Mr. Dennis J. Dunnigan joined the Company in February 2000 as Chief
Operating Officer. Mr. Dunnigan has been employed by Regent Pacific Management
Corporation, a professional services company that is currently providing our
company with management services, since 1986. Mr. Dunnigan has held various
positions with numerous publicly and privately held companies during his
employment with Regent Pacific Management Corporation. Mr. Dunnigan holds a B.
S. C. degree in Accounting from the University of Santa Clara.
Mr. Peter R. Simpson joined the Company in March 2000 as Chief Financial
Officer. Mr. Simpson has been employed since 1989 by Regent Pacific Management
Corporation, a professional services company that is currently providing our
company with management services. Mr. Simpson has held various positions with
numerous publicly and privately held companies though his employment with Regent
Pacific Management Services. Mr. Simpson holds a MBA degree in Finance from
Golden Gate University, and is a Fellow of the Institute of Chartered
Accountants in England and Wales.
Mr. Karl C. Powell joined the Company in February 2000 as an outside
Director. Mr. Powell is President and CEO of N H M & P, Inc., a newly formed
Oregon corporation engaged in the development of software management tools. Mr.
Powell, was a co-founder of Sequent Computer Systems, Inc. and acted as Chairman
of the Board and Chief Executive Officer, and a director of that company from
1983 until 1999, when it merged with IBM. Mr. Powell served as Sequent's CEO
since it's inception. From 1974 to 1983, Mr. Powell was employed by Intel
Corporation, where his most recent position was General Manager for
Microprocessor Operations. Mr. Powell served on the National Board of Directors
of the American Electronics Association
9
<PAGE> 13
from 1985 to 1986. He holds a Bachelor of Science Degree in mechanical
engineering from the U.S. Merchant Marine Academy at Kings Point, NY.
Mr. John E. McNulty joined the Company in February 2000 as an outside
Director. Mr. McNulty also has served since May 1999 as Chairman of the Board,
President and Chief Executive Officer of Secure Computing Corporation. Mr.
McNulty was employed by Genesys Telecom, where he served as Senior Vice
President from 1997 to 1999. Mr. McNulty served as Senior Director of Marketing
for Intel Corporation from 1993 to 1997.
Mr. Richard E. Chapman joined the Company in July 2000 as an outside
Director. Mr. Chapman also has served since October 1997 as Senior Vice
President and Chief Information Officer of Vencor, Inc. From March 1993 to
September 1997, he was Senior Vice President and CIO for Columbia/HCA Healthcare
Corporation. From March 1993 to August 1993 he was Vice President of Information
Systems for Galen Healthcare, Inc. From September 1988 to February 1993 he acted
as Vice President of Information Systems for Humana, Inc.
Mr. Michael S. Worhach joined the Company in August 2000 as its President.
Mr. Worhach previously served as Division Vice President at Data General, a
division of EMC since 1993. At Data General, Mr. Worhach had responsibility for
Americas Sales and Services and Worldwide Healthcare. From 1974 to 1992, Mr.
Worhach was employed by Unisys Corporation where he held a variety of management
positions in sales and marketing, including Division President. Mr. Worhach
holds a MBA from the University of Massachusetts, Amherst, and a B.S. from Kings
College, Pennsylvania.
Mr. Stephen L. Aleshire joined the Company in November 1997 as Vice
President of Customer Service. In July 1999, Mr. Aleshire assumed the role of
Vice President of Worldwide Sales and Customer Service. From September 1994 to
November 1997, Mr. Aleshire served as Director of Customer Service-American
Operations at Sequent Computer Systems, a provider of high-end scalable
data-center-ready open systems solutions for large organizations. Prior to that,
Mr. Aleshire held a variety of management positions while at Digital Equipment
Corporation for 17 years.
ITEM 2. PROPERTIES
The Company is headquartered in Santa Clara, California, where it leases
approximately 98,000 square feet of space which houses administrative, finance,
sales and marketing, manufacturing, customer service and product development
activities. The lease for these facilities expires in February 2010. In
addition, the lease agreement contains three successive options to extend the
lease term for sixty months each. The Company leases additional sales and
support offices located in the United States, Canada, the United Kingdom,
France, Germany, Japan and Singapore. The Company believes that its facilities
are adequate to meet the Company's current business requirements.* See also Note
4 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings incidental
to the conduct of its business. The Company believes that the litigation,
individually or in the aggregate, to which it is currently a party, is not
likely to have a material adverse effect on the Company's results of operations
or financial condition.
---------------
*See "Forward-Looking Statement" on page 1.
10
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Special Meeting of Stockholders, of the Company held
on August 15, 2000, the Company received proxies representing 28,826,706 shares
of Common Stock or 96% of the total outstanding shares voted the results of the
voting with respect to the matters submitted to a vote of the security holders
are as follows:
a. Proposal to ratify the sale and issuance by the Company on January 18,
2000 in a private placement of 25,000 shares of Series B Convertible
Preferred Stock and Warrants to purchase an aggregate of 1,605,136
shares of Common Stock, and to approve the issuance of Common Stock,
upon conversion of the Series B Convertible Preferred Stock and upon
exercise of such Warrants.
NUMBER OF VOTES
<TABLE>
<CAPTION>
CAST FOR CAST AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------ ----------- ----------------
<S> <C> <C> <C>
18,168,551 2,257,635 75,187 8,325,333
</TABLE>
b. Proposal to approve an amendment to the Company's 1993 Directors Stock
Option Plan to increase the number of shares of Common Stock reserved
for issuance thereunder by 500,000 shares to a total of 825,000 shares.
<TABLE>
<CAPTION>
CAST FOR CAST AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------ ----------- ----------------
<S> <C> <C> <C>
15,894,444 4,184,577 422,352 8,325,333
</TABLE>
c. Proposal to approve an amendment to the Company's 1997 Stock Plan to
increase the shares reserved for issuance thereunder by 8,000,000 shares
to a total of 9,250,000.
<TABLE>
<CAPTION>
CAST FOR CAST AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------ ----------- ----------------
<S> <C> <C> <C>
14,671,710 5,415,497 414,166 8,325,333
</TABLE>
d. Proposal to increase the authorized number of shares of Common Stock of
the Company from 50,000,000 shares to 120,000,000.
<TABLE>
<CAPTION>
CAST FOR CAST AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------ ----------- ----------------
<S> <C> <C> <C>
26,543,646 2,214,795 68,265 N/A
</TABLE>
11
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been approved for quotation on The Nasdaq
National Market under the symbol ASPX since the Company's initial public
offering in May 1993. The following table sets forth, for the periods indicated,
the range of high and low sales prices on the Nasdaq Composite, as reported in
The Wall Street Journal.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fourth Quarter of 2000................................... $10.125 $4.75
Third Quarter of 2000.................................... $17.375 $6.5625
Second Quarter of 2000................................... $14.375 $4.0625
First Quarter of 2000.................................... $12.625 $8.75
Fourth Quarter of 1999................................... $11.875 $7.125
Third Quarter of 1999.................................... $12.50 $3.875
Second Quarter of 1999................................... $ 4.3275 $1.6875
First Quarter of 1999.................................... $ 5.125 $1.75
</TABLE>
The Company believes that a number of factors including, but not limited
to, quarterly fluctuations in results of operations may cause the market price
of its common stock to fluctuate significantly. See "Management's Discussion and
Analysis -- Factors That May Affect Future Results."
As of September 15, 2000, the approximate number of common stockholders of
record was 575.
The Company has not, to date, paid cash dividends on its capital stock. The
Company currently intends to retain earnings for use within its business and
does not anticipate paying cash dividends in the foreseeable future.*
---------------
*See "Forward-Looking Statement" on page 1.
12
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 82,199 $113,475 $168,912 $202,486 $162,640
Income (loss) before income
taxes..................... (80,063) (38,828) (26,668) 24,362 29,597
Net income (loss)........... (80,760) (39,045) (17,334) 13,420 19,830
Dividends to preferred
stockholders.............. 2,350 -- -- -- --
Net income(loss) available
to common stockholders.... (83,110) (39,045) (17,334) 13,420 19,830
Net income (loss) per share
Basic..................... $ (2.95) $ (1.50) $ (0.69) $ 0.54 $ 0.84
Diluted................... $ (2.95)(1) $ (1.50) $ (0.69)(2) $ 0.52(3) $ 0.77
Shares used for net income
(loss) per share
Basic..................... 28,126 25,978 25,268 24,641 23,701
Diluted................... 28,126 25,978 25,268 25,658 25,702
Total assets...... $ 61,998 $115,048 $147,193 $157,152 $135,844
Long-term obligations....... $ 954 $ 1,304 $ -- $ -- $ --
Cash dividends declared per
common share.............. $ -- $ -- $ -- $ -- $ --
</TABLE>
---------------
(1) Includes restructuring costs of $17.6 million. Exclusive of these charges,
the diluted net loss per share for fiscal 2000 would have been $2.24.
(2) Includes costs of $9.4 million associated with write-down of disk drive
inventory to its net realizable value as a result of rapid price declines of
4-gigabyte disk drives and restructuring charges of $7.3 million. Exclusive
of these charges, diluted net loss per share for fiscal 1998 would have been
$0.26.
(3) Includes the write-off of in-process research and development of $7.4
million associated with the acquisition of Alphatronix, Inc. in the fourth
quarter of fiscal 1997. Exclusive of this write off, diluted net income per
share for fiscal 1997 would have been $0.81.
13
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years indicated the
percentage of total revenues represented by certain line items in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................... 100% 100% 100%
Cost of revenues............................................ 77 58 56
--- --- ---
Gross margin................................................ 23 42 44
--- --- ---
Operating Expenses
Marketing and sales....................................... 51 38 31
Engineering and development............................... 37 31 20
General and administrative................................ 12 9 6
Restructuring charges..................................... 21 -- 4
--- --- ---
Loss from operations...................................... (98) (36) (17)
Other income.............................................. 2 2 1
--- --- ---
Loss before income taxes.................................. (96) (34) (16)
Provision for (benefit from) income taxes................. 1 -- (6)
--- --- ---
Net loss.................................................. (97)% (34)% (10)%
=== === ===
</TABLE>
REVENUES
Product revenue includes hardware sales and software license fees. Product
revenue is recognized 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 is
recognized. Revenue earned under software license agreements with end-users are
generally recognized when the software has been shipped and there are no
significant obligations remaining. Revenues earned under software license
agreements are recognized in accordance with Statement of Position ("SOP") 97-2.
Software revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the fee is fixed
or determinable, collectibility is probable and vendor specific objective
evidence exists to allocate a portion of the total fee to any undelivered
elements of the arrangement.
Service revenue includes installation, maintenance and training and is
recognized ratably over the contractual period or as the services are provided.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company is currently evaluating the effect that
such adoption may have on the consolidated results of operations and financial
position and will be required to adopt SAB 101 in the fourth quarter of fiscal
2001.
Revenues for the fiscal year ended June 30, 2000 of $82.2 million decreased
28% over fiscal year 1999 revenues of $113.5 million.
The following table sets forth the principal components of the Company's
revenues (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Product revenue..................................... $54,607 $ 81,737 $142,812
Service revenue..................................... 27,592 31,738 26,100
------- -------- --------
Total revenues............................ $82,199 $113,475 $168,912
======= ======== ========
</TABLE>
14
<PAGE> 18
Product revenue decreased $27.1 million or 33% in fiscal 2000 as compared
to fiscal 1999, and decreased $61.1 million, or 43% in fiscal 1999 as compared
to fiscal 1998. The fiscal 2000 decrease is primarily due to the continued
competitive pressures, slower than expected acceptance of the new products
introduced in 1999, and is also attributable to some disruption and distraction
caused by the restructuring in the third quarter of fiscal 2000. The fiscal 1999
decrease primarily related to the Company's focus on new product introductions
of its UNIX and Windows NT product lines, which resulted in delayed customer
orders, and increased competitive pressures. Revenue from product upgrades,
which primarily consist of additional processors (or upgrades of existing
processors), memory and disk and tape drives, decreased to 21% of total revenue
in fiscal 2000, compared to 31% of total revenue in fiscal 1999. Revenue from
product upgrades remained relatively stable as a percentage of total revenue in
fiscal 1998.
The Company provides ongoing support and maintenance to its end-user
customers, distributors and OEMs, generally under annual service agreements.
Service revenue as a percentage of total revenues increased to 34% as compared
to 28% in fiscal 1999, and from 15% in fiscal 1998. The increase in service
revenue as a percentage of total revenues was primarily due to the decline in
product revenues.
The following table sets forth the Company's revenue by geographic area (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
North America.................. $52,192 63% $ 80,692 71% $116,835 69%
Pacific Rim.................... 11,443 14% 13,453 12% 23,388 14%
Europe......................... 18,564 23% 19,330 17% 28,689 17%
------- --- -------- --- -------- ---
Total revenues....... $82,199 100% $113,475 100% $168,912 100%
======= === ======== === ======== ===
</TABLE>
Revenue from North America decreased $28.5 million in fiscal 2000 compared
to fiscal 1999 and decreased $36.1 million in fiscal 1999 compared to fiscal
1998. The fiscal 2000 decrease is primarily related to the continued competitive
pressures, slower than expected acceptance of new products introduced in 1999,
and is also attributable to some disruption and distraction as result of the
restructuring in the third quarter of fiscal 2000. Also, North America's Sales
force experienced a higher than normal attrition rate, which resulted in lower
productivity. The fiscal 1999 decrease primarily related to the timing of new
product introductions and increased competitive pressures. Revenue from the
Pacific Rim decreased $2.0 million in fiscal 2000 compared to fiscal 1999, and
decreased $9.9 million in fiscal 1999 compared to fiscal 1998. The decrease in
Pacific Rim revenue as a percentage of total revenue and in absolute dollars in
fiscal 2000, 1999 and 1998 was primarily due to timing of new product
introductions, the reorganization of a major OEM partner, changes in senior
management, and weakness in the Japanese economy.
In the fiscal year 2000, no one customer accounted for 10% or more of total
revenues. Intel accounted for 20% of total revenues for the fiscal years ended
June 30, 1999 and 1998, respectively.
GROSS MARGIN
The Company's gross margin was 23%, 42% and 44% in fiscal 2000, 1999 and
1998, respectively. Costs of revenues include material costs, manufacturing and
service overhead costs, installation and warranty expenses, obsolescence, the
cost of spare parts and other related costs. The decrease in gross margin in
fiscal 2000 compared to fiscal 1999 is directly attributable to the lower
product revenue. Furthermore, gross margin was impacted by operational inventory
and other asset write-offs of $3.7 million. The decrease in gross margins in
fiscal 1999 compared to fiscal 1998 was due to lower prices on systems sales due
to competitive pressures and timing of new product introductions which
contributed to below break-even operations.
OPERATING EXPENSES
Marketing and sales expenses decreased by $1.2 million in fiscal 2000
compared to fiscal 1999 and decreased $8.6 million in fiscal 1999 compared to
fiscal 1998, and were 51%, 38% and 31% of total revenues in fiscal 2000, 1999
and 1998, respectively. The fiscal 2000 and 1999 decrease in absolute dollars
reflects steps
15
<PAGE> 19
the Company has taken to streamline operations and reduce overall costs. The
increase as a percentage of total revenues for the comparison periods is a
result of lower revenues in fiscal 2000 and 1999.
Engineering and development expenses decreased by $4.7 million in fiscal
2000 compared to fiscal 1999, and increased $1.3 million in fiscal 1999 compared
to fiscal 1998, and represented 37% , 31% and 20% of total revenues in fiscal
2000, 1999, and 1998, respectively. The decrease in engineering and development
expenses in fiscal 2000 reflects the company's efforts to streamline and reduce
costs, and also is reflective of the reductions due to restructuring charges
taken in the third quarter of fiscal 2000. The increase in engineering and
development expenses in fiscal 1999 and 1998 was primarily due to new product
development efforts.
General and administrative expenses decreased by $282,000 in fiscal 2000 as
compared to fiscal 1999, and increased $1.4 million in fiscal 1999 compared to
fiscal 1998. Such expenses represented approximately 12%, 9% and 6% of total
revenues in fiscal 2000, 1999 and 1998, respectively. General and administrative
expenses decreased in absolute dollars in fiscal 2000 due to the Company's
efforts to reduce costs, and increased in absolute dollars in fiscal 1999
compared to fiscal 1998 primarily due to the cost of expanding new facilities
occupied in February 1998. The increase in general and administrative expenses
as a percentage of revenue in fiscal 2000 and 1999 is a result of lower
revenues.
In the quarter ended March 31, 2000, the Company recorded restructuring
charges totalling $17.6 million. These charges reflect steps the Company has
taken to strengthen its competitiveness in the growing Network Attached Storage
market, streamline operations and reduce overall costs. The restructuring
charges are comprised primarily of $3.8 million for reduction of personnel and
$13.8 million to retire excess equipment and other assets related to the
restructuring of company operations. In connection with the restructuring
charges taken in the quarter ended March 31, 2000, the Company terminated 169
employees and has consolidated all of its Santa Clara headquarters activities
into one facility. The Company substantially completed the implementation of the
restructuring plan at the end of May 2000.
In the fourth quarter of fiscal 1998, the Company recorded a $7.3 million
restructuring charge, both to cover the planned costs of reducing certain
sectors of its workforce, scaling back its facilities and writing down equipment
and other assets. These charges reflect steps the Company has taken to improve
its product development efforts, streamline operations and overall costs.
OTHER INCOME
Other income and expense was $1.3 million, $2.0 million and $1.7 million in
fiscal 2000, 1999 and 1998, respectively. Other income and expense includes
interest income, interest expense and foreign exchange gains and losses.
Interest income was $1.7 million, $2.0 million and $2.4 million in fiscal 2000,
1999 and 1998, respectively.
PROVISION FOR INCOME TAXES
As of June 30, 2000, the Company had gross deferred tax assets of
approximately $55.8 million. Management has determined, based on the Company's
recent history of prior operating losses, the ability to carry back net
operating losses to prior periods and its expectations for future years, that it
is more likely than not that the deferred tax asset is not realizable.* No
assurances can be given that sufficient taxable income will be generated in
future years for the utilization of the deferred tax asset. Accordingly, the
Company has provided a valuation allowance for the entire deferred tax asset as
of June 30, 2000.
As of June 30, 2000, the Company had NOL carry forwards of approximately
$107.0 million and $77.0 million for federal and state tax purposes,
respectively. If not utilized, the federal NOL carry forwards will begin to
expire through 2019, and the state NOL carry forwards will begin to expire
through 2003. The Company also has research credits of approximately $2.0
million and $2.2 million for federal and state tax purposes, respectively. If
not utilized, the federal research credits begin to expire through 2019.
---------------
*See "Forward-Looking Statement" on page 1.
16
<PAGE> 20
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial
information for the Company's last eight quarters. This unaudited information
has been prepared on the same basis as the audited information and in
management's opinion reflects all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the information
for the periods presented. Based on the Company's operating history and factors
that may cause fluctuations in the quarterly results, quarter-to-quarter
comparisons should not be relied upon as indicators of future performance.
Although the Company's revenues are not generally seasonal in nature, the
Company has experienced decreases in first quarter revenues compared to the
preceding fourth quarter which are believed to result primarily from the capital
asset purchase cycle of the Company's customers.
The level of the Company's operating expenses is partially based on its
expectations of future revenues. The Company's results of operations may be
adversely affected if revenues do not materialize in a period as expected. Since
expense levels are usually committed in advance of revenues and because only a
small portion of expenses vary with revenues, the Company's results of
operations may be impacted significantly by lower revenues. The Company's
revenues were lower each quarter in fiscal 2000 compared to the corresponding
quarter in the prior year. This decrease in revenues was attributable to a slow
down in customer upgrading of legacy product, that has not been offset by
customer purchasing of the NS2000 product, and lower than expected acceptance by
the market of our NS2000 product. In addition, the Company reduced the average
selling price of a system as a result of competitive pressures.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
2000 SUMMARY BY QUARTER
Revenues.............................. $ 26,172 $ 22,604 $ 21,362 $ 12,061 $ 82,199
Gross margin.......................... 9,490 6,054 1,653 1,540 18,737
Loss before taxes..................... (12,171) (16,224) (39,579) (12,089) (80,063)
Net loss.............................. (12,221) (16,324) (39,858) (12,357) (80,760)
Dividends to preferred stockholders... -- -- 1,175 1,175 2,350
Net loss available to common
stockholders..................... (12,221) (16,324) (41,033) (13,532) (83,110)
Net loss per share
Basic............................... $ (.45) $ (.59) $ (1.42) $ (.46) $ (2.95)
Diluted............................. $ (.45) $ (.59) $ (1.42)(1) $ (.46) $ (2.95)
1999 SUMMARY BY QUARTER
Revenues.............................. $ 30,057 $ 30,564 $ 26,769 $ 26,085 $113,475
Gross margin.......................... 13,920 12,754 11,184 9,823 47,681
Loss before taxes..................... (6,745) (7,792) (10,891) (13,400) (38,828)
Net loss.............................. (6,789) (7,815) (10,931) (13,510) (39,045)
Net loss per share
Basic............................... $ (.26) $ (.30) $ (.41) $ (.51) $ (1.50)
Diluted............................. $ (.26) $ (.30) $ (.41) $ (.51) $ (1.50)
</TABLE>
---------------
(1) Includes the costs associated with restructuring charges of $17.6 million.
Exclusive of this charge, net diluted loss per share for third quarter of
fiscal 2000 would have been $.79 and the fiscal year 2000 would have been
$2.24.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments decreased
$13.4 million as of June 30, 2000, compared to June 30, 1999. The Company used
cash of approximately $43.6 million and $6.6 million in operating activities in
fiscal 2000 and 1999, respectively. The Company generated cash of approximately
17
<PAGE> 21
$14.6 million from operating activities in fiscal 1998. The increase in net cash
used in operating activities in fiscal 2000 was primarily due to the Company's
net loss for the year.
The Company's principal investing activities consisted of the purchase of
property and equipment amounting to $2.7 million, $15.2 million and $28.9
million in fiscal 2000, 1999 and 1998, respectively. These expenditures were for
leasehold improvements, equipment for engineering and development, manufacturing
test equipment, office equipment and spare parts to support customer service
contracts. Additionally, included in the fiscal 1998 purchases are disbursements
of $17.2 million in connection with capital expenditures and leasehold
improvements for a new facility, which the Company occupied in February 1998.
Purchases of short-term investments represent reinvestment of the proceeds from
sale and maturities of short-term investments and investment of cash and cash
equivalents into short-term investments.
The Company's primary financing activities included proceeds from the sale
of its Common Stock pursuant to employee benefit plans of $7.1 million, $3.1
million and $4.3 million in fiscal 2000, 1999 and 1998, respectively. In
addition, in fiscal year 2000, the Company's financing activities included
proceeds from the sale of $25 million of preferred stock, in a private
placement. During fiscal 1999, the Company also generated approximately $10.9
million in proceeds from sale and leaseback of furniture, fixtures and computer
equipment.
At June 30, 2000, the Company's principal sources of liquidity included
$29.3 million in cash, cash equivalents and short-term investments and $15.0
million available under a secured United States currency bank line of credit,
expiring December 22, 2002. At June 30, 2000, the Company had no outstanding
balance under this line of credit. There were commitments against the line of
credit, for two letters of credit totaling approximately $2,823,536, as of June
30, 2000. The line of credit is secured by the Company's inventory and accounts
receivable. The line of credit agreement contains certain financial covenants
determined on a quarterly basis.
As of June 30, 2000, working capital was $14.8 million as compared with
$49.3 million as of June 30, 1999. Based on its current operating plans, the
Company believes that its existing cash, cash equivalents and short-term
investments and cash flow from operations will be sufficient to meet its working
capital and capital expenditures requirements at least through the next 12
months.*
Prior to filing this document, the following events occurred, which impact
Liquidity and Capital Resources:
The remaining 75% of the Company's outstanding Series B Preferred
Stock has been converted into 3,394,781 shares of common stock, effective
September 15, 2000, in accordance with the terms and conditions of the
Series B Preferred Stock and related agreements, dated January 18, 2000.
The Company now has no outstanding preferred stock.
On September 25, 2000, the Company completed a private placement of
11,320,953 shares of common stock at a price of $7.9625 per share,
resulting in gross proceeds of $90.1 million. The participants in this
private placement include both existing and new shareholders.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks of the Restructuring Plan
The Company has implemented a restructuring plan that includes a
significant reduction in force and a consolidation of its Santa Clara-based
operations into one building. While management believes these measures are
necessary and that the reduction in force will not impair any of the critical
functions of the Company, if the Company is unable to retain and recruit
employees with critical skills in the future, that could have a negative impact
on future results.
---------------
*See "Forward-Looking Statement" on page 1.
18
<PAGE> 22
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 engineering and development, developing new products with improved
price/ performance characteristics and effectively managing the introduction of
new products into targeted markets.
Management in Transition; Employee Turnover
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. The Company has experienced
turnover of several senior members of management. In particular, on February 15,
2000, Mr. Gary J. Sbona replaced Mr. Bruce N. Moore as the Company's Chief
Executive Officer and Chairman of the Board of Directors, and the Company
entered into an agreement with Regent Pacific Management Corporation, ("Regent
Pacific") a management firm of which Mr. Sbona is the Chief Executive Officer.
Pursuant to the agreement, Regent Pacific will provide management services to
the Company, including the services of Mr. Sbona as Chief Executive Officer, one
of a five person Regent Pacific management team. The agreement has a one year
term and may be cancelled by the Company after expiration of the initial 26 week
period, with a minimum compensation to Regent Pacific of $1,950,000 for that
initial period. We rely on Regent Pacific Management Corporation for the
management of Auspex and the loss of these services could adversely affect our
business.
19
<PAGE> 23
Software Product Risks
The Company markets optional software products in addition to its line of
network file servers. These software products include: NeTservices(TM),
DriveGuard(TM), FastBackup(TM), ServerGuard(TM), ServerGuard Global(TM),
DataGuard(TM), Turbocopy, and TurbocopyReplicator. 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 revenues in fiscal 2000.
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 Linux, which
replace or diminish the market acceptance of UNIX operating systems, Network
File System (NFS) or Windows NT, 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 each of fiscal 2000, 1999 and 1998, direct sales of products and
services to Intel represented approximately 7%, 20% and 20%, respectively, of
the Company's revenues. Intel is not obligated to purchase any minimum level of
products from the Company. Additional 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
---------------
*See "Forward-Looking Statement" on page 1.
20
<PAGE> 24
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 fiscal 2000, 1999 and 1998, approximately 37%, 29%, and 31%,
respectively, of the Company's total revenues were derived from markets outside
of North America. The Company expects that sales to the Pacific Rim and Europe
will continue to represent a significant portion of its business.* However,
there can be no assurance that the Company's Pacific Rim or European operations
will continue to be successful.
The Company's international business may be affected by changes in demand
resulting from localized economic and market conditions. For example, the
Company experienced a decrease in revenues from the Pacific Rim during fiscal
2000 and 1999 due to further 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, increases in tariff and freight rates and difficulties in
obtaining necessary export licenses and meeting appropriate local regulatory
standards. For example, the Company has had to modify its products in minor
respects in Japan to comply with local electromagnetic emissions standards, and
must also comply with corresponding European Economic Community standards. In
marketing its products to the European Economic Community, the Company also must
face the challenges posed by a fragmented market complicated by local
distribution channels and local cultural considerations. For international
sales, the Company has largely relied on distributors or OEMs, most of who 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
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
---------------
*See "Forward-Looking Statement" on page 1.
21
<PAGE> 25
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 Compliance
To date, the Company has not incurred material costs associated with Year
2000 compliance nor any disruption with vendors or operations. Furthermore, the
Company believes that any future costs associated with Year 2000 compliance
efforts will not be material.*
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company ensures
the safety and preservation of its invested principal funds by limiting default
risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in safe and high-credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer, guarantor or depository. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
------- ---- ---- ---- ---- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents and short-term
investments
Fixed rate investments......... $29,286 -- -- -- -- -- $29,286
Average interest rate.......... 6.09% -- -- -- -- -- 6.09%
</TABLE>
Foreign Currency Exchange Risk
The Company transacts business in various foreign countries. Its primary
foreign currency cash flows are in certain European countries. During fiscal
2000, 1999 and 1998, the Company employed a foreign currency-hedging program
utilizing foreign currency forward exchange contracts to hedge local currency
cash flows for payroll and other operating expenditures in these European
countries. Under this program, increases or decreases in the Company's local
currency operating expenses and other cash outflows, as translated into U.S.
dollars, are partially offset by realized gains and losses on the hedging
instruments. The goal of this hedging program is to economically guarantee or
lock in the exchange rates on the Company's foreign currency cash outflows
rather than to eliminate the possibility of short-term earnings volatility. As
of June 30, 2000, the Company's foreign currency forward exchange contracts were
comprised of $5.1 million in British Pounds, $1.9 million in German Marks, and
$1.7 million French Francs.
---------------
*See "Forward-Looking Statement" on page 1.
22
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are incorporated by
reference from Part IV Item 14(a) 1 and 2 hereof. The selected quarterly
supplementary data is included as part of Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the Registrant will file a definitive proxy statement
within one hundred twenty (120) days after the end of its fiscal year pursuant
to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders
currently scheduled for November 14, 2000, and the information included in the
Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated by
reference to the information under the heading "Election of Directors" in the
Registrant's Proxy Statement.
Information regarding the executive officers of the Company is incorporated
by reference to the section of Part I of this Annual Report on Form 10-K
entitled "Item 1 -- Business -- Executive Officers of the Company".
Information regarding compliance with Section 16 of the Securities Exchange
Act of 1934, as amended, is incorporated by reference to the information under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of executive officers and directors
of the Company is incorporated by reference to the information under the heading
"Executive Compensation" and "Certain Transactions with Management" in the
Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the caption "Certain
Transactions with Management" in the Registrant's Proxy Statement.
23
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
The following consolidated financial statements of Auspex Systems, Inc. are
filed as part of this Annual Report on Form 10-K.
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... 29
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998.............................. 30
Consolidated Statements of Comprehensive Income for years
ended June 30, 2000, 1999 and 1998........................ 31
Consolidated Balance Sheets as of June 30, 2000 and 1999.... 32
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.................. 33
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998.............................. 34
Notes to Consolidated Financial Statements.................. 35
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules for each of the
three years in the period ending June 30, 2000, 1999 and 1998 are submitted
herewith:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and 47
Reserves..................................................
</TABLE>
(All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or notes thereto.)
3. EXHIBITS
The following exhibits are included in this Annual Report on Form 10-K
(numbered in accordance with Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(1) Certificate of Incorporation of Registrant as amended to
date.
3.2(1) By-laws of Registrant as amended to date.
4.1(2) Preferred Shares Rights Agreement between the Registrant and
The First National Bank of Boston as Rights Agent dated
April 19, 1995.
4.2(3) Registration Rights Agreement, dated as of January 18, 2000,
between Registrant and the investors named therein.
4.3(3) Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware on January 18,
2000.
4.4(3) Registration and Information Rights Agreement dated January
31, 1992.
10.1(1)(4) 1988 Stock Option Plan and forms of Incentive Stock Option
Agreements and Nonstatutory Stock Option Agreements, as
amended to date.
10.2(4)(7) 1993 Directors' Stock Option Plan and forms of Option
Agreements, as amended to date.
10.3(4)(5) 1993 Employee Stock Purchase Plan and forms of Option
Agreements, as amended to date.
10.4(4)(18) 1997 Stock Plan and Form of Stock Option Agreement, as
amended to date.
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5(4) 1998 Non-Statutory Stock Plan and form of Stock Option
Agreement, as amended to date.
10.6(4)(6) Employee Stock Option agreement, as amended, dated April 18,
2000 between Registrant and Gary J. Sbona.
10.7(3) Form of Warrant to Purchase Common Stock, dated January 18,
2000, issued to certain investors.
10.8(3) Securities Purchase Agreement, dated as of January 18, 2000,
between Registrant and the investors listed on the Schedule
of Buyers attached thereto.
10.9(6) Retainer Agreement between Company and Regent Pacific
Management Corporation, effective February 15, 2000.
10.10(1)(4) 401(k) Plan, as amended to date.
10.11(1)(4) Summary of Executive Bonus Program.
10.12(1)(4) Form of Directors' and Officers' Indemnification Agreement
with all of its Directors and Officers.
10.13(1)(8) OEM Agreement, dated March 9, 1993, between the Registrant
and Fuji Xerox Company, Ltd.
10.14(1)(8) Distributor Agreement, dated June 6, 1990, between the
Registrant and Nissho Electronics Corporation.
10.15(8) Distributor Agreement, dated June 6, 1990, between the
Registrant and Nissho Electronics Corporation, as amended on
July 29, 1997.
10.16(1)(8) Agreement between the Registrant and Solectron Corporation,
dated May 20, 1991, as amended on November 18, 1992.
10.17(1) U.S. OEM Discount Agreement between the Registrant and Sun
Microsystems, Inc., effective as of August 18, 1988, as
amended by Addendum dated September 8, 1988 and Addendum
dated September 14, 1989.
10.18(1) Source Code License between the Registrant and Sun
Microsystems, Inc., dated August 31, 1988, as amended on
April 30, 1991, February 11, 1992 and March 18, 1992.
10.19(1) NFS Software Agreement between the Registrant and Sun
Microsystems, Inc., dated September 29, 1988.
10.20(9)(10) Software Agreement between the Registrant and AT&T
Information Systems Inc., dated June 2, 1988, as amended by
Supplement Number 1, Supplement Number 2, dated August 5,
1988, and Supplement Number 3, dated August 10, 1990, as
amended on June 28, 1993.
10.21(9)(10) Sublicensing Agreement between the Registrant and AT&T
Information Systems Inc., dated August 30, 1988, as amended
on June 28, 1993.
10.22(1) Software Agreement between the Registrant and UNIX System
Laboratories, Inc., dated April 29, 1992.
10.23(1) License Agreement with the Regents of the University of
California, dated June 9, 1988, as amended by Addendum dated
October 21, 1988.
10.24(11)(12) Intel Corporation Purchase Agreement between Intel
Corporation and the Registrant, dated March 22, 1994.
10.25(13) Warranty and Service Provider Agreement between the
Registrant and AT&T Global Information Systems,dated April
15, 1994.
10.26(13) SunSoft Technology License and Distribution Agreement
between the Registrant and SunSoft, Inc., dated December 17,
1993.
</TABLE>
25
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.27(13) Amendment No. 2 to Lease Agreement between the Registrant
and WHC-SIX Real Estate, dated February 28, 1996.
10.28(13) Interactive SPARC Software and Sublicensing Agreement
between Auspex Systems, Inc. and Interactive systems
Corporation, dated November 15, 1991.
10.29(14) Lease Agreement by and Between South Bay/San Tomas
Associates and Auspex Systems, Inc., dated January 14, 1997,
for 2800 Scott Boulevard, Santa Clara facility.
10.30(14) Lease Agreement by and Between South Bay/San Tomas
Associates and Auspex Systems, Inc., dated January 14, 1997,
for 2300, 2320, 2330 Central Expressway, Santa Clara
facility.
10.31(16) Form of Change of Control Severance Agreement, filed on May
12, 1999.
10.32(16) Form of Change of Control Severance Agreement entered into
the form of the Company and Bruce N. Moore, President and
Chief Executive Officer, dated June 16, 1999.
10.33(15) Software Support Agreement between the Registrant and AT&T
dated July 10, 1997.
10.34(15) Software Licensing Agreement between the Registrant and AT&T
Corporation dated June 3, 1997, as amended on September 14,
1998.
10.35(15) Source License Agreement between the Registrant and
Programmed Logic Corp. Dated July 1, 1998; Bundled Hardware
OEM Binary License Agreement between the Registrant and
Programmed Logic Corp. dated July 1, 1998; Read-Only License
Agreement between the Registrant and Programmed Logic Corp.
dated July 1, 1998.
10.36(15) Master Value Added Distribution Agreement between the
Registrant and Fuji Xerox Co. Ltd. dated May 21, 1997.
10.37(17) Form of Change of Control Severance Agreement entered into
between the Company and Hans H. Schwarz, Senior Vice
President of Engineering, dated January 1, 2000.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
24.1 Power of Attorney (See Page 28).
27.1 Financial Data Schedule.
</TABLE>
---------------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-60052), which was declared effective on May 11, 1993.
(2) Incorporated by reference to Exhibit 1 filed in connection with the
Registrant's Form 8-A, which was filed on April 20, 1995.
(3) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K (File No.
0-21432), which was filed on January 19, 2000.
(4) Designates management contract or compensatory plan arrangements required
to be filed as an exhibit of this Annual Report on Form 10-K pursuant to
Item 14(c).
(5) Incorporated by reference to exhibits filed in connection with the
Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders,
which was filed on October 8, 1999.
(6) Incorporated by reference to exhibits filed in response to Item 6(a),
"Exhibits," filed in connection with Registrant's Form 10-Q for the quarter
ended March 31, 2000 (File No. 0-21432), which was filed on May 11, 2000.
(7) Incorporated by reference to exhibits filed in connection with Registrants'
Proxy Statement for the 1997 Annual Meeting of Stockholders, which was
filed on October 14, 1997.
(8) Confidential treatment granted by order effective May 11, 1993.
26
<PAGE> 30
(9) Incorporated by reference to identically numbered exhibits filed in
connection with Registrant's Form 10-K for the fiscal year ended June 25,
1993 (File No. 33-60052).
(10) Confidential treatment granted by order effective January 14, 1994.
(11) Incorporated by reference to Exhibit 10.1 filed in connection with
Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No.
0-21432), which was filed on May 16, 1994.
(12) Confidential treatment granted by order effective July 7, 1994.
(13) Incorporated by reference to exhibits filed in connection with the
Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File No.
0-21432), which was filed on September 28, 1994 and confidential treatment
granted by order effective December 5, 1994.
(14) Incorporated by reference to exhibits filed in connection with Registrant's
Form 10-K for the fiscal year ended June 30, 1997 (File No. 0-21432), which
was filed on September 24, 1997.
(15) Incorporated by reference to exhibits filed in connection with Registrant's
Form 10-K for the fiscal year ended June 30, 1999 (File No. 0-21432), which
was filed on September 27, 1999.
(16) Incorporated by reference to exhibits in connection with Registrant's Form
10-Q for the quarter ended March 31, 1999 (File No. 0-21432), which was
filed on May 12, 1999. Form of Change of Control Severance Agreement
entered into between 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, dated November 25, 1998
(17) Incorporated by reference to exhibits in connection with Registrant's Form
10-Q for the quarter ended December 31, 1999, which was filed on February
10, 2000.
(18) Incorporated by reference to exhibits filed in connection with Registrant's
Proxy Statement for the Special Meeting of Stockholders held on April 23,
1998, which was filed on March 20, 1998.
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K dated April 24, 2000,
pursuant to which it reported the issuance of a Press Release to reporting its
results for the fiscal quarter ended March 31, 2000.
27
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUSPEX SYSTEMS, INC.
Date: September 26, 2000 By: /s/ GARY J. SBONA
--------------------------------------
Gary J. Sbona
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary J. Sbona and Peter R. Simpson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of these
attorneys-in-fact, or his or her substitute or substitutes may do, or cause to
be done, by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ GARY J. SBONA Chief Executive Officer September 26, 2000
----------------------------------------------------- and Director
(Gary J. Sbona) (Principal Executive
Officer)
/s/ PETER R. SIMPSON Chief Financial Officer September 26, 2000
----------------------------------------------------- (Principal Financial and
(Peter R. Simpson) Principal Accounting
Officer)
/s/ KARL C. POWELL Director September 26, 2000
-----------------------------------------------------
(Karl C. Powell)
/s/ JOHN E. MCNULTY Director September 26, 2000
-----------------------------------------------------
(John E. McNulty)
/s/ RICHARD E. CHAPMAN Director September 26, 2000
-----------------------------------------------------
(Richard E. Chapman)
</TABLE>
28
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Auspex Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Auspex
Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2000 and
1999, and the related consolidated statements of operations, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended June 30, 2000. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Auspex Systems, Inc. and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements, and in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
July 21, 2000
29
<PAGE> 33
AUSPEX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues
Product revenue.......................................... $ 54,607 $ 81,737 $142,812
Service revenue.......................................... 27,592 31,738 26,100
-------- -------- --------
Total revenues................................... 82,199 113,475 168,912
-------- -------- --------
Cost of Revenues
Cost of product revenue.................................. 37,657 42,196 74,407
Cost of service revenue.................................. 25,805 23,598 21,017
-------- -------- --------
Total cost of revenues........................... 63,462 65,794 95,424
-------- -------- --------
Gross margin............................................. 18,737 47,681 73,488
-------- -------- --------
Operating Expenses
Marketing and sales...................................... 41,619 42,808 51,438
Engineering and development.............................. 30,616 35,272 34,000
General and administrative............................... 10,184 10,466 9,110
Restructuring charges.................................... 17,642 -- 7,349
-------- -------- --------
Total operating expenses......................... 100,061 88,546 101,897
-------- -------- --------
Loss from operations....................................... (81,324) (40,865) (28,409)
-------- -------- --------
Other Income
Interest income.......................................... 1,708 2,039 2,430
Interest expense......................................... (112) (35) (38)
Other income (expense)................................... (335) 33 (651)
-------- -------- --------
Total other income............................... 1,261 2,037 1,741
-------- -------- --------
Loss before income taxes................................. (80,063) (38,828) (26,668)
Provision for (benefit from) income taxes.................. 697 217 (9,334)
-------- -------- --------
Net loss................................................... (80,760) (39,045) (17,334)
-------- -------- --------
Dividends to preferred stockholders........................ 2,350 -- --
Net loss available to common stockholders................ $(83,110) $(39,045) $(17,334)
======== ======== ========
Net loss per share
Basic.................................................... $ (2.95) $ (1.50) $ (0.69)
======== ======== ========
Diluted.................................................. $ (2.95) $ (1.50) $ (0.69)
======== ======== ========
Number of shares used in per share computations
Basic.................................................... 28,126 25,978 25,268
======== ======== ========
Diluted.................................................. 28,126 25,978 25,268
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 34
AUSPEX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss................................................... $(80,760) $(39,045) $(17,334)
Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for-sale
securities, net of tax................................ 32 (81) 28
Foreign currency translation adjustment, net of tax...... 254 (34) (102)
-------- -------- --------
Comprehensive loss......................................... $(80,474) $(39,160) $(17,408)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 35
AUSPEX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 23,615 $ 26,592
Short-term investments.................................... 5,671 16,045
Accounts receivable, net of allowances of $1,720 and
$1,407 respectively.................................... 6,728 20,374
Inventories............................................... 5,095 10,905
Income tax receivable..................................... -- 4,865
Prepaid expenses and other................................ 4,115 5,054
-------- --------
Total current assets.............................. 45,224 83,835
-------- --------
Property and Equipment
Computer and manufacturing equipment...................... 34,971 39,292
System spares............................................. 17,322 15,992
Furniture and fixtures.................................... 1,546 1,466
Leasehold improvements.................................... 5,369 13,679
-------- --------
59,208 70,429
Less -- accumulated depreciation and amortization......... (44,149) (41,588)
-------- --------
Total property and equipment, net................. 15,059 28,841
Other Assets................................................ 1,715 2,372
-------- --------
$ 61,998 $115,048
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 8,053 $ 13,316
Accrued liabilities....................................... 14,440 11,975
Deferred revenue.......................................... 7,907 9,276
-------- --------
Total current liabilities......................... 30,400 34,567
-------- --------
Long-Term Liabilities
Deferred revenue.......................................... 954 1,304
-------- --------
Stockholders' Equity
Preferred stock, $.001 par value -- 5,000,000 shares
authorized; 18,750 and zero shares issued and
outstanding respectively............................... -- --
Common stock, $.001 par value -- 50,000,000 shares
authorized; 29,940,804 and 26,734,762 shares issued and
outstanding, respectively................................. 30 27
Additional paid-in capital.................................. 120,191 85,903
Retained deficit............................................ (89,228) (6,118)
Unrealized loss from available-for-sale securities.......... (11) (43)
Cumulative translation adjustment........................... (338) (592)
-------- --------
Total stockholders' equity........................ 30,644 79,177
-------- --------
$ 61,998 $115,048
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 36
AUSPEX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN
FROM
COMMON STOCK PREFERRED STOCK ADDITIONAL RETAINED AVAILABLE- CUMULATIVE
------------------- --------------- PAID-IN EARNINGS FOR-SALE TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES ADJUSTMENT TOTAL
---------- ------ ------ ------ ---------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997.... 25,004,965 $25 -- $-- $ 78,435 $ 50,261 $ (5) $(400) $128,316
Issuance of common stock
to employees............ 689,075 1 -- -- 3,715 -- -- -- 3,716
Tax benefits related to
exercise of stock
options................. -- -- -- -- 606 -- -- -- 606
Unrealized gain on
available-for-sale
securities.............. -- -- -- -- -- -- 43 -- 43
Translation adjustment.... -- -- -- -- -- -- -- (158) (158)
Net Loss.................. -- -- -- -- -- (17,334) -- -- (17,334)
---------- --- ------ -- -------- -------- ---- ----- --------
BALANCE, JUNE 30, 1998.... 25,694,040 26 82,756 32,927 38 (558) 115,189
Issuance of common stock
to employees............ 1,040,722 1 -- -- 3,147 -- -- -- 3,148
Unrealized loss on
available-for-sale
securities.............. -- -- -- -- -- -- (81) -- (81)
Translation adjustment.... -- -- -- -- -- -- -- (34) (34)
Net loss.................. -- -- -- -- -- (39,045) -- -- (39,045)
---------- --- ------ -- -------- -------- ---- ----- --------
BALANCE, JUNE 30, 1999.... 26,734,762 27 -- -- 85,903 (6,118) (43) (592) 79,177
Issuance of common stock
to employees............ 2,104,725 2 -- -- 7,096 -- -- -- 7,098
Issuance of preferred
stock................... -- -- 25,000 -- 24,843 -- -- -- 24,843
Conversion of preferred
stock into common
stock................... 998,299 1 (6,250) -- (1) -- -- -- --
Issuance of common stock
dividends............... 103,018 -- -- -- 698 (698) -- -- --
Accretion of fair value of
warrants................ -- -- -- -- 1,109 (1,109) -- -- --
Accretion of preferred
stock discount.......... -- -- -- -- 543 (543) -- -- --
Unrealized gain on
available-for-sale
securities.............. -- -- -- -- -- -- 32 -- 32
Translation adjustment.... -- -- -- -- -- -- -- 254 254
Net loss.................. -- -- -- -- -- (80,760) -- -- (80,760)
---------- --- ------ -- -------- -------- ---- ----- --------
BALANCE, JUNE 30, 2000.... 29,940,804 $30 18,750 $-- $120,191 $(89,228) $(11) $(338) $ 30,644
========== === ====== == ======== ======== ==== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 37
AUSPEX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss................................................. $(80,760) $(39,045) $(17,334)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Depreciation and amortization......................... 9,123 13,332 14,378
Restructuring charges, net of tax..................... 17,642 -- 5,903
Changes in assets and liabilities:
Decrease in accounts receivable..................... 13,646 5,268 17,488
(Increase) decrease in inventories.................. 3,751 (2,931) 2,188
(Increase) decrease in income tax receivable........ 4,865 4,145 (9,010)
(Increase) decrease in deferred tax assets.......... -- 8,970 (1,661)
(Increase) decrease in prepaid expenses and other... 939 (205) 157
Increase (decrease) in accounts payable............. (5,263) 3,250 3,160
Decrease in accrued liabilities..................... (5,735) (513) (666)
Increase (decrease) in deferred revenue............. (1,719) 1,130 (41)
-------- -------- --------
Net cash (used in) provided by operating activities... 43,553 (6,599) 14,562
-------- -------- --------
Cash Flows from Investing Activities
Purchases of available-for-sale short-term investments... (4,791) (38,016) (25,096)
Proceeds from sales/maturities of available-for-sale
short-term investments................................ 15,197 49,339 33,520
Purchase of property and equipment....................... (2,682) (15,205) (28,894)
Change in other assets................................... 657 (236) --
-------- -------- --------
Net cash (used in) provided by investing activities... 8,381 (4,118) (20,470)
-------- -------- --------
Cash Flows from Financing Activities
Proceeds from sale of common stock....................... 7,098 3,148 4,322
Proceeds from sale of preferred stock.................... 24,843
Proceeds from sale and leaseback of equipment............ -- 10,883 --
-------- -------- --------
Net cash provided by financing activities............. 31,941 14,031 4,322
-------- -------- --------
Effect of Exchange Rate Changes on Cash.................... 254 (34) (158)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....... (2,977) 3,280 (1,744)
Cash and Cash Equivalents, Beginning of Year............... 26,592 23,312 25,056
-------- -------- --------
Cash and Cash Equivalents, End of Year..................... $ 23,615 $ 26,592 $ 23,312
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 38
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. ORGANIZATION
Auspex Systems, Inc. (the "Company") was incorporated in 1987 in California
and reincorporated in Delaware in 1991. The Company develops, manufactures,
markets, sells and supports a line of high-performance UNIX/Windows NT
multi-protocol network file/data servers for the technical workstation market.
The Company's markets are principally in North America, Pacific Rim and Europe
and include customers in the technical and commercial computing market. See Note
8 for information on revenues by geographic area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation 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 is operating and reporting on a
52-53 week fiscal year. Accordingly, the Company's fiscal year 2000 ended 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 consolidated financial
statements for fiscal 2000.
Principles of Consolidation The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries after elimination
of intercompany accounts and transactions.
Estimates in the Preparation of Consolidated Financial Statements The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translations The functional currency of the Company's
foreign subsidiaries is the local currency. Accordingly, gains and losses
resulting from the translation of the subsidiaries' financial statements are
reported as a separate component of stockholders' equity.
Revenue Recognition Product revenue includes hardware sales and software
license fees. Effective July 1, 1997, the Company changed its revenue
recognition policy on system sales to end users such that revenues from system
sales are generally recognized upon shipment. Previously, the Company generally
recognized system sales to end users when the equipment had been shipped,
installed and accepted by the end user. The reason for this change was to better
conform the Company's policy with industry practices. The impact of this change
did not have a material effect on the Company's consolidated financial
statements. The installation of the Company's systems is not considered a
significant obligation and acceptance by the customer is not considered a
significant uncertainty. Revenues from upgrade sales are generally recognized at
the time the equipment is shipped. Provisions for product sales returns and
allowances are recorded in the same period as the related revenue. Revenues
earned under software license agreements are recognized in accordance with
Statement of Position ("SOP") 97-2. Software revenues are recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the fee is fixed or determinable, collectibility is probable
and vendor specific objective evidence exists to allocate a portion of the total
fee to any undelivered elements of the arrangement.
Service revenue includes installation, maintenance and training, and is
recognized ratably over the contractual period or as the services are provided.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company is currently evaluating the effect
35
<PAGE> 39
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
that such adoption may have on the consolidated results of operations and
financial position and will be required to adopt SAB 101 in the fourth quarter
of fiscal 2001.
Cash, Cash Equivalents and Short-Term Investments For purposes of the
statement of cash flows, all cash equivalents consist of investments in money
market deposits, commercial paper, and US Agency bonds with original maturities
of three months or less. Substantially all short-term investments consist of
corporate bonds, commercial paper, certificate of deposits, and US Agency bonds,
which the Company intends to hold between three and twelve months.
The Company classifies its investments in debt and equity securities as
available-for-sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Securities classified as available-for-sale are reported at
fair market value with the related unrealized gains and losses, reported as a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other than temporary are included in other income
in the consolidated statements of operations.
At June 30, 2000, the Company's available-for-sale securities had
contractual maturities that expire at various dates through May 2001. The fair
value of available-for-sale securities was determined based on quoted market
prices at the reporting date for those securities.
At June 30, 2000 and 1999, the amortized cost basis, aggregate fair value
and gross unrealized holding gains (losses) by major security type are as
follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR VALUE GAINS (LOSSES)
--------- ---------- --------------
<S> <C> <C> <C>
JUNE 30, 2000
Available-for-Sale Securities
US Agency (Gov't)........................... $ 4,609 $ 4,601 $ (8)
Certificate of deposit...................... 2,001 2,000 (1)
Corp Bonds.................................. 1,675 1,683 8
Money market................................ 2,317 2,317 --
Commercial paper............................ 4,984 4,974 (10)
------- ------- ----
Total Investment in Securities......... $15,586 $15,575 $(11)
======= ======= ====
JUNE 30, 1999
Available-for-Sale Securities
US Agency (Gov't)........................... $13,308 $13,281 $(27)
Auction rate securities..................... 2,900 2,900 --
Certificate of deposit...................... 1,999 1,996 (3)
Corporate bonds............................. 2,507 2,498 (9)
Money market................................ 3,380 3,380 --
Commercial paper............................ 5,022 5,018 (4)
------- ------- ----
Total Investment in Securities......... $29,116 $29,073 $(43)
======= ======= ====
</TABLE>
In fiscal year 2000, there were no significant gains or losses realized on
the Company's cash equivalents or short-term investments.
Supplemental Statement of Cash Flows Disclosures Cash paid for interest
during fiscal 2000, 1999 and 1998 was approximately $13,000, $11,000 and
$38,000, respectively. Cash paid for income taxes during fiscal 2000, 1999 and
1998 was approximately $379,000, $726,000, and $1,621,000, respectively. Net
inventory capitalized into property and equipment was approximately $2,059,000
and $4,234,000 for fiscal 2000 and
36
<PAGE> 40
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
1999, respectively. No inventory was capitalized into property and equipment in
fiscal 1998. In fiscal 1998, non-cash activity consisted of approximately
$606,000 from tax benefits related to exercise of stock options.
Concentrations of Credit Risk Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
investments and accounts receivable. The Company's cash investment policy limits
the amount of credit exposure to any one issuer and restricts purchase of these
investments from issuers evaluated as creditworthy. Concentrations of credit
risk in trade receivables is limited as a result of the large number of
customers comprising the Company's customer base and their dispersion across
many different industries and geographies.
Inventories Inventories are stated at the lower of cost (first-in,
first-out) or market, and include material, labor and manufacturing overhead
costs. Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Purchased materials..................................... $1,481 $ 4,158
Systems in process...................................... 2,322 4,044
Finished goods.......................................... 1,292 2,703
------ -------
$5,095 $10,905
====== =======
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were fully reserved at June 30, 2000 and
1999.
Certain of the Company's products contain critical components supplied by a
single or a limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products for
its customers. Any significant shortage of these components or the failure of
the third party suppliers to maintain or enhance these components could
materially and adversely affect the Company's results of operations.
Property And Equipment Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Computer and manufacturing equipment.... 1.5 to 5 years
System spares........................... 2 to 3 years
Furniture and fixtures.................. 3 years
Leasehold improvements.................. Shorter of the lease term or estimated useful life
</TABLE>
Software Development Costs The Company accounts for software development
costs in compliance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". Capitalization of software development costs begins upon
the determination of technological feasibility. The determination of
technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors including anticipated future gross product revenues, estimated
economic life and changes in hardware and software technology. No amounts were
capitalized in fiscal 2000, 1999 and 1998.
Amortization of capitalized software development costs begins when the
products are available for general release to customers and is computed on an
individual product basis and is the greater of the amount computed on a
units-sold basis or straight-line basis over the estimated economic life of the
product. Amortization of software development costs amounted to $12,000 and
$343,000 for the fiscal years ended June 30, 1999 and 1998, respectively.
Capitalized software development costs were fully amortized as of June 30, 1999
and no amounts were amortized in fiscal 2000.
37
<PAGE> 41
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
Accrued Liabilities Accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Payroll, bonus and vacation.............................. $ 3,428 $ 6,616
Restructuring............................................ 4,257 452
Other.................................................... 6,755 4,907
------- -------
$14,440 $11,975
======= =======
</TABLE>
Net Loss Per Share Basic net loss 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 and conversion of preferred stock Diluted net income per share is
computed based on the weighted average number of common shares plus dilutive
potential common shares calculated in accordance with the treasury stock method.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss................................................... $(80,760 $(39,045) $(17,334)
======== ======== ========
Basic Loss Per Share
Net loss available to common stockholders................ $(83,110) $(39,045) $(17,334)
Weighted average common shares outstanding............... 28,126 25,978 25,268
-------- -------- --------
Basic net loss per share................................. $ (2.95) $ (1.50) $ (0.69)
======== ======== ========
Diluted Net Loss Per Share
Net loss available to common stockholders................ $(83,110) $(39,045) $(17,334)
-------- -------- --------
Weighted average common shares outstanding............... 28,126 25,978 25,268
Dilutive potential common shares from stock options...... -- -- --
-------- -------- --------
Weighted average common shares and dilutive potential
common shares......................................... 28,126 25,978 25,268
-------- -------- --------
Diluted net loss per share............................... $ (2.95) $ (1.50) $ (0.69)
======== ======== ========
</TABLE>
All options outstanding during fiscal 2000 and 1999, approximately
6,239,522 and 4,887,000 shares respectively, were excluded from the computation
of diluted loss per share since their inclusion would have been anti-dilutive
due to the loss available to common stockholders.
Employee Stock Plans In accordance with the provisions of SFAS No. 123, the
Company applies Accounting Principles Board ("AFB") Opinion No. 25 and related
interpretations to account for its employee stock option and stock purchase
plans, and accordingly, does not recognize compensation expense. Note 6 to the
Consolidated Financial Statements contains a summary of the pro forma effects to
reported net loss and net loss per share as if the Company had elected to
recognize compensation expense based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123.
Comprehensive Income The Company adopted 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 loss includes unrealized
holding gains (losses) on available-for-sale securities and foreign currency
translation adjustments.
38
<PAGE> 42
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The following table sets forth the components of other comprehensive income
(loss) net of income tax for the year ended June 30 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
TAX NET-OF- TAX NET-OF- TAX NET-OF-
PRE-TAX (EXPENSE) TAX PRE-TAX (EXPENSE) TAX PRE-TAX (EXPENSE) TAX
AMOUNT ON BENEFIT AMOUNT AMOUNT ON BENEFIT AMOUNT AMOUNT ON BENEFIT AMOUNT
------- ---------- ------- ------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other comprehensive income
(loss):
Unrealized holding gains
(losses) on
available-for-sale
securities................. $ 32 $-- $ 32 $ (81) $-- $ (81) $ 43 $(15) $ 28
Foreign currency Translation
adjustment................. 254 -- 254 (34) -- (34) (158) 56 (102)
---- --- ---- ----- --- ----- ----- ---- -----
$286 $-- $286 $(115) $-- $(115) $(115) $ 41 $ (74)
==== === ==== ===== === ===== ===== ==== =====
</TABLE>
Segments In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
SFAS No. 131 changes the way companies report selected segment information in
annual financial statements and also requires companies to report selected
segment information in interim financial reports to stockholders. The Company
operates in one reportable segment. SFAS No. 131 has been implemented by the
Company. Note 9 to the Consolidated Financial Statements contains a summary
table of industry segment, geographic and customer information.
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.
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 year ended June 30, 1998
was approximately $3,045,000.
3. LINE OF CREDIT
In December 1999, the Company entered into a revolving line of credit
agreement with a bank under which it can borrow up to $15,000,000. The line of
credit bears interest as follows, each Euro dollar rate loan shall bear interest
at a per annum rate of 2.25 percentage points above the adjusted LIBOR rate (The
LIBOR rate was 6.78% at June 30, 2000); all other obligations shall bear
interest at a per annum rate of .25 percentage points above the Prime Rate (The
Prime Rate equals 9.50% at June 30, 2000). The line of credit expires on
December 22, 2002. At June 30, 2000 there were no borrowings outstanding under
the line of credit agreement. There were commitments against the line of credit
for two letters of credit totaling approximately $2,824,000, as of June 30,
2000. The line of credit is secured by the Company's inventory and accounts
receivable. The line of credit agreement contains certain financial covenants
determined on a quarterly basis. During the third and fourth quarters of fiscal
2000, the company was out of compliance with certain covenants, but obtained
waivers for the non-compliance from the bank.
4. COMMITMENTS AND CONTINGENCIES
Facilities and equipment are leased under various operating leases. Rent
expense was approximately $6,300,000, $5,204,000, and $4,720,000, for fiscal
2000, 1999 and 1998, respectively. During 1997, the Company entered into lease
agreements for four buildings in Santa Clara, California. The leases for these
39
<PAGE> 43
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
facilities commenced in March 1998 and expire in February 2010. During fiscal
1999, the Company entered into a sub-lease agreement for one building in its
Santa Clara facility. During fiscal year 2000, the Company renegotiated the
existing lease agreements for the facilities in Santa Clara and consolidated
from four buildings into one building, and was released from all remaining lease
obligations related to the vacated buildings.
As of June 30, 2000, future minimum gross lease payments under
non-cancelable leases were as follows (in thousands):
<TABLE>
<CAPTION>
NET
OPERATING SUB-LEASE OPERATING
YEARS ENDING JUNE 30, LEASES PAYMENTS LEASES
--------------------- --------- --------- ---------
<S> <C> <C> <C>
2001............................................. $ 8,012 $(1,538) $ 6,474
2002............................................. 5,848 (1,575) 4,273
2003............................................. 3,342 (1,613) 1,729
2004............................................. 2,250 -- 2,250
2005............................................. 1,966 -- 1,966
Thereafter....................................... 8,558 -- 8,558
------- ------- -------
Total minimum lease payments................ $29,976 $(4,726) $25,250
======= ======= =======
</TABLE>
5. RESTRUCTURING COSTS
In the quarter ended March 31, 2000, the Company recorded restructuring
charges totaling approximately $17,642,000. These charges reflect steps the
Company is taking to strengthen its competitiveness in the growing Network
Attached Storage market, streamline operations and reduce overall costs. The
restructuring charges are comprised primarily of $3,800,000 for reduction of
personnel and $13,842,000 to retire excess equipment and other assets related to
the restructuring of company operations. In connection with the restructuring
charges taken in the quarter ended March 31, 2000, the Company terminated 169
employees and consolidated all of its Santa Clara headquarters activities into
one facility. The Company substantially completed the implementation of the
restructuring plan at the end of May 2000.
In the quarter ended June 30, 1998, the Company recorded restructuring
charges totaling $7,349,000. These charges reflect steps the Company took to
improve its product development efforts, streamline operations and reduce
overall costs. The restructuring charges comprised $1,100,000 for severance and
benefits related to reduction of personnel due to consolidation of certain
operations, $1,200,000 for consolidation of excess facilities and $5,049,000 to
write off or write down equipment and other assets related to operations and
activities that the Company has exited. In connection with the restructuring
charges taken in the quarter ended June 30, 1998, the Company terminated 84
employees as of the fiscal year ended June 30, 1998. The employee groups
affected by the reduction in force included engineering, sales, marketing,
customer service and operations. The implementation of the restructuring plan
was substantially completed at the end of September 1998.
40
<PAGE> 44
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The following table summarizes the Company's restructuring activity for the
fiscal years ended 2000, 1999 and 1998, respectively, (in thousands):
<TABLE>
<CAPTION>
EXCESS
SEVERANCE EQUIPMENT
AND EXCESS AND OTHER
BENEFITS FACILITIES ASSETS TOTAL
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Restructuring amounts..................... $ 1,100 $1,200 $ 5,049 $ 7,349
Cash charges.............................. (1,100) (800) -- (1,900)
Non-cash charges.......................... -- -- (4,034) (4,034)
------- ------ -------- --------
Reserve balances, June 30, 1998........... -- 400 1,015 1,415
------- ------ -------- --------
Non-cash charges.......................... -- (86) (877) (963)
------- ------ -------- --------
Reserve balances, June 30, 1999........... -- 314 138 452
------- ------ -------- --------
Restructuring amounts..................... 3,800 -- 13,842 17,642
Cash Charges.............................. (3,511) (314) (3,825)
Non-cash charges.......................... -- -- (10,012) (10,012)
------- ------ -------- --------
Reserve balances, June 30, 2000........... $ 289 $ -- $ 3,968 $ 4,257
======= ====== ======== ========
</TABLE>
6. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has four stock option plans, the 1988 Employee Stock Option
Plan ("1988 Plan"), the 1997 Stock Plan ("1997 Plan"), the 1998 Non-Statutory
Stock Option Plan ("1998 Plan") and the Directors' Stock Option Plan
("Directors' Plan"), and an employee stock purchase plan ("1993 Employee Stock
Purchase Plan"). The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) and diluted earnings (loss) per share
would have been adjusted to the following pro forma amounts (in thousands,
except per share data):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported...................................... $(83,110) $(39,045) $(17,334)
Pro forma........................................ $(92,859) $(43,676) $(22,301)
Diluted loss per share:
As reported...................................... $ (2.95) $ (1.50) $ (0.69)
Pro forma........................................ $ (3.30) $ (1.68) $ (0.88)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: risk-free
interest rates of 5.8%, 5.0% and 5.5%, respectively; expected volatility of
144%, 81% and 68%, respectively; no expected dividends, and an expected life of
0.53 years beyond the vest date for each year's vesting increment of an option.
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
In August 1998, the Company offered its employees the ability to reprice
stock options granted prior to June 30, 1998 to the current fair market value.
As a result, the Company repriced 3,739,857 options at prices
41
<PAGE> 45
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
ranging from $2.75 to $18.25 per share at the then current fair market value of
$2.75 per share. Employees who submitted their option grants for repricing
agreed to forgo exercising their vested options for six months.
In November 1996, the Company offered its employees the option of
exchanging and canceling stock options granted from June 1995 through October
1996 for new options priced as of November 1, 1996. As a result, the Company
canceled 1,933,592 options at prices ranging from $10.75 to $23.125 per share
and reissued the same number of options at the then current fair market value of
$10.25 per share. Employees who submitted their option grants for repricing had
their vesting schedules amended by moving their vesting back three months or
restarting the vesting as of the new grant date, depending on the date of the
grant.
The Company may sell up to 2,100,000 shares of stock to its regular
full-time employees under the 1993 Employee Stock Purchase Plan. The Company has
sold 152,859, 357,101, and 282,337 shares in 2000, 1999 and 1998, respectively,
and has sold 1,444,300 shares through June 30, 2000. The Company sells shares at
85% of the lower of the stock's closing market price on the subscription or
purchase date of the six-month offering period. The weighted-average fair value
of shares sold in 2000, 1999 and 1998, respectively, was $6.49, $3.71, and
$6.00, respectively.
The Company could grant options for up to 10,000,000 shares under the 1988
Plan which expired in April 1998. The Company has 415,394 options outstanding at
June 30, 2000. The option exercise price is not less than 100% of the fair value
of the shares on the date of grant, except that non-statutory options may be
granted at 85% of such fair value. The 1988 Plan options are fully vested after
five years and expire after ten years. For options granted after November 20,
1997, options are generally fully vested after four years and expire after ten
years.
Stockholders approved the 1997 Plan in April 1998. The Company may grant
options for up to 9,250,000 shares under the 1997 Plan. The Company has
1,115,438 options outstanding at June 30, 2000. The option exercise price is not
less than 100% of the fair value of the shares on the date of grant, except that
non-statutory options may be granted at 85% of such fair value. The 1997 Plan
options are generally fully vested after four years and expire after ten years.
The Board of Directors approved the 1998 Plan in August 1998. The Company
may grant options for up to 3,000,000 shares under the 1998 Plan. The Company
has 2,267,138 options outstanding at June 30, 2000. The options exercise price
is not less than 100% of the fair value of the shares on the date of grant. The
1998 Plan options are generally fully vested after four years and expire after
ten years.
The Company may grant options for up to 825,000 shares under the Directors'
Plan. The Company has 40,000 options outstanding at June 30, 2000. The option
exercise price equals the closing price of the stock on the day of the grant.
The options are generally fully vested after four years and expire after ten
years.
42
<PAGE> 46
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
A summary of the status of the Company's stock option plans at June 30,
2000, 1999 and 1998 incorporating changes during the years then ended is
presented in the table below (share amounts in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ----------------- -----------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
----------------- ----------------- -----------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 4,857 $4.68 4,583 $9.45 4,080 $ 9.07
Granted.......................... 6,083 $7.74 2,610 $6.34 2,565 $ 9.71
Exercised........................ (1,952) $3.13 (684) $2.67 (410) $ 4.89
Cancelled........................ (2,749) $6.20 (1,622) $6.13 (1,652) $10.04
------ ------ ------
Outstanding at end of year....... 6,239 $7.52 4,887 $4.68 4,583 $ 9.45
====== ====== ======
Exercisable end of year.......... 1,605 $7.26 1,158 $3.42 1,303 $ 8.91
====== ====== ======
Weighted fair value per option
granted........................ $4.75 $1.83 $ 4.71
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER REMAINING YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$1.94 - $ 6.25........... 1,045 7.99 $3.99 446 $3.03
$6.28 - $ 6.28........... 1,777 9.86 $6.28 158 $6.28
$6.75 - $ 8.88........... 480 8.84 $7.47 110 $7.57
$9.44 - $12.13........... 2,937 5.46 $9.52 891 $9.52
----- -----
$1.94 - $12.13........... 6,239 7.39 $7.52 1,605 $7.26
===== =====
</TABLE>
Stockholder Rights Plan During 1995, the Company established a stock
purchase rights plan ("the Rights Plan"), under which stockholders may be
entitled to purchase stock in the Company, or in an acquirer of the Company at a
discounted price in the event of certain efforts to acquire control of the
Company. The rights expire on the earliest of (a) April 19, 2005, (b) exchange
or redemption of the rights pursuant to the Rights Plan, or (c) consummation of
a merger or consolidation.
7. PREFERRED STOCK
On January 18, 2000, the Company sold $25 million of its Series B
Convertible Preferred Stock to four institutional investors in a private
placement. The Series B Convertible Preferred Stock is non-voting, carries a 7%
per annum cumulative dividend, which may be paid in cash or Common Stock, and is
convertible into the Company's Common Stock at an 8% discount. In connection
with the sale, the Company issued four-year warrants to purchase an aggregate of
1,605,136 shares of the Company's Common Stock at a price of $8.5663 per share.
During the year ended June 30, 2000, the Company recorded $2,350,000 in
dividends to holders of the Series B Convertible Preferred Stock as a result of
the 7% dividend, the 8% conversion discount and the warrants. Each share of this
stock has liquidation value of $1,000 and pays annual dividends of 7% on a
quarterly basis, payable in cash or stock. Each share of Series B Preferred
Stock is non-voting and is convertible into Common Stock as set forth in detail
in the Certificate of Designations, Preferences and Rights of Series B Preferred
Stock filed with the Secretary of State of the State of Delaware on January 18,
2000.
43
<PAGE> 47
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
8. INCOME TAXES
The provision for (benefit from) income taxes is based upon the loss before
income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................... $(80,481) $(39,381) $(29,032)
Foreign............................................ $ 418 $ 553 $ 2,364
-------- -------- --------
Total.................................... $(80,063) $(38,828) $(26,668)
======== ======== ========
</TABLE>
The provision for (benefit from) income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
2000 1999 1998
---- ---- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $ -- $(6,992)
State................................................. 80 -- (68)
Foreign............................................... 617 217 1,049
---- ---- -------
697 217 (6,011)
---- ---- -------
Deferred (benefit):
Federal............................................... -- -- (3,278)
State................................................. -- -- (45)
---- ---- -------
-- -- (3,323)
---- ---- -------
Net tax provision(benefit)................................. $697 $217 $(9,334)
==== ==== =======
</TABLE>
The provision for (benefit from) income taxes is reconciled with the
Federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Provision (benefit) computed at Federal statutory @
35% rate.......................................... $(28,022) $(13,590) $(9,334)
Increase in valuation allowance................ 42,205 13,590 --
State taxes, net of Federal tax benefit........ (3,585) -- (113)
Research and development and other credits..... (1,163) -- (1,300)
Foreign taxes and other........................ (8,738) 217 1,413
-------- -------- -------
Net tax provision (benefit).................... $ 697 $ 217 $(9,334)
======== ======== =======
Net effective tax rate......................... (1)% 0% 35%
======== ======== =======
</TABLE>
44
<PAGE> 48
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Net operating losses........................................ $ 41,355 $ 8,009
Depreciation and asset basis differences.................... 1,877 1,782
Inventory reserve........................................... 3,007 3,028
Other reserves and accruals, not currently deductible for
tax purposes.............................................. 3,664 820
Restructuring reserve....................................... 1,706 176
Other and Credits........................................... 4,186 (225)
-------- --------
Gross deferred tax asset.................................... $ 55,795 $ 13,590
Less: valuation allowance................................... (55,795) (13,590)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>
As of June 30, 2000, the Company had gross deferred tax assets of
approximately $55.8 million. Due to the uncertainty surrounding the realization
of the future tax attributes in future tax returns, the Company has recorded a
valuation allowance against its net deferred tax assets.
As of June 30, 2000, the Company had NOL carryforwards of approximately
$107.0 million and $77.0 million for federal and state tax purposes,
respectively. If not utilized, the Federal NOL carryforwards expire through 2019
and the state NOL carryforwards will begin to expire in 2003. The Company also
has research credits of approximately $2.0 million and $2.2 million for federal
and state tax purposes, respectively. If not utilized, the federal research
credits begin to expire through 2019.
9. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
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 years ended June 30, (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- --------------------- ---------------------
LONG LIVED LONG LIVED LONG LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States.............. $46,017 $14,189 $ 75,951 $27,966 $110,801 $32,523
Europe..................... 18,564 493 19,330 625 28,689 860
Pacific Rim................ 11,443 377 13,453 249 23,388 229
Canada..................... 6,175 -- 4,741 1 6,034 5
------- ------- -------- ------- -------- -------
Total............ $82,199 $15,059 $113,475 $28,841 $168,912 $33,617
======= ======= ======== ======= ======== =======
</TABLE>
In fiscal 2000, no customers accounted for more than 10% of revenues. One
customer accounted for 20% of total revenues in each of fiscal 1999 and 1998.
10. EVENTS SUBSEQUENT TO DATE OF AUDITORS REPORT (UNAUDITED)
On August 15, 2000, the Company's stockholders authorized an increase in
the number of shares of Common Stock of the Company from 50,000,000 to
120,000,000.
45
<PAGE> 49
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
The remaining 75% of the Company's outstanding Series B Preferred Stock has
been converted into 3,394,781 shares of common stock, effective September 15,
2000, in accordance with the terms and conditions of the Series B Preferred
Stock and related agreements, dated January 18, 2000. The Company now has no
outstanding preferred stock.
On September 25, 2000, the Company completed a private placement of
11,320,953 shares of common stock at a price of $7.9625 per share, resulting in
gross proceeds of $90.1 million. The participants in this private placement
include both existing and new shareholders.
46
<PAGE> 50
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
for our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (Nos. 33-67100, 33-76640, 333-00886,
333-56305, 333-71115, 333-56307 and 333-94545) and on Form S-3 (Nos. 333-40452
and 333-30672).
/s/ ARTHUR ANDERSEN LLP
47
<PAGE> 51
AUSPEX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO AGAINST END
DESCRIPTION OF PERIOD EXPENSE REVENUES DEDUCTIONS OF PERIOD
----------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Allowances:
Year ended June 30, 1998.................... $1,193 $ 220 $556 $ (260) $1,709
Year ended June 30, 1999.................... 1,709 408 51 (761) 1,407
Year ended June 30, 2000.................... 1,407 -- 703 (390) 1,720
Restructuring Reserve:
Year ended June 30, 1998.................... $ -- $ 7,349 $ -- $ (5,934) $1,415
Year ended June 30, 1999.................... 1,415 -- -- (963) 452
Year ended June 30, 2000.................... 452 17,642 -- (13,837) 4,257
</TABLE>
48
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------- -----------
<C> <S>
3.1(1) Certificate of Incorporation of Registrant as amended to
date.
3.2(1) By-laws of Registrant as amended to date.
4.1(2) Preferred Shares Rights Agreement between the Registrant and
The First National Bank of Boston as Rights Agent dated
April 19, 1995.
4.2(3) Registration Rights Agreement, dated as of January 18, 2000,
between Registrant and the investors named therein.
4.3(3) Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware on January 18,
2000.
4.4(3) Registration and Information Rights Agreement dated January
31, 1992.
10.1(1)(4) 1988 Stock Option Plan and forms of Incentive Stock Option
Agreements and Nonstatutory Stock Option Agreements, as
amended to date.
10.2(4)(7) 1993 Directors' Stock Option Plan and forms of Option
Agreements, as amended to date.
10.3(4)(5) 1993 Employee Stock Purchase Plan and forms of Option
Agreements, as amended to date.
10.4(4)(18) 1997 Stock Plan and Form of Stock Option Agreement, as
amended to date.
10.5(4) 1998 Non-Statutory Stock Plan and form of Stock Option
Agreement, as amended to date.
10.6(4)(6) Employee Stock Option agreement, as amended, dated April 18,
2000 between Registrant and Gary J. Sbona.
10.7(3) Form of Warrant to Purchase Common Stock, dated January 18,
2000, issued to certain investors.
10.8(3) Securities Purchase Agreement, dated as of January 18, 2000,
between Registrant and the investors listed on the Schedule
of Buyers attached thereto.
10.9(6) Retainer Agreement between Company and Regent Pacific
Management Corporation, effective February 15, 2000.
10.10(1)(4) 401(k) Plan, as amended to date.
10.11(1)(4) Summary of Executive Bonus Program.
10.12(1)(4) Form of Directors' and Officers' Indemnification Agreement
with all of its Directors and Officers.
10.13(1)(8) OEM Agreement, dated March 9, 1993, between the Registrant
and Fuji Xerox Company, Ltd.
10.14(1)(8) Distributor Agreement, dated June 6, 1990, between the
Registrant and Nissho Electronics Corporation.
10.15(8) Distributor Agreement, dated June 6, 1990, between the
Registrant and Nissho Electronics Corporation, as amended on
July 29, 1997.
10.16(1)(8) Agreement between the Registrant and Solectron Corporation,
dated May 20, 1991, as amended on November 18, 1992.
10.17(1) U.S. OEM Discount Agreement between the Registrant and Sun
Microsystems, Inc., effective as of August 18, 1988, as
amended by Addendum dated September 8, 1988 and Addendum
dated September 14, 1989.
10.18(1) Source Code License between the Registrant and Sun
Microsystems, Inc., dated August 31, 1988, as amended on
April 30, 1991, February 11, 1992 and March 18, 1992.
10.19(1) NFS Software Agreement between the Registrant and Sun
Microsystems, Inc., dated September 29, 1988.
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------- -----------
<C> <S>
10.20(9)(10) Software Agreement between the Registrant and AT&T
Information Systems Inc., dated June 2, 1988, as amended by
Supplement Number 1, Supplement Number 2, dated August 5,
1988, and Supplement Number 3, dated August 10, 1990, as
amended on June 28, 1993.
10.21(9)(10) Sublicensing Agreement between the Registrant and AT&T
Information Systems Inc., dated August 30, 1988, as amended
on June 28, 1993.
10.22(1) Software Agreement between the Registrant and UNIX System
Laboratories, Inc., dated April 29, 1992.
10.23(1) License Agreement with the Regents of the University of
California, dated June 9, 1988, as amended by Addendum dated
October 21, 1988.
10.24(11)(12) Intel Corporation Purchase Agreement between Intel
Corporation and the Registrant, dated March 22, 1994.
10.25(13) Warranty and Service Provider Agreement between the
Registrant and AT&T Global Information Systems, dated April
15, 1994.
10.26(13) SunSoft Technology License and Distribution Agreement
between the Registrant and SunSoft, Inc., dated December 17,
1993.
10.27(13) Amendment No. 2 to Lease Agreement between the Registrant
and WHC-SIX Real Estate, dated February 28, 1996.
10.28(13) Interactive SPARC Software and Sublicensing Agreement
between Auspex Systems, Inc. and Interactive systems
Corporation, dated November 15, 1991.
10.29(14) Lease Agreement by and Between South Bay/San Tomas
Associates and Auspex Systems, Inc., dated January 14, 1997,
for 2800 Scott Boulevard, Santa Clara facility.
10.30(14) Lease Agreement by and Between South Bay/San Tomas
Associates and Auspex Systems, Inc., dated January 14, 1997,
for 2300, 2320, 2330 Central Expressway, Santa Clara
facility.
10.31(16) Form of Change of Control Severance Agreement, filed on May
12, 1999.
10.32(16) Form of Change of Control Severance Agreement entered into
the form of the Company and Bruce N. Moore, President and
Chief Executive Officer, dated June 16, 1999.
10.33(15) Software Support Agreement between the Registrant and AT&T
dated July 10, 1997.
10.34(15) Software Licensing Agreement between the Registrant and AT&T
Corporation dated June 3, 1997, as amended on September 14,
1998.
10.35(15) Source License Agreement between the Registrant and
Programmed Logic Corp. Dated July 1, 1998; Bundled Hardware
OEM Binary License Agreement between the Registrant and
Programmed Logic Corp. dated July 1, 1998; Read-Only License
Agreement between the Registrant and Programmed Logic Corp.
dated July 1, 1998.
10.36(15) Master Value Added Distribution Agreement between the
Registrant and Fuji Xerox Co. Ltd. dated May 21, 1997.
10.37(17) Form of Change of Control Severance Agreement entered into
between the Company and Hans H. Schwarz, Senior Vice
President of Engineering, dated January 1, 2000.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
24.1 Power of Attorney (See Page 28).
27.1 Financial Data Schedule.
</TABLE>
---------------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-60052), which was declared effective on May 11, 1993.
<PAGE> 54
(2) Incorporated by reference to Exhibit 1 filed in connection with the
Registrant's Form 8-A, which was filed on April 20, 1995.
(3) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K (File No.
0-21432), which was filed on January 19, 2000.
(4) Designates management contract or compensatory plan arrangements required
to be filed as an exhibit of this Annual Report on Form 10-K pursuant to
Item 14(c).
(5) Incorporated by reference to exhibits filed in connection with the
Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders,
which was filed on October 8, 1999.
(6) Incorporated by reference to exhibits filed in response to Item 6(a),
"Exhibits," filed in connection with Registrant's Form 10-Q for the quarter
ended March 31, 2000 (File No. 0-21432), which was filed on May 11, 2000.
(7) Incorporated by reference to exhibits filed in connection with Registrants'
Proxy Statement for the 1997 Annual Meeting of Stockholders, which was
filed on October 14, 1997.
(8) Confidential treatment granted by order effective May 11, 1993.
(9) Incorporated by reference to identically numbered exhibits filed in
connection with Registrant's Form 10-K for the fiscal year ended June 25,
1993 (File No. 33-60052).
(10) Confidential treatment granted by order effective January 14, 1994.
(11) Incorporated by reference to Exhibit 10.1 filed in connection with
Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No.
0-21432), which was filed on May 16, 1994.
(12) Confidential treatment granted by order effective July 7, 1994.
(13) Incorporated by reference to exhibits filed in connection with the
Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File No.
0-21432), which was filed on September 28, 1994 and confidential treatment
granted by order effective December 5, 1994.
(14) Incorporated by reference to exhibits filed in connection with Registrant's
Form 10-K for the fiscal year ended June 30, 1997 (File No. 0-21432), which
was filed on September 24, 1997.
(15) Incorporated by reference to exhibits filed in connection with Registrant's
Form 10-K for the fiscal year ended June 30, 1999 (File No. 0-21432), which
was filed on September 27, 1999.
(16) Incorporated by reference to exhibits in connection with Registrant's Form
10-Q for the quarter ended March 31, 1999 (File No. 0-21432), which was
filed on May 12, 1999. Form of Change of Control Severance Agreement
entered into between 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, dated November 25, 1998
(17) Incorporated by reference to exhibits in connection with Registrant's Form
10-Q for the quarter ended December 31, 1999, which was filed on February
10, 2000.
(18) Incorporated by reference to exhibits filed in connection with Registrant's
Proxy Statement for the Special Meeting of Stockholders held on April 23,
1998, which was filed on March 20, 1998.
