-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DNJZkJ9z2jKJnu3gYcbupRjUWO0WMh7PuvWrzcduhIhfoDVAfCmXDALxH32bToyI ezxVrokZ8OiFr73hWLb+hQ== 0000891618-99-005121.txt : 19991115 0000891618-99-005121.hdr.sgml : 19991115 ACCESSION NUMBER: 0000891618-99-005121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUSPEX SYSTEMS INC CENTRAL INDEX KEY: 0000860749 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 930963660 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21432 FILM NUMBER: 99748769 BUSINESS ADDRESS: STREET 1: 2300 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95050 BUSINESS PHONE: 4085662000 MAIL ADDRESS: STREET 1: 5200 GREAT AMERICAN PKWY CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 FORM 10-Q FOR PERIOD ENDED 9/30/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-21432 AUSPEX SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 93-0963760 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 2300 CENTRAL EXPRESSWAY SANTA CLARA, CA 95050 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (408) 566-2000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] NUMBER OF SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF NOVEMBER 2, 1999: 27,496,301 2 - -------------------------------------------------------------------------------- FORM 10-Q AUSPEX SYSTEMS, INC. INDEX
Page PART I. FINANCIAL INFORMATION Number ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 1 and June 30, 1999 Condensed Consolidated Statements of Operations for the Three 2 Months Ended September 30, 1999 and September 30, 1998 Condensed Consolidated Statements of Cash Flows for the Three 3 Months Ended September 30, 1999 and September 30, 1998 Notes to Unaudited Condensed Consolidated Financial Statements 4-7 ITEM 2. Management's Discussion and Analysis of Financial 8-15 Condition and Results of Operations ITEM 3. Qualitative and Quantitative Disclosures About Market Risks 16 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16
3 PART I. FINANCIAL INFORMATION Item 1. Financial statements AUSPEX SYSTEMS, INC. Condensed Consolidated Balance Sheets (In thousands) ASSETS
September 30, June 30, 1999 1999 - --------------------------------------------------------------------------------- (Unaudited) Current Assets Cash and cash equivalents $ 19,739 $ 26,592 Short-term investments 14,841 16,045 Accounts receivable, net 22,028 20,374 Inventories 10,353 10,905 Income tax receivable 187 4,865 Prepaid expenses and other 4,565 5,054 -------- -------- Total current assets 71,713 83,835 -------- -------- Property and equipment, net 28,056 28,841 Other assets 2,354 2,372 -------- -------- Total assets $102,123 $115,048 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY September 30, June 30, 1999 1999 - --------------------------------------------------------------------------------- Current Liabilities Accounts payable $ 11,372 $ 13,316 Accrued liabilities 12,359 11,975 Deferred revenue 7,829 9,276 -------- -------- Total current liabilities 31,560 34,567 -------- -------- Long Term Liabilities Deferred revenue 1,520 1,304 -------- -------- Stockholders' equity 69,043 79,177 -------- -------- Total liabilities and stockholders' equity $102,123 $115,048 ======== ========
The accompanying notes are an integral part of these financial statements. Page 1 4 AUSPEX SYSTEMS, INC. Condensed Consolidated Statements of Operations
Three Months Ended ---------------------------------- September 30, September 30, 1999 1998 - ------------------------------------------------------------------------------------- (In thousands, except per share amounts) (Unaudited) (Unaudited) Revenues Product revenue $ 18,942 $ 22,030 Service revenue 7,230 8,027 -------- -------- Total revenues 26,172 30,057 -------- -------- Cost of Revenues Cost of product revenue 10,111 10,453 Cost of service revenue 6,571 5,684 -------- -------- Total cost of revenues 16,682 16,137 -------- -------- Gross margin 9,490 13,920 -------- -------- Operating Expenses Selling, general and administrative 13,775 12,553 Research and development 8,305 8,708 -------- -------- Total operating expenses 22,080 21,261 -------- -------- Income/(loss) from operations (12,590) (7,341) Other income, net 419 596 -------- -------- Income/(loss) before provision for income taxes (12,171) (6,745) Provision for income taxes 50 44 -------- -------- Net income/(loss) $(12,221) $ (6,789) ======== ======== Net income/(loss) per share Basic $ (0.45) $ (0.26) ======== ======== Diluted $ (0.45) $ (0.26) ======== ======== Number of shares used in per share computations Basic 27,132 25,700 ======== ======== Diluted 27,132 25,700 ======== ========
The accompanying notes are an integral part of these financial statements. Page 2 5 AUSPEX SYSTEMS, INC. Consolidated Statements of Cash Flows
September 30, September 30, Three Months Ended 1999 1998 - --------------------------------------------------------------------------------------------------- (In thousands) (Unaudited) (Unaudited) Cash Flows from Operating Activities Net income/(loss) $(12,221) $ (6,789) Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities Depreciation and amortization 2,146 3,779 Changes in assets and liabilities: (Increase) decrease in accounts receivable (1,654) 273 (Increase) decrease in inventories 52 (4,348) Decrease in income tax receivable 4,678 9,010 Decrease in prepaid expenses and other 507 1,429 Increase (decrease) in accounts payable (1,944) 208 Increase in accrued liabilities 384 1,504 Decrease in deferred revenue (1,231) (888) -------- -------- Net cash (used in) provided by operating activities (9,283) 4,178 -------- -------- Cash Flows from Investing Activities Purchases of available-for-sale short-term investments (2,803) (8,799) Proceeds from sales/maturities of available-for-sale short-term investments 3,981 24,834 Purchases of property and equipment (832) (3,328) -------- -------- Net cash used in investing activities 346 12,707 -------- -------- Cash Flows from Financing Activities Proceeds from sale of common stock, net 2,033 19 -------- -------- Net cash provided by financing activities 2,033 19 -------- -------- Effect of exchange rate changes on cash 51 156 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (6,853) 17,060 Cash and Cash Equivalents, Beginning of Period 26,592 23,312 -------- -------- Cash and Cash Equivalents, End of Period $ 19,739 $ 40,372 ======== ========
The accompanying notes are an integral part of these financial statements. Page 3 6 AUSPEX SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying interim consolidated financial statements and related notes should be read in conjunction with the financial statements and related notes included in the Company's fiscal 1999 Annual Report to Stockholders. 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of the dates and results of operations for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. Additionally, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. While management makes its best effort to achieve its estimates, actual results could differ from estimates. The results of operations for the three months ended September 30, 1999, are not necessarily indicative of results for the entire fiscal year ending June 30, 2000. (See "Factors That May Affect Future Operating Performance" in Management's Discussion and Analysis of Financial Condition and Results of Operations.) Prior to the first quarter of fiscal 2000, the Company's fiscal year ended on the last day of the quarter within the year ended June 30. Beginning fiscal year 2000, the Company will operate and report on a 52-53 week fiscal year. Accordingly, the Company's fiscal year 2000 will end on July 1, 2000. The Company's fiscal quarters end on the Saturday of the thirteenth week of the quarter. For presentation purposes, the financial statements reflect the calendar month-end date. The change in reporting periods did not have a material effect on the accompanying financial statements for the first quarter of fiscal 2000. 2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Substantially all cash equivalents consist of investments in certificates of deposits, money market deposits, commercial paper and U.S. agency bonds with original maturities of three months or less. Substantially all short-term investments consist of certificates of deposits, commercial paper and U.S. agency bonds, which the Company intends to hold between three and twelve months. 3. NON-CASH INVESTING ACTIVITIES Net inventory capitalized into property and equipment was $500,000 and $4,234,000 for the three months ended September 30, 1999 and 1998, respectively. 4. REVENUE RECOGNITION Product revenue includes hardware sales and software license fees. The Company generally recognizes system sales upon shipment. The installation of the Company's systems is not considered a significant obligation and acceptance by the customer is not considered a significant uncertainty. Revenues from upgrade sales are generally recognized at the time the equipment is shipped. Provisions for product sales returns and allowances are recorded in the same period as the related revenue. Revenues earned under software license agreements with end users are generally recognized when the software has been shipped and there are no significant obligations remaining. Page 4 7 Service revenue includes installation, maintenance and training, and is recognized ratably over the contractual period or as the services are provided. 5. NET INCOME PER SHARE Basic net income per share is computed based only on the weighted average number of common shares outstanding during the period and does not give effect to the dilutive effect of common equivalent shares, such as stock options. Diluted net income per share is computed based on the weighted average number of common shares plus dilutive potential common shares calculated in accordance with the treasury stock method.
(In thousands) September 30, September 30, Three Months Ended 1999 1998 ------------- ------------- Net income (loss) .......................................... $(12,221) $ (6,789) ======== ======== Basic Earnings Per Share Income (loss) available to common stockholders ......... $(12,221) $ (6,789) Weighted average common shares outstanding ............. 27,132 25,700 ======== ======== Basic earnings (loss) per share ........................ $ (0.45) $ (0.26) ======== ======== Diluted Earnings Per Share Income (loss) available to common stockholders ......... $(12,221) $ (6,789) -------- -------- Weighted average common shares outstanding ............. 27,132 25,700 Dilutive potential common shares from stock options .... -- -- -------- -------- Weighted average common shares and dilutive potential common shares .......................... 27,132 25,700 -------- -------- Diluted earnings (loss) per share ..................... $ (0.45) $ (0.26) ======== ========
All stock options outstanding during the three months ended September 30, 1999 and 1998 of 4,233,501 and 4,574,919 shares, respectively, were excluded from the computation of diluted earnings per share because the effect of including them would have been antidilutive due to the loss available to common stockholders. 6. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and include material, labor, and manufacturing overhead costs. Inventories consist of the following (in thousands):
September 30, 1999 June 30, 1999 ------------------ ------------- Purchased materials $ 3,387 $ 4,158 Systems in process 4,632 4,044 Finished goods 2,334 2,703 ------- ------- Total inventories $10,353 $10,905 ======= =======
Inventories contained components and assemblies in excess of the Company's current estimated requirements and were fully reserved at September 30, 1999 and June 30, 1999. Page 5 8 Certain of the Company's products contain critical components supplied by a single or limited number of third parties. The Company has an inventory of these critical components so as to ensure an available supply of products for its customers. Any significant shortage of these components or the failure of the third party suppliers to maintain or enhance these components could materially adversely affect the Company's results of operations. (See "Factors That May Affect Future Operating Performance--Dependence on Certain Suppliers.") 7. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income," in the first quarter of fiscal 1999. SFAS No. 130 establishes standards for disclosure and financial statement display for reporting total comprehensive income and its individual components. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. The Company's comprehensive income includes net income, foreign currency translation adjustments and unrealized holding gains from available-for-sale securities. The following table sets forth the components of other comprehensive income (loss) net of income tax (in thousands):
September 30, September 30, Three Months Ended 1999 1998 ------------- ------------- Net income (loss) $(12,221) $ (6,789) Other comprehensive income (loss): Unrealized holding gains on available-for-sale securities 3 22 Foreign currency translation adjustment 51 156 -------- -------- Comprehensive income (loss) $(12,167) $ (6,611) ======== ========
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):
September 30, 1999 September 30, 1998 ------------------------- ------------------------- Long Lived Long Lived Revenue Assets Revenue Assets ------------------------- ------------------------- United States $ 14,689 $ 27,166 $ 17,001 $ 36,300 Europe 6,351 618 9,036 890 Pacific Rim 2,631 271 2,906 232 Canada 2,501 1 1,114 4 ------------------------ ------------------------ Total $ 26,172 $ 28,056 $ 30,057 $ 37,426 ======================== ========================
Page 6 9 No customers accounted for 10% or more of total revenues during three months ended September 30, 1999. One customer accounted for 15% of total revenues during three months ended September 30, 1998. 9. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that a reporting entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is required to adopt SFAS No. 133 in the first quarter of fiscal 2001. The impact of adopting SFAS No. 133 to the Company has not been determined. Page 7 10 AUSPEX SYSTEMS, INC. FORWARD-LOOKING STATEMENTS FROM TIME TO TIME, THE COMPANY MAY PUBLISH STATEMENTS THAT ARE NOT HISTORICAL FACTS BUT ARE FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW PRODUCTS, RESEARCH AND DEVELOPMENT ACTIVITIES AND SIMILAR MATTERS. SUCH STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS AND PHRASES, SUCH AS "INTENDED," "EXPECTS," "ANTICIPATES" AND "IS (OR ARE) EXPECTED (OR ANTICIPATED)." THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED TO THOSE IDENTIFIED BELOW WITH AN ASTERISK (*) SYMBOL. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND STOCKHOLDERS OF AUSPEX SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS FORM 10-Q, INCLUDING FACTORS THAT MAY AFFECT FUTURE RESULTS. AUSPEX MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS CONTAINED IN AUSPEX'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO STOCKHOLDERS. AUSPEX DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENTS THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF AUSPEX. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total revenues for the first quarter of fiscal 2000, ended September 30, 1999, were $26.2 million, as compared to total revenues of $30.1 million in the first quarter of fiscal 1999, ended September 30, 1998. Product revenues for the first quarter of fiscal 2000 were $18.9 million or 72% of total revenues compared to $22.0 million or 73% of total revenues in the first quarter of fiscal 1999. Revenues from system sales accounted for 54% of total revenues during the first quarter of fiscal 2000 and 31% for the first quarter of fiscal 1999, while revenues from upgrades, add-on options and software license agreements comprised 18% of total revenues during the first quarter of fiscal 2000 and 43% for the first quarter of fiscal 1999. Service revenues for the first quarter of fiscal 2000 were $7.2 million or 28% of total revenues compared to 27% in the first quarter of fiscal 1999. Geographically, North America accounted for 66% and 60% of total revenues in the first quarters of fiscal 2000 and 1999, respectively; the Pacific Rim accounted for 10% in the first quarters of fiscal 2000 and 1999, respectively; and Europe accounted for 24% and 30% in the first quarters of fiscal 2000 and 1999, respectively. The decrease in revenues in absolute dollars in North America, Europe and Pacific Rim was primarily due to product transition issues, increased competitive pressures, the reorganization of a major OEM partner and weakness in the Japanese economy. Gross margin was 36% of net revenues in the first quarter of fiscal 2000 compared with 46% in the first quarter of fiscal 1999. Product gross margin decreased to 47% in the first quarter of fiscal 2000 from 53% in the first quarter of fiscal 1999. The decrease in gross margins in the first quarter of fiscal 2000 was due to lower mix in upgrade revenues combined with competitive pressures, timing of new product introductions which contributed to below break-even operations and higher investments made in the service organization. Page 8 11 Selling, general and administrative expenses during the first quarter of fiscal 2000 totaled $13.8 million, an increase of 10% from $12.6 million in the corresponding period of the prior fiscal year, and comprised 53% and 42% of total revenues, respectively. The increase in selling, general and administrative expenses as a percentage of revenues is a result of an expansion of the North American direct sales operations, the growth of direct sales operations of the Company's international subsidiaries, growth in marketing operations and lower revenues in first quarter of fiscal 2000. Research and development expenses incurred during the first quarter of fiscal 2000 were $8.3 million, a decrease of 5% from $8.7 million in the corresponding period of the prior fiscal year, and comprised 32% and 29% of total revenues, respectively. Loss from operations for the first quarter of fiscal 2000 was $12.6 million, compared with loss from operations of $7.3 million in the first quarter of fiscal year 1999. The decline in operating results was primarily due to lower revenues and an increase in selling, general, and administrative expenses. The Company's effective tax rate for the first quarters of fiscal 2000 and 1999 was essentially 0%, respectively. The Company's tax provision includes state and minimum statutory taxes. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments decreased by $8.1 million to $34.6 million for the three months ended September 30, 1999. The Company used approximately $9.3 million in cash from operating activities in the first quarter of fiscal 2000, which included loss from operations before depreciation and amortization of $10.1 million, the decrease in accounts payable and deferred revenue and the increase in accounts receivable, partially offset by the collection of income tax refunds. The Company's primary financing activity included proceeds from the sale of its Common Stock pursuant to employee benefit plans of $2.0 million in the first quarter of fiscal 2000. The Company's working capital decreased during the first quarter of fiscal 2000 by $9.1 million to $40.2 million. At September 30, 1999, the Company's principal sources of liquidity included $34.6 million in cash, cash equivalents and short-term investments. Based on its current operating plans, the Company believes that its existing cash, cash equivalents and short-term investments will be adequate to meet its working capital and capital expenditure requirements at least through the next 12 months.* * See "Forward-Looking Statements" on page 8. Page 9 12 FACTORS THAT MAY AFFECT FUTURE RESULTS POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS The Company's operating results may fluctuate significantly from quarter to quarter due to a combination of factors. These factors include the timing of orders, the timing of new product introductions by the Company or its competitors, and the mix of distribution channels through which the Company's products are sold. The Company generally realizes higher gross margins on sales of systems to end users and on single-system sales than on systems sold through distributors and OEMs and on multiple-system sales. In addition, given the Company's focus on highly configured enterprise class systems, the loss or delay in a given quarter of a relatively limited number of system sales could adversely affect the Company's revenues. Historically, the Company often has recognized a substantial portion of its revenues in the last month of any given quarter. Because the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed, a small variation in the timing of the recognition of revenues could cause significant variations in operating results from quarter to quarter. COMPETITIVE MARKET The market for the Company's products is highly competitive. The Company experiences substantial competition, principally from Sun Microsystems, Network Appliance, EMC Corporation, Hewlett-Packard Company and SGI, among others. Some companies have introduced proprietary products to provide network attached storage. Most of the Company's competitors are better known and have substantially greater financial, technological, production and marketing resources than the Company. While the Company believes that the price/performance characteristics of its products are competitive, price competition in the markets for the Company's products is intense. Any material reduction in the price of the Company's products without corresponding decreases in manufacturing costs and increases in unit volume would negatively affect gross margins, which could in turn have a material adverse effect on the Company's business, financial condition and results of operations. The Company also derives a significant portion of its revenues from sales of product upgrades to its installed base of customers, including additional processors, memory and disk. Increased competition for the Company's products that results in lower product sales could also adversely impact the Company's upgrades sales. In addition, decisions by customers not to increase capacity to their current systems could adversely impact the Company's revenues and results of operations. The Company's ability to maintain its competitive position will depend upon, among other factors, its success in anticipating industry trends, investing in product research and development, developing new products with improved price/performance characteristics and effectively managing the introduction of new products into targeted markets. DEPENDENCE ON KEY PERSONNEL Competition for employees with highly technical, management and other skills is intense in the computer industry and is particularly intense in the San Francisco Bay Area. The Company has recently encountered some difficulties in fulfilling its hiring needs and retaining key employees in this employment market, and there can be no assurance that the Company will be successful in hiring and retaining qualified employees in the future. The Company's failure to retain the services of key personnel or to attract additional qualified employees could have a material adverse effect on the Company's business, financial condition and results of operations. Page 10 13 SOFTWARE PRODUCT RISKS The Company markets software products in addition to its line of network file servers. These software products include: NeTservices(TM), DriveGuard(TM), FastBackup(TM), ServerGuard(TM), ServerGuard Global(TM) and DataGuard(TM). The Company also expects to release enhancements and new features for these products from time to time.* Although the Company performs extensive testing prior to releasing software products, such products may contain undetected errors or bugs when first released. These may not be discovered until the product has been used by customers in different application environments. Failure to discover product deficiencies or bugs could delay product introductions, require design modifications to previously shipped products, cause unfavorable publicity or negatively impact system shipments; any of which could result in a materially adverse effect on the Company's business, financial condition and results of operations. NEW PRODUCTS New product introductions by the Company or its competitors carry the risk that customers could delay or cancel orders for existing products pending shipment of the new products. For instance, product transition issues had an adverse impact on North America, Europe and Pacific Rim revenue in the first quarter of fiscal 2000 and entire fiscal 1999. The Company's strategy is to continue to introduce new products and upgrades to existing products on an ongoing basis. There can be no assurance that the Company will not experience difficulties that delay or prevent the successful development, introduction or marketing of these products and enhancements or that these new products and enhancements will adequately address market requirements, achieve market acceptance or generate substantial sales. Additionally, delays in the launch or lack of availability of new products could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON ESTABLISHED STANDARDS The rapid emergence of new or alternate standards, such as Windows NT and Linux, which replace or diminish the market acceptance of UNIX operating systems or Network File System (NFS), on which the Company's products are currently based, could materially and adversely affect the Company's results of operations unless the Company is able to incorporate any such standards in the Company's products in a timely manner. DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS For the three months ended September 30, 1998, direct sales of products and services to Intel Corporation ("Intel") represented approximately 15% of the Company's revenues. Intel is not obligated to purchase any minimum level of products from the Company. Significant reductions in product sales to Intel would materially and adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON CERTAIN SUPPLIERS Certain of the Company's products contain critical components supplied by a single or limited number of third parties. While the Company has an inventory of these critical components, any significant or prolonged shortage of these components or the failure of the third-party suppliers to maintain or enhance these components could materially and adversely affect the Company's results of operations. * See "Forward-Looking Statements" on page 8. Page 11 14 EXCESS OR OBSOLETE INVENTORY Managing the Company's inventory of components and finished products is a complex task. A number of factors, including but not limited to, the need to maintain a significant inventory of certain components which are in short supply or which must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules, may result in the Company maintaining large amounts of inventory. Other factors, including changes in market demand and technology, may cause inventory to become obsolete. Any excess or obsolete inventory could result in price reductions and/or inventory write-downs, which in turn could adversely affect the Company's business and results of operations. RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS During the first three months ended September 30, 1999 and September 30, 1998, approximately 34% and 40%, respectively, of the Company's total revenues were derived from markets outside of North America. The Company expects that sales to the Pacific Rim and Europe will continue to represent a significant portion of its business.* Nonetheless, there can be no assurance that the Company's Pacific Rim or European operations will continue to be successful. The Company's international business may be affected by changes in demand resulting from localized economic and market conditions. For example, the Company experienced a decrease in revenues from the Pacific Rim during the first three months ended September 30, 1999 due to continued weakness in the Japanese economy. In addition, the Company's international business may be affected by fluctuations in currency exchange rates and currency restrictions. The Company purchases the majority of its materials and services in U.S. dollars, and most of its foreign sales are transacted in U.S. dollars. Continued increases in the value of the U.S. dollar relative to foreign currencies will make the Company's products sold internationally less price competitive. The Company has offices in a number of foreign countries, the operating expenses of which are also subject to the effects of fluctuations in foreign exchange rates. Financial exposure may result due to the timing of transactions and movement of exchange rates. The Company's international business may further be affected by risks such as trade restrictions, increase in tariff and freight rates and difficulties in obtaining necessary export licenses and meeting appropriate local regulatory standards. For example, the Company has had to modify its products in minor respects in Japan to comply with local electromagnetic emissions standards, and must also comply with corresponding European Economic Community standards. In marketing its products to the European Economic Community, the Company also must face the challenges posed by a fragmented market complicated by local distribution channels and local cultural considerations. For international sales, the Company has largely relied on distributors or OEMs, most of whom are entitled to carry products of the Company's competitors. There can be no assurance that any of the foregoing risks or issues will not have a material adverse effect on the Company's business, financial condition and results of operations. STOCK MARKET FLUCTUATIONS In recent years, the stock market in general and the market for technology stocks in particular, including the Company's Common Stock, have experienced extreme price fluctuations. The market price of the Company's Common Stock may be significantly affected by various factors such as quarterly variations in the Company's operating results, changes in revenue growth rates for the Company as a whole or for specific geographic areas or products, changes in earning estimates by market analysts, the announcements of new products or product enhancements by the Company or its competitors, speculation in the press or analyst community, and general market conditions or market conditions specific to particular industries. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future. * See "Forward-Looking Statements" on page 8. Page 12 15 INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company currently relies on a combination of patent, copyright, trademark and trade secret laws and contractual provisions to protect its proprietary rights in its hardware and software products. The Company currently holds fourteen United States patents and has filed applications for additional patents. The Company also has filed applications for counterpart patents in foreign countries, including Japan. There can be no assurance that the Company's present or future competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Further, there can be no assurance that the Company's patent applications will result in issued patents, or that the Company's issued patents will be upheld if challenged. Additionally, there can be no assurance that third parties will not assert intellectual property infringement claims against the Company in the future with respect to current or future projects or that any such assertions may not require the Company to refrain from the sale of its products, enter into royalty arrangements or undertake costly litigation. The Company's adherence to industry standards with respect to its products limits the Company's opportunities to provide proprietary features, which may be protected. In addition, the laws of various countries in which the Company's products may be sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. YEAR 2000 READINESS DISCLOSURES The Company is aware of the issues associated with the programming code in existing computer systems, both customers and internal, as the Year 2000 approaches. The Year 2000 problem is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to "00". Systems that do not properly recognize date-sensitive information when the year changes to 2000 could generate erroneous data or cause a system to fail. Significant uncertainty exists in the software industry concerning the potential effects associated with the Year 2000 problem. The Company's new products are being designed to be Year 2000 compliant (as the Company has defined that term in its published statements).* Nonetheless, some of the Company's older products will not be Year 2000 compliant and, as a result, the Company's customers will be required to upgrade these products. Although products have undergone, or will undergo, the Company's normal quality testing procedures, there can be no assurance that the Company's products will contain all necessary date code changes.* Any failure of the Company's products to perform, including system malfunctions due to the onset of Year 2000, could result in claims against the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company's customers could choose to convert to other Year 2000 compliant products or to develop their own products in order to avoid such malfunctions, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has completed the audit of its core information technology infrastructure for Year 2000 compliance, including reviewing what actions are required to make all software systems Year 2000 compliant as well as actions needed to mitigate the risks of Year 2000. Such actions include a review of vendors' contracts, attention to Year 2000 issues in future contracts with vendors and formal communications with suppliers requesting that they certify that their products are Year 2000 compliant. STATE OF READINESS The Company has been actively addressing the Year 2000 issues since fiscal 1997. The following sections broadly address Year 2000 matters with respect to the Company's (a) suppliers, (b) facilities and infrastructure, (c) information technology systems, (d) engineering infrastructure, and (e) manufacturing operation Year 2000 compliance assessment. * See "Forward-Looking Statements" on page 8. Page 13 16 Suppliers During fiscal year 1998 the Company sent out a Year 2000 Readiness Letter/Questionnaire to its supply chain. 98% of the supply chain contacted has responded to the inquiries and all responding have indicated they are, or will be, fully compliant by December 31, 1999. The outstanding suppliers still needing to respond were actively solicited for their position. This solicitation was completed as of September 30, 1999. For any suppliers responding in the negative, wherever possible, an alternate supplier who meets the Year 2000 requirements, will be identified and qualified.* There can be no assurance that the Company will be able to find suitable alternate suppliers and contract with them on reasonable terms, or at all, and such inability could have a material and adverse impact on the Company's business and results of operations. Facilities and Infrastructure The Company's headquarters facility in Santa Clara and domestic remote sites are believed to be Year 2000 compliant with respect to building automation systems, electronic security systems and utilities.* The Company has presented formal queries to local fire departments with regard to Year 2000 compliance/readiness. Formal responses have been received as of this filing which state Year 2000 compliance of local fire departments and power companies. The Company believes, in its judgment, that there will be no significant Year 2000 problem with its English, French, German and Japanese facilities.* Information Technology Systems Over the past several years, the Company has invested in a number of Year 2000 compliant PBX and voice-mail systems. No effort has yet been spent on verifying Year 2000 compliance of local telephone systems of most sales offices and the Company does not expect to have verified such compliance as the Company believes, in its judgment, that there will be no significant Year 2000 problem with the local telephone systems of the sales offices.* The Company believes that its internal production data communication network is Year 2000 compliant.* A majority of the key components, which the Company believes to be Year 2000 compliant,* of the network were installed within the past fiscal year. The Company's wide-area network requirements are provided by a major national and international carrier. The Company believes there is some uncertainty between these carriers due to the fact testing between carriers cannot commence until each carrier is Year 2000 compliant. No significant effort has been spent on verifying Year 2000 compliance for local services that are provided by local carriers and the Company does not expect to have verified such compliance as the Company believes, in its judgment, more likely than not, there is no significant uncertainty.* The Company has replaced or upgraded, or is in the process of replacing/upgrading, many of its core applications systems. A new Year 2000 compliant* enterprise resource planning package was installed in the first calendar quarter of 1998. An upgrade to a newer version of this package was completed during the fourth calendar quarter of 1998 which incorporates several Year 2000 compliance related bug fixes. In September 1998, the Company installed newer versions of its payroll and human resources system with vendor provided Year 2000 compliant upgrades of their software applications. The Company's customer call tracking system was upgraded to provide additional Year 2000 compliant functionality and stability during September 1999, as provided by the vendor. During fiscal 1998, the Company invested in a desktop upgrade program. Vendors have affirmed that standard personal computers and laptop computing installed during 1998 are Year 2000 compliant. Testing has confirmed that commonly used functions operate satisfactorily.* Engineering Infrastructure The Company's engineering infrastructure is in a continual state of change due to the dynamic nature of the Company's business and focus on new products. As older products are retired and new products developed, the tools, equipment and laboratory environments change. The Company completed the assessment of Year 2000 issues of its engineering infrastructure during the fourth calendar quarter of 1998 and believes it has resolved all significant issues.* Testing has confirmed that commonly used functions operate satisfactorily.* * See "Forward-Looking Statements" on page 8. Page 14 17 Manufacturing Operations The Company is primarily an assemble-to-order manufacturing operation. There is no significant automated assembly equipment on its manufacturing shop floor. The Company completed the assessment of Year 2000 issues of its manufacturing operations during the fourth calendar quarter of 1998 and believes it has resolved all significant issues.* Testing has affirmed that commonly used functions operate satisfactorily.* COSTS TO ADDRESS YEAR 2000 ISSUES The Company expects to incur total software-, hardware- and systems-related costs of approximately $1.9 million and solutions providers' costs of approximately $500,000 in connection with remediations of Year 2000 compliance issues, in addition to incurring payroll costs for our Information Technology staff which the Company does not separately track.* There can be no assurance that the cost estimates associated with the Company's Year 2000 issues will prove to be accurate or that the actual costs will not have a material adverse effect on the Company's results of operations and financial condition. YEAR 2000 ISSUES The Company's Technical Support representatives work closely with customers to resolve problems, issues and questions. The Company's Customer Service organization uses several toll free phone numbers to address customer problems, issues and questions. These calls are logged and tracked using a call management system. Customer Service has a significant reliance on communications, voice-mail, email, paging, Web and file transfer program services and data communications. Given the number and variety of suppliers and their inter-dependencies, the number and location of worldwide customers and the number and locations of the various Technical Support offices, it is not feasible to fully test whether the Company will be able to guarantee that each customer will be able to contact and/or do business with Customer Service without disruption on or about the beginning of 2000. The Company expects an increase in calls on or about the beginning of Year 2000, which will likely impact Customer Service responsiveness. CONTINGENCY PLANS The Company has completed the preparation of general contingency plans, which includes staffing requirements to handle all inquiries, for the Year 2000 compliance issues areas noted above. There can be no assurance that such staffing contingency plans will be able to handle and resolve all Year 2000 inquiries or the measures taken by the Company will prevent the occurrence of Year 2000 problems, which could have a material adverse effect upon the Company's business, operating results and financial condition. Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS INTEREST RATE RISK There were no material changes during the first quarter of fiscal 2000 to the Company's exposure to market risk for changes in interest rates. FOREIGN CURRENCY EXCHANGE RISK There were no material changes during the first quarter of fiscal 2000 to the Company's exposure to foreign currency exchange risk. * See "Forward-Looking Statements" on page 8. Page 15 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits 27 Financial Data Schedule b. Reports on Form 8-K No report on Form 8-K was filed during the current period SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Auspex Systems, Inc. ----------------------------------- Date November 12, 1999 /s/ R. Marshall Case -------------------------- ----------------------------------- R. Marshall Case Vice President of Finance and Chief Financial Officer Page 16 19 AUSPEX SYSTEMS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Sequentially Exhibit Description Numbered Page - ------- ----------- ------------- 27 Financial Data Schedule 17
EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS JUL-01-2000 JUL-01-1999 SEP-30-1999 19,739 14,841 23,130 1,102 10,353 71,713 71,301 43,245 102,123 31,560 0 0 0 27 69,016 102,123 18,942 26,172 10,111 16,682 22,080 0 0 (12,171) 50 (12,221) 0 0 0 (12,221) (0.45) (0.45)
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