<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 DECEMBER 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-21432
AUSPEX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-0963760
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
2300 CENTRAL EXPRESSWAY
SANTA CLARA, CA 95050
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (408) 566-2000
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
FEBRUARY 1, 2000: 28,034,104
<PAGE> 2
FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of December 31, 1999 1
and June 30, 1999
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended December 31, 1999 and December 31, 1998 2
Condensed Statements of Cash Flows for the Six 3
Months Ended December 31, 1999 and December 31, 1998
Notes to Condensed Consolidated Financial Statements 4-7
ITEM 2. Management's Discussion and Analysis of Financial 8-16
Condition and Results of Operations
ITEM 3. Qualitative and Quantitative Disclosures About Market Risks 16
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AUSPEX SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 14,135 $ 26,592
Short-term investments 14,922 16,045
Accounts receivable, net 19,051 20,374
Inventories 9,948 10,905
Income tax receivable - 4,865
Prepaid expenses and other 4,766 5,054
---------- ----------
Total current assets 62,822 83,835
---------- ----------
Property and equipment, net 27,506 28,841
Other assets 2,336 2,372
---------- ----------
Total assets $ 92,664 $ 115,048
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit borrowings $ 2,800 $ -
Accounts payable 12,865 13,316
Accrued liabilities 13,148 11,975
Deferred revenue 8,396 9,276
---------- ----------
Total current liabilities 37,209 34,567
---------- ----------
Long Term Liabilities
Deferred revenue 1,316 1,304
---------- ----------
Stockholders' equity 54,139 79,177
---------- ----------
Total liabilities and stockholders' equity $ 92,664 $ 115,048
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUSPEX SYSTEMS, INC.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Product revenue $ 15,795 $ 22,353 $ 34,657 $ 44,383
Service revenue 6,809 8,211 14,119 16,238
----------- ----------- ----------- -----------
Total revenues 22,604 30,564 48,776 60,621
----------- ----------- ----------- -----------
Cost of Revenues
Cost of product revenue 9,955 12,025 20,026 22,478
Cost of service revenue 6,595 5,785 13,206 11,469
----------- ----------- ----------- -----------
Total cost of revenues 16,550 17,810 33,232 33,947
----------- ----------- ----------- -----------
Gross margin 6,054 12,754 15,544 26,674
----------- ----------- ----------- -----------
Operating Expenses
Selling, general and administrative 14,417 12,476 28,192 25,029
Research and development 7,975 8,391 16,280 17,099
----------- ----------- ----------- -----------
Total operating expenses 22,392 20,867 44,472 42,128
----------- ----------- ----------- -----------
Loss from operations (16,338) (8,113) (28,928) (15,454)
Other income, net 114 321 533 917
----------- ----------- ----------- -----------
Loss before provision
for income taxes (16,224) (7,792) (28,395) (14,537)
Provision for income taxes 100 23 150 67
----------- ----------- ----------- -----------
Net loss $ (16,324) $ (7,815) $ (28,545) $ (14,604)
=========== =========== =========== ===========
Earnings (loss) per share
Basic $ (0.59) $ (0.30) $ (1.04) $ (0.57)
=========== =========== =========== ===========
Diluted $ (0.59) $ (0.30) $ (1.04) $ (0.57)
=========== =========== =========== ===========
Shares used for earnings (loss) per share
Basic 27,630 25,728 27,377 25,714
=========== =========== =========== ===========
Diluted 27,630 25,728 27,377 25,714
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUSPEX SYSTEMS, INC.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
December 31, December 31,
Six Months Ended 1999 1998
----------- -----------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (28,545) $ (14,604)
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities
Depreciation and amortization 4,339 7,551
Changes in assets and liabilities
Decrease in accounts receivable 1,323 1,334
Increase in inventories (883) (2,147)
Decrease in income tax receivable 4,865 10,050
Decrease in prepaid expenses and other 324 215
Decrease in accounts payable (451) (200)
Increase (decrease) in accrued liabilities 1,173 (876)
Decrease in deferred revenue (868) (759)
----------- -----------
Net cash (used in) provided by operating activities (18,723) 564
----------- -----------
Cash Flows from Investing Activities
Purchases of available-for-sale short-term investments (2,804) (20,249)
Proceeds from sales/maturities of available-for-sale short-term 3,981 29,334
investments
Purchases of property and equipment (1,216) (4,905)
Decrease in other assets - 8
----------- -----------
Net cash from (used in) provided by investing activities (39) 4,188
----------- -----------
Cash Flows from Financing Activities
Borrowings from line of credit 2,800 -
Proceeds from sale and lease back of equipment - 2,147
Proceeds from sale of common stock 3,730 754
----------- -----------
Net cash provided by financing activities 6,530 2,901
----------- -----------
Effect of exchange rate changes on cash (225) 312
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (12,457) 7,965
Cash and Cash Equivalents, Beginning of Period 26,592 23,312
----------- -----------
Cash and Cash Equivalents, End of Period $ 14,135 $ 31,277
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUSPEX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying interim condensed consolidated financial statements and
related notes should be read in conjunction with the financial statements and
related notes included in the Company's fiscal 1999 Annual Report to
Stockholders.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
as of the dates and results of operations for the periods indicated.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Additionally, the preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. While
management makes its best effort to achieve its estimates, actual results could
differ from estimates.
The results of operations for the three months and six months ended
December 31, 1999, are not necessarily indicative of results for the entire
fiscal year ending June 30, 2000. (See "Factors That May Affect Future Operating
Performance" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
Prior to the first quarter of fiscal 2000, the Company's fiscal year
ended on the last day of the quarter within the year ended June 30. Beginning
fiscal year 2000, the Company will operate and report on a 52-53 week fiscal
year. Accordingly, the Company's fiscal year 2000 will end on July 1, 2000. The
Company's fiscal quarters end on the Saturday of the thirteenth week of the
quarter. For presentation purposes, the financial statements reflect the
calendar month-end date. The change in reporting periods did not have a material
effect on the accompanying financial statements for the first and second
quarters of fiscal 2000.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Substantially all cash equivalents consist of investments in certificates
of deposits, money market deposits, and U.S. agency bonds with original
maturities of three months or less. Substantially all short-term investments
consist of certificates of deposits, commercial paper and U.S. agency bonds,
which the Company intends to hold between three and twelve months.
3. NON-CASH INVESTING ACTIVITIES
Net inventory capitalized into property and equipment was $1,840,000 and
$5,141,000 for the six months ended December 31, 1999 and 1998, respectively.
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4. REVENUE RECOGNITION
Product revenue includes hardware sales and software license fees. The
Company generally recognizes system sales upon shipment. The installation of the
Company's systems is not considered a significant obligation and acceptance by
the customer is not considered a significant uncertainty. Revenues from upgrade
sales are generally recognized at the time the equipment is shipped. Provisions
for product sales returns and allowances are recorded in the same period as the
related revenue. Revenues earned under software license agreements with end
users are generally recognized when the software has been shipped and there are
no significant obligations remaining.
Service revenue includes installation, maintenance, training and
professional services and is recognized ratably over the contractual period or
as the services are provided.
5. NET INCOME/(LOSS) PER SHARE
Basic net income per share is computed based only on the weighted average
number of common shares outstanding during the period and does not give effect
to the dilutive effect of common equivalent shares, such as stock options.
Diluted net income per share is computed based on the weighted average number of
common shares plus dilutive potential common shares calculated in accordance
with the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss ............................................... $ (16,324) $ (7,815) $ (28,545) $ (14,604)
=========== =========== =========== ===========
Basic Earnings Per Share
Income (loss) available to common stockholders ....... $ (16,324) $ (7,815) $ (28,545) $ (14,604)
Weighted average common shares outstanding ........... 27,630 25,728 27,377 25,714
----------- ----------- ----------- -----------
Basic earnings (loss) per share ........................ $ (0.59) $ (0.30) $ (1.04) $ (0.57)
=========== =========== =========== ===========
Diluted Earnings Per Share
Income (loss) available to common stockholders ....... $ (16,324) $ (7,815) $ (28,545) $ (14,604)
=========== =========== =========== ===========
Weighted average common shares outstanding ........... 27,630 25,728 27,377 25,714
Dilutive potential common shares from stock
options .............................................. - - - -
----------- ----------- ----------- -----------
Weighted average common shares and dilutive
potential common shares .............................. 27,630 25,728 27,377 25,714
----------- ----------- ----------- -----------
Diluted loss per share ................................. $ (0.59) $ (0.30) $ (1.04) $ (0.57)
=========== =========== =========== ===========
</TABLE>
All stock options outstanding during the three months ended December 31,
1999 and 1998 of 3,425,147 and 4,247,483 shares, respectively, were excluded
from the computation of diluted earnings per share because the effect of
including them would have been antidilutive due to the loss available to common
stockholders. All stock options outstanding during the six months ended December
31, 1999 and 1998 of 3,517,088 and 3,416,213 shares, respectively, were excluded
from the computation of diluted earnings per share because the effect of
including them would have been antidilutive due to the loss available to common
stockholders.
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>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
Purchased materials $ 3,560 $ 4,158
Systems in process 5,034 4,044
Finished goods 1,354 2,703
---------- ----------
Total inventories $ 9,948 $ 10,905
========== ==========
</TABLE>
Inventories contained components and assemblies in excess of the
Company's current estimated requirements and were fully reserved at December 31,
1999 and June 30, 1999.
Certain of the Company's products contain critical components supplied by
a single or limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products for
its customers. Any significant shortage of these components or the failure of
the third party suppliers to maintain or enhance these components could
materially adversely affect the Company's results of operations. (See "Factors
That May Affect Future Operating Performance--Dependence on Certain Suppliers.")
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130 "Reporting Comprehensive Income," in the first quarter of fiscal 1999.
SFAS No. 130 establishes standards for disclosure and financial statement
display for reporting total comprehensive income and its individual components.
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. The Company's comprehensive income includes net income,
foreign currency translation adjustments and unrealized holding gains (losses)
from available-for-sale securities.
The following table sets forth the components of other comprehensive
income (loss) net of income tax (in thousands):
<TABLE>
<CAPTION>
Three Months Ended, Six Months Ended,
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (16,324) $ (7,815) $ (28,545) $ (14,604)
Other comprehensive income (loss):
Unrealized holding gains (losses)
on available-for-sale securities 1 (63) 4 (42)
Foreign currency translation adjustments (276) 157 (225) 313
----------- ----------- ----------- -----------
Comprehensive loss $ (16,599) $ (7,721) $ (28,766) $ (14,333)
=========== =========== =========== ===========
</TABLE>
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8. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.
The Company, which operates in one reportable industry segment, develops,
manufactures, distributes and supports a line of multi-protocol high performance
network file servers and high availability enterprise data management software
solution for storing, serving and managing multiple terabytes of network data
for the technical network market.
Revenues and long-lived assets by geography (net of accumulated
depreciation) consisted of the following for the quarters ended (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- ------------------------
Long Lived Long Lived
Revenue Assets Revenue Assets
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
United States .... $ 11,952 $ 26,639 $ 21,440 $ 32,022
Europe ........... 5,866 492 3,586 807
Pacific Rim ...... 2,470 375 4,036 271
Canada ........... 2,316 - 1,502 3
--------- --------- --------- ---------
Total ...... $ 22,604 $ 27,506 $ 30,564 $ 33,103
========= ========= ========= =========
</TABLE>
No customers accounted for 10% or more of total revenues during three
months ended December 31, 1999. One customer accounted for 26% of total revenues
during three months ended December 31, 1998.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that a reporting entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133 in the first quarter of fiscal 2001 and does not expect such
adoption to have a material effect on the consolidated financial statements.
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AUSPEX SYSTEMS, INC.
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 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 second quarter of fiscal 2000, ended December 31,
1999, were $22.6 million, a decrease of 26% compared to total revenues of $30.6
million in the second quarter of fiscal 1999. Total revenues for the six months
ended December 31, 1999 were $48.8 million, a decrease of 20% compared to total
revenues of $60.6 million for the six months ended December 31, 1998.
Product revenues for the second quarter of fiscal 2000 were $15.8 million
or 70% of total revenues compared to $22.4 million or 73% of total revenues in
the second quarter of fiscal 1999. Revenues from system sales accounted for 38%
of total revenues during the second quarter of fiscal 2000 and 34% for the
second quarter of fiscal 1999, while revenues from upgrades, add-on options and
software license agreements comprised 32% of total revenues during the second
quarter of fiscal 2000 and 39% for the second quarter of fiscal 1999. Service
revenues for the second quarter of fiscal 2000 were $6.8 million or 30% of total
revenues compared to 27% in the second quarter of fiscal 1999. Geographically,
North America accounted for 63% and 74% of total revenues in the second quarters
of fiscal 2000 and 1999, respectively; the Pacific Rim accounted for 11% and 13%
of total revenues in the second quarters of fiscal 2000 and 1999, respectively;
and Europe accounted for 26% and 13% in the second quarters of fiscal 2000 and
1999, respectively. The decrease in revenues in North America was primarily due
to delayed sales execution combined with a loss of sales momentum due to
apprehension over the Year 2000, which resulted in a number of orders being
frozen late in the quarter.
Gross margin was 27% of net revenues in the second quarter of fiscal 2000
compared with 42% in the second quarter of fiscal 1999. For the six months ended
December 31, 1999 and 1998, gross margins were 32% and 44%, respectively.
Product gross margin decreased to 37% in the second quarter of fiscal year 2000
from 46% in the second quarter of fiscal year 1999. The decrease in gross
margins in the second quarter of fiscal 2000 was due to lower service revenue as
a result of lower installed base of non-Year 2000 compliant NS 3000, 5000 and
6000 systems and higher investments made in the service organization, combined
with a higher mix of NS 2000 systems sold through indirect channels which
realize lower gross margins on less sales expense.
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Gross margin was 27% of net revenues in the second quarter of fiscal 2000
compared with 42% in the second quarter of fiscal 1999. For the six months ended
December 31, 1999 and 1998, gross margins were 32% and 44%, respectively.
Product gross margin decreased to 37% in the second quarter of fiscal year 2000
from 46% in the second quarter of fiscal year 1999. The decrease in gross
margins in the second quarter of fiscal 2000 was due to lower service revenue as
a result of lower installed base of non-Year 2000 compliant NS 3000, 5000 and
6000 systems and higher investments made in the service organization, combined
with a higher mix of NS 2000 systems sold through indirect channels which
realize lower gross margins on less sales expense.
Selling, general and administrative expenses during the second quarter of
fiscal 2000 totaled $14.4 million, an increase of 16% from $12.5 million in the
corresponding period of the prior fiscal year, and comprised 64% and 41% of
total revenues, respectively. For the six months ended December 31, 1999,
selling, general and administrative expenses totaled $28.2 million, an increase
of 13% from $25.0 million for the six months ended December 31, 1998 and were
58% and 41% of total revenues for the first six months of fiscal years 2000 and
1999, respectively. The increase in selling, general and administrative expenses
as a percentage of revenues for the comparison periods is a result of lower
revenues in the second quarter and the first six months of fiscal 2000 combined
with a planned increase in marketing program investments during the second
quarter of fiscal 2000.
Research and development expenses incurred during the second quarter of
fiscal 2000 were $8.0 million, a decrease of 5% from $8.4 million in the
corresponding period of the prior fiscal year, and comprised 35% and 28% of
total revenues, respectively. For the six months ended December 31, 1999,
research and development expenses were $16.3 million, a decrease of 5% from
$17.1 million for the six months ended December 31, 1998, and were 33% and 28%
of total revenues for the first six months of fiscal years 2000 and 1999,
respectively. The decrease in absolute dollars is primarily due to a planned
reduction in contract labor and consulting investments. The increase in research
and development expenses as a percentage of revenues for the comparison periods
is a result of lower revenues in the second quarter and first six months of
fiscal 2000.
Loss from operations for the second quarter of fiscal 2000 was
$16.3 million, compared with loss from operations of $8.1 million in the second
quarter of fiscal year 1999. These operating losses were primarily due to lower
revenues and increased selling, general and administrative expenses, reflecting
the Company's investment across the organization in support of new marketing
programs.
The Company's income tax rate for the first six months of fiscal 2000 and
1999 was essentially 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 decreased
by $13.6 million to $29.1 million for the six months ended December 31, 1999.
The Company used approximately $18.7 million in cash from operating activities
in the first six months of fiscal 2000, which included loss from operations
before depreciation and amortization of $24.2 million, the decrease in accounts
payable and deferred revenue, partially offset by the collection of income tax
refunds, accounts receivable and a decrease in prepaid expenses. The Company's
primary investing activities included the purchase of available-for-sale
short-term investments of $2.8 million and additional property and equipment of
$1.2 million, offset by the sale/maturity of available-for-sale short-term
investments of $4.0 million. Lastly, the Company's primary financing activities
included proceeds from the sale of its Common Stock pursuant to employee benefit
plans of $3.7 million and borrowing of $2.8 million under its short-term line of
credit. The Company's working capital decreased during the first six months of
fiscal 2000 by $23.7 million to $25.6 million.
At December 31, 1999, the Company's principal sources of liquidity
included $29.1 million in cash, cash equivalents and short-term investments and
net $8.5 million available under a secured United States currency bank line of
credit, expiring December 22, 2002. At December 31, 1999, the Company had $2.8
million outstanding under this line of credit and had commitments against the
line of credit, for two letters of credit totalling $3.7 million, as of December
31, 1999.
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Based on its current operating plans, the Company believes that its
existing cash, cash equivalents, short-term investments and equity funding
through a private placement will be adequate to meet its working capital and
capital expenditure requirements at least through the next 12 months.*
FACTORS THAT MAY AFFECT FUTURE RESULTS
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly from quarter
to quarter due to a combination of factors. These factors include the timing of
orders, the timing of new product introductions by the Company or its
competitors and the mix of distribution channels through which the Company's
products are sold. The Company generally realizes higher gross margins on sales
of systems to end users and on single-system sales than on systems sold through
distributors and OEMs and on multiple-system sales. In addition, given the
Company's focus on highly configured enterprise class systems, the loss or delay
in a given quarter of a relatively limited number of system sales could
adversely affect the Company's revenues.
Historically, the Company often has recognized a substantial portion of
its revenues in the last month of any given quarter. Because the Company's
operating expenses are based on anticipated revenue levels and because a high
percentage of the Company's expenses are relatively fixed, a small variation in
the timing of the recognition of revenues could cause significant variations in
operating results from quarter to quarter.
COMPETITIVE MARKET
The market for the Company's products is highly competitive. The Company
experiences substantial competition, principally from Sun Microsystems, Network
Appliance, EMC Corporation, Hewlett-Packard Company and SGI, among others. Some
companies have introduced proprietary products to provide network attached
storage. Most of the Company's competitors are better known and have
substantially greater financial, technological, production and marketing
resources than the Company. While the Company believes that the
price/performance characteristics of its products are competitive, price
competition in the markets for the Company's products is intense. Any material
reduction in the price of the Company's products without corresponding decreases
in manufacturing costs and increases in unit volume would negatively affect
gross margins, which could in turn have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also derives a significant portion of its revenues from sales of product
upgrades to its installed base of customers, including additional processors,
memory and disk 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.
DEPENDENCE ON KEY PERSONNEL
Competition for employees with highly technical, management and other
skills is intense in the computer industry and is particularly intense in the
San Francisco Bay Area. The Company has recently encountered some difficulties
in fulfilling its hiring needs and retaining key employees in this employment
market, and there can be no assurance that the Company will be successful in
hiring and retaining qualified employees in the future. The Company's failure to
retain the services of key personnel or to attract additional qualified
employees could have a material adverse effect on the Company's business,
financial condition and results of operations.
* See "Forward-Looking Statements" on page 8.
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SOFTWARE PRODUCT RISKS
The Company markets software products in addition to its line of network
file servers. These software products include: NeTservices(TM), DriveGuard(TM),
FastBackup(TM), ServerGuard(TM), ServerGuard Global(TM) and DataGuard(TM). The
Company also expects to release enhancements and new features for these products
from time to time.* Although the Company performs extensive testing prior to
releasing software products, such products may contain undetected errors or bugs
when first released. These may not be discovered until the product has been used
by customers in different application environments. Failure to discover product
deficiencies or bugs could delay product introductions, require design
modifications to previously shipped products, cause unfavorable publicity or
negatively impact system shipments; any of which could result in a materially
adverse effect on the Company's business, financial condition and results of
operations.
NEW PRODUCTS
New product introductions by the Company or its competitors carry the
risk that customers could delay or cancel orders for existing products pending
shipment of the new products. For instance, product transition issues had an
adverse impact on North America, Europe and Pacific Rim revenue in the first six
months of fiscal 2000 and entire fiscal 1999. The Company's strategy is to
continue to introduce new products and upgrades to existing products on an
ongoing basis. There can be no assurance that the Company will not experience
difficulties that delay or prevent the successful development, introduction or
marketing of these products and enhancements or that these new products and
enhancements will adequately address market requirements, achieve market
acceptance or generate substantial sales. Additionally, delays in the launch or
lack of availability of new products could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON ESTABLISHED STANDARDS
The rapid emergence of new or alternate standards such as Windows NT and
Linux, which replace or diminish the market acceptance of UNIX operating systems
or Network File System (NFS), on which the Company's products are currently
based, could materially and adversely affect the Company's results of operations
unless the Company is able to incorporate any such standards in the Company's
products in a timely manner. At this time, Windows NT has been incorporated into
the Company's product offerings.
DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS
For the first six months ended December 31, 1999, no customers
represented more than 10% of the Company's revenues. For the first six months
ended December 31, 1998, direct sales of products and services to Intel
Corporation ("Intel") represented approximately 20% of the Company's revenues.
Intel is not obligated to purchase any minimum level of products from the
Company. Significant reductions in product sales to Intel would materially and
adversely affect the Company's business, financial condition and results of
operations. For example, during the first six months of fiscal 2000, reduction
in product sales to Intel had a material and adverse effect on the Company's
results of operations.
DEPENDENCE ON CERTAIN SUPPLIERS
Certain of the Company's products contain critical components supplied
by a single or limited number of third parties. While the Company has an
inventory of these critical components, any significant or prolonged shortage of
these components or the failure of the third-party suppliers to maintain or
enhance these components could materially and adversely affect the Company's
results of operations.
* See "Forward-Looking Statements" on page 8.
Page 11
<PAGE> 14
EXCESS OR OBSOLETE INVENTORY
Managing the Company's inventory of components and finished products is
a complex task. A number of factors, including but not limited to the need to
maintain a significant inventory of certain components which are in short supply
or which must be purchased in bulk to obtain favorable pricing, and the general
unpredictability of demand for specific products and customer requests for quick
delivery schedules, may result in the Company maintaining large amounts of
inventory. Other factors, including changes in market demand and technology, may
cause inventory to become obsolete. Any excess or obsolete inventory could
result in price reductions and/or inventory write-downs, which in turn could
adversely affect the Company's business and results of operations.
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During the first six months ended December 31, 1999, and 1998,
approximately 35% and 33%, respectively, of the Company's total revenues were
derived from markets outside of North America. The Company expects that sales to
the Pacific Rim and Europe will continue to represent a significant portion of
its business.* Nonetheless, there can be no assurance that the Company's Pacific
Rim or European operations will continue to be successful.
The Company's international business may be affected by changes in
demand resulting from localized economic and market conditions. For example, the
Company experienced a decrease in revenues from the Pacific Rim during the first
six months ended December 31, 1999 due to continued weakness in the Japanese
economy. In addition, the Company's international business may be affected by
fluctuations in currency exchange rates and currency restrictions. The Company
purchases the majority of its materials and services in U.S. dollars, and most
of its foreign sales are transacted in U.S. dollars. Continued increases in the
value of the U.S. dollar relative to foreign currencies will make the Company's
products sold internationally less price competitive. The Company has offices in
a number of foreign countries, the operating expenses of which are also subject
to the effects of fluctuations in foreign exchange rates. Financial exposure may
result due to the timing of transactions and movement of exchange rates. The
Company's international business may further be affected by risks such as trade
restrictions, increase in tariff and freight rates and difficulties in obtaining
necessary export licenses and meeting appropriate local regulatory standards.
For example, the Company has had to modify its products in minor respects in
Japan to comply with local electromagnetic emissions standards, and must also
comply with corresponding European Economic Community standards. In marketing
its products to the European Economic Community, the Company also must face the
challenges posed by a fragmented market complicated by local distribution
channels and local cultural considerations. For international sales, the Company
has largely relied on distributors or OEMs, most of whom are entitled to carry
products of the Company's competitors. There can be no assurance that any of the
foregoing risks or issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
STOCK MARKET FLUCTUATIONS
In recent years, the stock market in general and the market for
technology stocks in particular, including the Company's Common Stock, have
experienced extreme price fluctuations. The market price of the Company's Common
Stock may be significantly affected by various factors such as quarterly
variations in the Company's operating results, changes in revenue growth rates
for the Company as a whole or for specific geographic areas or products, changes
in earning estimates by market analysts, the announcements of new products or
product enhancements by the Company or its competitors, speculation in the press
or analyst community, and general market conditions or market conditions
specific to particular industries. There can be no assurance that the market
price of the Company's Common Stock will not experience significant fluctuations
in the future.
* See "Forward-Looking Statements" on page 8.
Page 12
<PAGE> 15
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company currently relies on a combination of patent, copyright,
trademark and trade secret laws and contractual provisions to protect its
proprietary rights in its hardware and software products. The Company currently
holds 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 READINESS DISCLOSURES
The Company is aware of the issues associated with the programming code
in existing computer systems, both customers and internal, as the Year 2000
approaches. The Year 2000 problem is pervasive and complex, as virtually every
computer operation will be affected in some way by the rollover of the two-digit
year value to "00". Systems that do not properly recognize date-sensitive
information when the year changes to 2000 could generate erroneous data or cause
a system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with the Year 2000 problem. The
Company's new products are being designed to be Year 2000 compliant (as the
Company has defined that term in its published statements).* Nonetheless, some
of the Company's older products will not be Year 2000 compliant and, as a
result, the Company's customers will be required to upgrade or discontinue use
of these products. Although products have undergone, or will undergo, the
Company's normal quality testing procedures, there can be no assurance that the
Company's products will contain all necessary date code changes.* Any failure of
the Company's products to perform, including system malfunctions due to the
onset of Year 2000, could result in claims against the Company, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company's customers could choose to convert
to other Year 2000 compliant products or to develop their own products in order
to avoid such malfunctions, either of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company has completed the audit of its core information technology
infrastructure for Year 2000 compliance, including reviewing what actions are
required to make all software systems Year 2000 compliant as well as actions
needed to mitigate the risks of Year 2000. Such actions include a review of
vendors' contracts, attention to Year 2000 issues in future contracts with
vendors and formal communications with suppliers requesting that they certify
that their products are Year 2000 compliant.
State of Readiness
The Company has been actively addressing the Year 2000 issues since
fiscal 1997. The following sections broadly address Year 2000 matters with
respect to the Company's (a) suppliers, (b) facilities and infrastructure, (c)
information technology systems, (d) engineering infrastructure, and (e)
manufacturing operation Year 2000 compliance assessment.
* See "Forward-Looking Statements" on page 8.
Page 13
<PAGE> 16
Suppliers
During fiscal year 1998 the Company sent out a Year 2000 Readiness
Letter/Questionnaire to its supply chain. 100% of the supply chain contacted had
responded to the inquiries and all responding had indicated they were, or would
be, fully compliant by December 31, 1999.
In preparation for Year 2000, we did have response from all suppliers
identifying their readiness and/or programs for readiness. As a precaution, we
also built up some excess inventory on critical parts to ensure no interruptions
to business in the first few weeks of January, 2000. As a result, there has been
no significant impact from these suppliers and we have resumed business with
each of them. No supplier has communicated to have any significant Year 2000
issues and we have not experienced delays in procurement of transactions or
deliveries.
Facilities and Infrastructure
The Company's headquarters facility in Santa Clara and domestic remote
sites were believed to be Year 2000 compliant with respect to building
automation systems, electronic security systems and utilities.* The Company had
presented formal queries to local fire departments with regard to Year 2000
compliance/readiness. Formal responses have been received which state Year 2000
compliance of local fire departments and power companies. The Company believes,
in its judgment, that there were no significant Year 2000 problems with its
English, French, German and Japanese facilities.*
All worldwide facilities and infrastructure were unaffected by Year 2000
problems.
Information Technology Systems
Over the past several years, the Company had invested in a number of
Year 2000 compliant PBX and voice-mail systems. No effort was spent on verifying
Year 2000 compliance of local telephone systems of most sales offices and the
Company did not expect to have verified such compliance as the Company believes,
in its judgment, that there were no significant Year 2000 problems with the
local telephone systems of the sales offices.*
The Company believes that its internal production data communication
network is Year 2000 compliant.* A majority of the key components, which the
Company believes to be Year 2000 compliant,* of the network were installed
within the past fiscal year. The Company's wide-area network requirements are
provided by a major national and international carrier. The Company believes
there was some uncertainty between these carriers due to the fact testing
between carriers cannot commence until each carrier is Year 2000 compliant. No
significant effort was spent on verifying Year 2000 compliance for local
services that are provided by local carriers and the Company does not expect to
have verified such compliance as the Company believes, in its judgment, more
likely than not, there is no significant uncertainty.*
* See "Forward-Looking Statements" on page 8.
Page 14
<PAGE> 17
The Company had replaced or upgraded many of its core applications
systems. A new Year 2000 compliant* enterprise resource planning package was
installed in the first calendar quarter of 1998. An upgrade to a newer version
of this package, as provided by the vendor, was completed during the fourth
calendar quarter of 1998 which incorporates several Year 2000 compliance related
bug fixes. In September 1998, the Company installed newer versions of its
payroll and human resources system with vendor provided Year 2000 compliant
upgrades of their software applications. The Company's customer call tracking
system was upgraded to provide additional Year 2000 functionality and stability
during September 1999, as provided by the vendor. During fiscal 1998, the
Company invested in a desktop upgrade program. Vendors have affirmed that
standard personal computers and laptop computing installed during 1998 are Year
2000 compliant. Testing confirmed that commonly used functions operate
satisfactorily.*
With respect to our information systems and network infrastructure, we
implemented precautionary steps and performed second round testing during late
December, 1999. On December 31,1999, we executed full system back-ups prior to
the clock roll-over. On January 3, 2000, our team tested critical systems to
verify system integrity. All systems performed as expected. As a consequence,
there was no significant impact to the business.
Engineering Infrastructure
The Company's engineering infrastructure is in a continual state of
change due to the dynamic nature of the Company's business and focus on new
products. As older products are retired and new products developed, the tools,
equipment and laboratory environments change. The Company completed the
assessment of Year 2000 issues of its engineering infrastructure during the
fourth calendar quarter of 1998 and believes it has resolved all significant
issues.* Testing confirmed that commonly used functions operate satisfactorily.*
Year 2000 preparation in Engineering has produced no significant issues
and has not impacted our research and development efforts or processes.
Manufacturing Operations
The Company is primarily an assemble-to-order manufacturing operation.
There is no significant automated assembly equipment on its manufacturing shop
floor. The Company completed the assessment of Year 2000 issues of its
manufacturing operations during the fourth calendar quarter of 1998 and believes
it has resolved all significant issues.* Testing affirmed that commonly used
functions operate satisfactorily.*
All internal test systems were made Year 2000 ready and as a result
there has been no issue identified associated with Year 2000. There has been no
impact to manufacturing operations.
Costs to Address Year 2000 Issues
The Company has incurred total software-, hardware- and systems-related
costs of approximately $1.9 million and solutions providers' costs of
approximately $500,000 in connection with remediations of Year 2000 compliance
issues, in addition to incurring payroll costs for our Information Technology
staff which the Company does not separately track.* There can be no assurance
that the cost estimates associated with the Company's Year 2000 issues will
prove to be accurate or that the actual costs will not have a material adverse
effect on the Company's results of operations and financial condition.
* See "Forward-Looking Statements" on page 8.
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<PAGE> 18
Year 2000 Issues
The Company's Technical Support representatives work closely with
customers to resolve problems, issues and questions. The Company's Customer
Service organization uses several toll free phone numbers to address customer
problems, issues and questions. These calls are logged and tracked using a call
management system. Customer Service has a significant reliance on
communications, voice-mail, email, paging, Web and file transfer program
services and data communications. Given the number and variety of suppliers and
their inter-dependencies, the number and location of worldwide customers and the
number and locations of the various Technical Support offices, it was not
feasible to fully test whether the Company would be able to guarantee that each
customer would be able to contact and/or do business with Customer Service
without disruption on or about the beginning of 2000. The Company expected an
increase in calls on or about the beginning of Year 2000.
Contingency Plans
Contingency plans implemented for customer protection in terms of
Technical Support, production readiness, information technology systems and
network infrastructure were in place and were either not required or served
their purpose. There has been no impact to our business with the roll over to
Year 2000.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
There were no material changes during the second quarter of fiscal 2000
to the Company's exposure to market risk for changes in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
There were no material changes during the second quarter of fiscal 2000
to the Company's foreign currency hedging programs.
Page 16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The 1999 Annual Meeting of the Stockholders of Auspex Systems, Inc. was
held at the company's headquarters, 2300 Central Expressway, Santa
Clara, California 95050 on November 18, 1999 at 9:00 a.m. (the "Annual
Meeting").
b. At the Annual Meeting one (1) director was elected to the Company's
Board of Directors as a Class ll director to serve for a two-year term.
NUMBER OF VOTES
<TABLE>
<CAPTION>
Nominee Cast for Withheld
------- -------- --------
<S> <C> <C>
R. Stephen Cheheyl 17,386,704 6,256,188
</TABLE>
c. The following additional proposals were considered at the Annual Meeting
and were approved according to the respective vote of the stockholders.
(1) Approval of the Company's 1993 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for
issuance thereunder by 800,000.
<TABLE>
<CAPTION>
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
<S> <C> <C> <C>
17,230,105 6,046,825 230,893 135,069
</TABLE>
(2) Ratification and approval of appointment of Arthur Andersen LLP
as the independent public accountants of the Company for the
year ending June 30, 2000.
<TABLE>
<CAPTION>
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
<S> <C> <C> <C>
23,037,288 567,178 38,426 0
</TABLE>
d. The following additional proposal was considered at the Annual Meeting
and was not approved according to the respective vote of the
stockholders.
(1) Approval of amendments to the Company's 1997 Stock Plan to
increase the shares reserved for issuance thereunder by 500,000.
<TABLE>
<CAPTION>
Cast for Against Abstentions Broker Non-Votes
-------- ------- ----------- ----------------
<S> <C> <C> <C>
10,641,288 12,594,376 272,159 135,069
</TABLE>
ITEM 5. OTHER INFORMATION
a. Effective January 7, 2000, Fred J. Wiele, Vice President of
Marketing, resigned from the Company.
Page 17
<PAGE> 20
b. Subsequent Event
On January 19, 2000, the Company completed a $25 million equity
funding through a private placement with three institutional
investors. Under the terms of the placement, the investors have
purchased $25 million in the Company's Series B Convertible
Preferred stock and warrants. The non-voting preferred shares
carry a 7% dividend per annum, which may be paid in cash or
common stock. For more information with respect to such
transaction, please refer to the Company's Current Report on
Form 8-K filed with the United States Securities and Exchange
Commission on January 19, 2000.
c. Effective January 28, 2000, R. Marshall Case, Vice President of
Finance and Chief Financial Officer, resigned from the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
<TABLE>
<S> <C>
27 Financial Data Schedule
10.35 Form of Change of Control Severance Agreement entered
into the form of the Company and Hans H. Schwarz, Senior
Vice President of Engineering, dated January 1, 2000.
</TABLE>
b. Reports on Form 8-K
No report on Form 8-K was filed during the current period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date February 10, 2000 /s/ BRUCE N. MOORE
--------------------------- -------------------------------------
Bruce N. Moore
President and Chief Executive Officer
Page 18
<PAGE> 21
AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
10.35 Form of Change of Control Severance Agreement entered into the
form of the Company and Hans H. Schwarz, Senior Vice President
of Engineering, dated January 1, 2000.
</TABLE>
<PAGE> 1
EXHIBIT 10.35
AUSPEX SYSTEMS, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and
entered into by and between Hans H. Schwarz (the "Employee") and Auspex Systems,
Inc., a Delaware corporation (the "Company"), effective as 01/01, 2000 (the
"Effective Date").
RECITALS
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon Employee's termination of employment following a
Change of Control which provides the Employee with enhanced financial security
and provides incentive and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.
D. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the date
that all obligations of the parties hereto with respect to this Agreement have
been satisfied.
2. At-Will Employment. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
3. Severance Benefits.
<PAGE> 2
(a) Involuntary Termination Other than for Cause; Voluntary
Termination for Good Reason; Death; Permanent and Total Disability. If the
Employee's employment is (i) involuntarily terminated by the Company other than
for Cause (as defined herein), (ii) voluntarily terminated by Employee for Good
Reason (as defined herein), (iii) terminates due to Employee's death or
"permanent and total disability" (as such term is defined under Internal Revenue
Code Section 22(e)(3) or its successor provision), in any case within twelve
(12) months following a Change of Control (as defined herein), then, subject
Section 3(e) below, the Employee shall receive the following severance benefits
from the Company:
(1) Severance Payments. Twelve equal monthly
payments yielding in aggregate an amount equal to one hundred percent (100%) of
the Employee's Annual Compensation (as defined herein);
(2) Medical Benefits. Payment of Employee's
Consolidated Budget Reconciliation Act of 1985 ("COBRA") premiums (the
"Company-Paid Coverage"). If Employee's health insurance coverage included
Employee's dependents immediately prior to the Change-in Control, such
dependents shall also be covered at Company's expense. Company-Paid Coverage
shall continue until the earlier of (a) twelve (12) months after the date of
termination of Employee's employment or (b) the date Employee becomes eligible
for coverage under another employer's health insurance plan. For purposes of
Title X of COBRA, the date of the "qualifying event" for Employee and his or her
dependents shall be the date upon which Employee's employment terminates.
(b) Timing of Severance Payments. Any severance payments to
which Employee is entitled under Section 3(a)(1) shall be paid by the Company to
the Employee (or to the Employee's successors in interest, pursuant to Section
7(b)) in cash installments with each installment being paid on or before the end
of month-long period following the Termination Date (e.g. on each monthly
"anniversary" of the Termination Date).
(c) Voluntary Resignation other than for Good Reason,
Termination For Cause. If the Employee's employment terminates by reason of the
Employee's voluntary resignation other than for Good Reason, or if the Employee
is terminated involuntarily by the Company for Cause, then the Employee shall
not be entitled to receive severance or other benefits except for those (if any)
as may then be established under the Company's then existing severance and
benefits plans and practices or pursuant to other agreements with the Company.
(d) Termination Apart from Change of Control. In the event
the Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the eighteen (18) month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.
-2-
<PAGE> 3
(e) Contingent Obligations. The Company's obligation to pay
the severance payments, or any portion thereof remaining unpaid, set forth in
Section 3(a)(1) above and pay the Company-paid Coverage, set forth in Section
3(a)(2) above, shall terminate immediately in the event that Employee breaches
either of Employee's obligations set forth in Section 9 below.
4. Attorney Fees, Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.
5. Limitation on Payments. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to the
Employee (i) constitute "parachute payments" within the meaning of Section 28OG
(as it may be amended or replaced) of the Internal Revenue Code of 1986, as
amended or replaced (the "Code") and (ii) but for this Section 5, would be
subject to the excise tax imposed by Section 4999 (as it may be amended or
replaced) of the Code (the "Excise Tax"), then the Employee's severance benefits
hereunder Section 3 shall be either
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to the
Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by the
Employee on an after-tax basis, of the greatest amount of severance benefits,
notwithstanding that all or some portion of such severance benefits may be
taxable under the Excise Tax. Unless the Company and the Employee otherwise
agree in writing, any determination required under this Section 5 shall be made
in writing in good faith by the accounting firm serving as the Company's
independent public accountants immediately prior to the Change of Control (the
"Accountants"). In the event of a reduction in benefits hereunder, the Employee
shall be given the choice of which benefits to reduce. For purposes of making
the calculations required by this Section 5, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of the Code.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Annual Compensation. "Annual Compensation" means an
amount equal to the sum of Employee's (i) annual Company salary at the highest
rate in effect in the twelve months immediately preceding the Change of Control,
and (ii) 100% of the Employee's annual target bonus as in effect immediately
prior to the Change of Control.
-3-
<PAGE> 4
(b) Cause. "Cause" shall mean either (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) Employee's conviction of a felony, (iii) a willful act by the
Employee which constitutes gross misconduct and which is injurious to the
Company, or (iv) following delivery to the Employee of a written demand for
performance from the Company which describes the basis for the Company's belief
that the Employee has not substantially performed his duties, continued
substantial violations by the Employee of the Employee's obligations to the
Company which are demonstrably willful and deliberate on the Employee's part.
(c) Change of Control. "Change of Control" means the
occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule l3d-3 under said Act) ("Beneficial
Owner"), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities;
(ii) A change in the composition of the Board
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board with the affirmative
vote of at least a majority of the Incumbent Directors at the time of such
election or nomination;
(iii) The consummation of a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity
or the entity that controls the Company or controls such surviving entity) at
least fifty percent (50%) of the total voting power represented by the voting
securities of the Company or such surviving entity or the entity that controls
the Company or controls such surviving entity outstanding immediately after such
merger or consolidation; or
(iv) The consummation of the sale or disposition by
the Company at least fifty percent (50%) of the Company's assets.
(d) Good Reason. "Good Reason" shall mean (i) without the
Employee's express written consent, a material reduction of the Employee's
duties, title, authority or responsibilities, relative to the Employee's duties,
title, authority or responsibilities as in effect immediately prior to such
reduction, or the assignment to Employee of such reduced duties, title,
authority or responsibilities; provided, however, that a reduction in duties,
title, authority or responsibilities solely by virtue of the Company being
acquired and made part of a larger entity (as, for example, when the Chief
Financial Officer of Auspex remains as such following a Change of Control and is
not made the Chief Financial Officer of the acquiring corporation) shall not
constitute "Good
-4-
<PAGE> 5
Reason;" (ii) without the Employee's express written consent, a material
reduction, without good business reasons, of the facilities and perquisites
(including office space and location) available to the Employee immediately
prior to such reduction; (iii) a reduction by the Company in the base salary of
the Employee as in effect immediately prior to such reduction; (iv) a material
reduction by the Company in the kind or level of employee benefits, including
bonuses, to which the Employee was entitled immediately prior to such reduction
with the result that the Employee's overall benefits package is materially
reduced; (v) the relocation of the Employee to a facility or a location more
than thirty (30) miles from the Employee's then present location, without the
Employee's express written consent; (vi) any purported termination of the
Employee by the Company which is not effected for Disability or for Cause, or
any purported termination for which the grounds relied upon are not valid; (vii)
the failure of the Company to obtain the assumption of this agreement by any
successors contemplated in Section 7(a) below; or (viii) any act or set of facts
or circumstances which would, under California case law or statute constitute a
constructive termination of the Employee.
(e) Termination Date. "Termination Date" shall mean (i) if
this Agreement is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee (provided that the Employee
shall not have returned to the performance of the Employee's duties on a
full-time basis during such thirty (30)-day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days after
the Company gives the Employee notice of termination, the Employee notifies the
Company that a dispute exists concerning the termination or the benefits due
pursuant to this Agreement, then the Termination Date shall be the date on which
such dispute is finally determined, either by mutual written agreement of the
parties, or a by final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected), or (iii) if the Agreement is terminated by the Employee, the
date on which the Employee delivers the notice of termination to the Company.
7. Successors.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and
all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
-5-
<PAGE> 6
8. Notice.
(a) General. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company
for Cause or by the Employee as a result of a voluntary resignation or an
Involuntary Termination shall be communicated by a notice of termination to the
other party hereto given in accordance with Section 8(a) of this Agreement. Such
notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than 30 days after
the giving of such notice). The failure by the Employee to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Employee hereunder or preclude the
Employee from asserting such fact or circumstance in enforcing his rights
hereunder.
9. Employee Obligations. Notwithstanding any other obligations of
Employee to Company following his or her termination from the Company and
pursuant to any other agreements, Employee hereby agrees that he or she shall be
bound by the following restrictions for a period of one (1) year from the
Termination Date:
(a) Non-Solicitation. Employee agrees that he shall not
either directly or indirectly solicit, induce, attempt to hire, recruit,
encourage, take away, hire any employee of the Company or cause an employee to
leave their employment either for Employee or for any other entity; and
(b) Non Disparagement. The Employee agrees to refrain from
any defamation, libel or slander of the Company, or tortious interference with
the contracts and relationships of the Company.
10. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required
to mitigate the amount of any payment contemplated by this Agreement, nor shall
any such payment be reduced by any earnings that the Employee may receive from
any other source.
(b) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by
-6-
<PAGE> 7
either party of any breach of, or of compliance with, any condition or provision
of this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
represents the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same.
(d) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) Withholding. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes to the extent required by law.
(g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-7-
<PAGE> 8
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
set forth above.
COMPANY AUSPEX SYSTEMS, INC.
-------------------------------
/s/ BRUCE N. MOORE
-------------------------------------------
Bruce N. Moore, Chief Executive Officer
EMPLOYEE /s/ HANS H. SCHWARZ
-------------------------------------------
-8-
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0
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<INCOME-PRETAX> (16,224)
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