<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-21432
AUSPEX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-0963760
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
2800 SCOTT BOULEVARD
SANTA CLARA, CA 95050
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
FORMER BUSINESS ADDRESS:
2300 CENTRAL EXPRESSWAY
SANTA CLARA, CA 95050
REGISTRANT'S TELEPHONE NUMBER: 408-566-2000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X]
NO [ ]
NUMBER OF SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF
NOVEMBER 3, 2000: 44,917,279.
<PAGE> 2
--------------------------------------------------------------------------------
FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
ITEM 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 2000 1
and June 30, 2000
Condensed Consolidated Statements of Operations for the Three 2
Months Ended September 30, 2000 and September 30, 1999
Consolidated Statements of Cash Flows for the Three Months 3
Ended September 30, 2000 and September 30, 1999
Notes to Condensed Consolidated Financial Statements 4-8
ITEM 2. Management's Discussion and Analysis of Financial 9-14
Condition and Results of Operations
ITEM 3. Qualitative and Quantitative Disclosures about Market Risks 14
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUSPEX SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $106,201 $ 23,615
Short-term investments 7,539 5,671
Accounts receivable, net 7,061 6,728
Inventories 2,535 5,095
Prepaid expenses and other 3,786 4,115
-------- --------
Total current assets 127,122 45,224
-------- --------
Property and equipment, net 13,834 15,059
Other assets 1,452 1,715
-------- --------
Total assets $142,408 $ 61,998
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,500 $ 8,053
Accrued liabilities 19,181 14,440
Deferred revenue 7,710 7,907
-------- --------
Total current liabilities 33,391 30,400
-------- --------
Long-Term Liabilities
Deferred revenue 742 954
-------- --------
Stockholders' equity 108,275 30,644
-------- --------
Total liabilities and stockholders' equity $142,408 $ 61,998
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 1
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AUSPEX SYSTEMS, INC.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 30, September 30,
2000 1999
------------------------------------------------------------------------------------
(In thousands, except per share amounts) (Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Product revenue $ 10,036 $ 18,942
Service revenue 6,034 7,230
-------- --------
Total revenues 16,070 26,172
-------- --------
Cost of Revenues
Cost of product revenue 6,848 10,111
Cost of service revenue 4,787 6,571
-------- --------
Total cost of revenues 11,635 16,682
-------- --------
Gross margin 4,435 9,490
-------- --------
Operating Expenses
Selling, general and administrative 9,345 13,775
Engineering and development 4,230 8,305
-------- --------
Total operating expenses 13,575 22,080
-------- --------
Loss from operations (9,140) (12,590)
Other income, net 577 419
-------- --------
Loss before provision
for income taxes (8,563) (12,171)
-------- --------
Provision for income taxes 300 50
-------- --------
Net loss (8,863) (12,221)
-------- --------
Accretion and dividends to preferred stockholders 5,174 ---
Net Loss available to common stockholders $(14,037) $(12,221)
======== ========
Net loss per share
Basic and Diluted $ (0.43) $ (0.45)
======== ========
Number of shares used in per share computations
Basic and Diluted 32,276 27,132
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 2
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AUSPEX SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
September 30, September 30,
Three Months Ended 2000 1999
-----------------------------------------------------------------------------------------------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (8,863) $ (12,221)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 1,822 2,146
Changes in assets and liabilities:
Increase in accounts receivable (333) (1,654)
Decrease in inventories 2,188 52
Decrease in income tax receivable --- 4,678
Decrease in prepaid expenses and other 329 507
Decrease in accounts payable (1,553) (1,944)
Increase in accrued liabilities 4,741 384
Decrease in deferred revenue (409) (1,231)
--------- ---------
Net cash used in operating activities (2,078) (9,283)
--------- ---------
Cash Flows from Investing Activities
Purchases of available-for-sale short-term investments (1,873) (2,803)
Proceeds from sales/maturities of available-for-sale
short-term investments --- 3,981
Purchases of property and equipment (225) (850)
Change in other assets 263 18
--------- ---------
Net cash (used in)/provided by investing activities (1,835) 346
--------- ---------
Cash Flows from Financing Activities
Proceeds from sale of common stock, net 86,666 2,033
--------- ---------
Net cash provided by financing activities 86,666 2,033
--------- ---------
Effect of exchange rate changes on cash (167) 51
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 82,586 (6,853)
Cash and Cash Equivalents, Beginning of Period 23,615 26,592
--------- ---------
Cash and Cash Equivalents, End of Period $ 106,201 $ 19,739
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
<PAGE> 6
AUSPEX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements
and related notes should be read in conjunction with the financial statements
and related notes included in the Annual Report to Stockholders of Auspex
Systems, Inc. ("Auspex" or the "Company") for fiscal 2000.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements reflect, in the opinion of management, all adjustments necessary to
present fairly the financial position as of the dates and results of operations
for the periods indicated.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Additionally, the preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. While
management makes its best effort to achieve its estimates, actual results could
differ from these estimates.
The results of operations for the three months ended September 30, 2000,
are not necessarily indicative of results for the entire fiscal year ending June
30, 2001. (See "Factors That May Affect Future Results" in Management's
Discussion and Analysis of Financial Condition and Results of Operations).
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Substantially all cash equivalents consist of investments in
certificates of deposits, money market deposits, commercial paper, auction rate
securities, and U.S. agency bonds with original maturities of three months or
less. Substantially all short-term investments consist of certificates of
deposits, commercial paper, corporate bonds and U.S. agency bonds, which the
Company intends to hold between three and twelve months.
3. NON-CASH INVESTING ACTIVITIES
Net inventory capitalized into property and equipment was $372,000 and
$500,000 for the three months ended September 30, 2000 and 1999, respectively.
During the three months period ended September 30, 2000, the Company recorded
$5,174,000 in accretion and dividends to holders of the Series B Convertible
Preferred Stock as a result of the 7% dividend, the 8% conversion discount and
the warrants.
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.
4. 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.
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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.
5. 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.
Diluted net loss 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>
September 30, September 30,
Three Months Ended 2000 1999
-------- --------
<S> <C> <C>
Net loss $ (8,863) $(12,221)
======== ========
Basic Net Loss Per Share
Net loss available to common stockholders $(14,037) $(12,221)
Weighted average common shares outstanding 32,276 27,132
-------- --------
Basic net loss per share $ (0.43) $ (0.45)
======== ========
Diluted Net Loss Per Share
Net loss available to common stockholders $(14,037) $(12,221)
-------- --------
Weighted average common shares outstanding 32,276 27,132
Dilutive potential common shares from stock options - -
Weighted average common shares and dilutive
potential common shares 32,276 27,132
-------- --------
Diluted net loss per share $ (0.43) $ (0.45)
======== ========
</TABLE>
All weighted average stock options outstanding during the three months ended
September 30, 2000 and 1999 of 9,487,456 and 4,233,501 shares, respectively,
were excluded from the computation of diluted net loss per share because the
effect of including them would have been antidilutive due to the net loss
available to common stockholders.
Page 5
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6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out)
or market, and include material, labor and manufacturing overhead costs.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------ ------
<S> <C> <C>
Purchased materials $1,180 $1,481
Systems in process 998 2,322
Finished goods 357 1,292
------ ------
Total inventories $2,535 $5,095
====== ======
</TABLE>
Inventories contained components and assemblies in excess of the
Company's current estimated requirements and were fully reserved at September
30, 2000 and June 30, 2000.
Certain of the Company's products contain critical components supplied
by a single or limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products for
its customers. Any significant shortage of these components or the failure of
the third-party suppliers to maintain or enhance these components could
materially adversely affect the Company's results of operations. (See "Factors
That May Affect Future Results--Dependence on Certain Suppliers").
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130") effective for fiscal years
beginning after December 15, 1997 and has restated information for all prior
periods reported below to conform to this standard. The following table sets
forth the components of other comprehensive income (loss) net of income tax (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended,
----------------------------------
September 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Net loss $ (8,863) $(12,221)
Other comprehensive income (loss):
Unrealized holding gains
on available-for-sale securities 5 3
Foreign currency translation adjustments 169 51
-------- --------
Comprehensive loss $ (8,689) $(12,167)
======== ========
</TABLE>
8. Industry Segment, Geographic and Customer Information
Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.
Page 6
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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 solutions 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 three month periods ended (in
thousands):
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
--------------------------- ---------------------------
Long Lived Long Lived
Revenue Assets Revenue Assets
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
United States $ 7,986 $12,967 $14,689 $27,166
Europe 2,849 513 6,351 618
Pacific Rim 4,609 354 2,631 271
Canada 626 - 2,501 1
------- ------- ------- -------
Total $16,070 $13,834 $26,172 $28,056
======= ======= ======= =======
</TABLE>
One customer accounted for 18% of total revenues during three months
ended September 30, 2000. No customers accounted for 10% or more of total
revenues during the three months ended September 30, 1999.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that a reporting entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair market value. In June 1999, SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement 133," was issued. The statement defers
the effective date of SFAS No. 133 until the first quarter of fiscal 2001. The
Company adopted SFAS No. 133 during the three month period ended September 30,
2000 and such adoption did not have a material effect on the Company's financial
position, results of operations, or cash flows.
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.
10. RESTRUCTURING COSTS
In the quarter ended March 31, 2000, the Company recorded restructuring
charges totaling $17.6 million. 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 $3.8 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 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.
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The following table summarizes the Company's restructuring activity for the
three months period ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Severance Excess Equipment
and Benefits and Other Assets Other Total
------------ ---------------- ----- -----
<S> <C> <C> <C> <C>
Reserve balances, June 30, 2000 $ 289 $ 3,968 $ - $ 4,257
Restructuring charges - - - -
Cash charges (198) - - (198)
Non-cash charges (544) - (544)
------- ------- -------- -------
Reserve balances, Sept 30, 2000 $ 91 $ 3,424 $ $ 3,515
======= ======= ======== =======
</TABLE>
11. 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 three month period ended September 30, 2000, the Company recorded
$5,174,000 in accretion and dividends to holders of the Series B Convertible
Preferred Stock as a result of the 7% dividend, the 8% conversion discount and
the warrants.
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.
12. COMMON STOCK - PRIVATE PLACEMENT
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
net proceeds of $86.7 million. The participants in this private placement
include both existing and new shareholders.
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FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS AND
PHRASES, SUCH AS "INTENDED," "EXPECTS," "ANTICIPATES" AND "IS (OR ARE) EXPECTED
(OR ANTICIPATED)." THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED
TO THOSE IDENTIFIED BELOW WITH AN ASTERISK (*) SYMBOL. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND
STOCKHOLDERS OF AUSPEX NETWORKS, INC. ("AUSPEX" OR THE "COMPANY") SHOULD
CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS FORM 10-Q,
INCLUDING THOSE SET FORTH UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE
RESULTS". AUSPEX DOES NOT UNDERTAKE TO UPDATE ANY OF SUCH FORWARD-LOOKING
STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the first quarter of fiscal 2001, ended September 30,
2000, were $16.1 million, a decrease of 39% compared to total revenues of $26.2
million in the first quarter of fiscal 2000.
Product revenue for the first quarter of fiscal 2001 were $10.0 million
or 62% of total revenues compared to $18.9 million or 72% of total revenues in
the first quarter of fiscal 2000. Revenues from system sales accounted for 38%
of total revenues during the first quarter of fiscal 2001 and 54% for the first
quarter of fiscal 2000, while revenues from upgrades, add-on options and
software license agreements comprised 24% of total revenues during the first
quarter of fiscal 2001 and 18% during the first quarter of fiscal 2000. Service
revenues for the first quarter of fiscal 2001 were $6.0 million or 38% of total
revenues compared to 28% in the first quarter of fiscal 2000. Geographically,
North America accounted for 54% and 66% of total revenues in the first quarters
of fiscal 2001 and 2000, respectively; the Pacific Rim accounted for 29% and 10%
of total revenues in the first quarters of fiscal 2001 and 2000, respectively;
and Europe accounted for 18% and 24% of total revenues in the first quarters of
fiscal 2001 and 2000, respectively. The decrease in total revenues was
attributable to a slow down in the upgrading by customers of the Legacy product,
which has not been offset by customer upgrades of the NS2000 product and by the
lower than expected acceptance by the market of our NS2000 product. In addition,
the Company has reduced its average selling price as a result of competitive
pressures.
Gross margin was 28% of net revenues in the first quarter of fiscal 2001
compared with 36% in the first quarter of fiscal 2000. Product gross margin
decreased to 32% in the first quarter of fiscal year 2001 from 47% in the first
quarter of fiscal year 2000. The decline in product gross margin was in part
attributable to the decrease in revenues and the decrease in average selling
prices, resulting from competitive pressures.
Service gross margin was 21% in the first quarter of fiscal year 2001 as
compared to 9% in the first quarter of fiscal year 2000. The increase in service
gross margin was due to the reductions in service labor costs associated with
the restructuring completed in the fourth quarter of the fiscal year 2000.
Page 9
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Selling, general and administrative expenses during the first quarters
of fiscal 2001 and fiscal 2000 totaled $9.3 million and $13.8 million,
respectively, representing a decrease of 32%, and constituted 58% and 53% of
total revenues, respectively. The decrease in absolute dollars for the
comparison periods can be attributed to the impact of reduced spending rates,
resulting from the restructuring completed in the fourth quarter of the fiscal
year 2000. The increase in selling, general and administrative expenses as a
percentage of revenues for the comparison periods resulted from a decrease in
revenues in the first quarter of fiscal 2001, as compared to the first quarter
of fiscal 2000.
Engineering and development expenses during the first quarters of fiscal
2001 and fiscal 2000 were $4.2 million and $8.3 million, respectively,
representing a decrease of 49%, and comprised 26% and 32%, respectively, of
total revenues. This decrease in engineering and development expenses as a
percentage of revenues resulted primarily from reduced spending rates which, in
turn, resulted from the restructuring completed in the fourth quarter of fiscal
2000.
Loss from operations for the first quarter of fiscal 2001 was $9.1
million, compared with $12.6 million in the first quarter of fiscal year 2000.
During the quarter ended September 30, 2000, the Company recorded
$5,174,000 in accretion and dividends to holders of the Series B Convertible
Preferred Stock as a result of the 7% dividend, the 8% conversion discount and
the warrants. During the quarter ended September 30, 2000, all shares of Series
B Convertible Preferred Stock were converted into Common Stock. Therefore, the
Company will no longer need to record dividends related to the Series B
Convertible Preferred Stock.
The Company's income tax rate for the first quarter of each of fiscal
2001 and 2000 was approximately 0%. The Company's tax provision includes state
and minimum statutory taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
increased by $84.4 million to $113.7 million for the three months ended
September 30, 2000. This was due in large part to the issuance, in a private
placement of 11,320,953 shares of common stock at a price of $7.9625 per share,
resulting in net proceeds of $86.6 million. The Company used approximately $2.1
million in cash from operating activities in the first three months of fiscal
2001, which included a net loss of $8.9 million, offset by depreciation and
amortization of $1.8 million and further offset by the decrease in net
inventories of $2.2 million and an increase in accrued liabilities of $4.7
million. The Company's primary investing activities included the purchase of
available-for-sale short-term investments of $1.9 million and additional
property and equipment of $225,000.
At September 30, 2000, the Company's principal sources of liquidity
included $113.7 million in cash, cash equivalents and short-term investments and
a secured line of credit from a United States currency bank, expiring December
22, 2002, under which $12.5 million is available. At September 30, 2000, the
Company had commitments against the line of credit, for letters of credit
totaling $2.5 million.
Based on its current operating plans, the Company believes that its
existing cash, cash equivalents, and short-term investments will be adequate to
meet its working capital and capital expenditure requirements for at least the
next twelve months. *
* See "Forward-Looking Statements" on page 9.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly from quarter
to quarter due to a combination of factors. These factors include the timing of
orders and shipments, the timing of new product introductions by the Company or
its competitors, the mix of distribution channels through which the Company's
products are sold, and the Company's ability to align its expense levels with
changing revenue levels. 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 Corporation, 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 drives. Increased competition for the Company's products that
results in lower product sales could also adversely impact the Company's
upgrades sales. In addition, decisions by customers not to increase capacity of
their current systems could adversely impact the Company's revenues and results
of operations. The Company's ability to maintain its competitive position will
depend upon, among other factors, its success in anticipating industry trends,
investing in product research and development, developing new products with
improved price/performance characteristics and effectively managing the
introduction of new products into targeted markets.
* See "Forward-Looking Statements" on page 9.
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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, 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.
SOFTWARE PRODUCT RISKS
The Company markets software products in addition to its line of network
file servers. These software products include: NeTservices(TM), DriveGuard(TM),
FastBackup(TM), ServerGuard(TM), ServerGuard Global(TM) and DataGuard(TM). The
Company also expects to release enhancements and new features for these products
from time to time.* Although the Company performs extensive testing prior to
releasing software products, such products may contain undetected errors or bugs
when first released. These may not be discovered until the product has been used
by customers in different application environments. Failure to discover product
deficiencies or bugs could delay product introductions, require design
modifications to previously shipped products, cause unfavorable publicity or
negatively impact system shipments; any of which could result in a material
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. 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 into the Company's
products in a timely manner.
* See "Forward-Looking Statements" on page 9.
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<PAGE> 15
DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS
For the three months ended September 30, 2000, direct sales of products
and services to one customer represented approximately 18% of the Company's
revenues. For the three months ended September 30, 1999, direct sales of
products and services to one customer did not represent 10% or more of the
Company's revenues. Customers are not obligated to purchase any minimum quantity
of products from the Company. However, significant reductions in product sales
to certain key customers 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 that are in short supply
or that must be purchased in bulk to obtain favorable pricing, the general
unpredictability of demand for specific products and customer requests for quick
delivery schedules, may result in the Company maintaining large amounts of
inventory. Other factors, including changes in market demand and technology, may
cause inventory to become obsolete. Any excess or obsolete inventory could
result in sales price reductions and/or inventory write-downs, which in turn
could adversely affect the Company's business and results of operations.
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During the three months ended September 30, 2000 and 1999, approximately
46% and 34%, respectively, of the Company's total revenues were derived from
markets outside of North America. The Company expects that sales to the Pacific
Rim and Europe will continue to represent a significant portion of its
business.* Nonetheless, there can be no assurance that the Company's Pacific Rim
or European operations will continue to be successful.
The Company's international business may be affected by changes in
demand resulting from localized economic and market conditions. For example, the
Company experienced a decrease in revenues from the Pacific Rim during the six
months ended December 31, 1999 due to weakness in the Japanese economy. In
addition, the Company's international business may be affected by fluctuations
in currency exchange rates and currency restrictions. The Company purchases the
majority of its materials and services in U.S. dollars, and most of its foreign
sales are transacted in U.S. dollars. Continued increases in the value of the
U.S. dollar relative to foreign currencies will make the Company's products sold
internationally less price competitive. The Company has offices in a number of
foreign countries, the operating expenses of which are also subject to the
effects of fluctuations in foreign exchange rates. Financial exposure may result
due to the timing of transactions and movement of exchange rates. The Company's
international business may further be affected by risks such as trade
restrictions, increase in tariff and freight rates and difficulties in obtaining
necessary export licenses and meeting appropriate local regulatory standards.
For example, the Company has had to modify its products in minor respects in
Japan to comply with local electromagnetic emissions standards, and must also
comply with corresponding European Economic Community standards. In marketing
its products to the European Economic Community, the Company also must face the
challenges posed by a fragmented market complicated by local distribution
channels and local cultural considerations. For international sales, the Company
has largely relied on distributors or OEMs, most of whom are entitled to carry
products of the Company's competitors. There can be no assurance that any of the
foregoing risks or issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
* See "Forward-Looking Statements" on page 9.
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<PAGE> 16
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 continue to 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 fifteen United States patents and has filed applications for additional
patents. The Company also has filed applications for counterpart patents in
foreign countries, including Japan. There can be no assurance that the Company's
present or future competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Further,
there can be no assurance that the Company's patent applications will result in
issued patents, or that the Company's issued patents will be upheld if
challenged. Additionally, there can be no assurance that third parties will not
assert intellectual property infringement claims against the Company in the
future with respect to current or future projects or that any such assertions
may not require the Company to refrain from the sale of its products, enter into
royalty arrangements or undertake costly litigation.
The Company's adherence to industry standards with respect to its
products limits the Company's opportunities to provide proprietary features,
which may be protected. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
YEAR 2000 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 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
There were no material changes during the first quarter of fiscal 2001
to the Company's exposure to market risk for changes in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
There were no material changes during the first quarter of fiscal 2001
to the Company's foreign currency hedging programs.
* See "Forward-Looking Statements" on page 9.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)(i) On September 19, 2000, the Company entered into a Share Purchase
Agreement pursuant to which it sold 11,320,953 shares of common stock to
sixty-two accredited investors for a price per share of $7.9625 and for gross
proceeds of $90,143,088.28. This sale was effected as a private placement under
Regulation D of the Securities Act of 1933. The stock certificates bear a
restrictive legend and each purchaser represented to the Company that it was
accredited and that it was purchasing the securities for its own account.
The Company engaged Halpern Capital Advisors ("HCA") to provide capital
raising services in connection with the private placement. As compensation for
such services, the Company agreed to pay to HCA a fee consisting of (i)
$4,507,154.40 (representing 5% of the aggregate amount of the private placement)
and (ii) warrants to purchase 566,048 shares of common stock of the Company with
an exercise price of $7.9625 per share.
The Company intends to use the proceeds from the sale for working
capital and other general corporate purposes. Auspex Systems Inc.'s common stock
is traded on the Nasdaq National Market.
(ii) In connection with the private placement described in clause (c)(i)
above, the Company entered into a Warrant Purchase Agreement, dated as of
October __, 2000, pursuant to which it issued two warrants to purchase up to
35,000 and 531,048 shares, respectively, of common stock of the Company at a
price per share of $7.9625. This issuance was effected as a private placement
under Regulation D of the Securities Act of 1933. The warrants bear a
restrictive legend and each purchaser represented to the Company that it was
accredited and that it was purchasing the securities for its own account. Each
warrant is exercisable at the option of the relevant purchasers at any time on
or before the date of termination thereof.
(iii) On August 1, 2000, the Company granted Michael S. Worhach an
option to purchase 1,000,000 shares of common stock of the Company at a price
per share of $7.3438 as an inducement to Mr. Worhach's entering into an
employment relationship with the Company. This issuance was effected as a
private placement under Regulation D of the Securities Act of 1933. The option
has a term of ten years and will vest at the rate of 1/24th of the shares
subject to the option at the end of each of the 12 one-month periods immediately
following the date of grant, and 1/2 of the shares subject to the option at the
end of the two-year period immediately following the date of grant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this item is hereby incorporated by
reference to the Company's [Annual Report on Form 10-K, which was filed on
September 28, 2000].
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<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The following exhibits are included in this Quarterly Report on Form
10-Q (numbered in Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Certificate of Amendment of Certificate of Incorporation, dated
August 29, 2000.
3.2 By-laws of Registrant.
10.1 Share Purchase Agreement, dated as of September 19, 2000, between
Registrant and the purchasers referred to therein.
10.2 Amendment, dated October 11, 2000, to Share Purchase Agreement,
dated as of September 27, 2000.
10.3 Letter Agreement, dated September 27, 2000, between Halpern
Capital Advisors and Registrant.
10.4 Warrant Purchase Agreement, dated October 17, 2000, between
Baruch and Shoshana Halpern and Registrant.
10.5 Form of Common Stock Purchase Warrant, dated October 17, 2000,
issued to Baruch and Shoshana Halpern.
10.6 Form of Common Stock Purchase Warrant, dated October 17, 2000,
issued to Baruch and Shoshana Halpern.
10.7 Stock Option Agreement, dated August 1, 2000.
27.1 Financial Data Schedule.
</TABLE>
b. Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated October 2,
2000, which reported under "Item 5. Other Events."
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 10, 2000 /s/ Peter R. Simpson
----------------- --------------------------
Peter R. Simpson
Chief Financial Officer
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<PAGE> 20
AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
<S> <C> <C>
3.1 Certificate of Amendment of Certificate of Incorporation, dated
August 29, 2000.
3.2 By-laws of Registrant.
10.1 Share Purchase Agreement, dated as of September 19, 2000, between
Registrant and the purchasers referred to therein.
10.2 Amendment, dated October 11, 2000, to Share Purchase Agreement,
dated as of September 27, 2000.
10.3 Letter Agreement, dated September 27, 2000, between Halpern
Capital Advisors and Registrant.
10.4 Warrant Purchase Agreement, dated October 17, 2000, between
Baruch and Shoshana Halpern and Registrant.
10.5 Form of Common Stock Purchase Warrant, dated October 17, 2000,
issued to Baruch and Shoshana Halpern.
10.6 Form of Common Stock Purchase Warrant, dated October 17, 2000,
issued to Baruch and Shoshana Halpern.
10.7 Stock Option Agreement, dated August 1, 2000.
27.1 Financial Data Schedule.
</TABLE>
