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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 28, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (IRS EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
495 EAST JAVA DRIVE,
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 822-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (NO PAR VALUE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of May 26, 2000, was $18,217,977,594 (based on the closing price
for shares of the Registrant's common stock as reported by the Nasdaq National
Market for the last trading day prior to that date). Shares of common stock held
by each executive officer, director, and holder of 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On May 26, 2000, 312,417,087 shares of the Registrant's common stock, no
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference from
the definitive Proxy Statement for our annual meeting of shareholders to be held
on October 11, 2000, which will be filed with the Securities and Exchange
Commission not later than 120 days after April 28, 2000.
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This Annual Report on Form 10-K contains forward looking statements that
are accompanied by cautionary statements that identify important factors that
could cause actual results to differ materially from those in the forward
looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Network Appliance pioneered the concept of the "network appliance," an
extension of the industry trend toward specialized devices that perform a
specific function in the network, similar to the development of the router for
network communications. Today we are a leader in delivering high-performance
network-attached data storage and access devices specifically designed to
improve the accessibility of data stored and distributed over a network. Our
Internet caching solutions (NetCache(TM) appliances) and file servers (filers)
deliver fast, simple, reliable and cost-effective access to network-stored data
and enable simultaneous shared file services for UNIX(R), Windows NT(R), and the
World Wide Web. Our solutions are faster, more highly available and easier to
operate than similarly configured and competitively priced products. System
performance is accomplished by a specialized and patented software and operating
system optimized to exclusively perform file server and caching tasks, thus
providing performance advantages when compared to general purpose computers in
similar environments.
Our dedicated Internet caching appliance, designed to serve data at high
speeds, eases network and server bottlenecks and speeds up delivery of web
content by storing or caching frequently used content closer to end-users. Our
NetCache solutions scale network infrastructures and enhance end-user
performance, benefiting customers struggling with Web data traffic that is,
according to market analysts, doubling every three to six months.
Our filers are marketed to users of leading database and enterprise
software applications, such as those offered by Oracle Corp., Sybase, Inc.,
Informix Software, Inc. and SAP AG. We have OEM agreements with Dell Computer
Corporation and Fujitsu Limited to broaden our focus on the Windows NT market.
We continue to leverage our core software architecture in developing new
enterprise software and data management tools by providing solutions for the
e-business infrastructure and database applications among Internet and
enterprise-related customers.
PRODUCTS
The demand for our Network Attached Storage (NAS) and caching appliances is
driven by the need to manage the rapid growth in data volume and the increasing
complexity of data type and content delivery. We are focused on creating
dedicated, specialized data access solutions that perform a single function:
serve data. Both our filers and NetCache appliances are based on our patented
Data ONTAP(TM) software and standards-compliant hardware.
Filers. Our first Network Appliance(TM) product was a filer developed for
the UNIX environment. Subsequently, we added the capability for the filer to
handle the heterogeneous network environment of UNIX, Windows NT and the World
Wide Web, using the NFS, CIFS, and HTTP protocols. Current products include: the
NetApp(R) F720, an entry-level filer targeted for workgroups and smaller
application environments, the NetApp F740, designed to address the needs of
large departments, and the NetApp F760, an enterprise class filer. All filers
are based on a PCI-bus architecture and come packaged in rack mountable
enclosures which may be factory installed in cabinets. The NetApp F700-series
filers are all based on the Digital(R) Alpha(R) processor and support either
fibre channel arbitrated loop (FC-AL) conventions or legacy SCSI as storage
options.
All of our filers include the Data ONTAP operating system and one base or
standard protocol (either NFS, CIFS or HTTP). Data ONTAP delivers simultaneous
file service to UNIX, Windows NT and Web
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clients. Data ONTAP, versions 5.0 and higher, supports multiple volume server
partitioning, a popular strategy for modularizing, consolidating and
administering data according to applications, data types and organizational
needs. Native multi-protocol functionality can be easily added through licensing
non-base protocols at an additional cost. Cluster Failover software technology,
which automatically senses a system failure and switches all file service
functions to its cluster partner, is available on the NetApp F740 and NetApp
F760 products.
Two software features SnapMirror(TM) and SnapRestore(TM), (based on the
Data ONTAP Snapshot(TM) technology), allow enterprise, database and e-commerce
customers to implement multi-terabyte data management systems by utilizing
remote mirroring, enterprise backup, disaster recovery and data replication.
These data protection tools further enhance our filers' performance allowing
customers to minimize downtime, eliminate unnecessary storage investment and
time consuming backup routines. A third software feature, SecureAdmin(TM) is a
security product that allows administrators to conduct encrypted management
sessions with the filer over the Internet or corporate intranets.
In fiscal 2000, we launched two new storage management software solutions:
SnapManager(TM) for Microsoft(R) Exchange that allows customers to perform
online backup and rapid data recovery in Microsoft Exchange environments; and
ApplianceWatch(TM) that allows IT professionals to centrally manage, administer
and optimize our systems for superior performance.
NetCache Appliances. NetCache appliances were developed to address the
explosive growth of Internet traffic that is slowing Web data access. The rapid
growth and increasing richness of web content, including images, audio, video
and downloadable applications are creating a greater demand for bandwidth.
NetCache appliances scale network infrastructure by distributing content closer
to the end-users and improving end-user performance. Web access delays can be
substantially reduced if frequently accessed data is stored or "cached" nearer
to the end-user.
Our NetCache products further assist customers in growing network
infrastructure and managing mission critical data, providing customers with a
fast, cost-effective way to administer corporate Internet/Intranet access
policies and offers advanced security features, including user authentication,
filtering and auditing. With our patented Write Anywhere File Layout (WAFL(TM))
file system, microkernel OS and advanced caching algorithms, NetCache appliances
provide enhanced response times and throughput.
In fiscal 2000, we introduced new caching products, which included NetCache
4.1, the industry's first streaming media appliance supporting Apple(R)
Quicktime(TM), Microsoft(R) Windows Media(TM) and RealNetworks(R) Real
System(TM) G2 users, delivering live broadcasting on the Internet.
The NetCache appliance provides a high performance, cost-effective,
scalable solution that:
- enables enterprise web caching to efficiently accelerate information
gathering along with decreasing overall bandwidth demands and costs and
provides security access and content filtering controls;
- mirrors the most often used corporate data to distributed enterprise
sites, thereby relieving network congestion across the enterprise
intranet;
- delivers high performance NetNews, based on NNTP (Network News transfer
protocol) for all network environments; and
- improves delivery of Internet content, allowing webcasting, replicating
video and audio streams to thousands of simultaneous users.
Current products include the entry-level NetApp C720s, a dedicated caching
appliance designed for smaller ISP and enterprise environments, the NetApp C720,
designed for remote, low administrative overhead environments such as Internet
Points-of-Presence (POPs), web hosting and content providers and larger
enterprises, and the NetApp C760, which supports the most demanding,
data-intensive caching environments.
Our product list prices range from $6,000 to $750,000, depending primarily
on the model purchased and average product configuration.
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SALES AND MARKETING
We seek to market and distribute our products and technology globally. In
North America, we employ a multi-tiered distribution strategy, which focuses on
product sales to end-users through a direct sales force, as well as selected
value-added resellers in certain geographies. In Europe, we employ a mix of
resellers and direct sales channels to sell to end-users. In Asia, our products
are primarily sold through resellers, which are supported by our channel sales
representatives and technical support personnel. In fiscal 1999, we entered into
OEM agreements with Dell Computer Corporation and Fujitsu Limited, which are
part of our strategy to increase the worldwide distribution of our filer
products. No single customer accounted for 10% or more of our net sales in
fiscal 2000, 1999 or 1998. See additional discussion regarding sales and
marketing in "Note 8 -- Segment, Geographic and Customer Information under Item
8. Financial Statements and Supplementary Data -- Notes to Consolidated
Financial Statements."
BACKLOG
We manufacture our products based upon forecasts of our customers' demand.
Orders are generally placed by customers on an as-needed basis. Products are
typically shipped within one to four weeks following receipt of an order. In
certain circumstances, customers may cancel or reschedule orders without
penalty. For these reasons, we do not believe "orders" constitute a firm
"backlog" and we believe orders are not a meaningful indicator of revenues nor
material to an understanding of our business.
CUSTOMER SERVICE AND SUPPORT
Support Services. Our customer service and support organization provides
technical support, education and training. We believe that providing a high
level of customer service and technical support is critical to customer
satisfaction and our success. Warranty coverage provides customers with free
7x24-telephone support for emergency situations for one year from the date of
purchase along with the same day shipment of replacement parts, and access to
our self-service on-line website, NetApp on the Web (NOW). In addition, our
customers receive 90 days of software subscription -- on-line access to all
entitled software updates. Additional software support can be purchased through
our Warranty Plus offering, which includes:
- One year of access to NOW, and Information Subscription Service;
- AutoSupport;
- Software Subscription Service;
- Next-Business-Day Parts Delivery (Disks and System Hardware); and
- 7x24 Emergency Telephone Support, and 7x24 Web Case Support for
Non-Emergency Situations.
Additional service options available in-warranty or post warranty include:
- Non-Emergency Telephone Support;
- Upgraded Hardware Services for Disks;
- Upgraded Hardware Services for System Hardware;
- Global Advisor, providing a customer with access to a team of advisors
and tools that will monitor all service-based activity for their account;
and
- Global Advisor Plus, providing immediate phone access to our "back line"
engineers for non-emergency situations. This service allows incoming
requests to be automatically upgraded to receive emergency support, thus
immediately escalating the case to the highest level resource available
at the time the call is received.
Professional Services. Our professional services organization offers a
comprehensive solution designed to optimize performance and improve reliability
for enterprise-wide data management, enabling more cost-effective network and
information technology administration. Our baseline professional service
includes a self-
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service web site, web case support for non-emergency situations, subscription
services and next-business-day hardware delivery. We also offer upgraded
services, providing for faster on-site hardware replacement and non-emergency
telephone support through the global support center.
Professional services programs also include:
- System Availability Management, providing proactive system administration
involving global support center call activity review, regular site
inspections and system availability reviews plus upgraded services
involving on-site and 24-hour emergency response from a Professional
Services Engineer;
- Expert consulting services available on an hourly or daily rate basis to
help customers develop customized solutions; and
- Time and materials consulting services for short-term consulting or
emergency on-site response.
In general, we charge for service programs on an annual subscription basis.
On-site support is primarily provided by independent parties both in North
America and internationally.
MANUFACTURING
Our manufacturing operations, located in Sunnyvale, California, include
materials procurement, commodity management, component engineering, test
engineering, manufacturing engineering, product assembly, product assurance,
quality control and final test. We rely on many suppliers for materials, as well
as several key subcontractors for the production of certain sub-assemblies. Our
strategy has been to develop close relationships with our suppliers, exchanging
critical information and implementing joint quality training programs. We are
currently expanding the use of subcontractors for the production of major
sub-assemblies. See "-- Risk Factors -- We rely upon a limited number of
suppliers." This manufacturing strategy minimizes capital investment and
overhead expenditures and creates flexibility by allowing us to rapidly expand.
We were awarded the ISO 9001 certification on May 29, 1997.
RESEARCH AND DEVELOPMENT
Since our inception we have made substantial investments in research and
development. We believe that our future performance will depend in large part on
our ability to maintain and enhance our current product line, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet an expanding range of customer requirements. We intend to continuously
expand our existing product offerings and to introduce new products.
As part of our ongoing development process, we continue to deliver new data
access solutions with enterprise software and database management tools. New
products introduced in fiscal 1999 included the F700 series filers, the C700
caching products, new enterprise software offerings and data management tools
with the Cluster Failover solutions, SnapMirror, SnapRestore, and SecureAdmin.
In the fourth quarter of fiscal 2000, we shipped two new storage management
software solutions, SnapManager for Microsoft Exchange and ApplianceWatch. New
caching product introductions in fiscal 2000 included NetCache software release
4.0 and NetCache 4.1, adding streaming media support for Apple Quicktime,
Microsoft Windows Media and RealNetworks Real System G2 users, delivering live
broadcasting on the Internet.
Our future growth depends upon the successful development and introduction
of new hardware and software, however we cannot assure you that these or other
new products will attain market acceptance. See "-- Risk Factors -- We depend
upon our research and development efforts to develop and introduce new products"
and "-- We face risks of technological changes that affect our products."
Our total expenses for research and development for fiscal years 2000, 1999
and 1998 were $62.1 million, $30.5 million, and $16.6 million, respectively. We
anticipate that research and development expenses will increase in absolute
dollars in future periods.
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COMPETITION
The network attached data storage market is intensely competitive and
characterized by rapidly changing technology. With the increasing adoption of
network attached storage, or NAS, appliances that substitute for the use of
general purpose computers, we compete against traditional suppliers of
UNIX-based general purpose computers that are used as network file servers
including Sun Microsystems, Inc., Hewlett-Packard Company, Silicon Graphics,
Inc., and IBM Corporation, among others. In addition, certain of these large
traditional suppliers of general purpose computers may in the future offer
specialized file server products with dedicated solutions for file serving,
database serving, caching and web serving, which are more directly competitive
with our products. We also encounter competition from manufacturers of PC-based
file servers utilizing Windows NT such as Compaq Computer Corporation and Dell
Computer Corporation, as well as competition from manufacturers of open systems
storage and RAID solutions such as EMC Corporation, Compaq StorageWorks, and MTI
Corporation. We also experience competition from smaller NAS appliance vendors
including Procom Technology, Inc., MetaStor Storage Solutions (a subsidiary of
LSI Logic Corp.) and specialized network file server companies such as Auspex
Systems, Inc. In the Internet caching market, our NetCache appliances compete
against both the caching appliance vendors including CacheFlow Inc., Cisco
Systems, Inc. as well as the caching software vendors including Inktomi Corp.,
and Novell, Inc. See "-- Risk Factors -- An increase in competition could
materially adversely affect our operating results" and "-- We face risks of
technological changes that affect our products."
We believe that the principal competitive factors affecting our market
include product features such as response time, reliability, data availability,
scalability, ease of use, price, multiprotocol capabilities and customer service
and support. Although we believe that our products currently compete favorably
with respect to these factors, we can not assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources.
PROPRIETARY RIGHTS
We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, contractual provisions and patents to
protect our proprietary rights. We seek to protect our software, documentation
and other written materials under trade secret, copyright and patent laws, which
afford only limited protection. We have registered our "Network Appliance" name
and logo, "FAServer", "FilerView", "NetApp" and "SecureShare" trademarks in the
United States. Other United States trademarks and some of the other United
States registered trademarks are registered internationally as well. We will
continue to evaluate the registration of additional trademarks as appropriate.
We generally enter into confidentiality agreements with our employees, resellers
and customers. We currently have multiple United States and international patent
applications pending and four United States patents issued. See "-- Risk
Factors -- If we are unable to protect our intellectual property we may be
subject to increased competition which could materially adversely affect our
operating results."
EMPLOYEES
As of April 28, 2000, we had 1,469 employees. Of the total, 775 were in
sales and marketing, 327 in research and development, 162 in finance and
administration and 205 in operations. Our future performance depends in
significant part upon our key technical and senior management personnel, none of
whom is bound by an employment agreement. We have never had a work stoppage and
consider relations with our employees to be good.
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EXECUTIVE OFFICERS
Our executive officers and their ages as of April 28, 2000, are as follows:
NAME AGE POSITION
---- --- --------
Daniel J. Warmenhoven......... 49 Chief Executive Officer and Director
Thomas F. Mendoza............. 49 President
Jeffry R. Allen............... 48 Executive Vice President, Finance and Operations,
Chief Financial Officer and Secretary
David Hitz.................... 37 Executive Vice President, Engineering
James K. Lau.................. 41 Executive Vice President and Chief Strategy Officer
Daniel J. Warmenhoven has served as our President and Chief Executive
Officer and has been a member of the Board of Directors since October 1994.
Prior to joining us, Mr. Warmenhoven served in various capacities, including
President, Chief Executive Officer and Chairman of the Board of Directors of
Network Equipment Technologies, Inc., a telecommunications company, from
November 1989 to January 1994. He presently serves on the Board of Directors of
Redback Networks, Inc., a communications products company. Mr. Warmenhoven holds
a B.S. degree in electrical engineering from Princeton University.
Thomas F. Mendoza was promoted to President in May 2000. Previously he has
served as our Senior Vice President, Worldwide Sales and Marketing since
February 1999 and Senior Vice President, Worldwide Sales since 1998. Prior to
that he served as Vice President, North American Sales. From November 1993 to
April 1994, Mr. Mendoza served in various capacities including Vice President,
Sales at Work Group Technology, a product data management company. Prior to
that, Mr. Mendoza served in various capacities including Vice President of North
American Sales at Auspex Systems, Inc., a UNIX-based network file server
company, from November 1990 to October 1993. Mr. Mendoza was previously Vice
President of Western Operations at Stratus Computer Corp., a vendor of fault
tolerant computers, from May 1982 to October 1990. Mr. Mendoza holds a B.A.
degree from the University of Notre Dame.
Jeffry R. Allen was promoted to Executive Vice President, Finance and
Operations, Chief Financial Officer and Secretary in May 2000 and has served as
our Senior Vice President, Finance and Operations, Chief Financial Officer and
Secretary since December 1996. From October 1994 to December 1996, Mr. Allen
served in various capacities, including Senior Vice President of Operations and
Vice President and Controller of Bay Networks, Inc., a networking company. From
December 1990 to October 1994, Mr. Allen held various positions at SynOptics,
Inc., the latest of which was Vice President and Controller. Before joining
SynOptics, Inc., he held various positions, from December 1973 to November 1990,
at Hewlett-Packard Company, the latest of which was Controller of the
Information Networks Group. He presently serves on the Board of Directors of VA
Linux Systems, a provider of Linux and Open Source solutions for the Web. Mr.
Allen holds a B.S. degree from San Diego State University.
David Hitz was promoted to Executive Vice President, Engineering in May
2000 and has served as our Senior Vice President, Engineering since February
2000 and Vice President and a co-founder of the Company since April 1992. Prior
to that, Mr. Hitz worked as a senior engineer at Auspex Systems, Inc., a
UNIX-based network file server company, from May 1988 to January 1991.
Previously to Auspex, Mr. Hitz held various engineering positions at MIPS
Computer. Mr. Hitz holds a B.S. degree in computer science and electrical
engineering from Princeton University.
James K. Lau was promoted to Executive Vice President and Chief Strategy
Officer in May 2000. Mr. Lau has served as our Vice President, Chief Technical
Officer and Vice President of Engineering and a co-founder of the Company since
April 1992. Prior to that, he served as director of software development at
Auspex Systems, Inc. Prior to Auspex, he served as group manager of PC products
at Bridge Communications, now known as 3Com. Mr. Lau holds a B.S. degree in
computer science and mathematics from the University of California, Berkeley and
a master's degree in computer engineering from Stanford University.
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RISK FACTORS
FACTORS BEYOND OUR CONTROL COULD CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE.
Although we have experienced significant revenue growth in recent periods,
this growth may not be indicative of our future operating results. As a result,
we believe that period-to-period comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as indicators of future
performance. Many of the factors that could cause our quarterly operating
results to fluctuate significantly in the future are beyond our control and
include the following:
- the level of competition in our target product markets;
- the size, timing and cancellation of significant orders;
- product configuration and mix;
- market acceptance of new products and product enhancements;
- new product announcements or introductions by us or our competitors;
- deferrals of customer orders in anticipation of new products or product
enhancements;
- changes in pricing by us or our competitors;
- our ability to timely develop, introduce and market new products and
enhancements;
- supply constraints;
- technological changes in our target product markets;
- the levels of expenditure on research and development and expansion of
our sales and marketing programs;
- seasonality; and
- general economic trends.
In addition, sales for any future quarter may vary and accordingly be
inconsistent with our plans. We generally operate with limited order backlog
because our products are typically shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network attached storage market is rapidly evolving and our sales
cycle varies substantially from customer to customer.
Due to all of the foregoing factors, it is possible that in one or more
future quarters our results may fall below the expectations of public market
analysts and investors. In such event, the trading price of our common stock
would likely decrease.
OUR GROSS MARGINS MAY VARY BASED ON THE CONFIGURATION OF OUR PRODUCTS.
We derive a significant portion of our sales from the resale of disk drives
as components of our filers, and the resale market for hard disk drives is
highly competitive and subject to intense pricing pressures. Our sales of disk
drives generate lower gross margin percentages than those of our filer products.
As a result, as we sell more highly configured systems with greater disk drive
content, overall gross margin percentages will be negatively affected.
Conversely, we believe our increased licensing of add-on software products may
favorably impact gross margins.
Our gross margins have been and may continue to be affected by a variety of
other factors, including:
- competition;
- direct versus indirect sales;
- the mix of software as a percentage of revenue;
- the mix and average selling prices of products;
- new product introductions and enhancements; and
- the cost of components and manufacturing labor.
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A SIGNIFICANT PERCENTAGE OF OUR EXPENSES ARE FIXED WHICH COULD AFFECT OUR NET
INCOME.
Our expense levels are based in part on our expectations as to future sales
and a significant percentage of our expenses are fixed. As a result, if sales
levels are below expectations, net income may be disproportionately affected.
OUR FUTURE FINANCIAL PERFORMANCE DEPENDS ON GROWTH IN THE NETWORK ATTACHED DATA
STORAGE MARKET AND ANY LACK OF GROWTH WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS.
All of our filer products address the network attached data storage market.
Accordingly, our future financial performance will depend in large part on
continued growth in the network attached data storage market and on emerging
standards in this market. We cannot assure you that the market for network
attached data storage will continue to grow or that emerging standards in the
network attached data storage market will not adversely affect the growth of
UNIX and Windows NT server markets. If the network attached data storage market
grows more slowly than anticipated or if network attached data storage based on
emerging standards other than those adopted by us become increasingly accepted
by the market, our operating results could be materially adversely affected.
THE SUCCESS OF OUR NETCACHE APPLIANCE PRODUCTS DEPENDS UPON MARKET ACCEPTANCE OF
CACHING TECHNOLOGY AND CONTINUED GROWTH IN THE CACHING APPLIANCE MARKET.
In late 1997, we released our NetCache appliance products, a new category
of hardware-based Internet caching appliances designed to speed the delivery of
information stored on the Web. However, hardware-based caching technology is
still in its infancy.
Our future financial performance will depend in part on the acceptance of
caching technology and the acceptance of our NetCache appliance products. We
cannot assure you that the caching appliance market will continue to grow at its
current rate, or at all.
IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS, OR IF OUR NEW PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE, OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED.
We derive a substantial portion of our revenue from the sale of our network
filer products. As a result, a reduction in the demand for our filer products
due to increased competition, a general decline in the market for network
attached data storage or other factors could materially adversely affect our
operating results. As part of our ongoing development process, we launched our
F700 filer products, C700 caching products, Cluster Failover solutions,
SnapMirror, SnapRestore, and SecureAdmin in fiscal 1999. During the third
quarter of fiscal 2000, we introduced new caching products, which included
NetCache software release 4.0 and NetCache 4.1, adding streaming media support
for Apple Quicktime, Microsoft Windows Media and RealNetworks Real System G2
users, delivering live broadcasting on the Internet. During the fourth quarter
of fiscal 2000, we launched more new enterprise software and data management
tools: SnapManager for Microsoft Exchange and ApplianceWatch. We expect to
derive a substantial portion of our revenue from sales of our F700 filer and
C700 caching products and these major data management software products.
Additional product introductions in future periods are expected to impact the
sales of existing products. If we are unable to introduce new products in a
timely manner, effectively manage the introduction of new products and any
related inventory transitions, or if such products do not achieve market
acceptance, our operating results could be materially adversely affected.
IF WE FAIL TO MANAGE OUR EXPANDING BUSINESS EFFECTIVELY OUR OPERATING RESULTS
COULD BE MATERIALLY ADVERSELY AFFECTED.
We have experienced rapid growth. Our future operating results depend to a
large extent on management's ability to successfully manage expansion and
growth, including but not limited to expanding international operations,
forecasting revenues, addressing new markets, controlling expenses, implementing
infrastructure and systems and managing our assets. In addition, an unexpected
decline in the growth rate of
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revenues without a corresponding and timely reduction in expense growth or a
failure to manage other aspects of growth could materially adversely affect our
operating results.
WE DEPEND ON ATTRACTING AND RETAINING QUALIFIED TECHNICAL AND SALES PERSONNEL.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel. Because
our future success is dependent on our ability to continue to enhance and
introduce new products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with the requisite
education, backgrounds and industry experience. Competition for qualified
engineers, particularly in Silicon Valley, is intense. The loss of the services
of a significant number of our engineers or sales people could be disruptive to
our development efforts or business relationships and could materially adversely
affect our operating results.
RISKS INHERENT IN OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
We conduct business internationally. For the year ended April 30, 2000
approximately 30.7% of our net sales were to international customers (including
United States exports). Accordingly, our future operating results could be
materially adversely affected by a variety of factors, some of which are beyond
our control, including regulatory, political or economic conditions in a
specific country or region, trade protection measures and other regulatory
requirements and government spending patterns.
Our international sales are denominated in U.S. dollars and in foreign
currencies. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in foreign markets. For international sales and expenditures
denominated in foreign currencies, we are subject to risks associated with
currency fluctuations. We hedge risks associated with foreign currency
transactions in order to minimize the impact of changes in foreign currency
exchange rates on earnings. We utilize forward contracts to hedge trade and
intercompany receivables and payables. All hedge contracts are marked to market
through earnings every period.
Additional risks inherent in our international business activities
generally include, among others, longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. Such factors could materially adversely affect our future
international sales and, consequently, our operating results.
Although operating results have not been materially adversely affected by
seasonality in the past, because of the significant seasonal effects experienced
within the industry, particularly in Europe, our future operating results could
be materially adversely affected by seasonality.
We believe that continued growth and profitability will require successful
expansion of our international operations and sales and therefore we have
committed significant resources to such expansion. In order to successfully
expand international sales in future periods, we must strengthen foreign
operations, hire additional personnel and recruit additional international
distributors and resellers. This will require significant management attention
and financial resources and could materially adversely affect our operating
results. To the extent that we are unable to effect these additions in a timely
manner, our growth, if any, in international sales will be limited, and our
operating results could be materially adversely affected. In addition, we cannot
assure you that we will be able to maintain or increase international market
demand for our products.
AN INCREASE IN COMPETITION COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
The network attached data storage market is intensely competitive and
characterized by rapidly changing technology. With the increasing adoption of
the NAS appliances that substitute for the use of general purpose server-storage
computers, we compete against traditional suppliers of UNIX-based general
purpose computers that are used as network file servers including Sun
Microsystems, Inc., Hewlett-Packard Company, Silicon Graphics, Inc. and IBM
Corporation, among others. Many of our current and potential competitors have
significantly greater financial, technical, marketing and other resources than
we do. In addition, certain of these large traditional suppliers of general
purpose computers may in the future offer specialized file server
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products with dedicated solutions for file serving, database serving, caching
and web serving, which are more directly competitive with our products. We also
encounter competition from manufacturers of PC-based file servers utilizing
Windows NT such as Compaq Computer Corporation and Dell Computer Corporation, as
well as competition from manufacturers of open systems storage and RAID
solutions such as EMC Corporation, Compaq StorageWorks, and MTI Corporation. We
also experience competition from smaller NAS appliance vendors including Procom
Technology, Inc., MetaStor Storage Solutions (a subsidiary of LSI Logic Corp.)
and specialized network file server companies such as Auspex Systems, Inc. In
the Internet caching market, our NetCache appliances compete against both the
caching appliance vendors, including CacheFlow, Inc. and Cisco Systems, Inc. as
well as the caching software vendors, including Inktomi Corp. and Novell, Inc.
Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our operating results. As a result, our competitors may be able to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion, sale
and support of their products. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully against
current or future competitors. Competitive pressures we face could materially
adversely affect our operating results.
We believe that the principal competitive factors affecting our market
include product features such as response time, reliability, data availability,
scalability, ease of use, price, multiprotocol capabilities and customer service
and support. Although we believe that our products currently compete favorably
with respect to these factors, we cannot assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources.
WE RELY UPON A LIMITED NUMBER OF SUPPLIERS AND ANY DISRUPTION OR TERMINATION OF
THESE SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
We rely upon a limited number of suppliers of several key components
utilized in the assembly of our products. We purchase most of our disk drives
through a single supplier. We purchase computer boards and microprocessors from
a limited number of suppliers. Our reliance on a limited number of suppliers
involves several risks, including:
- a potential inability to obtain an adequate supply of required components
because we do not have long-term supply commitments;
- supplier capacity constraints;
- price increases;
- timely delivery; and
- component quality.
In the future, we intend to increasingly rely on contract manufacturers to
assemble our products. If our contract manufacturers' operations were
interrupted for any reason, our ability to meet scheduled product deliveries to
customers would be materially adversely affected.
Component quality is particularly significant with respect to our supplier
of disk drives. In order to meet product performance requirements, we must
obtain disk drives of extremely high quality and capacity. In addition, there
are periodic supply and demand issues for disk drives, microprocessors and for
semiconductor memory components, which could result in component shortages,
selective supply allocations and increased prices of such components. We cannot
assure you that we will be able to obtain our full requirements of such
components in the future or that prices of such components will not increase. In
addition, problems with respect to yield and quality of such components and
timeliness of deliveries could occur. Disruption or
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termination of the supply of these components could delay shipments of our
products and could materially adversely affect our operating results. Such
delays could also damage relationships with current and prospective customers.
WE CANNOT ASSURE YOU THAT WE WILL NOT INCUR PROBLEMS WITH CURRENT OR FUTURE
EQUITY INVESTMENTS AND ACQUISITIONS OR THAT WE WILL REALIZE VALUE FROM SUCH
STRATEGIC RELATIONSHIPS.
We are continuously evaluating alliances and external investment in
technologies related to our business and have already made relatively small
strategic investments in a number of NAS-related technology companies. Equity
investments may result in the loss of investment capital. Acquisitions of
companies or products and alliances and strategic investments entail numerous
risks, and we cannot assure you that we will be able to successfully integrate
acquired operations and products or to realize anticipated synergies, economies
of scale, or other value. In addition, we may experience a diversion of
management's attention, the loss of key employees of acquired operations or the
inability to recover strategic investments in development stage entities. Any
such problems could have a material adverse effect on our business, financial
condition and results of operation.
WE CANNOT ASSURE YOU THAT OUR OEM RELATIONSHIPS WITH DELL COMPUTER CORPORATION
AND FUJITSU LIMITED WILL GENERATE SIGNIFICANT REVENUE.
While our agreements with Dell Computer Corporation and Fujitsu Limited are
an element of our strategy to increase penetration in the Windows NT market,
neither Dell Computer Corporation nor Fujitsu Limited have made purchase
commitments for our products. In addition, since these agreements are relatively
new, we do not have a history upon which to base an analysis of their future
success. Currently we do not, and cannot assure you that we will, generate
significant revenue from these agreements.
WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS AND ACCORDINGLY
THERE IS A RISK THAT THOSE DISTRIBUTORS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF
OTHER SUPPLIERS WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our distribution customers generally offer products of several different
companies, including products of our competitors. Accordingly, there is risk
that these distributors may give higher priority to products of other suppliers,
which could materially adversely affect our operating results.
WE DEPEND UPON OUR RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP AND INTRODUCE NEW
PRODUCTS AND ANY FAILURE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY
COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our future growth depends upon the successful development and introduction
of new hardware and software products. We cannot assure you that these or other
new products will be introduced on a timely basis or attain market acceptance.
Due to the complexity of network file servers and Internet caching devices, and
the difficulty in gauging the engineering effort required to produce new
products, new products are subject to significant technical risks. We cannot
assure you that new products will be introduced on a timely basis or at all. In
the past, we have experienced delays in the shipments of our new products
principally due to an inability to qualify component parts from disk drive and
other suppliers, resulting in delay or loss of product sales. If new products
are delayed or do not achieve market acceptance, our operating results will be
materially adversely affected.
WE FACE RISKS OF TECHNOLOGICAL CHANGES THAT AFFECT OUR PRODUCTS.
The markets we serve are characterized by rapid technological change,
changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards could render our existing products
obsolete and unmarketable. Our future success will depend upon our ability to
develop and introduce new products (including new software releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of our
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customers. We cannot assure you that we will be successful in developing and
marketing new products that respond to technological changes or evolving
industry standards. If we are unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, our operating results will be
materially adversely affected.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. Despite testing by us and by current
and potential customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could materially adversely affect our operating results.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO
INCREASED COMPETITION WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions and patents to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret, copyright and patent laws, which afford
only limited protection. We have registered trademarks including our "Network
Appliance" name and logo, "FAServer," "FilerView," "NetApp" and "SecureShare"
trademarks in the United States. Other United States trademarks and some of the
other United States -- registered trademarks are registered internationally as
well. We will continue to evaluate the registration of additional trademarks as
appropriate. We generally enter into confidentiality agreements with our
employees and with our resellers and customers. We currently have multiple
United States and international patent applications pending and four United
States patents issued. The pending applications may not be approved and if
patents are issued, such patents may be challenged. If such challenges are
brought, the patents may be invalidated. We cannot assure you that we will
develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not materially
adversely affect our ability to do business.
Litigation may be necessary to protect our proprietary technology. Any such
litigation may be time-consuming and costly. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect proprietary rights
to as great an extent as do the laws of the United States. We cannot assure you
that our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology, duplicate our
products or design around patents issued to us or other intellectual property
rights of ours.
We are subject to intellectual property infringement claims. We may, from
time to time receive claims that we are infringing third parties' intellectual
property rights. In fiscal 1997, we settled litigation related to the alleged
infringement of third party rights and other claims, which resulted in a pre-tax
expense of $4.3 million ($3.5 million in payments to the plaintiffs and $0.8
million in legal fees). Third parties may in the future claim infringement by us
with respect to current or future products, patents, trademarks or other
proprietary rights. We expect that companies in the appliance market will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims could be time-consuming,
result in costly litigation, cause product shipment delays, require us to
redesign our products or require us to enter into royalty or licensing
agreements, any of which could materially adversely affect our operating
results. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to us or at all.
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THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE AND ANY BROAD MARKET
FLUCTUATIONS MAY MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
The market price for our common stock has been volatile in the past, and
several factors could cause the price to fluctuate substantially in the future.
These factors include:
- fluctuations in our operating results;
- fluctuations in the valuation of companies perceived by investors to be
comparable to us;
- a shortfall in revenues or earnings compared to securities analysts'
expectations;
- changes in analysts' recommendations or projections;
- announcements of new products, applications or product enhancements by us
or our competitors; and
- changes in our relationships with our suppliers or customers.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated to the operating results
of such companies. As a result, the market price of our common stock may
fluctuate significantly in the future and any broad market fluctuations may
materially adversely affect the market price of our common stock. Due to all of
the foregoing, the current market price of our common stock may not be
indicative of future market prices.
PROTECTIVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MATERIALLY
ADVERSELY AFFECT STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. The rights of the holders of common stock will be
subject to, and may be materially adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Further, certain
provisions of our bylaws pertaining to the future elimination of cumulative
voting and shareholder action by written consent, and the requirement that
shareholders may call a special meeting of shareholders only upon a request of
shareholders owning at least 50% of our common stock, could delay or make more
difficult a proxy contest involving us, which could materially adversely affect
the market price of our common stock.
ITEM 2. PROPERTIES
In fiscal 2000, we executed agreements to acquire approximately 37.7 acres
of land in Sunnyvale, California. These sites will support expansion of
approximately 800,000 square feet to accommodate future growth. In fiscal 1999,
we executed agreements to acquire approximately 18 acres of land in Sunnyvale,
California and to develop 393,000 square feet of buildings. Beginning in June
1999, we began relocating all of our principal activities to Sunnyvale. This new
headquarter site will consolidate general administration, sales and marketing,
research and development, customer services and manufacturing operations. Our
manufacturing and research and development facilities will begin to relocate in
the first quarter of fiscal 2001 and will be complete in the second quarter of
fiscal 2001. The Santa Clara facilities are leased under various operating
leases with 100,000 square feet of space expiring in June 2000, and the
remaining 20,000 square feet expiring in fiscal 2003.
We have commitments related to operating lease arrangements, under which we
have an option to purchase various properties for an aggregate of $245.0
million, or arrange for the sale of the properties to a third party for at least
the option price with a contingent liability for any deficiency. We lease other
sales offices and a design center throughout the United States and
internationally. We believe that our existing facilities and those being
developed in Sunnyvale are adequate for our requirements over at least the next
two years and that additional space will be available as needed.
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See additional discussion regarding properties in "Note 4 under Item 8.
Financial Statements and Supplementary Data -- Notes to Consolidated Financial
Statements" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock commenced trading on the Nasdaq National Market on
November 21, 1995 and is traded under the symbol "NTAP." As of April 28, 2000,
there were 636 holders of record of the common stock. The following table sets
forth for the periods indicated the high and low closing sale prices for our
common stock as reported on the Nasdaq National Market, adjusted to reflect the
effect of the December 20, 1999 and March 22, 2000 two-for-one stock splits.
FISCAL 2000 FISCAL 1999
----------------- ---------------
HIGH LOW HIGH LOW
------- ------ ------ -----
First Quarter................................... $ 15.84 $ 9.91 $ 6.28 $4.14
Second Quarter.................................. 19.58 12.78 7.56 4.35
Third Quarter................................... 59.06 18.50 13.88 6.85
Fourth Quarter.................................. 120.19 50.19 15.88 9.91
We believe that a number of factors may cause the market price of our
common stock to fluctuate significantly. See "Item 1. Business -- Risk Factors."
We have never paid cash dividends on our capital stock. We currently
anticipate retaining all available funds, if any, to finance internal growth and
product development. Payment of dividends in the future will depend upon our
earnings and financial condition and such other factors as the directors may
consider or deem appropriate at the time.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE FISCAL YEARS ENDED APRIL 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
Net Sales............................. $579,300 $289,420 $166,163 $93,333 $46,632
Income From Operations................ 105,368 55,126 32,658 3,083 6,000
Net Income............................ 73,792 35,613 20,965 250 6,600
Net Income Per Share, basic........... 0.25 0.13 0.08 0.00 0.05
Net Income Per Share, diluted......... 0.21 0.11 0.07 0.00 0.03
Total Assets.......................... 592,233 346,347 115,736 68,941 45,449
Long-Term Obligations................. 54 93 163 232 318
Total Shareholders' Equity............ 478,746 295,724 86,265 54,029 39,029
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the related
notes thereto set forth under "Item 8. Financial Statements and Supplementary
Data." This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in those forward-looking statements as a result of certain factors,
including those set forth in "Item 1. Business -- Risk Factors" and elsewhere in
this Annual Report on Form 10-K.
Overview
We pioneered the concept of the "network appliance," an extension of the
industry trend toward specialized devices that perform a specific function in
the network, similar to the adoption of the router for network communications.
Today we are the leading supplier of network attached data storage and access
devices, called filers. Extending our technology strengths in providing
intelligent data storage and access appliances, in late 1997, we introduced a
dedicated Internet caching appliance, NetCache, designed to serve data at high
speeds over the Internet and enterprise networks.
We derive a substantial portion of our revenue from the sales of our
network filer and caching appliances. As a result, a reduction in the demand for
our filer and NetCache appliances due to increased competition, a general
decline in the market for network attached data storage or other factors could
materially adversely affect our operating results.
Our gross margin has been and may continue to be affected by a variety of
other factors, including:
- competition;
- product configuration;
- direct versus indirect sales;
- the mix of software as a percentage of revenue;
- the mix and average selling prices of products;
- new product introductions and enhancements; and
- the cost of components and manufacturing labor.
Operating results have not been materially adversely affected by
seasonality in the past. However, because of the significant summer seasonal
effects experienced within the industry, particularly in Europe, our future
operating results could be materially adversely affected by seasonality.
For the year ended April 28, 2000 approximately 30.7% of our net sales were
derived from international customers (including United States exports).
Accordingly our future operating results could be materially adversely affected
by a variety of factors, some of which are beyond our control. For more
information on risks associated with our international operations, see "Item
1 -- Business -- Risk Factors -- Risks inherent in our international operations
could have a material adverse effect on our operating results."
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
YEARS ENDED APRIL 30,
-----------------------
2000 1999 1998
----- ----- -----
Net Sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 40.7 40.8 40.7
----- ----- -----
Gross Margin.............................................. 59.3 59.2 59.3
----- ----- -----
Operating Expenses:
Sales and Marketing....................................... 26.7 26.1 25.7
Research and Development.................................. 10.7 10.5 10.0
General and Administrative................................ 3.7 3.5 3.9
----- ----- -----
Total Operating Expenses.......................... 41.1 40.1 39.6
----- ----- -----
Income From Operations...................................... 18.2 19.1 19.7
Other Income, Net........................................... 1.5 0.6 0.5
----- ----- -----
Income Before Income Taxes.................................. 19.7 19.7 20.2
Provision for Income Taxes.................................. 7.0 7.4 7.6
----- ----- -----
Net Income.................................................. 12.7% 12.3% 12.6%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales -- Net sales increased by 100.2% to $579.3 million in fiscal
2000, from $289.4 million in fiscal 1999. Net sales growth was across all
geographies, products and markets. This increase was primarily attributable to a
higher volume of units shipped, as compared to the corresponding period of the
prior fiscal year. Factors impacting unit growth include:
- strong demand for our F700 filer products utilizing primarily
fibre-channel connectivity;
- increased worldwide demand for our NetCache solutions;
- increased worldwide shipment of NetApp Cluster Failover solutions, which
require another filer to take over in the event of a hardware failure;
- increased demand for the SnapMirror software option, which requires
multiple filers to provide remote mirroring of data for quick disaster
recovery and backup at remote sites;
- expansion of our sales organization to 582 in fiscal 2000, from 309 in
fiscal 1999; and
- increased sales through indirect channels, representing 28.0% of total
sales compared to 25.2% in the prior year, including sales through our
two OEM partners.
Net sales growth was also positively impacted by:
- a higher average selling price due to the introduction of new software
features: SnapMirror, SnapRestore and Cluster Failover, supporting
mission-critical applications;
- the increase in storage capacity;
- increased add-on software revenue from multi-protocol solutions; and
- higher software subscription and service revenues to support a growing
installed base.
Overall net sales growth was partially offset by declining unit sales of
our older products and declining average selling price of the caching products
due primarily to competitive pricing pressure.
International net sales (including United States exports) grew by 100.4%
for fiscal 2000, as compared to fiscal 1999. International net sales were $177.9
million, or 30.7% of total net sales for fiscal 2000. The increase
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in international sales for fiscal 2000, was primarily a result of European sales
growth, due to increased headcount in the direct sales force, increased indirect
channel sales, increased shipments of filers, Cluster Failover solutions,
NetCache appliances and increased sales of add-on software licenses. Asia
Pacific net sales growth for fiscal 2000, was also primarily driven by increased
sales through resellers, increased headcount in the direct sales force,
increased shipments of filers, and NetCache appliances and increased sales of
add-on software licenses, as compared to fiscal 1999.
We cannot assure you that our net sales will continue to increase in
absolute dollars or at the rate at which they have grown in recent fiscal
periods.
Gross Margin -- Gross margin increased slightly to 59.3% of net sales for
fiscal 2000, from 59.2% for fiscal 1999.
Gross margin was favorably impacted by:
- increased licensing of add-on software options such as: multi-protocol,
Cluster Failover, SnapMirror and SnapRestore associated with new filers
shipped;
- growth in software subscription due primarily to a larger installed base;
- increased manufacturing efficiencies;
- the increase in product volume; and
- lower costs of key components.
Gross margin was negatively impacted by sales price reductions on storage
products due to competitive pricing pressure from other storage vendors and
increased investments in customer service personnel in areas such as logistics
and professional services.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and certain customer
service and support costs. Sales and marketing expenses increased 104.6% to
$154.5 million for fiscal 2000 from $75.5 million for fiscal 1999. These
expenses were 26.7% and 26.1% of net sales for fiscal 2000 and 1999,
respectively. The increase in absolute dollars was primarily related to the
continued worldwide expansion and increased headcount growth of our sales and
customer service organizations, and increased commission expenses. Sales and
marketing headcount increased from 411 at April 30, 1999 to 775 at April 30,
2000. In fiscal 2000, we launched various marketing and advertising programs,
which also contributed to absolute dollar increases in sales and marketing
expenses. We expect to continue to increase our sales and marketing expenses in
an effort to expand domestic and international markets, introduce new products,
establish and expand new distribution channels and increase product and company
awareness. We believe that our continued growth and profitability is dependent
in part on the successful expansion of our international operations, and
therefore, have committed significant resources to increase international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses, non-recurring
engineering charges and fees paid to outside consultants. Research and
development expenses increased 103.8% to $62.1 million in fiscal 2000 from $30.5
million in fiscal 1999. These expenses represented 10.7% and 10.5% of net sales,
for fiscal 2000 and 1999, respectively. Research and development expenses
increased in absolute dollars, primarily as a result of increased headcount,
ongoing support of current and future product development and enhancement
efforts, prototyping expenses and non-recurring engineering charges associated
with the development of new products and technologies. Research and development
headcount increased from 198 at April 30, 1999 to 327 at April 30, 2000. In
fiscal 2000, we shipped new enterprise software offerings and data management
tools with SnapManager for Microsoft Exchange and ApplianceWatch. We also
introduced new caching products which included NetCache software release 4.0 and
NetCache 4.1, adding streaming media support for Apple Quicktime, Microsoft
Windows Media and RealNetworks Real System G2 users, delivering live
broadcasting on the Internet. In fiscal 1999, we introduced the F700 series
filers, the Cluster Failover solutions, the C700 caching products, SnapMirror,
SnapRestore, and SecureAdmin. We believe that our future performance will depend
in large part on our
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ability to maintain and enhance our current product line, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. We intend to continuously expand
our existing product offerings and introduce new products and expect that such
expenditures will continue to increase in absolute dollars. For both fiscal 2000
and 1999, no software development costs were capitalized.
General and Administrative -- General and administrative expenses increased
111.2% to $21.5 million in fiscal 2000, from $10.2 million in fiscal 1999. These
expenses represented 3.7% and 3.5% of net sales, for fiscal 2000 and 1999,
respectively. Increases in absolute dollars were primarily due to increased
headcount, expenses associated with initiatives to implement enterprise-wide
management information systems, increases in professional services, consulting
fees and outside service fees. General and administrative headcount increased
from 80 at April 30, 1999 to 162 at April 30, 2000. We believe that our general
and administrative expenses will increase in absolute dollars as we continue to
build our infrastructure.
Total Other Income, net -- Total other income, net, was $9.0 million and
$1.9 million in fiscal 2000 and 1999, respectively. The increase was due
primarily to interest income earned on the net proceeds from the March 1999
follow-on public offering, cash generated from operations, and net proceeds from
stock option exercises. Fiscal 1999 included losses from foreign currency
transactions as compared to fiscal 2000, where gains or losses from foreign
transactions have been partially mitigated through our hedging program.
Provision for Income Taxes -- Our effective tax rate was 35.5% for fiscal
2000 compared to 37.5% for the fiscal 1999. The effective tax rates differed
from the U.S. statutory rate primarily due to state taxes, credits and tax
exempt interest.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased by 74.2%, to $289.4 million in fiscal 1999 from $166.2
million in fiscal 1998. This increase was primarily attributable to a higher
volume of units shipped, as compared to the corresponding period of the prior
fiscal year. Factors impacting unit growth include:
- expansion of our sales organization to 309 in fiscal 1999, from 173 in
fiscal 1998;
- increased unit shipments principally due to the successful launching of
our F700 filer products during the second quarter of fiscal 1999;
- increased worldwide shipment of NetApp cluster failover and NetCache
solutions;
- increased multi-protocol software licensing, software subscription and
service revenues due to a growing installed base, and increased sales of
multi-protocol systems; and
- increased sales through indirect channels, representing 25.2% of total
sales compared to 20.9% in the prior year, including sales through our
two OEM partners.
Net sales growth was also positively impacted by a higher average selling
price of the newly introduced F700 filer products due primarily to the increase
in storage content. Factors which partially offset overall net sales growth
include declining unit sales of our older products and decreases in base prices
of our older product line due to competitive forces.
International net sales (including United States exports) grew by 116.3%
for fiscal 1999 as compared to fiscal 1998. International net sales were $88.8
million, or 30.7%, of total net sales for fiscal 1999. The increase in
international sales for fiscal 1999 was primarily a result of European sales
growth due to increased headcount in the direct sales force, indirect channel
sales through resellers, shipments of filers and sales of our new NetApp Cluster
Failover solutions and NetCache appliances. Asia Pacific net sales growth for
fiscal 1999 was also driven by indirect sales through resellers, increased
headcount in the direct sales force, increased shipments of filers and the sale
of NetCache appliances, as compared to fiscal 1998.
We cannot assure you that our net sales will continue to increase in
absolute dollars or at the rate at which they have grown in recent fiscal
periods.
18
20
Gross Margin -- Gross margin remained relatively flat decreasing slightly
to 59.2% of net sales for fiscal 1999 as compared to 59.3% for fiscal 1998. The
consistency in gross margin for fiscal 1999 as compared to fiscal 1998 was
primarily attributable to the increase in product volume, lower costs of key
components, increased manufacturing efficiencies, increased market acceptance of
our product line with the continuance of the cost-reduced designs introduced in
the second quarter of fiscal 1999, the introduction of the F700 filer products
and NetApp Cluster Failover system during the second quarter of fiscal 1999 and
the revenue growth from sales of NetCache appliances. Gross margin was also
favorably impacted by the licensing of multi-protocol software and support
contracts, and by growth in software subscription and service revenues due to a
larger installed base. Primary factors negatively impacting gross margin were
the increase in the sales volume of the F700 products, which has higher
incremental costs associated with greater disk drive and memory content, and the
effect of base system price reductions across the full range of older generation
filers.
Our gross margin may also vary based upon the configuration of systems that
are sold and whether they are sold directly or through indirect channels. Highly
configured systems have historically generated lower overall gross margin
percentages due to greater disk drive and memory content.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and certain promotional expenses and customer
service and support costs. In fiscal 1999, sales and marketing expenses of $75.5
million reflect an increase of 76.5% over fiscal 1998. These expenses were 26.1%
and 25.7% of net sales for fiscal 1999 and 1998, respectively. The increase in
absolute dollars was primarily related to the continued expansion of our sales
and marketing organization, including growth in the domestic and international
direct sales forces and increased commission expenses. Sales and marketing
headcount increased from 240 at April 30, 1998 to 411 at April 30, 1999. We
expect to continue to increase our sales and marketing expenses in an effort to
expand domestic and international markets, introduce new products, establish and
expand new distribution channels and increase product and company awareness. We
believe that our continued growth and profitability is dependent in part on the
successful expansion of our international operations, and therefore, have
committed significant resources intended to increase international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses and fees paid to outside
consultants. Research and development expenses increased 82.9% to $30.5 million
in fiscal 1999 from $16.6 million in fiscal 1998. These expenses represented
10.5% and 10.0% of net sales, respectively, for those periods. Research and
development expenses increased in absolute dollars, primarily as a result of
increased headcount, ongoing support of current and future product development
and enhancement efforts and prototyping expenses associated with the development
of new products, including the NetApp F700 series filers and the C700 caching
products, the second generation of our NetCache appliances. Research and
development headcount increased from 116 at April 30, 1998 to 198 at April 30,
1999. We believe that our future performance will depend in large part on our
ability to maintain and enhance our current product line, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. We intend to continuously expand
our existing product offerings and to introduce new products. Consequently, we
expect that such expenditures will continue to increase in absolute dollars. For
both fiscal 1999 and 1998, no software development costs were capitalized.
General and Administrative -- General and administrative expenses increased
56.1% to $10.2 million in fiscal 1999 from $6.5 million in fiscal 1998. These
expenses represented 3.5% and 3.9% of net sales, respectively, for those
periods. Increases in absolute dollars were primarily due to increased
headcount, and increases to the allowance for doubtful accounts and outside
service fees. General and administrative headcount increased from 23 at April
30, 1998 to 80 at April 30, 1999. We believe that our general and administrative
expenses will increase in absolute dollars as we continue to build our
infrastructure.
Other Income, Net -- Other income, net, was $1.9 million and $0.9 million
in fiscal 1999 and 1998, respectively. The increase was due primarily to
interest income earned on the net proceeds of $138.8 million from our March 1999
follow-on public offering and cash flow from operations, but was partially
offset by foreign currency exchange losses recorded in fiscal 1999.
Provision for Income Taxes -- Our effective tax rate was 37.5% for both
fiscal 1999 and 1998.
19
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LIQUIDITY AND CAPITAL RESOURCES
As of April 28, 2000, as compared to the April 30, 1999 balances, our cash,
cash equivalents and short-term investments increased by $126.4 million to
$353.5 million. Working capital increased by $154.8 million to $419.6 million.
We generated cash from operating activities totaling $118.1 million and $45.9
million in fiscal 2000 and fiscal 1999, respectively. Net cash provided by
operating activities in fiscal 2000 was principally related to net income of
$73.8 million, increases in accounts payable, accrued compensation and related
benefits, deferred revenue and other accrued liabilities, coupled with
depreciation and amortization and income tax benefit from employee stock
transactions which are non-cash transactions, partially offset by increases in
accounts receivable, inventories, prepaid expenses and other and deferred income
taxes.
We used $40.8 million and $15.5 million of cash during fiscal 2000 and
1999, respectively, for capital expenditures. The increases were primarily
attributed to upgrades of software and computer equipment purchases and
furniture and fixtures for the Sunnyvale headquarters facility. We have used
$68.9 million during fiscal 2000 and received net proceeds of $5.0 million
during fiscal 1999, for net short-term investment redemptions. Investing
activities in fiscal 2000 also included equity investments of $7.0 million in
three technology companies. These investments were recorded at cost which
approximated fair market value. We cannot assure you that such equity
investments made to date nor any potential future investments will be
successful.
Financing activities provided $53.8 million and $155.5 million during
fiscal 2000 and 1999 respectively. The decrease in cash provided by financing
activities in fiscal 2000, compared to fiscal 1999, was due to a follow-on
common stock offering in fiscal 1999 yielding proceeds of approximately $138.8
million. Excluding the impact of the fiscal 1999 common stock offering, proceeds
from sale of common stock in fiscal 2000 increased over the prior fiscal year
due to an increased quantity of stock options exercised at a higher average
exercise price and a greater number of employees participating in the employee
stock purchase plan.
In fiscal 2000, we executed two lease agreements to acquire approximately
37.7 acres of land in Sunnyvale, California and the accompanying 533,262 square
feet of buildings. We subsequently assigned our rights and obligations under all
the agreements for the Sunnyvale facilities to a third-party entity and entered
into two operating leases. Our lease payments will vary based on London
Interbank Offered Rate (LIBOR) plus a spread. The leases are for five years and
can be renewed for two five-year periods, subject to the approval of the
third-party entity. At the expiration or termination of the leases, we have the
option to either purchase these properties for $55.0 million and $62.0 million,
respectively, or arrange for the sale of the properties to a third party for at
least $55.0 million and $62.0 million, respectively, with a contingent liability
for any deficiency. If the properties under these leases are not purchased or
sold as described above, we will be obligated for additional lease payments of
approximately $49.3 million and $51.5 million, respectively. The leases also
require us to maintain specified financial covenants with which we were in
compliance as of April 30, 2000.
Excluding the commitments related to operating lease arrangements for
various properties, which aggregate $245.0 million, we currently have no
significant commitments other than commitments under operating leases. We
believe that our existing liquidity and capital resources, including the
available amounts under our $5.0 million line of credit, are sufficient to fund
our operations for at least the next twelve months.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement, as amended, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Although we
have not fully assessed the implications of this new statement, we do not
believe adoption of this statement will have a material impact on our
consolidated financial position, results of operations or cash flows.
20
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in interest rates and
in foreign currency exchange rates. We use certain derivative financial
instruments to manage these risks. We do not use derivative financial
instruments for speculative or trading purposes. All financial instruments are
used in accordance with management-approved policies.
Market Interest Risk
Short-term Investments -- As of April 28, 2000 and April 30, 1999, we had
short-term investments of $74.5 million and $5.8 million, respectively. These
short-term investments consist of highly liquid investments with original
maturities at the date of purchase between three and twelve months. These
investments are subject to interest rate risk and will decrease in value if
market interest rates increase. A hypothetical 10 percent increase in market
interest rates from levels at April 28, 2000 and April 30, 1999, would cause the
fair value of these short-term investments to decline by an immaterial amount.
Because we have the ability to hold these investments until maturity we would
not expect any significant decline in value of our investments caused by market
interest rate changes. Declines in interest rates over time will, however,
reduce our interest income.
Operating Lease Commitments -- As of April 28, 2000 and April 30, 1999, we
have outstanding lease commitments to a third-party entity under operating lease
agreements, which vary based on a monthly LIBOR rate plus a spread. A
hypothetical 10 percent increase in interest rates would increase our annual
rent expense under operating lease commitments by approximately $2.0 million.
Increases in interest rates could, however, increase our rent expenses
associated with future lease payments. We do not currently hedge against
interest rate increases. Our investment portfolio offers a natural hedge against
interest rate risk from our operating lease commitments in the event of a
significant increase in the market interest rate.
The hypothetical changes and assumptions discussed above will be different
from what actually occurs in the future. Furthermore, such computations do not
anticipate actions that may be taken by management, should the hypothetical
market changes actually occur over time. As a result, the effect on actual
earnings in the future will differ from those described above.
Foreign Currency Exchange Rate Risk -- We hedge risks associated with
foreign currency transactions in order to minimize the impact of changes in
foreign currency exchange rates on earnings. We utilize forward contracts to
hedge against the short-term impact of foreign currency fluctuations on certain
assets and liabilities denominated in foreign currencies. All hedge instruments
are marked to market through earnings every period. We believe that these
forward contracts do not subject us to undue risk due to foreign exchange
movements because gains and losses on these contracts are offset by losses and
gains on the underlying assets and liabilities.
All contracts have a maturity of less than one year and we do not defer any
gains and losses, as they are all accounted for through earnings every period.
The following table provides information about our foreign exchange forward
contracts outstanding on April 28, 2000, (in thousands):
BUY/ FOREIGN CONTRACT VALUE FAIR VALUE
CURRENCY SELL CURRENCY AMOUNT USD IN USD
-------- ---- --------------- -------------- ----------
CHF................................. Sell 4,013 $ 2,300 $ 2,333
GBP................................. Sell 11,929 $18,016 $18,641
GBP................................. Buy 5,000 $ 7,785 $ 7,756
EUR................................. Sell 17,505 $15,928 $15,235
EUR................................. Buy 11,500 $10,464 $10,640
21
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The following table provides information about our foreign exchange forward
contracts outstanding on April 30, 1999, (in thousands):
BUY/ FOREIGN CONTRACT VALUE FAIR VALUE
CURRENCY SELL CURRENCY AMOUNT USD IN USD
-------- ---- --------------- -------------- ----------
GBP................................. Buy 3,500 $ 5,643 $ 5,630
GBP................................. Sell 6,100 $ 9,802 $ 9,813
EUR................................. Buy 1,534 $ 1,631 $ 1,621
EUR................................. Sell 11,900 $12,825 $12,574
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. and its subsidiaries as of April 30, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended April 30, 2000. Our audits also included the consolidated financial
statement schedule listed in Item 14(a)(2). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Network Appliance,
Inc. and its subsidiaries as of April 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 2000 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the consolidated
financial statement schedule listed in Item 14(a)(2), when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 16, 2000 (June 13, 2000 as to Note 11)
23
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NETWORK APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30,
--------------------
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $279,014 $221,284
Short-term investments.................................... 74,477 5,800
Accounts receivable, net of allowances of $3,039 in 2000
and $1,886 in 1999..................................... 108,902 57,163
Inventories............................................... 20,434 13,581
Prepaid expenses and other................................ 27,958 7,384
Deferred income taxes..................................... 22,215 10,134
-------- --------
Total current assets.............................. 533,000 315,346
Property and Equipment, net................................. 47,949 19,271
Deposits.................................................... -- 7,000
Other Assets................................................ 11,284 4,730
-------- --------
$592,233 $346,347
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 34,061 $ 15,126
Accrued compensation and related benefits................. 34,902 15,189
Other accrued liabilities................................. 21,288 8,741
Deferred revenue.......................................... 23,182 11,474
-------- --------
Total current liabilities......................... 113,433 50,530
LONG-TERM OBLIGATIONS....................................... 54 93
-------- --------
113,487 50,623
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000 shares authorized;
shares outstanding: none in 2000 and 1999.............. -- --
Common stock, no par value; 880,000 shares authorized;
shares outstanding: 311,803 in 2000 and 291,324 in
1999................................................... 352,693 240,807
Deferred stock compensation............................... (1,174) (714)
Retained earnings......................................... 129,746 55,954
Cumulative other comprehensive loss....................... (2,519) (323)
-------- --------
Total shareholders' equity........................ 478,746 295,724
-------- --------
$592,233 $346,347
======== ========
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30,
--------------------------------
2000 1999 1998
-------- -------- --------
NET SALES.................................................. $579,300 $289,420 $166,163
COST OF SALES.............................................. 235,846 118,120 67,549
-------- -------- --------
Gross Margin............................................. 343,454 171,300 98,614
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing...................................... 154,496 75,526 42,779
Research and development................................. 62,065 30,457 16,649
General and administrative............................... 21,525 10,191 6,528
-------- -------- --------
Total operating expenses......................... 238,086 116,174 65,956
-------- -------- --------
INCOME FROM OPERATIONS..................................... 105,368 55,126 32,658
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income.......................................... 10,846 2,645 1,097
Other expense............................................ (1,808) (781) (208)
-------- -------- --------
Total other income, net.......................... 9,038 1,864 889
-------- -------- --------
INCOME BEFORE INCOME TAXES................................. 114,406 56,990 33,547
PROVISION FOR INCOME TAXES................................. 40,614 21,377 12,582
-------- -------- --------
NET INCOME................................................. $ 73,792 $ 35,613 $ 20,965
======== ======== ========
NET INCOME PER SHARE(1):
Basic.................................................... $ 0.25 $ 0.13 $ 0.08
======== ======== ========
Diluted.................................................. $ 0.21 $ 0.11 $ 0.07
======== ======== ========
SHARES USED IN PER SHARE CALCULATIONS(1):
Basic.................................................... 299,370 273,740 259,656
======== ======== ========
Diluted.................................................. 345,171 311,724 287,608
======== ======== ========
- ---------------
(1) Share and per share amounts have been adjusted to reflect the two-for-one
stock splits which were effective December 20, 1999 and March 22, 2000.
See notes to consolidated financial statements.
25
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
RETAINED CUMULATIVE
COMMON STOCK DEFERRED EARNINGS OTHER
------------------ STOCK (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT COMPENSATION DEFICIT) LOSS TOTAL
------- -------- ------------ ------------ ------------- --------
BALANCES, APRIL 30, 1997................. 262,656 $ 54,707 $ (54) $ (624) $ -- $ 54,029
Net income and comprehensive income...... -- -- -- 20,965 -- 20,965
Issuance of common stock................. 6,616 6,937 -- -- -- 6,937
Repurchase of common stock............... (88) (1) -- -- -- (1)
Deferred stock compensation.............. -- 714 (714) -- -- --
Amortization of deferred stock
compensation........................... -- -- 270 -- -- 270
Income tax benefit from employee stock
transactions........................... -- 4,065 -- -- -- 4,065
------- -------- ------- -------- ------- --------
BALANCES, APRIL 30, 1998................. 269,184 66,422 (498) 20,341 -- 86,265
Components of comprehensive income:
Net income............................. -- -- -- 35,613 -- 35,613
Currency translation adjustment........ -- -- -- -- (323) (323)
--------
Total comprehensive income..... 35,290
Issuance of common stock................. 10,724 16,942 -- -- -- 16,942
Repurchase of common stock............... (84) (280) -- -- -- (280)
Issuance of common stock at $12.63 per
share pursuant to follow-on public
offering, net.......................... 11,500 138,834 -- -- -- 138,834
Deferred stock compensation.............. -- 916 (916) -- -- --
Amortization of deferred stock
compensation........................... -- -- 667 -- -- 667
Reversal of deferred stock compensation
due to employee termination............ -- (33) 33 -- -- --
Other stock compensation expense......... -- 230 -- -- -- 230
Income tax benefit from employee stock
transactions........................... -- 17,776 -- -- -- 17,776
------- -------- ------- -------- ------- --------
BALANCES, APRIL 30, 1999................. 291,324 240,807 (714) 55,954 (323) 295,724
Components of comprehensive income:
Net income............................. -- -- -- 73,792 -- 73,792
Currency translation adjustment........ -- -- -- -- (2,204) (2,204)
Unrealized loss on investments......... -- -- -- -- 8 8
--------
Total comprehensive income..... 71,596
Issuance of common stock, net............ 20,479 53,833 -- -- -- 53,833
Deferred stock compensation.............. -- 1,845 (1,845) -- -- --
Amortization of deferred stock
compensation........................... -- -- 1,345 -- -- 1,345
Reversal of deferred stock compensation
due to employee termination............ -- (40) 40 -- -- --
Income tax benefit from employee stock
transactions........................... -- 56,248 -- -- -- 56,248
------- -------- ------- -------- ------- --------
BALANCES, APRIL 30, 2000................. 311,803 $352,693 $(1,174) $129,746 $(2,519) $478,746
======= ======== ======= ======== ======= ========
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
---------------------------------
2000 1999 1998
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 73,792 $ 35,613 $ 20,965
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 15,708 8,146 5,548
Other stock compensation expense..................... -- 230 --
Loss on disposal of equipment........................ 1,904 1,221 --
Provision for doubtful accounts...................... 1,153 1,075 481
Deferred income taxes................................ (11,614) (5,084) (1,749)
Deferred rent........................................ (39) (70) (36)
Changes in assets and liabilities:
Accounts receivable................................ (53,230) (24,188) (20,883)
Inventories........................................ (12,425) (4,934) 1,213
Prepaid expenses and other assets.................. 39,327 12,042 3,339
Accounts payable................................... 18,935 5,085 5,626
Accrued compensation and related benefits.......... 19,713 6,704 3,819
Other accrued liabilities.......................... 13,148 3,432 1,921
Deferred revenue................................... 11,708 6,675 2,482
--------- -------- --------
Net cash provided by operating activities....... 118,080 45,947 22,726
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments..................... (99,514) (18,680) (15,050)
Redemptions of short-term investments................... 30,650 23,680 11,166
Purchases of property and equipment..................... (40,819) (15,474) (7,971)
Purchases of equity investments......................... (7,000) -- (2,000)
Refund (payment) of deposits, net....................... 2,500 (7,000) --
--------- -------- --------
Net cash used in investing activities........... (114,183) (17,474) (13,855)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations..................... -- -- (12)
Proceeds from sale of common stock, net................. 53,833 16,662 6,936
Proceeds from follow-on common stock offering, net...... -- 138,834 --
--------- -------- --------
Net cash provided by financing activities....... 53,833 155,496 6,924
--------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 57,730 183,969 15,795
CASH AND CASH EQUIVALENTS:
Beginning of year....................................... 221,284 37,315 21,520
--------- -------- --------
End of year............................................. $ 279,014 $221,284 $ 37,315
========= ======== ========
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
1. THE COMPANY
Network Appliance, Inc., incorporated in the state of California in April
1992, and its subsidiaries operate in a single industry segment and are involved
in the design, manufacturing, marketing and support of high performance network
attached data storage and access devices which provide fast, simple, reliable
and cost-effective file service and content delivery solutions for
data-intensive network environments.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- We operate on a 52-week or 53-week year ending on the last
Friday in April. For presentation purposes we have indicated in the accompanying
consolidated financial statements that our fiscal year end is April 30. Fiscal
2000 was a 52-week fiscal year. Fiscal 1999 was a 53-week fiscal year and fiscal
1998 was a 52-week year.
Basis of Presentation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts
and transactions are eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to current-year presentation. These
reclassifications did not change previously reported total assets, liabilities,
shareholders' equity or net income.
Cash and Cash Equivalents -- We consider all highly liquid debt investments
with original maturities of three months or less to be cash equivalents.
Short-term Investments -- Our short-term investments consist of debt and
equity securities with original maturities ranging between three and twelve
months. All of our investments are classified as available-for-sale, which are
measured at market value, and net unrealized gains or losses are recorded in
cumulative other comprehensive loss, a separate component of shareholders'
equity, until realized. Any gains or losses on sales of investments are computed
based upon specific identification. For all periods presented, realized gains
and losses on available-for-sale investments were not significant. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates the classification at each reporting date.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market.
Property and Equipment -- Property and equipment are stated at cost and
depreciated on a straight-line basis over estimated useful lives which range
from two to five years. Leasehold improvements are amortized over their
estimated useful lives or the life of the lease, whichever is shorter.
Revenue Recognition -- In accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition," we recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the fee is fixed or determinable, collectibility is probable and
vendor specific objective evidence exists to allocate a portion of the total fee
to any undelivered elements of the arrangement. This generally occurs at the
time of shipment, at which time we also record estimated product return and
warranty reserves. Revenues from software subscriptions, which entitle customers
to software updates, including bug fixes, patch releases and major revisions,
and services are recognized over the terms of the related contractual periods
and were less than 10% of net sales in fiscal 2000, 1999 and 1998.
Advertising Costs -- Advertising costs are charged to operations when
incurred. Advertising expenses for fiscal 2000, 1999 and 1998 were approximately
$2,594, $1,072 and $1,000, respectively.
Software Development Costs -- We capitalize eligible computer software
development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occur upon the completion of a
working model. Software development costs capitalized have not been significant.
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30
NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Foreign Currency Translation and Foreign Exchange Contracts -- Prior to
fiscal 1999, the functional currency of our foreign subsidiaries was the U.S.
dollar. Accordingly, all monetary assets and liabilities were translated at the
current exchange rate at the end of the year, nonmonetary assets and liabilities
were translated at historical rates and net sales and expenses were translated
at average exchange rates in effect during the period. Transaction gains and
losses, which are included in other income (expense) in the accompanying
consolidated statements of income, have not been significant.
In fiscal 1999, we determined that the functional currencies of certain of
our foreign subsidiaries had changed from the U.S. dollar to the local
currencies. Accordingly, for fiscal 2000 and 1999, assets and liabilities of our
foreign subsidiaries are translated to U.S. dollars at the exchange rates in
effect as of the balance sheet date, and results of operations for each
subsidiary are translated using average rates in effect for the period
presented. Translation adjustments have been included within shareholders'
equity as part of cumulative other comprehensive loss. The effect of the change
in functional currencies did not have a material impact on our consolidated
financial position, results of operations or cash flows.
Foreign currency transaction gains and losses, which are included in the
consolidated statements of income, have not been material in any of the three
years presented. We utilize forward exchange contracts to hedge against the
short-term impact of foreign currency fluctuations on certain assets or
liabilities denominated in foreign currencies. The gains or losses on these
contracts are included in income as the exchange rates change. Management
believes that these forward contracts do not subject us to undue risk due to
foreign exchange movements because gains and losses on these contracts are
offset by losses and gains on the underlying assets and transactions being
hedged.
Certain Significant Risks and Uncertainties -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We are subject to certain risks, including without limitation, risks
relating to fluctuating operating results, customer and market acceptance of new
products, dependence on new products, rapid technological change, litigation,
dependence on growth in the network attached data storage market, expansion of
international operations, product concentration, changing product mix,
competition, management of expanding operations, dependence on high-quality
components, dependence on proprietary technology, intellectual property rights,
dependence on key personnel, volatility of stock price, shares eligible for
future sale, and effect of certain anti-takeover provisions and dilution.
Concentration of Credit Risk -- Financial instruments which potentially
subject us to concentrations of credit risk consist primarily of cash
equivalents, short-term investments and accounts receivable. Cash, cash
equivalents and short-term investments consist primarily of municipal
securities, cash accounts held at various banks and a money market fund held at
several financial institutions. We sell our products primarily to large
organizations in different industries and geographies. Credit risk is further
mitigated by our credit evaluation process and limited payment terms. We do not
require collateral or other security to support accounts receivable. In
addition, we maintain an allowance for estimated credit losses. In entering into
forward foreign exchange contracts, we have assumed the risk that might arise
from the possible inability of counterparties to meet the terms of their
contracts. The counterparties to these contracts are major multinational
commercial banks, and we do not expect any losses as a result of counterparty
defaults.
Comprehensive Income -- During fiscal 1999, we adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner sources.
29
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Comprehensive income for the years ended April 30, 2000, 1999 and 1998 has been
disclosed within the consolidated statements of shareholders' equity and
comprehensive income. Total comprehensive income was equal to net income for the
year ended April 30, 1998.
Net Income Per Share -- Basic net income per share is computed by dividing
net income by the weighted average number of common shares outstanding for that
period. Diluted net income per share is computed giving effect to all dilutive
potential shares that were outstanding during the period. Dilutive potential
common shares consist of incremental common shares subject to repurchase and
common shares issuable upon exercise of stock options. All prior-period net
income per-share amounts have been restated to reflect the two-for-one stock
splits which were effective December 20, 1999 and March 22, 2000 (See Note 6).
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:
YEARS ENDED APRIL 30,
--------------------------------
2000 1999 1998
-------- -------- --------
NET INCOME (NUMERATOR):
Net Income, basic and diluted.................... $ 73,792 $ 35,613 $ 20,965
======== ======== ========
SHARES (DENOMINATOR):
Weighted average common shares outstanding....... 299,554 275,060 265,600
Weighted average common shares outstanding
subject to repurchase......................... (184) (1,320) (5,944)
-------- -------- --------
Shares used in basic computation................. 299,370 273,740 259,656
Weighted average common shares outstanding
subject to repurchase......................... 184 1,320 5,944
Common shares issuable upon exercise of stock
options (treasury stock method)............... 45,617 36,664 22,008
-------- -------- --------
Shares used in diluted computation............... 345,171 311,724 287,608
======== ======== ========
NET INCOME PER SHARE:
Basic............................................ $ 0.25 $ 0.13 $ 0.08
======== ======== ========
Diluted.......................................... $ 0.21 $ 0.11 $ 0.07
======== ======== ========
Statements of Cash Flows -- Supplemental cash flow and noncash investing
and financing activities are as follows:
2000 1999 1998
------- ------- ------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid net of refund...................... $ (225) $ 7,985 $9,402
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock compensation.......................... 1,805 883 714
Income tax benefit from employee stock
transactions...................................... 56,248 17,776 4,065
Conversion of evaluation inventory to fixed assets... 3,723 1,665 975
Geographic Operating Information -- During fiscal 1999, we adopted
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), which establishes annual
and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. We operate in one reportable segment (Note 8).
30
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Stock-Based Compensation -- We account for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."
Accounting for Long-Lived Assets -- We evaluate the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recently Issued Accounting Standards -- In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedging accounting when certain conditions are
met. This statement, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Although we have not fully assessed the
implications of this new statement, we do not believe adoption of this statement
will have a material impact on our consolidated financial position, results of
operations or cash flows.
3. BALANCE SHEET COMPONENTS
SHORT-TERM INVESTMENTS
APRIL 30,
--------------------
2000 1999
-------- --------
Municipal bonds............................................. $ 12,481 $ --
Municipal securities........................................ 285,675 183,650
Corporate bonds............................................. 5,000 --
U.S. government securities.................................. 8,996 --
-------- --------
Total debt and equity securities............................ 312,152 183,650
Less cash equivalents....................................... 237,675 177,850
-------- --------
Short-term investments...................................... $ 74,477 $ 5,800
======== ========
INVENTORIES, NET
APRIL 30,
------------------
2000 1999
------- -------
Purchased components........................................ $ 9,230 $ 5,316
Work in process............................................. 646 1,727
Finished goods.............................................. 10,558 6,538
------- -------
$20,434 $13,581
======= =======
PROPERTY AND EQUIPMENT
APRIL 30,
--------------------
2000 1999
-------- --------
Computers, related equipment and purchased software......... $ 54,716 $ 28,619
Furnitures and fixtures..................................... 8,159 2,236
Leasehold improvements...................................... 3,747 3,104
-------- --------
66,622 33,959
Accumulated depreciation and amortization................... (18,673) (14,688)
-------- --------
$ 47,949 $ 19,271
======== ========
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
4. COMMITMENTS AND CONTINGENCIES
In fiscal 2000, we executed agreements to acquire approximately 37.7 acres
of land in Sunnyvale, California. These sites will support expansion of
approximately 800,000 square feet to accommodate future growth. In fiscal 1999,
we executed agreements to acquire approximately 18 acres of land in Sunnyvale,
California and to develop 393,000 square feet of buildings. Beginning in June
1999, we began relocating all of our principal activities to Sunnyvale. This new
headquarter site will consolidate general administration, sales and marketing,
research and development, customer services and manufacturing operations. Our
manufacturing and research and development facilities will begin to relocate in
the first quarter of fiscal 2001 and will be complete in the second quarter of
fiscal 2001. The Santa Clara facilities are leased under various operating
leases with 100,000 square feet of space expiring in June 2000, and the
remaining 20,000 square feet expiring in fiscal 2003. We lease other sales
offices and a design center throughout the United States and internationally.
These sales offices are also leased under operating leases which expire through
fiscal 2013. We are responsible for certain maintenance costs, taxes and
insurance under these leases.
In fiscal 2000, we executed two lease agreements to acquire approximately
37.7 acres of land in Sunnyvale, California and the accompanying 533,262 square
feet of buildings. We subsequently assigned our rights and obligations under all
the agreements for the Sunnyvale facilities to a third-party entity and entered
into two operating leases. Our lease payments will vary based on LIBOR plus a
spread (8.0% at April 30, 2000). The leases are for five years and can be
renewed for two five-year periods, subject to the approval of the third-party
entity. At the expiration or termination of the leases, we have the option to
either purchase these properties for $55,000 and $62,000, respectively, or
arrange for the sale of the properties to a third party for at least $55,000 and
$62,000, respectively, with a contingent liability for any deficiency. If the
properties under these leases are not purchased or sold as described above, we
will be obligated for additional lease payments of approximately $49,288 and
$51,460, respectively.
In fiscal 1999, we executed three lease agreements to acquire approximately
18 acres of land in Sunnyvale, California and to develop 393,000 square feet of
buildings. We subsequently assigned our rights and obligations under all the
agreements for the Sunnyvale facilities to a third-party entity and entered into
three operating leases. The leases require monthly payments, which vary, based
on the LIBOR plus a spread. The aggregate annual minimum rent commitment under
one lease, which began in August 1999, is approximately $3,520. The lease
payments under the other two operating leases are expected to commence in the
first and second quarter of fiscal 2001 and will also vary based on LIBOR plus a
spread, estimated to be approximately $3,840 and $2,880. Our lease payments
under these three leases are included in the minimum annual lease payments
schedule below. The leases are for five years and can be renewed for two
five-year periods, subject to the approval of the third-party entity. At the
expiration or termination of the leases, we have the option to either purchase
these properties for $44,000, $48,000 and $36,000, respectively, or arrange for
the sale of the properties to a third party for at least $44,000, $48,000 and
$36,000, respectively, with a contingent liability for any deficiency. If the
properties under these leases are not purchased or sold as described above, we
will be obligated for additional lease payments of approximately $36,960,
$43,912 and $32,610, respectively.
The operating leases mentioned above require us to maintain specified
financial covenants with which we were in compliance as of April 30, 2000.
32
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Future minimum annual lease payments as of April 30, 2000, are as follows:
YEARS ENDING APRIL 30,
----------------------
2001....................................................... $13,185
2002....................................................... 14,413
2003....................................................... 13,716
2004....................................................... 13,120
2005....................................................... 10,006
Thereafter................................................. 5,547
-------
Total lease payments............................. $69,987
=======
Rent expense was $7,779, $5,963 and $4,278 for the years ended April 30,
2000, 1999 and 1998, respectively. Rent expense under certain of our facility
leases is recognized on a straight-line basis over the term of the lease. The
difference between the amounts paid and the amounts expensed is classified as
long-term obligations in the accompanying consolidated balance sheets.
We are also subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the normal course of business. We do not
believe that any current litigation claims will have a material adverse effect
on our consolidated financial position, results of operations or cash flows.
5. LINE OF CREDIT
In July 1998, we negotiated a $5,000 unsecured revolving credit facility
with a domestic commercial bank. Under terms of the credit facility, which
expires in July 2000, we must maintain various financial covenants. Any
borrowings under this agreement bear interest at either LIBOR plus 1% or at the
lender's "prime" lending rate, such rate determined at our discretion.
We also have foreign exchange facilities used for hedging arrangements with
several banks that allow us to enter into foreign exchange contracts of up to
$65,000, of which $10,395 was available at April 30, 2000.
6. SHAREHOLDERS' EQUITY
Follow-on Public Offering -- In March 1999, we completed a public offering
of 11,500 shares of our common stock and received net proceeds of $138,834.
Stock Splits -- On December 20, 1999 and March 22, 2000, the Company
effected two-for-one stock splits of the outstanding shares of common stock. All
share and per share amounts in these consolidated financial statements have been
adjusted to give effect to the stock split.
Preferred Stock -- Our Board of Directors has the authority to issue up to
5,000 shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders.
Stock Option Plans -- We adopted the 1993 Stock Option/Stock Issuance Plan
(the "1993 Plan") in April 1993. In September 1995, we adopted the 1995 Stock
Incentive Plan (the "1995 Plan"). The 1995 Plan replaced the 1993 Plan, and
provides for the grant of options and the issuance of common stock under terms
substantially the same as those provided under the 1993 Plan, except that the
1995 Plan does not allow for the exercise of options prior to vesting.
Accordingly, all options and shares issued under the 1993 Plan were incorporated
into the 1995 Plan upon the effectiveness of our initial public offering.
Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of our common stock. The
exercise price for an incentive stock option and a nonqualified
33
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
stock option cannot be less than 100% and 85%, respectively, of the fair market
value of our common stock as determined by the Board of Directors on the date of
grant. Options granted under the 1995 Plan generally vest at a rate of 25% on
the first anniversary of the vesting commencement date and then ratably over the
following 36 months. Options expire as determined by the Board of Directors, but
not more than ten years after the date of grant.
In April 1997, the Board of Directors adopted the Special Non-Officer Stock
Option Plan (the "Non-Officer Plan") which provides for the grant of options and
the issuance of common stock under terms substantially the same as those
provided under the 1995 Plan, except that the Non-Officer Plan allows only for
the issuance of nonqualified options to non-officer employees.
In August 1999, the Board of Directors adopted the 1999 Stock Option Plan
(the "1999 Plan") which is comprised of two separate equity incentive programs:
(i) the Discretionary Option Grant Program under which options may be granted to
eligible individuals during the service period at a fixed price per share and
(ii) Automatic Option Grant Program under which non-employee Board members will
automatically receive special option grants at designated intervals over their
period of Board service.
The 1999 Plan will supplement the existing 1995 Plan and Non-Officer Plan
and those plans will continue to remain in full force and effect until all
available shares have been issued under each such plan. However, the Automatic
Option Grant Program previously in effect under the 1995 Plan terminated as of
October 26, 1999 and all automatic option grants made to non-employee Board
members on or after that date will be made under the 1999 Plan.
Under the 1999 Plan, the Board of Directors may grant to employees,
directors and consultants and other independent advisors options to purchase
shares of our common stock during their period of service with us. The exercise
price for an incentive stock option and a non-statutory option cannot be less
than 100% of the fair market value of the common stock on the grant date.
Options granted under the 1999 Plan generally vest at a rate of 25% on the first
anniversary of the vesting commencement date and then ratably over the following
36 months. Options will have a term of ten years after the date of grant,
subject to earlier termination upon the occurrence of certain events.
Options granted under the 1999 Plan are subject to the cancellation/regrant
program with the following limitations: (i) only options held by employees who
are neither executive officers nor members of the Board can be repriced; and
(ii) the total number of repriced options will not exceed ten percent of the
total number of shares of common stock authorized for issuance under the 1999
Plan. No options have been repriced under the 1999 Plan.
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
A summary of the combined activity under our stock option plans and
agreements is as follows:
OPTIONS OUTSTANDING
---------------------
SHARES WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER EXERCISE
GRANT OF SHARES PRICE
--------- --------- --------
Balances, April 30, 1997.............................. 7,512 45,112 $ 1.36
Shares reserved for plan............................ 32,000 -- --
Options granted (weighted average fair value of
$1.14)........................................... (21,792) 21,792 2.94
Options exercised................................... -- (4,960) 1.06
Options canceled.................................... 4,592 (4,592) 1.73
------- -------
Balances, April 30, 1998 (20,048 options exercisable
at a weighted average exercise price of $0.99)...... 22,312 57,352 1.95
Shares reserved for plan............................ 21,600 -- --
Options granted (weighted average fair value of
$2.46)........................................... (25,292) 25,292 6.29
Options exercised................................... -- (8,972) 1.55
Options canceled.................................... 3,700 (3,700) 2.68
------- -------
Balances, April 30, 1999 (26,348 options exercisable
at a weighted average exercise price of $1.73)...... 22,320 69,972 3.53
Shares reserved for plan............................ 13,200 -- --
Options granted (weighted average fair value of
$13.98).......................................... (25,773) 25,773 28.60
Options exercised................................... -- (18,976) 2.55
Options canceled.................................... 3,127 (3,127) 7.19
------- -------
Balances, April 30, 2000.............................. 12,874 73,642 $12.45
======= =======
Options for the purchase of 24,829 shares of common stock were vested as of
April 30, 2000. Unvested common shares of 92 issued under the 1993 Plan as of
April 30, 2000 are subject to repurchase by the Company.
Additional information regarding options outstanding as of April 30, 2000
is as follows:
OPTIONS OUTSTANDING
---------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE AVERAGE
RANGE OF OUTSTANDING AT LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES APRIL 30, 2000 (IN YEARS) PRICE EXERCISABLE PRICE
- ---------------- -------------- ----------- -------- ----------- --------
$ 0.01 - $ 0.69 4,596 5.25 $ 0.40 4,288 $ 0.40
0.74 - 1.82 5,507 6.61 1.53 4,293 1.51
1.82 - 3.27 16,266 7.07 2.51 9,853 2.48
3.31 - 9.20 19,229 8.21 5.23 5,617 5.01
10.50 - 18.50 18,144 9.20 14.32 770 12.53
31.25 - 67.88 9,130 9.72 46.92 24 38.74
95.03 - 95.03 770 9.84 95.03 -- --
------ ------
$ 0.01 - $95.03 73,642 8.10 $12.45 24,845 $ 2.87
====== ======
Employee Stock Purchase Plan -- Under the Employee Stock Purchase Plan,
employees are entitled to purchase shares of our common stock at 85% of the fair
market value at certain specified dates. Of the 8,200 shares authorized to be
issued under this plan, 2,713 shares were available for issuance at April 30,
2000 and
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
1,473 and 1,092 shares were issued in fiscal 2000 and 1999, respectively, at a
weighted average price of $3.87 and $2.80, respectively.
Pro Forma Information -- As discussed in Note 2, we continue to account for
our stock-based awards using the intrinsic value method in accordance with APB
No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements with the exception of
$1,345, $667 and $270 in fiscal 2000, 1999 and 1998, respectively, which
consists of the amortization of deferred stock compensation related to the
granting of nonqualified stock options at exercise prices below market.
In fiscal 1999, we recorded $230 compensation expense for the fair value of
options granted to an independent contractor.
SFAS 123 requires the disclosure of pro forma net income and net income per
share had we adopted the fair value method as of the beginning of fiscal 1996.
Under SFAS 123, the fair value of stock-awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradeable, fully transferable options
without vesting restrictions, which significantly differ from our stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. Our calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions:
YEARS ENDED APRIL 30,
-----------------------
2000 1999 1998
----- ----- -----
Expected Life (in years).................................... 3.20 3.07 2.94
Risk-free interest rate..................................... 6% 5% 6%
Volatility.................................................. 65% 50% 50%
Expected dividend........................................... -- -- --
Our calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
awards issued beginning in fiscal 1996 had been amortized to expense over the
vesting period of the awards, pro forma net income and net income per share
would have been as follows:
YEARS ENDED APRIL 30,
---------------------------
2000 1999 1998
------ ------- ------
Net income.............................................. $3,065 $12,163 $8,677
Net income per share, basic............................. 0.01 0.04 0.03
Net income per share, diluted........................... 0.01 0.04 0.03
However, the impact of outstanding non-vested stock options granted prior
to fiscal 1996 has been excluded from the pro forma calculations; accordingly,
the fiscal 2000, 1999 and 1998 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
Deferred Stock Compensation -- In May 1995, we issued stock options for the
purchase of 8,504 shares of common stock at $0.02 per share. We recognized $515
of deferred compensation in May 1995 equal to the difference between the option
price as determined by the Board of Directors and $0.08 (the deemed fair value
for financial reporting purposes) for each option. We are amortizing the
deferred compensation expense ratably over the four-year period in which the
options vest.
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
We recorded $1,845, $916 and $714 of deferred compensation in fiscal 2000,
1999 and 1998, respectively, primarily related to the grant of stock options to
certain highly compensated employees. Under terms of the 1995 Stock Option Plan,
highly compensated employees as defined by our management are eligible to
contribute between $15 to $75 in annual salary for the rights to be granted
nonqualified stock options. The discount from fair market value which is equal
to the amount of salary contributed has been recorded as deferred compensation
expense. We are amortizing the deferred compensation expense ratably over a
one-year period.
7. INCOME TAXES
Income before income taxes is as follows:
YEARS ENDED APRIL 30,
------------------------------
2000 1999 1998
-------- ------- -------
Domestic............................................. $105,806 $45,617 $33,175
Foreign.............................................. 8,600 11,373 372
-------- ------- -------
Total...................................... $114,406 $56,990 $33,547
======== ======= =======
The provision for income taxes consists of the following:
YEARS ENDED APRIL 30,
------------------------------
2000 1999 1998
-------- ------- -------
CURRENT:
Federal............................................ $ 41,475 $20,094 $12,132
State.............................................. 7,973 3,098 2,199
Foreign............................................ 2,780 3,269 --
-------- ------- -------
Total current...................................... 52,228 26,461 14,331
-------- ------- -------
DEFERRED:
Federal............................................ (8,631) (4,078) (1,597)
State.............................................. (2,983) (1,006) (152)
-------- ------- -------
Total deferred..................................... (11,614) (5,084) (1,749)
-------- ------- -------
Provision for income taxes................. $ 40,614 $21,377 $12,582
======== ======= =======
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
YEARS ENDED APRIL 30,
-----------------------------
2000 1999 1998
------- ------- -------
Tax computed at federal statutory rate................ $40,042 $19,947 $11,741
State income taxes, net of federal benefit............ 5,720 2,850 1,482
Federal and state credits............................. (2,623) (1,802) (555)
Benefit of foreign sales corporation.................. -- (142) (489)
Tax exempt interest................................... (3,301) (547) (281)
Other................................................. 776 1,071 684
------- ------- -------
Provision for income taxes............................ $40,614 $21,377 $12,582
======= ======= =======
The income tax benefits associated with dispositions from employee stock
transactions of $56,248, $17,776 and $4,291, respectively, for fiscal 2000, 1999
and 1998, were recognized as additional paid in capital.
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
The components of net deferred tax assets are as follows:
YEARS ENDED APRIL 30,
----------------------
2000 1999
--------- ---------
Inventory reserves.......................................... $12,732 $ 5,120
Reserves and accruals not deductible for tax purposes....... 5,197 2,654
Research and development credits............................ 4,285 2,227
Tax benefit of options issued in IMC acquisition............ 532 913
Depreciation................................................ 544 585
Other....................................................... 51 228
------- -------
Deferred tax assets............................... $23,341 $11,727
======= =======
Current net deferred tax assets are $22,215 and $10,134, as of April 30,
2000 and April 30, 1999, respectively. Non-current net deferred tax assets at
April 30, 2000 and 1999 of $1,126 and $1,593, respectively, are included in
other assets within the accompanying consolidated balance sheets.
As of April 30, 2000, the federal and state net operating loss
carryforwards for income tax purposes were approximately $209,702 and $136,814,
respectively. The federal net operating loss carryforwards will begin to expire
in 2020, and the state net operating loss carryforwards will begin to expire in
2006. As of April 30, 2000, we had federal and state research and development
credit carryforwards of approximately $6,440 and $6,135, respectively, available
to offset future taxable income. These federal credit carryforwards will begin
to expire in 2013.
Deferred tax assets of approximately $89,493 consisting of certain net
operating loss and credit carryforwards resulting from the exercise of employee
stock options have not been recognized in the financial statements. When
utilized, the tax benefit of these loss and credit carryforwards will be
accounted for as a credit to additional paid in capital.
8. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
SFAS 131 establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Under SFAS 131, we operate in
one reportable industry segment: the design, manufacturing and marketing of
high-performance network attached data storage and access devices. For the years
ended April 30, 2000, 1999 and 1998, we recorded revenue from customers
throughout the United States and Canada; Europe; Latin America, Australia and
Asia Pacific.
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NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
The following presents net sales for the years ended April 30, 2000, 1999,
and 1998 by geographic area and long-lived assets as of April 30, 2000 and 1999
by geographic area.
YEAR ENDED APRIL 30,
--------------------------------
2000 1999 1998
-------- -------- --------
Net Sales:
United States...................................... $401,377 $200,627 $125,108
International...................................... 177,923 88,793 41,055
-------- -------- --------
Total net sales.......................... $579,300 $289,420 $166,163
======== ======== ========
Long-lived Assets:
United States...................................... $ 55,857 $ 29,198
International...................................... 3,376 1,803
-------- --------
Total assets............................. $ 59,233 $ 31,001
======== ========
Net sales above are attributed to regions based on the customers' shipment
locations.
International sales include export sales primarily to United Kingdom,
Germany, Japan, France, Israel, the Netherlands, Switzerland, Sweden, Canada and
Australia. No single foreign country accounted for 10% or more of net sales in
fiscal 2000, 1999 and 1998.
No customer accounted for 10% or more of net sales in fiscal 2000, 1999 or
1998.
9. FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The following disclosures are made in accordance with the provisions of
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), which requires the disclosure of
fair value information about both on- and off-balance sheet financial
instruments where it is practicable to estimate the value. Fair value is defined
in SFAS 107 as the amount at which an instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
None of the financial instruments are held or issued for trading purposes.
At April 30, 2000, we had $54,605 of outstanding foreign exchange contracts
in British Pounds, Swiss Francs and European Currency Units. These foreign
exchange contracts are adjusted to the fair value at the end of every month.
Unrealized gains or losses on foreign exchange contracts were not significant at
April 30, 2000. Other than foreign exchange contracts, we have not entered into
any other material financial derivative instruments.
The fair values of cash and cash equivalents and short-term investments
reported in the balance sheets approximate their carrying value. The fair value
of short-term investments and foreign exchange contracts is based on quoted
market value.
10. EMPLOYEE BENEFIT PLAN
We have established a 401(k) tax-deferred savings plan ("Savings Plan").
Employees meeting the eligibility requirements, as defined, may contribute
specified percentages of their salaries. We contributed $611, $314 and $202 for
fiscal 2000, 1999 and 1998, respectively.
11. SUBSEQUENT EVENT
In June 2000, we acquired privately-held Orca Systems, Inc. ("Orca"), a
developer of high performance Virtual Interface Architecture software. Under the
terms of the agreement, we acquired Orca for approxi-
39
41
NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
mately $49,000 in common stock, assumed options and cash, with an obligation to
provide approximately 280 shares of additional common stock, if certain
performance criteria are achieved. The acquisition will be accounted for using
the purchase method of accounting.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED APRIL 30, 2000
--------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
Net sales............................... $103,279 $124,712 $151,290 $200,019
Gross margin............................ 60,740 73,196 89,875 119,643
Net income.............................. 13,468 16,048 19,799 24,477
Net income per share, basic............. 0.05 0.05 0.07 0.08
Net income per share, diluted........... 0.04 0.05 0.06 0.07
YEAR ENDED APRIL 30, 1999
--------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
Net sales............................... $ 57,375 $ 65,625 $ 75,616 $ 90,804
Gross margin............................ 34,136 38,744 44,798 53,622
Net income.............................. 7,097 8,376 9,394 10,746
Net income per share, basic............. 0.03 0.03 0.03 0.04
Net income per share, diluted........... 0.02 0.03 0.03 0.03
40
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
under Item 1 of Part I of this Report under the section entitled "Executive
Officers." The information required by this Item with respect to the Company's
directors is incorporated herein by reference from the information provided
under the heading "Election of Directors" of the Definitive Proxy Statement
which will be filed with the Commission. The information required by Item 405 of
Regulation S-K is incorporated herein by reference from the information provided
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" of
the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of executive officers and directors
of the Company is incorporated by reference from the information under the
heading "Executive Compensation and Related Information" in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the information under the heading
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the information under the caption "Employment
Contracts, Termination of Employment and Change-In-Control Agreements" in our
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Network Appliance,
Inc. are filed as part of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets -- April 30, 2000 and 1999
Consolidated Statements of Income for the years ended April 30, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended April 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended April 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
41
43
(a)(2) Financial Statement Schedule.
The following financial statement schedule of the Company is filed in Part
IV, Item 14(d) of this Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the consolidated financial statements or
notes thereto.
(a)(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
2.1(1) Agreement and Plan of Reorganization, dated as of March 17,
1997, between the Company and IMC, a California corporation
2.2(1) Agreement of Merger between the Company and IMC as filed
with the California Secretary of State on March 17, 1997
3.1(2) Restated Articles of Incorporation of the Company
3.2(3) Bylaws of the Company
3.3(8) Amendment to the Restated Articles of Incorporation of the
Company, filed December 18, 1997
3.4(11) Certificate of Amendment to the Restated Articles of
Incorporation of the Company
4.1(3) Reference is made to Exhibits 3.1 and 3.2
4.2(3) Specimen Common Stock certificate
4.3(3) Amended and Restated Investors' Rights Agreement, dated
September 23, 1994, among the Company and the investors and
the founders named therein, as amended
4.4(3) Amended and Restated Shareholders Agreement, dated September
23, 1994, among the Company and the employee holders and the
Preferred Stock investors named therein
4.5(3) Forms of Warrants to Purchase Shares of Series A and Series
C Preferred Stock
10.1*(3) Distributor Agreement, dated June 1, 1993, by and among the
Company, Itochu Corporation and CTC Supply Sales
10.2(3) Forms of Indemnification Agreements entered into between the
Company and its directors and officers
10.3(3) The Company's 1993 Stock Option/Stock Issuance Plan
10.4(3) The Company's 1993 Stock Incentive Plan
10.5(3) The Company's Employee Stock Purchase Plan
10.6(3) Series C Preferred Stock and Common Stock and Warrant to
Purchase Series C Preferred Stock Purchase Agreement, dated
September 23, 1994, among the Company and the purchasers
named therein
10.7(3) Office lease dated October 21, 1993, between the Company and
Vanni Business Park General Partnership ("Vanni") and Office
Lease Agreement, dated October 20, 1994, between the Company
and Vanni
10.8(3) Agreement dated June 19, 1995, between the Company and
Imperial Bank, as amended, Promissory Note issued thereunder
and ancillary documents
10.9(3) Settlement Agreement and General Release, dated June 28,
1995, between the Company and Michael Malcolm
10.10(3) Security and Loan Agreement, Credit Terms and Conditions and
General Security Agreement between the Company and Imperial
Bank, dated August 31, 1994, as amended
10.11(4) Facility sublease, dated August 9, 1996, by and between S3,
Inc. and the Company
10.12(5) The Company's Amended 1995 Stock Incentive Plan
10.13(5) The Company's Special Non-Officer Stock Option Plan
10.14(6) Facility lease, dated August 18, 1997, by and between the
McCandless -- San Tomas No. 2 and the Company
42
44
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
10.15(8) Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Company
10.16(8) Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Company
10.17(8) Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Company
10.18(8) Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
10.19(9) Purchase and Sale Agreement, dated August 5, 1998, by and
between Martin/Crossman, LLC and the Company.
10.20*(10) OEM Distribution and License Agreement, dated October 27,
1998, by and between Dell Products L.P. and the Company
10.21(11) Amended Purchase and Sale Agreement, dated December 9, 1998,
by and between Martin/ Crossman, LLC and the Company.
10.22(11) Amended Purchase and Sale Agreement, dated December 21,
1998, by and between 495 Java Drive Associates. L.P. and the
Company.
10.23(11) Lease Agreement, dated January 20, 1999, by and between BNP
Leasing Corporation and the Company
10.24(11) Purchase Agreement, dated January 20, 1999, by and between
BNP Leasing Corporation and the Company
10.25(11) Pledge Agreement, dated January 20, 1999, by and between BNP
Leasing Corporation, Bank Nationale De Paris and the Company
10.26(11) OEM Distribution and License Agreement, dated November 6,
1998, by and between Fujitsu Limited and the Company
10.27(12) Construction Management Agreement (Phase
II -- Improvements), dated May 3, 1999, by and between BNP
Leasing Corporation and the Registrant
10.28(12) Lease Agreement (Phase II -- Improvements), dated May 3,
1999, by and between BNP Leasing Corporation and the
Registrant
10.29(12) Lease Agreement (Phase II -- Land), dated May 3, 1999, by
and between BNP Leasing Corporation and the Registrant
10.30(12) Pledge Agreement (Phase II -- Land), dated May 3, 1999, by
and between BNP Leasing Corporation and the Registrant
10.31(12) Pledge Agreement (Phase II -- Improvements), dated May 3,
1999, by and between BNP Leasing Corporation and the
Registrant
10.32(12) Purchase Agreement (Phase II -- Land), dated May 3, 1999, by
and between BNP Leasing Corporation and the Registrant
10.33(12) Purchase Agreement (Phase II -- Improvements), dated May 3,
1999, by and between BNP Leasing Corporation and the
Registrant
10.34(12) Construction Management Agreement (Phase
III -- Improvements), dated June 16, 1999, by and between
BNP Leasing Corporation and the Registrant
10.35(12) Lease Agreement (Phase III -- Improvements), dated June 16,
1999, by and between BNP Leasing Corporation and the
Registrant
10.36(12) Lease Agreement (Phase III -- Land), dated June 16, 1999, by
and between BNP Leasing Corporation and the Registrant
10.37(12) Pledge Agreement (Phase III -- Land), dated June 16, 1999,
by and between BNP Leasing Corporation and the Registrant
10.38(12) Pledge Agreement (Phase III -- Improvements), dated June 16,
1999, by and between BNP Leasing Corporation and the
Registrant
10.39(12) Purchase Agreement (Phase III -- Land), dated June 16, 1999,
by and between BNP Leasing Corporation and the Registrant
10.40(12) Purchase Agreement (Phase III -- Improvements), dated June
16, 1999, by and between BNP Leasing Corporation and the
Registrant
43
45
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
10.41(13) Purchase and Sale Agreement, dated September 9, 1999, by and
between Trinet Essential Facilities XII, Inc., and the
Company
10.42(13) Agreement of Assignment of Lease, dated September 3, 1999 by
and between Lockheed Martin Corporation, and the Company
10.43(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1347 Crossman
Avenue in Sunnyvale, California
10.44(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1350 Geneva
Drive in Sunnyvale, California
10.45(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1345 Crossman
Avenue in Sunnyvale, California
10.46(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1330 Geneva
Drive in Sunnyvale, California
10.47(14) Assignment of Agreement of Sale, dated December 20, 1999, by
and between BNP Leasing and the Company
10.48(14) Purchase and Sale Agreement, dated November 16, 1999, by and
between TRW Inc. and ESL Incorporated and the Company
10.49(14) Closing Certificate (Phase IV) and Agreement, dated December
20, 1999, by and between BNP Leasing Corporation and the
Company
10.5(14) Lease Agreement (Phase IV -- Land), dated December 20, 1999,
by and between BNP Leasing Corporation and the Company
10.51(14) Lease Agreement (Phase IV -- Improvements ), dated December
20, 1999, by and between BNP Leasing Corporation and the
Company
10.52(14) Purchase Agreement (Phase IV -- Land), dated December 20,
1999, by and between BNP Leasing Corporation and the Company
10.53(14) Purchase Agreement (Phase IV -- Improvements), dated
December 20, 1999, by and between BNP Leasing Corporation
and the Company
10.54(14) Pledge Agreement (Phase IV -- Land), dated December 20,
1999, by and between BNP Leasing Corporation and the Company
10.55(14) Pledge Agreement (Phase IV -- Improvements), dated December
20, 1999, by and between BNP Leasing Corporation and the
Company
10.56(14) Participation Agreement (Phase IV), dated December 20, 1999,
by and between BNP Leasing Corporation and Banque Nationale
De Paris
10.57 Closing Certificate (Phase V) and Agreement, dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.58 Lease Agreement (Phase V -- Land), dated March 1, 2000, by
and between BNP Leasing Corporation and the Company
10.59 Lease Agreement (Phase V -- Improvements ), dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.60 Purchase Agreement (Phase V -- Land), dated March 1, 2000,
by and between BNP Leasing Corporation and the Company
10.61 Purchase Agreement (Phase V -- Improvements), dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.62 Pledge Agreement (Phase V -- Land), dated March 1, 2000, by
and between BNP Leasing Corporation and the Company
10.63 Pledge Agreement (Phase V -- Improvements), dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.64 Construction Management Agreement (Phase V -- Improvements),
dated March 1, 2000, by and between BNP Leasing Corporation
and the Company
10.65 Participation Agreement (Phase V), dated March 1, 2000, by
and between BNP Leasing Corporation and Banque Nationale De
Paris
10.66 Modification Agreement (Phase V), dated April 19, 2000, by
and between BNP Leasing Corporation and the Company
21.1 Subsidiaries of the Company
44
46
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
23.1 Independent Auditors' Consent
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedules
27.3 Restated Financial Data Schedules
27.4 Restated Financial Data Schedules
27.5 Restated Financial Data Schedules
27.6 Restated Financial Data Schedules
27.7 Restated Financial Data Schedules
- ---------------
(1) Previously filed as an exhibit with the Company's Form 8-K dated March 17,
1997.
(2) Previously filed as an exhibit with the Company's Annual Report on Form
10-K dated July 25, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-97864)
(4) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 7, 1997.
(5) Previously filed as an exhibit with the Company's Annual Report on Form
10-K dated July 23, 1997.
(6) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 5, 1997.
(7) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 6, 1998
(8) Previously filed as an exhibit with the Company's Annual Report on Form
10-K dated July 22, 1998
(9) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated September 11, 1998
(10) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 11, 1998
(11) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 11, 1999
(12) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated August 31, 1999
(13) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 2, 1999
(14) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated February 29, 2000
* Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment
(b) Reports on Form 8-K.
None.
45
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on July 12, 2000.
NETWORK APPLIANCE, INC.
By: /s/ DANIEL J. WARMENHOVEN
------------------------------------
Daniel J. Warmenhoven
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel J. Warmenhoven and Jeffry R. Allen, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Annual Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitutes, may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
---------- ----- ----
/s/ DANIEL J. WARMENHOVEN Chief Executive Officer, Director July 12, 2000
- --------------------------------------------------- (Principal Executive Officer)
(Daniel J. Warmenhoven)
/s/ DONALD T. VALENTINE Chairman of the Board, Director July 12, 2000
- ---------------------------------------------------
(Donald T. Valentine)
/s/ JEFFRY R. ALLEN Executive Vice President Finance and July 12, 2000
- --------------------------------------------------- Operations, Chief Financial Officer
(Jeffry R. Allen) (Principal Financial and Accounting
Officer) and Secretary
/s/ SANJIV AHUJA Director July 12, 2000
- ---------------------------------------------------
(Sanjiv Ahuja)
/s/ CAROL A. BARTZ Director July 12, 2000
- ---------------------------------------------------
(Carol A. Bartz)
/s/ LARRY R. CARTER Director July 12, 2000
- ---------------------------------------------------
(Larry R. Carter)
46
48
SIGNATURES TITLE DATE
---------- ----- ----
/s/ MICHAEL R. HALLMAN Director July 12, 2000
- ---------------------------------------------------
(Michael R. Hallman)
/s/ ROBERT T. WALL Director July 12, 2000
- ---------------------------------------------------
(Robert T. Wall)
/s/ DR. SACHIO SEMMOTO Director July 12, 2000
- ---------------------------------------------------
(Dr. Sachio Semmoto)
47
49
SCHEDULE II
NETWORK APPLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------
Allowance for doubtful accounts:
2000........................................... $1,886 $1,275 $ 122 $3,039
1999........................................... 811 1,100 25 1,886
1998........................................... 330 550 69 811
Excess and obsolescence inventory reserve:
2000........................................... 2,480 4,274 3,753 3,001
1999........................................... 2,985 1,380 1,885 2,480
1998........................................... 3,016 1,302 1,333 2,985
48
50
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(1) Agreement and Plan of Reorganization, dated as of March 17,
1997, between the Company and IMC, a California corporation
2.2(1) Agreement of Merger between the Company and IMC as filed
with the California Secretary of State on March 17, 1997
3.1(2) Restated Articles of Incorporation of the Company
3.2(3) Bylaws of the Company
3.3(8) Amendment to the Restated Articles of Incorporation of the
Company, filed December 18, 1997
3.4(11) Certificate of Amendment to the Restated Articles of
Incorporation of the Company
4.1(3) Reference is made to Exhibits 3.1 and 3.2
4.2(3) Specimen Common Stock certificate
4.3(3) Amended and Restated Investors' Rights Agreement, dated
September 23, 1994, among the Company and the investors and
the founders named therein, as amended
4.4(3) Amended and Restated Shareholders Agreement, dated September
23, 1994, among the Company and the employee holders and the
Preferred Stock investors named therein
4.5(3) Forms of Warrants to Purchase Shares of Series A and Series
C Preferred Stock
10.1*(3) Distributor Agreement, dated June 1, 1993, by and among the
Company, Itochu Corporation and CTC Supply Sales
10.2(3) Forms of Indemnification Agreements entered into between the
Company and its directors and officers
10.3(3) The Company's 1993 Stock Option/Stock Issuance Plan
10.4(3) The Company's 1993 Stock Incentive Plan
10.5(3) The Company's Employee Stock Purchase Plan
10.6(3) Series C Preferred Stock and Common Stock and Warrant to
Purchase Series C Preferred Stock Purchase Agreement, dated
September 23, 1994, among the Company and the purchasers
named therein
10.7(3) Office lease dated October 21, 1993, between the Company and
Vanni Business Park General Partnership ("Vanni") and Office
Lease Agreement, dated October 20, 1994, between the Company
and Vanni
10.8(3) Agreement dated June 19, 1995, between the Company and
Imperial Bank, as amended, Promissory Note issued thereunder
and ancillary documents
10.9(3) Settlement Agreement and General Release, dated June 28,
1995, between the Company and Michael Malcolm
10.10(3) Security and Loan Agreement, Credit Terms and Conditions and
General Security Agreement between the Company and Imperial
Bank, dated August 31, 1994, as amended
10.11(4) Facility sublease, dated August 9, 1996, by and between S3,
Inc. and the Company
10.12(5) The Company's Amended 1995 Stock Incentive Plan
10.13(5) The Company's Special Non-Officer Stock Option Plan
10.14(6) Facility lease, dated August 18, 1997, by and between the
McCandless -- San Tomas No. 2 and the Company
10.15(8) Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Company
10.16(8) Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Company
10.17(8) Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Company
10.18(8) Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
10.19(9) Purchase and Sale Agreement, dated August 5, 1998, by and
between Martin/Crossman, LLC and the Company.
49
51
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.20*(10) OEM Distribution and License Agreement, dated October 27,
1998, by and between Dell Products L.P. and the Company
10.21(11) Amended Purchase and Sale Agreement, dated December 9, 1998,
by and between Martin/ Crossman, LLC and the Company.
10.22(11) Amended Purchase and Sale Agreement, dated December 21,
1998, by and between 495 Java Drive Associates. L.P. and the
Company.
10.23(11) Lease Agreement, dated January 20, 1999, by and between BNP
Leasing Corporation and the Company
10.24(11) Purchase Agreement, dated January 20, 1999, by and between
BNP Leasing Corporation and the Company
10.25(11) Pledge Agreement, dated January 20, 1999, by and between BNP
Leasing Corporation, Bank Nationale De Paris and the Company
10.26(11) OEM Distribution and License Agreement, dated November 6,
1998, by and between Fujitsu Limited and the Company
10.27(12) Construction Management Agreement (Phase
II -- Improvements), dated May 3, 1999, by and between BNP
Leasing Corporation and the Registrant
10.28(12) Lease Agreement (Phase II -- Improvements), dated May 3,
1999, by and between BNP Leasing Corporation and the
Registrant
10.29(12) Lease Agreement (Phase II -- Land), dated May 3, 1999, by
and between BNP Leasing Corporation and the Registrant
10.30(12) Pledge Agreement (Phase II -- Land), dated May 3, 1999, by
and between BNP Leasing Corporation and the Registrant
10.31(12) Pledge Agreement (Phase II -- Improvements), dated May 3,
1999, by and between BNP Leasing Corporation and the
Registrant
10.32(12) Purchase Agreement (Phase II -- Land), dated May 3, 1999, by
and between BNP Leasing Corporation and the Registrant
10.33(12) Purchase Agreement (Phase II -- Improvements), dated May 3,
1999, by and between BNP Leasing Corporation and the
Registrant
10.34(12) Construction Management Agreement (Phase
III -- Improvements), dated June 16, 1999, by and between
BNP Leasing Corporation and the Registrant
10.35(12) Lease Agreement (Phase III -- Improvements), dated June 16,
1999, by and between BNP Leasing Corporation and the
Registrant
10.36(12) Lease Agreement (Phase III -- Land), dated June 16, 1999, by
and between BNP Leasing Corporation and the Registrant
10.37(12) Pledge Agreement (Phase III -- Land), dated June 16, 1999,
by and between BNP Leasing Corporation and the Registrant
10.38(12) Pledge Agreement (Phase III -- Improvements), dated June 16,
1999, by and between BNP Leasing Corporation and the
Registrant
10.39(12) Purchase Agreement (Phase III -- Land), dated June 16, 1999,
by and between BNP Leasing Corporation and the Registrant
10.40(12) Purchase Agreement (Phase III -- Improvements), dated June
16, 1999, by and between BNP Leasing Corporation and the
Registrant
10.41(13) Purchase and Sale Agreement, dated September 9, 1999, by and
between Trinet Essential Facilities XII, Inc., and the
Company
10.42(13) Agreement of Assignment of Lease, dated September 3, 1999 by
and between Lockheed Martin Corporation, and the Company
10.43(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1347 Crossman
Avenue in Sunnyvale, California
10.44(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1350 Geneva
Drive in Sunnyvale, California
10.45(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1345 Crossman
Avenue in Sunnyvale, California
50
52
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.46(14) Industrial Lease Agreement, dated December 20, 1999 between
TRW Inc. and the Company in connection with 1330 Geneva
Drive in Sunnyvale, California
10.47(14) Assignment of Agreement of Sale, dated December 20, 1999, by
and between BNP Leasing and the Company
10.48(14) Purchase and Sale Agreement, dated November 16, 1999, by and
between TRW Inc. and ESL Incorporated and the Company
10.49(14) Closing Certificate (Phase IV) and Agreement, dated December
20, 1999, by and between BNP Leasing Corporation and the
Company
10.5(14) Lease Agreement (Phase IV -- Land), dated December 20, 1999,
by and between BNP Leasing Corporation and the Company
10.51(14) Lease Agreement (Phase IV -- Improvements ), dated December
20, 1999, by and between BNP Leasing Corporation and the
Company
10.52(14) Purchase Agreement (Phase IV -- Land), dated December 20,
1999, by and between BNP Leasing Corporation and the Company
10.53(14) Purchase Agreement (Phase IV -- Improvements), dated
December 20, 1999, by and between BNP Leasing Corporation
and the Company
10.54(14) Pledge Agreement (Phase IV -- Land), dated December 20,
1999, by and between BNP Leasing Corporation and the Company
10.55(14) Pledge Agreement (Phase IV -- Improvements), dated December
20, 1999, by and between BNP Leasing Corporation and the
Company
10.56(14) Participation Agreement (Phase IV), dated December 20, 1999,
by and between BNP Leasing Corporation and Banque Nationale
De Paris
10.57 Closing Certificate (Phase V) and Agreement, dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.58 Lease Agreement (Phase V -- Land), dated March 1, 2000, by
and between BNP Leasing Corporation and the Company
10.59 Lease Agreement (Phase V -- Improvements ), dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.60 Purchase Agreement (Phase V -- Land), dated March 1, 2000,
by and between BNP Leasing Corporation and the Company
10.61 Purchase Agreement (Phase V -- Improvements), dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.62 Pledge Agreement (Phase V -- Land), dated March 1, 2000, by
and between BNP Leasing Corporation and the Company
10.63 Pledge Agreement (Phase V -- Improvements), dated March 1,
2000, by and between BNP Leasing Corporation and the Company
10.64 Construction Management Agreement (Phase V -- Improvements),
dated March 1, 2000, by and between BNP Leasing Corporation
and the Company
10.65 Participation Agreement (Phase V), dated March 1, 2000, by
and between BNP Leasing Corporation and Banque Nationale De
Paris
10.66 Modification Agreement (Phase V), dated April 19, 2000, by
and between BNP Leasing Corporation and the Company
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedules
27.3 Restated Financial Data Schedules
27.4 Restated Financial Data Schedules
27.5 Restated Financial Data Schedules
51
53
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.6 Restated Financial Data Schedules
27.7 Restated Financial Data Schedules
- ---------------
(1) Previously filed as an exhibit with the Company's Form 8-K dated March 17,
1997.
(2) Previously filed as an exhibit with the Company's Annual Report on Form
10-K dated July 25, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-97864)
(4) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 7, 1997.
(5) Previously filed as an exhibit with the Company's Annual Report on Form
10-K dated July 23, 1997.
(6) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 5, 1997.
(7) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 6, 1998
(8) Previously filed as an exhibit with the Company's Annual Report on Form
10-K dated July 22, 1998
(9) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated September 11, 1998
(10) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 11, 1998
(11) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 11, 1999
(12) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated August 31, 1999
(13) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 2, 1999
(14) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated February 29, 2000
* Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment
52