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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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 24, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
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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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
2770 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
(408) 367-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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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 31, 1998, was $984,774,626 (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 31, 1998, 33,802,814 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 to the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
October 8, 1998, which will be filed with the Securities and Exchange Commission
not later than 120 days after April 24, 1998.
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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, Inc. (the "Company" or "Network Appliance") designs,
manufactures, markets and supports high performance network data storage devices
which provide fast, simple, reliable and cost effective file service for
data-intensive network environments. The Company pioneered the concept of the
"network appliance," an extension of the industry trend towards dedicated,
specialized devices which perform a single function in the network, similar to
the adoption of the router for network communications management. The Company's
products consist of network data storage appliances or "filers" and proxy
caching solutions developed to address the specific market requirements of
data-intensive network environments as well as the World Wide Web. The Company's
filers utilize an efficient software kernel optimized to exclusively perform the
file service task. Unlike previous file server approaches, these products are
not burdened by a general purpose operating system or file system overhead. By
using a proprietary software architecture, Network Appliance is able to use
industry standard hardware components rather than specialized hardware. The
Company's filer products combine specialized proprietary software and
state-of-the-art industry standard hardware to provide a unique solution for the
NFS, Common Internet File System ("CIFS"), and HTTP server markets.
PRODUCTS
Filers -- The Company offers data access appliances or filers which cover a
broad range of needs. Current products include the NetApp(R) F210, an
entry-level appliance targeted for small workgroups and branch offices, the
NetApp F230 workgroup filer, the NetApp F520, designed to address the needs of
large departments, and the enterprise-class NetApp F630. All filers are based on
a PCI-bus architecture and come packaged in rack mountable enclosures. The
NetApp F210 and F230 filers are based on Pentium(R) processors and utilize
SCSI-based storage. The NetApp F520 and NetApp F630 are based on Digital's
Alpha(R) processor and support either SCSI or fibre channel arbitrated loop
("Fibre Channel") conventions as storage options.
All of the Company's filers include the Data ONTAP(TM) operating system and
one base or standard protocol (either NFS, CIFS or HTTP). Native multiprotocol
functionality can be easily added through licensing non-base protocols at an
additional cost.
NetApp filer list prices range from approximately $15,000 to $600,000,
depending primarily on the model purchased and the product configuration.
Data ONTAP Operating System -- Combining advanced multiprotocol file system
technology and a powerful microkernel-based design, the Network Appliance filer
software solution, Data ONTAP, delivers simultaneous file service to UNIX,
Windows and Web clients. Data ONTAP, version 5.0, supports multiple volume
server partitioning, a popular strategy for modularizing, consolidating and
administering data according to applications, data types and organizational
needs.
Proxy Caching Solutions -- NetCache(TM), the Web proxy caching software
made available through the Internet Middleware Corporation ("IMC") acquisition,
allows network administrators to replicate or cache Web content. This reduces
bandwidth costs by avoiding duplicate requests generated over the WAN, and
significantly speeds up access for users. NetCache also provides greater control
and selection of information permitted over the network. The software is
currently available for Windows NT, SPARC Solaris and Digital UNIX.
In fiscal 1998, the Company introduced a family of network cache
appliances. NetCache appliances and software allow carriers, ISPs and
corporations to reduce network traffic, significantly improve user response time
and enhance security. The NetApp C230 is a dedicated caching appliance designed
for small points of presence ("POPs") and remote offices where there are no
system administrators present. The NetApp C630, supporting access times up to
T3, is a high-performance appliance, suitable for large corporate installations
and ISP data centers.
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SALES AND MARKETING
Network Appliance has established multiple distribution channels to
accelerate market penetration of its products. The Company initially marketed
its products primarily through indirect sales channels both domestically and
internationally. In fiscal 1995, the Company shifted its emphasis domestically
to direct sales and significantly expanded its direct sales force. The Company
continues to rely primarily on indirect sales in Asia and in some portions of
Europe. Network Appliance has approximately 25 sales offices located within
North America and 6 sales offices within Europe and Asia. No customers accounted
for 10% or more of the Company's net sales in fiscal 1998, 1997 or 1996.
BACKLOG
The Company manufactures its products based upon forecast of customers'
demand. Orders are generally placed by customers on an as-needed basis and
products are typically shipped within one to four weeks following receipt of an
order. In general, customers may cancel or reschedule orders without penalty.
For these reasons, the Company does not believe "orders" constitute a firm
"backlog" and believes it is not a meaningful indicator of revenues nor material
to an understanding of its business.
CUSTOMER SERVICE AND SUPPORT
Network Appliance's customer service and support organization provides
customers with technical support, education and training. Network Appliance
believes that providing a high level of customer service and technical support
is critical to customer satisfaction and the Company's success. Warranty
coverage includes 24 hour telephone support plus advanced replacement of
defective hardware shipped on a next business day basis. For an additional
charge, the Company also offers upgraded service during the warranty period,
providing for faster on-site hardware repair. The standard hardware warranty for
most parts includes one year of part replacement for failed components. Software
support, including the repair of errors or defects, and new release updates are
provided at no extra charge for 90 days after product shipment. Support for
software is available beyond the initial period through the software
subscription program.
Post-warranty service programs include: cooperative maintenance wherein the
customer purchases replacements or extra parts and performs self-maintenance
tasks, a full-service program involving a combination of telephone-based support
and on-site advanced replacement, and a software subscription program that
includes telephone support and software upgrades. The Company charges for
service programs on an annual subscription basis, with discounts to sites with
multiple filers. On-site support is primarily provided by independent parties
both in North America and internationally.
MANUFACTURING
Network Appliance's manufacturing operations, located in Santa Clara,
California, consist of procurement of materials, commodity management, component
engineering, manufacturing engineering, product assembly, product assurance,
quality control and final test. Network Appliance relies on many suppliers for
the procurement of materials, as well as several key subcontractors for the
production of certain board level assemblies. The Company's manufacturing
strategy has been to develop close relationships with its suppliers, exchanging
critical information and implementing joint quality training programs. This
manufacturing strategy minimizes capital investment and overhead expenditures
and creates flexibility by providing the capacity for rapid expansion. During
May 1997, Network Appliance was awarded the ISO 9001 certification.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. The Company
procures disk drives from multiple sources. However, the Company purchases most
of its disk drives through a single supplier. The Company purchases computer
boards and microprocessors from a limited number of suppliers. The Company's
reliance on its suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, price increases,
timely delivery and component quality. This risk is particularly significant
with respect to the Company's supplier of disk drives because in order to meet
product performance requirements, the Company must obtain disk drives of
extremely high quality and capacity. In addition, there are periodic supply and
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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. Although to date the
Company has been able to purchase its requirements of such components, there is
no assurance that the Company will be able to obtain its full requirements of
such components in the future or that prices of such components will not
increase. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results, financial condition or cash flows.
Such delays could also damage relationships with current and prospective
customers.
Certain of the Company's resellers and end-users have historically
purchased minimally configured systems from the Company and have sourced
additional disk drives and memory components from other vendors. Since these
components do not undergo the Company's rigorous sourcing and testing
procedures, they may experience more failures and incompatabilities when
deployed in the Company's products. Any such higher failure rate or
incompatabilities could negatively impact the Company's reputation and, as a
result, could materially adversely affect its business, operating results,
financial condition or cash flows.
RESEARCH AND DEVELOPMENT
Since its inception, Network Appliance has made substantial investments in
research and development. Network Appliance believes that its future performance
will depend in large part on its ability to maintain and enhance its current
product line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new products.
As part of the Company's ongoing development process, the Company
introduced a significant software release during fiscal 1998 -- Data ONTAP
release 5.0. The Company also initiated production shipments of its NetApp C230
and NetApp C630 NetCache appliances. In November 1997, the Company released
version 2.0 of its NetApp Windows Networking Software, featuring
SecureShare(TM). SecureShare enables true file system sharing for clients based
on different operating systems. Windows and UNIX clients are now able to access
the same files, at the same time.
The Company's future growth depends upon the success of these and other new
products, however there can be no assurance that these or other new products
will attain market acceptance. Due to the complexity of network file servers and
the difficulty in gauging the engineering effort required to produce new
products, new products are subject to significant technical risks. There can be
no assurance that new products will be introduced on a timely basis or at all.
In the past, the Company has experienced delays in the shipments of its 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, the Company's
business, operating results, financial condition or cash flows will be
materially adversely affected.
The network file server market is 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 the Company's existing
products obsolete and unmarketable. The Company's future success will depend
upon its 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 its customers. There can be no assurance that the Company
will be successful in developing and marketing new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer
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requirements, the Company's business, operating results, financial condition or
cash flows will be materially adversely affected.
Network file server products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results, financial condition or cash flows.
The Company's total expenses for research and development for fiscal years
1998, 1997 and 1996 were $16.6 million, $9.0 million and $4.8 million,
respectively. The Company anticipates that research and development expenses
will increase in absolute dollars in future periods.
COMPETITION
The network file server market is intensely competitive and characterized
by rapidly changing technology. The Company experiences substantial competition
from specialized network file server companies, such as Auspex Systems, Inc. The
Company also competes against traditional suppliers of UNIX-based systems that
are used as network file servers including Sun Microsystems, Digital Equipment
Corporation, Hewlett-Packard Company, EMC (indirectly through OEM relationships
with system vendors), 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 which are
more directly competitive with those of the Company. The Company also encounters
competition from manufacturers of PC-based file servers utilizing Windows NT and
emerging standards. The Company's NetCache software and NetCache appliances
compete against a number of software and hardware solutions, ranging from small
start-ups to larger systems vendors.
While the Company believes that the price-performance characteristics of
its products are currently competitive, increased competition is likely to
result in price reductions, reduced gross margin and loss of market share, any
of which could materially adversely affect the Company's business, operating
results, financial condition or cash flows. Many of the Company's current and
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion, sale
and support of their products than the Company. 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. In addition, the Company derives a
significant portion of its sales from the resale of disk drives as components of
its filers and therefore experiences competition from disk drive resellers. The
market for the resale of disk drives is highly competitive and subject to
intense price pressures. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results, financial condition or cash flows.
The Company believes that the principal competitive factors affecting its
market include product features such as response time, scalability and ease of
use, price, multiprotocol capabilities and customer service and support.
Although the Company believes that its products currently compete favorably with
respect to these factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.
PROPRIETARY RIGHTS
Network Appliance's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited
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protection. The Company has registered its Network Appliance name and logo,
FAServer and NetApp trademarks. The Company will continue to evaluate the
registration of additional trademarks as appropriate. The Company generally
enters into confidentiality agreements with its employees and with its resellers
and customers. The Company currently has multiple U.S. and international patent
applications pending. There can be no assurance that the pending applications
will be approved, or that if issued, such patents will not be challenged, and if
such challenges are brought, that such patents will not be invalidated. There
can be no assurance that the Company will develop proprietary products or
technologies that are patentable, that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's ability to do business. Litigation may be necessary to protect
the Company's proprietary technology. Any such litigation may be time-consuming
and costly. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards 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. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around patents issued to
the Company or other intellectual property rights of the Company.
There have also been substantial amounts of litigation in the computer
industry regarding intellectual property rights. In the first quarter of fiscal
1997, the Company settled litigation related to the alleged infringement of
third party rights and other claims, which resulted in the Company recording a
pre-tax expense of $4.3 million ($3.5 million in payments to the plaintiffs and
$0.8 million in legal fees). In addition, the Company may from time to time
receive claims that it is infringing third parties' intellectual property
rights. There can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the file server market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's 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 the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon the Company's business, operating results,
financial condition or cash flows. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
EMPLOYEES
As of May 31, 1998, Network Appliance had a total of approximately 450
employees. Of the total, 247 were in sales and marketing, 116 in research and
development, 45 in finance and administration and 42 in operations. The
Company's future performance also depends in significant part upon the continued
service of its key technical and senior management personnel, none of whom is
bound by an employment agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
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EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of May 31, 1998,
are as follows:
NAME AGE POSITION
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Daniel J. Warmenhoven........ 47 President, Chief Executive Officer and Director
M. Helen Bradley............. 44 Vice President, Engineering
Jeffry R. Allen.............. 46 Vice President, Finance and Operations, Chief Financial
Officer, and Secretary
Thomas F. Mendoza............ 47 Senior Vice President, Worldwide Sales
Charles E. Simmons........... 49 Vice President, Marketing
Daniel J. Warmenhoven joined the Company in October 1994 as President and
Chief Executive Officer, and has been a member of the Board of Directors since
October 1994. Prior to joining the Company, 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. Mr. Warmenhoven holds a B.S. degree
in electrical engineering from Princeton University.
M. Helen Bradley joined the Company as Vice President, Engineering in
September 1995. Prior to that, Ms. Bradley owned a management consulting
business from January 1995 to September 1995. She also served as Senior Vice
President, Technology Development at Openvision, a client-server applications
company, from May 1994 to January 1995. From August 1990 to April 1994, Ms.
Bradley was the Vice President, Systems Software at Sun Microsystems. Ms.
Bradley holds a B.S. degree in mathematics from the Massachusetts Institute of
Technology and an M.S. degree in computer science from the Georgia Institute of
Technology.
Jeffry R. Allen joined the Company in December 1996 as Vice President,
Finance and Operations, Chief Financial Officer and Secretary. 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, the latest of which was Vice President and Controller.
Before joining SynOptics, 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. Mr. Allen holds a B.S. degree from San Diego
State University.
Thomas F. Mendoza joined the Company in May 1994 as Vice President, North
American Sales. During fiscal 1998, Mr. Mendoza was promoted to Senior Vice
President, Worldwide 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, 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,
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.
Charles E. Simmons joined the Company in May 1996 as Vice President,
Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner &
Associates, a consulting firm, from January 1995 to May 1996. From February 1994
to October 1994, Mr. Simmons served as Vice President of Marketing at Voyant
Corporation, a developer of videoconferencing equipment. Prior to that, Mr.
Simmons was with Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems, Inc., from November 1984 to February 1994, most recently as
Director of Business Strategy and Technology Marketing. Mr. Simmons received a
B.S. degree in electrical engineering from Washington University, an M.S. degree
in electrical engineering from the Massachusetts Institute of Technology and an
MBA from Santa Clara University.
OTHER FACTORS AFFECTING THE COMPANY
History of Operating Losses; Potential Fluctuations in Quarterly
Results -- The Company was organized in April 1992 and first shipped products in
June 1993. While the Company generated net income in fiscal
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1998, 1997 and 1996, it incurred significant losses in fiscal 1995 and in each
of its prior fiscal years. There can be no assurance that the Company will
remain profitable on a quarterly or annual basis.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition; 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 the Company
or its competitors; deferrals of customer orders in anticipation of new products
or product enhancements; changes in pricing by the Company or its competitors;
the ability of the Company to develop, introduce and market new products and
product enhancements on a timely basis; hardware component costs; supply
constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the network file server market; the mix of
sales among the Company's sales channels; levels of expenditure on research and
development; changes in Company strategy; personnel changes; general economic
trends and other factors.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are 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 file server market is rapidly evolving and the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations in any
particular quarter; and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
Because Company expense levels are based, in part, on its expectations as to
future sales and because a significant percentage of the Company's expenses are
fixed, if sales levels are below expectations, net income may be
disproportionately affected. Although the Company has experienced significant
revenue growth in recent periods, such growth may not be indicative of future
operating results. Period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as an indicator of
future performance. Due to all of the foregoing factors, it is possible that in
some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's common stock would likely be materially adversely affected.
Dependence on Growth in the Network File Server Market -- All of the
Company's filer products address the network file server market. The Company's
future financial performance will depend in large part on continued growth in
the network file server market and on emerging standards in this market. There
can be no assurance that the market for network file servers will continue to
grow or that emerging standards in the network file server market will not
adversely affect the growth of the NFS and Windows NT servers. If the network
file server market fails to grow, grows more slowly than anticipated, or if
network file servers, based on emerging standards other than those adopted by
the Company, become increasingly accepted by the market, the Company's business,
operating results, financial condition or cash flows could be materially
adversely affected. During recent years, segments of the computer industry have
experienced significant economic downturns characterized by decreased product
demand, production overcapacity, price erosion, work slowdowns and layoffs. The
Company's operations may in the future experience substantial fluctuations from
period-to-period as a consequence of such industry patterns, general economic
conditions affecting the timing of orders from major customers and other factors
affecting capital spending. There can be no assurance that such factors will not
have a material adverse effect on the Company's business, operating results,
financial condition or cash flows.
International Operations -- The Company conducts business internationally.
Accordingly, the Company's future operating results could be materially
adversely affected by a variety of uncontrollable and changing factors including
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements and government
spending patterns.
The Company's 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 the Company's products more
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expensive and, therefore, potentially less competitive in those markets. For
international sales denominated in foreign currencies, the Company is subject to
risks associated with currency fluctuations.
Additional risks, among others, inherent in the Company's international
business activities generally include longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results, financial condition or
cash flows.
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, there can be no assurance that the
Company's future operating results will not be adversely affected by
seasonality.
The Company believes that its continued growth and profitability will
require successful expansion of its international operations and sales and
therefore the Company has committed significant resources to such expansion. In
order to successfully expand international sales in fiscal 1999 and subsequent
periods, the Company 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 the Company's business, operating results, financial
condition or cash flows. To the extent that the Company is unable to effect
these additions in a timely manner, the Company's growth, if any, in
international sales will be limited, and the Company's business, operating
results, financial condition or cash flows could be materially adversely
affected. In addition, there can be no assurance that the Company will be able
to maintain or increase international market demand for the Company's products.
The Company currently sells a significant portion of its products
internationally through resellers. There can be no assurance that any of the
Company's international resellers or customers will continue to distribute or
purchase the Company's products.
Product Concentration; Changing Product Mix -- The Company derives a
substantial portion of its revenues from the sale of its network filer product
line. As a result, a reduction in the demand for filer products due to increased
competition, a general decline in the market for network file servers or other
factors would have a material adverse effect on the Company's business,
operating results, financial condition or cash flows. In fiscal 1998, the
Company introduced four new filers: the NetApp F210, NetApp F230, NetApp F520
and NetApp F630. Additional product introductions in future periods are expected
to impact the sales of existing products. If the Company is 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, the Company's business, operating results, financial
condition or cash flows could be materially adversely affected.
Concentration of Sales -- Historically, a significant portion of the
Company's sales have been made to a limited number of end user customers and
resellers. In fiscal 1998, 1997 and 1996, no customers accounted for 10% or more
of net sales. The Company generally has not entered into long term volume
purchase contracts with its end user customers or resellers, and such end user
customers or resellers may have certain rights to extend or delay the shipment
of their orders. The loss of a major end user customer or reseller, the
reduction, delay or cancellation of orders or a delay in shipment of the
Company's products to such end user customer or reseller could materially
adversely affect the Company's business, operating results and financial
condition. In addition, should one or more of these resellers choose to promote
products competitive with the Company's products, the Company's business,
operating results, financial condition or cash flows could be materially
adversely affected.
Dependence Upon Key Personnel -- The Company's continued growth and success
depends to a significant extent on the continued service of senior management
and other key employees and the hiring of additional qualified employees.
Competition for highly-skilled personnel is intense in the high technology
industry. There can be no assurance that the Company will be successful in
recruiting new personnel or in retaining existing personnel. The loss of one or
more key employees or the Company's inability to attract additional qualified
employees or retain other employees could have a material adverse effect on the
Company's business, results of operations, financial condition or cash flows.
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Management of Expanding Operations -- The Company has a history of rapid
growth. The Company's future operating results will depend to a large extent on
management's ability to successfully manage expansion and growth, including but
not limited to hiring and retaining significant numbers of qualified technical,
sales and other employees, expanding international operations, forecasting
revenues, addressing new markets, controlling expenses, implementing
infrastructure and systems and managing its assets. An unexpected decline in the
growth rate of revenues without a corresponding and timely reduction in expense
growth or a failure to manage other aspects of growth could have a material
adverse effect on the Company's business, results of operations, financial
condition or cash flows.
Possible Volatility of Stock Price -- The trading price of the Company's
common stock could be subject to wide fluctuations in response to a number of
factors, including quarterly variations in operating results, announcements of
technological innovations or new products, applications or product enhancements
by the Company or its competitors, changes in financial estimates by securities
analysts and other events. 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 or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.
Effect of Certain Charter Provisions; Anti-takeover Effects of Provisions
of the Bylaws -- The Company's 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 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 the outstanding voting
stock of the Company. Further, certain provisions of the Company's 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 the Company's common stock, could delay or make more difficult a proxy
contest involving the Company, which could adversely affect the market price of
the Company's common stock.
Year 2000 Issues -- The "Year 2000 Issue" refers to computer programs which
use two digits rather than four to define a given year and which therefore might
read a date using "00" as the year 1900 rather than the year 2000. The Company
is currently assessing the impact the Year 2000 Issue will have on its internal
information systems. The Company believes that the majority of its current
products are Year 2000 compliant and that new products are being designed to be
Year 2000 compliant. The Company is currently performing extended testing. The
Company does not anticipate that addressing the Year 2000 Issue for its internal
information systems and current and future products will have a material adverse
impact on its operations, financial results or cash flows. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000 Issue could lower demand for the Company's products
while increasing the Company's costs. These combining factors, while not
quantified, could have a material adverse impact on the Company's business,
operating results, financial condition or cash flows.
The Company has key relationships with suppliers. If these suppliers fail
to adequately address the Year 2000 Issue for the products they provide the
Company, this could have a material adverse impact on the Company's business,
operating results, financial condition or cash flows. The Company is still
assessing the effect the Year 2000 Issue will have on its suppliers and, at this
time, cannot determine the impact it will have.
ITEM 2. PROPERTIES
Network Appliance's principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
120,000 square feet of space in Santa Clara, California. This facility is leased
under various operating leases which expire through fiscal 2003. The Company
leases other sales offices throughout the U.S. and in Europe. The Company
believes that the existing facilities are adequate for its current needs and
that additional space will be available as needed. See additional discussion
regarding
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properties in "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
The Company's common stock commenced trading on the Nasdaq National Market
on November 21, 1995 and is traded under the symbol "NTAP." As of May 31, 1998,
there were 284 holders of record of the common stock and 6,667 beneficial
owners. The following table sets forth for the periods indicated the high and
low closing sale prices for the common stock as reported on the Nasdaq National
Market, adjusted to reflect the effect of the December 17, 1997 two-for-one
stock split.
FISCAL 1998 FISCAL 1997
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter........................................... $20.50 $14.00 $19.38 $12.13
Second Quarter.......................................... 28.31 19.88 17.59 10.88
Third Quarter........................................... 35.50 24.13 28.00 15.75
Fourth Quarter.......................................... 36.25 27.31 27.50 13.13
The Company believes that a number of factors, including, but not limited
to, quarterly variations in results of operations may cause the market price of
its common stock to fluctuate significantly. See "Item 1. Business -- Other
Factors Affecting the Company."
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in its
business and does not anticipate paying any cash dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE FISCAL YEARS ENDED APRIL 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
Net Sales....................................... $166,163 $93,333 $46,632 $14,796 $ 2,244
Income (Loss) From Operations(1)................ 32,658 3,083 6,000 (4,913) (1,955)
Net Income (Loss)(2)............................ 20,965 250 6,600 (4,764) (1,874)
Net Income (Loss) Per Share, basic(2)........... 0.65 0.01 0.37 (0.56) (0.23)
Net Income (Loss) Per Share, diluted(2)......... 0.58 0.01 0.21 (0.56) (0.23)
Total Assets.................................... 115,736 68,941 45,449 10,628 4,055
Long-Term Obligations........................... 180 232 318 11,607 4,855
Total Shareholder's Equity (Deficit)............ 86,265 54,029 39,029 (5,923) (1,324)
- ---------------
(1) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $10,519 and the Whipsaw litigation
of $4,300. See Notes 4 and 9 of Notes to Consolidated Financial Statements.
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(2) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $9,215 (net of taxes) and the
Whipsaw litigation of $2,795 (net of taxes). See Notes 4 and 9 of Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section of this Annual Report on Form 10-K titled "Item 1. Business,"
beginning on page 2, discusses risk factors in numerous places, including the
section titled "Other Factors Affecting the Company" and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"). MD&A should also be read in conjunction with the
audited, consolidated financial statements and the notes thereto included in the
section titled "Item 8. Financial Statements and Supplementary Data."
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,
-----------------------
1998 1997 1996
----- ----- -----
Net Sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 40.7 40.8 44.1
----- ----- -----
Gross margin........................................... 59.3 59.2 55.9
----- ----- -----
Operating Expenses:
Sales and marketing....................................... 25.7 26.0 27.3
Research and development.................................. 10.0 9.6 10.2
General and administrative................................ 3.9 4.4 5.5
Purchased in-process technology and related compensation
charge................................................. -- 11.3 --
Litigation settlement..................................... -- 4.6 --
----- ----- -----
Total operating expenses............................... 39.6 55.9 43.0
----- ----- -----
Income from Operations...................................... 19.7 3.3 12.9
Other Income, net........................................... 0.5 1.0 1.3
----- ----- -----
Income before Income Taxes.................................. 20.2 4.3 14.2
Provision for Income Taxes.................................. 7.6 4.0 --
----- ----- -----
Net income............................................. 12.6% 0.3% 14.2%
===== ===== =====
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales -- Net sales increased to $166.2 million in fiscal 1998 from
$93.3 million in fiscal 1997, an increase of 78.0%. The increase in net sales
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from the Company's expansion of its direct
sales force and the introduction of new products during June and July 1997,
particularly the enterprise-class NetApp F630, the NetApp F520 and the NetApp
F230. Net sales for fiscal 1998 were also positively impacted by a shift in
product mix toward higher-end systems, primarily due to the introduction of new
products, leading to higher average selling prices for filers than in the
previous fiscal year. Net sales also grew as a result of increased multiprotocol
system shipments, the licensing of multiprotocol software to pre-existing
customers and increased service and software subscription revenues due to a
growing installed base.
International net sales (including U.S. exports) were $37.8 million and
$16.1 million, for fiscal 1998 and 1997, respectively. The increase in
international net sales was primarily a result of European sales growth due to
increased headcount in the direct sales force over the prior fiscal year and to
the introduction of the new products in June and July 1997.
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There can be no assurance that the Company's 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 remained relatively flat increasing slightly
to 59.3% of net sales for fiscal 1998 compared to 59.2% of net sales for fiscal
1997. This increase in gross margin was primarily attributable to the increase
in product volume, lower costs of key components, increased manufacturing
efficiencies and by the sale of the Company's new product with cost-reduced
designs first introduced in June and July 1997. Gross margin was also favorably
impacted by the licensing of multiprotocol software and by growth in software
subscription and service revenues due to a growing installed base. Factors
contributing to gross margin growth were partially offset by the sale of 4
gigabyte drives at reduced prices in fiscal 1998.
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, new product
introductions and enhancements and the cost of components and manufacturing
labor. In particular, the Company's gross margin varies based upon the
configuration of systems that are sold and whether they are sold directly or
through indirect channels. Highly configured systems typically generate 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 promotional expenses and customer service
and support costs. Sales and marketing expenses increased 76.3% to $42.8 million
in fiscal 1998, compared to $24.3 million in fiscal 1997. These expenses were
25.7% and 26.0% of net revenues for fiscal 1998 and 1997, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, including growth in the domestic and
international direct sales forces and increased commission expenses. During the
quarter ended January 23, 1998, the Company launched an advertising campaign
which contributed to absolute dollar growth in sales and marketing expenses for
fiscal 1998. The Company expects to continue to increase its 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. The Company believes that its continued growth
and profitability is dependent in part on the successful expansion of its
international operations, and therefore, has committed significant resources to
international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 85.6% to $16.6 million in fiscal 1998, compared
to $9.0 million in the prior fiscal year. These expenses represented 10.0% and
9.6% of net sales in fiscal 1998 and 1997, respectively, and increased as a
result of headcount growth, prototyping expenses associated with the development
of new products and ongoing support of current and future product development
and enhancement efforts. The Company believes that significant investments in
research and development will be required to remain competitive and expects that
such expenditures will continue to increase in absolute dollars.
General and Administrative -- General and administrative expenses were $6.5
million in fiscal 1998, compared to $4.1 million in fiscal 1997, an increase of
57.9%. These expenses represented 3.9% and 4.4% of net sales for such periods
and increased in absolute dollars primarily as a result of headcount growth,
increased professional services fees and an increase to the allowance for bad
debt. The Company believes that its general and administrative expenses will
increase in absolute dollars as the Company continues to build its
infrastructure.
Litigation Settlement -- See discussion in MD&A section titled "Fiscal 1997
Compared to Fiscal 1996."
Purchased In-Process Technology and Related Compensation Charge -- See
discussion in MD&A section titled "Fiscal 1997 Compared to Fiscal 1996."
Other Income, Net -- Other income, net, was $0.9 million and $1.0 million
in fiscal 1998 and 1997, respectively. Other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in fiscal 1998.
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Provision for Income Taxes -- The Company's effective tax rate for fiscal
1998 was 37.5% compared to 93.8% for fiscal 1997. The fiscal 1997 tax rate was
primarily affected by the one-time charge to operations of $7.4 million for the
write-off of purchased in-process research and development related to the IMC
acquisition which was not deductible for income tax purposes. Excluding the net
effect of the IMC acquisition, the fiscal 1997 effective tax rate would have
been 35%. The higher effective tax rate in fiscal 1998, compared to the fiscal
1997 effective tax rate, exclusive of the IMC acquisition, relates to increased
earnings, which reduce the impact of research and development and other tax
credits on the effective tax rate. Additionally, fiscal 1997 included a benefit
for the reversal of a valuation allowance previously provided against deferred
tax assets which did not occur in fiscal 1998. As of April 30, 1998 and 1997, a
valuation allowance was deemed unnecessary as Company management determined that
it is more likely than not that the net deferred tax asset is realizable.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales -- Net sales increased by 100% to $93.3 million in fiscal 1997
from $46.6 million in fiscal 1996. This increase was attributable to an
increased shipping volume of filers and related peripheral devices and higher
average selling prices of filers. The increase in filer shipments resulted
primarily from the Company's expansion of its domestic and international direct
sales force, growth of the Company's domestic and international indirect sales
channel, increased market acceptance of the Company's products and the
introduction of the NetApp F540. The higher average selling prices resulted
primarily from the introduction of the enterprise-class NetApp F540 and the
shipment of a greater number of units directly to end users, who generally
purchase more highly configured systems at higher average selling prices than
resellers. Net sales also increased as a result of the introduction of
multiprotocol systems and the licensing of multiprotocol software to
pre-existing customers.
Gross Margin -- Gross margin increased to 59.2% in fiscal 1997 from 55.9%
in fiscal 1996. This increase in gross margin was primarily attributable to the
increase in product volume in fiscal 1997, lower costs of key components and
increased manufacturing efficiencies. Gross margin also increased over the prior
fiscal year as a result of licensing multiprotocol software and increases in
software subscription revenue due to a larger installed base. These factors
offset the effect of increased sales of highly configured systems during fiscal
1997, which generally generate lower gross margins per system due to higher disk
drive content.
Sales and Marketing -- Sales and marketing expenses increased 90.6% to
$24.3 million in fiscal 1997 from $12.7 million in fiscal 1996. These expenses
were 26.0% and 27.3% of net sales in fiscal 1997 and 1996, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, particularly the increase in the
direct sales force, and increased commission expenses related to higher sales
volumes.
Research and Development -- Research and development expenses increased
88.3% to $9.0 million in fiscal 1997 from $4.8 million in fiscal 1996. These
expenses represented 9.6% and 10.2% of net sales in fiscal 1997 and 1996,
respectively, and increased in absolute dollars primarily as a result of
increased headcount, prototyping expenses associated with the development of new
products and the support of the current and future product development and
enhancement efforts.
General and Administrative -- General and administrative expenses were $4.1
million in fiscal 1997, compared to $2.6 million in fiscal 1996, an increase of
60.4%. These expenses represented 4.4% and 5.5%, respectively, of net sales for
such periods. In fiscal 1997, the Company continued its investments in
additional staffing, facilities expansion and related occupancy costs necessary
to manage and support the Company's growth. Professional fees also increased
from fiscal 1996 to fiscal 1997. The growth in professional fees was primarily
related to increases in general legal fees, investor relation activities and
accounting related services.
Purchased In-Process Technology and Related Compensation Charge -- On March
17, 1997, the Company acquired all outstanding shares and options to purchase
shares of IMC common stock by issuing 374,046 shares of the Company's common
stock and options to purchase shares of the Company's common stock. In
connection with the acquisition, intangible assets of $8.4 million were
acquired, of which $7.4 million
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was reflected as a one-time charge to operations for the write-off of in-process
research and development that had not reached technological feasibility and, in
management's opinion, had no probable alternative future use. The remaining
intangible assets of $1.0 million, consisting of existing technology and
goodwill, are included in other assets in the accompanying consolidated balance
sheets and are being amortized over their estimated useful lives of five years.
Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the Company's common stock immediately
preceding the acquisition. In connection with the granting of these options, the
Company recorded a compensation charge of $3.2 million in the fourth quarter of
fiscal 1997.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. IMC results of
operations included in the Company's consolidated financial statements for
fiscal 1997 were not significant. See Note 4 of Notes to Consolidated Financial
Statements for pro forma financial information.
Litigation Settlement -- In July 1994, the Company and certain of its
former employees were named as defendants in a lawsuit which alleged that one of
the Company's founders, who left the Company in March 1995, misappropriated
confidential information prior to the Company's founding in April 1992. In
August 1996, the Company entered into a settlement with the plaintiff which
resulted in a charge to earnings of $4.3 million in the first quarter of fiscal
1997, which included a $3.5 million payment to the plaintiffs and $0.8 million
of legal fees. As the payment released the Company from all liabilities
associated with the case, the Company has no future obligations to the
plaintiffs. The Company denies any wrongdoing on its part or on the part of the
founder.
Other Income, Net -- Other income, net, was $1.0 million and $0.6 million
in fiscal 1997 and 1996, respectively. In both of these periods, other income,
net, represented less than 2% of net sales. Other income, net, increased in
fiscal 1997 due primarily to interest income earned over four quarters of fiscal
1997 on the net proceeds of $25.7 million from the Company's November 1995
initial public offering ("IPO") compared to interest earnings on IPO proceeds
over two quarters for fiscal 1996.
Provision for Income Taxes -- The fiscal 1997 income tax provision was $3.8
million (effective rate of 93.8%). The fiscal 1997 tax rate was primarily
affected by the one-time charge to operations of $7.4 million for the write-off
of purchased in-process research and development related to the IMC acquisition
which was not deductible for income tax purposes. Excluding the net effect of
the IMC acquisition, the effective tax rate would have been 35%. As of April 30,
1997, a valuation allowance was deemed unnecessary as Company management
determined that it is more likely than not that the net deferred tax asset is
realizable.
In fiscal 1996, the Company's federal and state income tax liabilities were
offset by the realization of a portion of its net deferred tax assets. The
Company recognized a benefit for its net deferred tax assets to the extent that
they were recoverable through tax refunds in the event of future net operating
losses. The Company recorded a valuation allowance for the balance of its net
deferred tax assets as a result of uncertainty regarding realization of the
assets, including the limited operating history of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, compared to the April 30, 1997 balances, the
Company's cash, cash equivalents and short-term investments increased by $19.7
million to $48.1 million. Working capital increased by $27.7 million to $69.6
million, impacted primarily by increases in accounts receivable, cash and cash
equivalents and short-term investments, partially offset by increases in
accounts payable, deferred revenue, accrued compensation and benefits and other
accrued liabilities. The Company generated cash from operating activities
totaling $22.7 million and $6.3 million in fiscal 1998 and fiscal 1997,
respectively. Net cash provided by operating activities in fiscal 1998
principally related to net income of $21.0 million, depreciation and
amortization which are non-cash expenses and increases in current liabilities,
partially offset by increases in accounts receivable, prepaid expenses and other
and deferred income taxes.
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The Company used $8.0 million and $7.1 million of cash during fiscal 1998
and 1997, respectively, to purchase property and equipment. In addition, the
Company used $3.9 million in both fiscal 1998 and fiscal 1997 for net short-term
investment purchases. Financing activities provided $6.9 million and $1.7
million during fiscal 1998 and 1997, respectively. The increase in cash provided
by financing activities in fiscal 1998 compared to the prior fiscal year was due
to an increased quantity of stock options exercised at a higher average exercise
price.
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5.0 million of the $33.8 million
purchase price as a nonrefundable deposit. The agreement allows the Company to
assign its rights and obligations to a third-party entity should the Company
decide to enter into an operating lease. It is the Company's intent to assign
its rights and obligations to a third-party entity and enter into an operating
lease, provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4.5 million
refundable deposit. The option allows the Company to purchase the land, within a
90-day period, commencing in December 1999 at a purchase price of $23.7 million
and its rights and obligations under this agreement may be assigned to third
parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5.0 million unsecured revolving
credit facility with a domestic commercial bank. Under terms of the credit
facility which expires in July 1999, the Company 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 the
discretion of the Company. As of July 17, 1998, there were no borrowings under
the credit facility.
Excluding the commitments related to the aforementioned properties which
the Company intends to assign to a third party and then establish operating
leases, the Company currently has no significant commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources, including the $5.0 million line of credit, are
sufficient to fund its operations for at least the next twelve months.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. The Company is currently
assessing the impact the Year 2000 Issue will have on its internal information
systems. The Company believes that the majority of its current products are Year
2000 compliant and that new products are being designed to the Year 2000
compliant. The Company is currently performing extended testing. The Company
does not anticipate that addressing the Year 2000 Issue for its internal
information systems and current and future products will have a material adverse
impact on its operations, financial results or cash flows. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000 Issue could lower demand for the Company's products
while increasing the Company's costs. These combining factors, while not
quantified, could have a material adverse impact on the Company's business,
operating results, financial condition and cash flows.
The Company has key relationships with certain suppliers. If these
suppliers fail to adequately address the Year 2000 Issue for the products they
provide the Company, this could have a material adverse impact on the Company's
business, operating results, financial condition or cash flows. The Company is
still assessing the effect the Year 2000 Issue will have on its suppliers and,
at this time, cannot determine the impact it will have.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
statements of financial accounting standards ("SFAS"). SFAS No. 130, "Reporting
Comprehensive Income", requires that an enterprise report, by major components
and as a single total, the change in its net assets from nonowner sources during
the period. SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company has not yet
identified its SFAS No. 131 reporting segments. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for the Company's fiscal
year 1999.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition."
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity (deficit) and
cash flows for each of the three years in the period ended April 30, 1998. Our
audits also included the financial statement schedule listed in Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Network
Appliance, Inc. and its subsidiaries as of April 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, 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 8, 1998 (July 17, 1998 as to Note 11)
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NETWORK APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30,
-------------------
1998 1997
-------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 37,315 $21,520
Short-term investments.................................... 10,800 6,916
Accounts receivable, net of allowances of $811 in 1998 and
$330 in 1997........................................... 34,313 13,911
Inventories............................................... 8,707 9,920
Prepaid expenses and other................................ 2,524 1,253
Deferred taxes............................................ 5,280 3,100
-------- -------
Total current assets.............................. 98,939 56,620
-------- -------
PROPERTY AND EQUIPMENT, NET................................. 12,217 9,238
OTHER ASSETS................................................ 4,580 3,083
-------- -------
$115,736 $68,941
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ 17 $ 21
Accounts payable.......................................... 10,024 4,394
Income taxes payable...................................... 1,782 1,023
Accrued compensation and related benefits................. 8,485 4,666
Other accrued liabilities................................. 4,201 2,280
Deferred revenue.......................................... 4,799 2,317
-------- -------
Total current liabilities......................... 29,308 14,701
-------- -------
LONG-TERM OBLIGATIONS....................................... 163 211
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000 shares authorized;
shares outstanding: none in 1998 and 1997.............. -- --
Common stock, no par value; 110,000 shares authorized;
shares outstanding: 33,648 in 1998 and 32,832 in
1997................................................... 66,422 54,707
Deferred stock compensation............................... (498) (54)
Retained earnings (accumulated deficit)................... 20,341 (624)
-------- -------
Total shareholders' equity........................ 86,265 54,029
-------- -------
$115,736 $68,941
======== =======
See notes to consolidated financial statements.
18
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
-------- ------- -------
NET SALES................................................... $166,163 $93,333 $46,632
COST OF SALES............................................... 67,549 38,061 20,557
-------- ------- -------
Gross margin...................................... 98,614 55,272 26,075
-------- ------- -------
OPERATING EXPENSES:
Sales and marketing....................................... 42,779 24,268 12,735
Research and development.................................. 16,649 8,968 4,762
General and administrative................................ 6,528 4,134 2,578
Purchased in-process technology and related compensation
charge................................................. -- 10,519 --
Litigation settlement..................................... -- 4,300 --
-------- ------- -------
Total operating expenses.......................... 65,956 52,189 20,075
-------- ------- -------
INCOME FROM OPERATIONS...................................... 32,658 3,083 6,000
OTHER INCOME (EXPENSE):
Interest income........................................... 1,097 1,048 668
Interest and other expense................................ (208) (88) (68)
-------- ------- -------
Total other income................................ 889 960 600
-------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 33,547 4,043 6,600
PROVISION FOR INCOME TAXES.................................. 12,582 3,793 --
-------- ------- -------
NET INCOME.................................................. $ 20,965 $ 250 $ 6,600
======== ======= =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.65 $ 0.01 $ 0.37
======== ======= =======
Diluted................................................... $ 0.58 $ 0.01 $ 0.21
======== ======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic..................................................... 32,457 30,489 17,997
======== ======= =======
Diluted................................................... 35,951 34,402 31,468
======== ======= =======
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
SERIES A
CONVERTIBLE RETAINED
PREFERRED STOCK COMMON STOCK DEFERRED EARNINGS
---------------- ---------------- STOCK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT) TOTAL
------ ------- ------ ------- ------------ ------------ -------
BALANCES, APRIL 30, 1995...... 2,374 $ 1,340 10,132 $ 211 -- $(7,474) $(5,923)
Exercise of stock options..... -- -- 2,875 274 -- -- 274
Exercise of warrants.......... -- -- 719 708 -- -- 708
Issuance of common stock in
connection with the
Company's initial public
offering.................... -- -- 4,310 25,714 -- -- 25,714
Repurchase of common stock.... -- -- (429) (68) -- -- (68)
Conversion of Series A
preferred stock into common
stock....................... (2,374) (1,340) 2,374 1,340 -- -- --
Conversion of Series B and C
preferred stock into common
stock....................... -- -- 12,299 11,354 -- -- 11,354
Deferred stock compensation... -- -- -- 515 (515) -- --
Amortization of deferred stock
compensation................ -- -- -- -- 132 -- 132
Income tax benefit from
employee stock
transactions................ -- -- -- 238 -- -- 238
Net income.................... -- -- -- -- -- 6,600 6,600
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1996...... -- -- 32,280 40,286 (383) (874) 39,029
Issuance of common stock...... -- -- 583 1,730 -- -- 1,730
Repurchase of common stock.... -- -- (376) (52) -- -- (52)
Amortization of deferred stock
compensation................ -- -- -- -- 85 -- 85
Reversal of deferred stock
compensation due to employee
termination................. -- -- -- (244) 244 -- --
Income tax benefit from
employee stock
transactions................ -- -- -- 2,487 -- -- 2,487
Common stock issued for IMC
acquisition................. -- -- 345 7,350 -- -- 7,350
Compensation charge for IMC
acquisition................. -- -- -- 3,150 -- -- 3,150
Net income.................... -- -- -- -- -- 250 250
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1997...... -- -- 32,832 54,707 (54) (624) 54,029
Issuance of common stock...... -- -- 827 6,937 -- -- 6,937
Repurchase of common stock.... -- -- (11) (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
Net income.................... -- -- -- -- -- 20,965 20,965
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1998...... -- -- 33,648 $66,422 $(498) $20,341 $86,265
====== ======= ====== ======= ===== ======= =======
See notes to consolidated financial statements.
20
21
NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
-------------------------------
1998 1997 1996
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 20,965 $ 250 $ 6,600
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 5,548 2,866 1,386
Purchased in-process technology and related compensation
charge................................................. -- 10,519 --
Provision for doubtful accounts........................... 481 -- 110
Deferred income taxes..................................... (1,749) (2,794) (2,100)
Deferred rent............................................. (36) (69) 87
Changes in assets and liabilities:
Accounts receivable.................................... (20,883) (8,573) (2,270)
Inventories............................................ 1,213 (5,095) (1,181)
Prepaid expenses and other............................. (1,484) (1,031) (525)
Accounts payable....................................... 5,626 2,295 (1,415)
Accrued compensation and related benefits.............. 3,819 2,636 1,065
Income taxes payable................................... 4,823 3,010 500
Other accrued liabilities.............................. 1,921 338 876
Deferred revenue....................................... 2,482 1,917 370
-------- -------- -------
Net cash provided by operating activities......... 22,726 6,269 3,503
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,971) (7,124) (4,281)
Redemptions of short-term investments..................... 11,166 13,836 --
Purchases of short-term investments....................... (15,050) (17,770) (2,982)
Other assets.............................................. (2,000) -- --
Cash acquired from IMC purchase........................... -- 11 --
-------- -------- -------
Net cash used in investing activities............. (13,855) (11,047) (7,263)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 1,250
Repayments of long-term obligations....................... (12) (17) (1,272)
Payments for repurchase of common stock................... (1) (52) (68)
Proceeds from sale of common stock, net................... 6,937 1,730 26,696
-------- -------- -------
Net cash provided by financing activities......... 6,924 1,661 26,606
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 15,795 (3,117) 22,846
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 21,520 24,637 1,791
-------- -------- -------
End of year............................................... $ 37,315 $ 21,520 $24,637
======== ======== =======
See notes to consolidated financial statements.
21
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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 (the "Company") operate in a single industry segment
and are involved in the design, manufacturing, marketing and support of high
performance network data storage devices which provide fast, simple, reliable
and cost-effective file service for data-intensive network environments.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- Although the Company operates on a 52-week or 53-week year
ending on the last Friday in April, for presentation purposes the Company has
indicated in the accompanying consolidated financial statements that its fiscal
year end is April 30. Fiscal 1998, 1997 and 1996 were 52-week years. Fiscal 1999
will be a 53-week fiscal year.
Basis of Presentation -- The consolidated financial statements include 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 -- The Company considers all highly liquid debt
investments with original maturities of three months or less to be cash
equivalents.
Short-term Investments -- The Company's short-term investments consist of
securities with original maturities ranging between three and six months. All of
the Company's investments are classified as available-for-sale, and are stated
at amortized cost, which approximates fair market value. Short-term investments
consist of $10,800 and $6,916 of municipal securities as of April 30, 1998, and
April 30, 1997, respectively. No short-term investments were sold during any of
the periods presented.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Inventories consist of the following:
APRIL 30,
----------------
1998 1997
------ ------
Purchased components....................................... $4,494 $6,775
Work in process............................................ 1,889 1,524
Finished goods............................................. 2,324 1,621
------ ------
$8,707 $9,920
====== ======
Property and Equipment -- Property and equipment is stated at cost and is
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. Property
and equipment consists of the following:
APRIL 30,
------------------
1998 1997
------- -------
Computers, related equipment and purchased software...... $16,979 $11,011
Furniture and fixtures................................... 1,962 1,221
Leasehold improvements................................... 2,782 1,520
------- -------
21,723 13,752
Accumulated depreciation and amortization................ (9,506) (4,514)
------- -------
$12,217 $ 9,238
======= =======
22
23
Revenue Recognition -- The Company recognizes revenue and records estimated
product return and warranty reserves upon shipment if no material obligations
remain outstanding and the collectibility of receivables is deemed to be
probable. Service and software subscription revenues are recognized over the
terms of the related contractual periods. Combined service and software
subscription revenues were less than 10% of net sales for all of the periods
presented.
Advertising Costs -- Advertising costs are charged to operations when
incurred. Advertising expenses for fiscal 1998, 1997 and 1996 were aproximately
$1,000, $100 and $25, respectively.
Software Development Costs -- The Company capitalizes eligible computer
software development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occurs upon the completion of
a working model. Software development costs capitalized have not been
significant.
Foreign Currency Translation -- The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are 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.
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. Such management estimates include the
allowance for doubtful accounts receivable, inventory reserves, various accruals
and warranty reserves. Actual results could differ from those estimates.
The Company is subject to certain risks, including without limitation risks
relating to history of operating losses, fluctuating operating results, customer
and market acceptance of new products, dependence on new products, rapid
technological change, litigation, dependence on growth in the network file
server market, expansion of international operations, product concentration,
changing product mix, competition, recent management additions, 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, effect of
certain anti-takeover provisions and dilution and the Year 2000 Issue.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company 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
a single financial institution. The Company sells its products primarily to
large organizations in different industries and geographies. Credit risk is
further mitigated by the Company's credit evaluation process and limited payment
terms. The Company does not require collateral or other security to support
accounts receivable. The Company maintains an allowance for potential credit
losses.
Net Income Per Share -- The Company has adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
effective in the third quarter of fiscal 1998. SFAS 128 requires the
presentation of basic and diluted net income per share. Basic net income per
share is computed by dividing income available to common stockholders 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, common shares
issuable upon exercise of stock options and warrants and convertible preferred
stock. All prior-period net income (loss) per-share amounts have been restated
to comply with SFAS 128 as well as the two-for-one stock split (See Note 5).
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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,
-----------------------------
1998 1997 1996
------- ------- -------
NET INCOME (NUMERATOR):
Net Income, basic and diluted....................... $20,965 $ 250 $ 6,600
======= ======= =======
SHARES (DENOMINATOR):
Weighted average common shares outstanding.......... 33,200 32,329 20,948
Weighted average common shares outstanding subject
to repurchase.................................... (743) (1,840) (2,951)
------- ------- -------
Shares used in basic computation.................... 32,457 30,489 17,997
Weighted average common shares outstanding subject
to repurchase.................................... 743 1,840 2,951
Common shares issuable upon exercise of stock
options and warrants............................. 2,751 2,073 2,269
Convertible preferred stock......................... -- -- 8,251
------- ------- -------
Shares used in diluted computation.................. 35,951 34,402 31,468
======= ======= =======
NET INCOME PER SHARE:
Basic............................................... $ 0.65 $ 0.01 $ 0.37
======= ======= =======
Diluted............................................. $ 0.58 $ 0.01 $ 0.21
======= ======= =======
Statements of Cash Flows -- Supplemental cash flow and noncash investing
and financing activities are as follows:
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------ ------ -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid......................................... $ -- $ -- $ 60
Income taxes paid..................................... 9,402 3,809 1,362
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock compensation........................... 714 (244) 515
Conversion of preferred stock into common stock....... -- -- 12,694
Income tax benefit from employee stock transactions... 4,065 2,487 238
Common stock issued for IMC acquisition............... -- 7,350 --
Deferred stock compensation charge for IMC
acquisition........................................ -- 3,150 --
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
Accounting for Long-Lived Assets -- Effective May 1, 1996, the Company
adopted Financial Accounting Standards Board Statement No. 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires the Company to review 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. The adoption of SFAS 121 had no
impact on the Company's financial condition or results of operations.
Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board issued two new statements of financial accounting
standards ("SFAS"). SFAS No. 130, "Reporting Comprehensive Income", requires
that an enterprise report, by major components and as a single total, the change
in its net assets from nonowner sources during the period. SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and change in its net assets from nonowner sources during the period. SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for
24
25
major customers. The Company has not yet identified its SFAS No. 131 reporting
segments. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for the Company's fiscal year 1999.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition".
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.
3. COMMITMENTS
The Company leases its main facility under operating leases that expire
through fiscal 2003. Sales offices of the Company are also leased under
operating leases which expire through fiscal 2013. The Company is responsible
for certain maintenance costs, taxes and insurance under the leases. Future
minimum annual lease payments as of April 30, 1998, are as follows:
YEARS ENDING APRIL 30,
----------------------
1999............................................. $ 4,249
2000............................................. 3,323
2001............................................. 1,049
2002............................................. 886
2003............................................. 707
Thereafter....................................... 2,185
-------
Total lease payments............................... $12,399
=======
Rent expense was $4,278, $1,195 and $755 for the years ended April 30,
1998, 1997 and 1996, respectively. Rent expense under certain Company 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.
The total of minimum rental payments to be received through 1999 under
non-cancelable subleases is $1,268 as of April 30, 1998.
4. ACQUISITION
On March 17, 1997, the Company acquired all outstanding shares and options
to purchase shares of IMC common stock by issuing 374 shares of the Company's
common stock and options to purchase shares of the Company's common stock. The
purchase price related to the common stock and options to purchase shares of the
Company's common stock was $7,350. IMC was founded in 1996 to develop and
commercialize Internet/intranet proxy caching software.
Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the Company's common stock immediately
preceding the acquisition. In connection with the granting of discounted options
to purchase shares of the Company's common stock, the Company recorded a
compensation expense of $3,150 in the fourth quarter of fiscal 1997. The Company
also recorded a deferred income tax benefit of $1,304, primarily related to the
compensation charge.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. In connection with
the acquisition, intangible assets of $8,362 were acquired, of which $7,369 was
reflected as a one-time charge to operations for the write-off of purchased
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The
25
26
$10,519 combined one-time charge for purchased in-process technology and
compensation expense has been reflected in the Company's fiscal 1997
consolidated statement of income within operating expenses. The remaining
intangible assets of $993, consisting of existing technology and goodwill, are
included in other assets in the accompanying consolidated balance sheets and are
being amortized over their estimated useful lives of five years.
In connection with the acquisition, net assets acquired were as follows:
Current assets.............................................. $ 21
Property and equipment, net................................. 46
Intangible assets, including purchased in-process
technology................................................ 8,362
Current liabilities assumed................................. (1,079)
-------
Net assets acquired......................................... $ 7,350
=======
The following unaudited pro forma information shows the results of
operations for the two fiscal years ended April 30, 1997 as if the IMC
acquisition had occurred at the beginning of each period presented and at the
purchase price established in March 1997. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma results for fiscal 1997
combine the Company's results of operations for the fiscal year ended April 30,
1997 with the results of IMC for the period from inception (May 6, 1996) through
the date of acquisition and include the $10,519 charge for purchased in-process
technology and the related compensation charge, as well as the related tax
benefits, and the straight-line amortization of intangible assets over a period
of five years. The pro forma results for fiscal 1996 reflect the Company's
actual results of operations for that year less the amortization of intangible
assets related to the acquisition:
YEARS ENDED APRIL 30,
----------------------
1997 1996
-------- --------
Net Sales.............................................. $93,552 $46,632
Net Income (Loss)...................................... (390) 6,401
Net Income (Loss) per Share, Basic..................... (0.01) 0.35
Net Income (Loss) per Share, Diluted................... (0.01) 0.20
5. SHAREHOLDERS' EQUITY
Initial Public Offering -- In November 1995, the Company completed its
initial public offering of 4,310 shares of its common stock. Net proceeds from
the offering were $25,714. In conjunction with the offering, all outstanding
shares of preferred stock automatically converted into common stock. In
addition, the Company issued 362 shares of common stock upon the exercise of
Series A preferred warrants, and 357 shares of common stock upon the exercise of
Series C preferred warrants. The Company received total proceeds of $708 from
the exercise of these warrants.
Preferred Stock -- The Company's 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 Split -- On November 11, 1997, the Board of Directors approved a
two-for-one stock split of the Company's common stock which was effective
December 18, 1997. Share and per share data for all periods presented herein
have been adjusted to give effect to the split.
Stock Option Plans -- The Company adopted the 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan") in April 1993. In September 1995, the Company
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
26
27
under the 1993 Plan were incorporated into the 1995 Plan upon the effectiveness
of the Company's initial public offering.
Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of the Company's common
stock. The exercise price for an incentive stock option and a nonqualified stock
option cannot be less than 100% and 85%, respectively, of the fair market value
of the Company's 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. A summary of the
combined activity under the Company's stock option plans and agreements is as
follows:
SHARES OUTSTANDING OPTIONS
AVAILABLE ---------------------
FOR NUMBER WEIGHTED
GRANT OF SHARES AVERAGE
--------- --------- --------
Balances, April 30, 1995.............................. 336 2,777 $ 0.07
Shares reserved for plan............................ 6,500 -- --
Options granted (weighted average fair value of
$1.60)........................................... (3,586) 3,586 4.23
Options exercised................................... -- (2,875) 0.11
Options canceled.................................... 295 (295) 1.01
------ ------
Balances, April 30, 1996 (196 options exercisable).... 3,545 3,193 4.63
Shares reserved for IMC acquisition................. 258 -- --
Options granted (weighted average fair value of
$6.59)........................................... (3,338) 3,338 14.84
Options exercised................................... -- (418) 1.65
Options canceled.................................... 474 (474) 5.35
------ ------
Balances, April 30, 1997 (1,997 options
exercisable)........................................ 939 5,639 10.83
Shares reserved for plan............................ 4,000 -- --
Options granted (weighted average fair value of
$9.12)........................................... (2,724) 2,724 23.51
Options exercised................................... -- (620) 8.46
Options canceled.................................... 574 (574) 13.81
------ ------
Balances, April 30, 1998 (2,506 options
exercisable)........................................ 2,789 7,169 $15.58
====== ======
Options for the purchase of 1,873 shares of common stock were vested as of
April 30, 1998. Unvested common shares issued under the 1993 Plan of 310 as of
April 30, 1998 are subject to repurchase by the Company.
27
28
Additional information regarding options outstanding as of April 30, 1998
is as follows:
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
NUMBER REMAINING WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES APRIL 30, 1998 (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- ----------- --------------
$ 0.05 - $ 0.07 181 6.15 $ 0.06 181 $ 0.06
0.10 - 0.14 127 6.95 0.13 111 0.13
1.00 - 1.50 181 7.38 1.33 162 1.32
2.25 - 3.00 115 7.32 2.64 115 2.64
3.60 - 4.05 674 7.46 3.83 674 3.83
5.50 - 5.90 410 8.17 5.68 258 5.55
10.88 - 15.75 2,303 8.58 13.90 715 13.57
17.00 - 25.38 2,183 9.02 20.42 290 18.95
25.63 - 33.58 995 9.69 29.78 -- 0.00
----- -----
$ 0.05 - $33.58 7,169 8.60 $15.58 2,506 $ 7.88
===== =====
Employee Stock Purchase Plan -- Under the Employee Stock Purchase Plan,
employees are entitled to purchase shares of the Company's common stock at 85%
of the fair market value at certain specified dates. Of the 700 shares
authorized to be issued under this plan, 335 shares were available for issuance
at April 30, 1998 and 201 and 164 shares were issued in fiscal 1998 and 1997,
respectively, at a weighted average price of $8.41 and $6.33, respectively.
Pro Forma Information -- As discussed in Note 2, the Company continues to
account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board 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 $270, $85 and $132 in fiscal 1998, 1997 and
1996, respectively, which consists of the amortization of deferred stock
compensation related to the granting of nonqualified stock options at exercise
prices below market.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and net income per share had the Company 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 the Company's 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. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:
YEARS ENDED APRIL 30,
-----------------------
1998 1997 1996
----- ----- -----
Expected life (in years).................................... 2.94 2.90 3.01
Risk-free interest rate..................................... 6.00% 6.06% 5.89%
Volatility.................................................. 50% 50% 50%
Expected dividend........................................... -- -- --
28
29
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the fiscal 1998, 1997 and 1996 awards had been amortized to expense
over the vesting period of the awards, pro forma net income (loss) and net
income (loss) per share would have been as follows:
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------ ------- ------
Net income (loss)....................................... $8,677 $(4,661) $5,824
Net income (loss) per share, basic...................... 0.27 (0.15) 0.32
Net income (loss) per share, diluted.................... 0.24 (0.15) 0.19
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 1998, 1997 and 1996 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, the Company issued stock
options for the purchase of 1,063 shares of common stock at $0.14 per share. The
Company recognized $515 of deferred compensation in May 1995 equal to the
difference between the option price as determined by the Board of Directors and
$0.63 (the deemed fair value for financial reporting purposes) for each option.
The Company is amortizing the deferred compensation expense ratably over the
four-year period in which the options vest.
In fiscal 1998, the Company recorded $714 of deferred compensation,
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 Company's 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. The
Company is amortizing the deferred compensation expense ratably over a one-year
period.
6. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan ("Savings
Plan"). Employees meeting the eligibility requirements, as defined, may
contribute specified percentages of their salaries. The Company contributed $202
and $119 for fiscal 1998 and 1997, respectively. The Company did not make any
contributions to the Savings Plan in fiscal 1996.
7. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED APRIL 30,
-----------------------------
1998 1997 1996
------- ------- -------
CURRENT:
Federal............................................. $12,132 $ 5,062 $ 1,880
State............................................... 2,199 1,525 220
------- ------- -------
Total current....................................... 14,331 6,587 2,100
------- ------- -------
DEFERRED:
Federal............................................. (1,597) (2,394) (1,880)
State............................................... (152) (400) (220)
------- ------- -------
Total deferred...................................... (1,749) (2,794) (2,100)
------- ------- -------
Provision for income taxes.................. $12,582 $ 3,793 $ --
======= ======= =======
Deferred income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes.
29
30
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
YEARS ENDED APRIL 30,
----------------------------
1998 1997 1996
------- ------ -------
Tax computed at federal statutory rate................. $11,741 $1,415 $ 2,310
State income taxes, net of federal benefit............. 1,482 764 405
Non-deductible acquisition charges related to the IMC
acquisition.......................................... -- 2,904 --
Research and experimentation credit.................... (555) (410) (50)
Investment tax credit.................................. -- -- (150)
Benefit of foreign sales corporation................... (489) (105) --
Tax exempt interest.................................... (281) (184) --
Change in valuation allowance.......................... -- (673) (2,510)
Business meal exclusion................................ 100 45 --
Other.................................................. 584 37 (5)
------- ------ -------
Provision for income taxes............................. $12,582 $3,793 $ --
======= ====== =======
The income tax benefits associated with dispositions from employee stock
transactions reduced taxes currently payable by $4,291, $2,487 and $238,
respectively, for fiscal 1998, 1997 and 1996.
Income before income taxes is as follows:
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------- ------ ------
Domestic................................................ $33,175 $3,983 $6,580
Foreign................................................. 372 60 20
------- ------ ------
Total......................................... $33,547 $4,043 $6,600
======= ====== ======
Current net deferred tax assets are $5,280 and $3,100, as of April 30, 1998
and April 30, 1997, respectively. Non-current net deferred tax assets at April
30, 1998 and 1997 of $1,363 and $1,794, respectively, are included in other
assets within the accompanying consolidated balance sheets. The components of
the Company's net deferred tax assets are as follows:
APRIL 30,
----------------
1998 1997
------ ------
Reserves and accruals not currently deductible for tax
purposes............................................... $4,599 $2,662
Tax benefit of options issued in IMC acquisition.......... 1,074 1,304
Net operating loss carryforwards.......................... 236 116
Depreciation.............................................. 197 369
Deferred rent............................................. 66 80
Capitalized research and development costs................ -- 142
Other..................................................... 471 221
------ ------
Deferred tax assets............................... $6,643 $4,894
====== ======
As of April 30, 1998, the Company had federal net operating loss
carryforwards of approximately $674 available to offset future taxable income.
These carryforwards expire in fiscal 2010.
8. OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates primarily in one industry segment: the design,
manufacturing and marketing of high-performance network data storage devices.
30
31
The Company's European operations primarily consist of sales by its
subsidiaries in the United Kingdom, France, Germany and Italy to either
unaffiliated European customers or to independent distributors.
YEARS ENDED APRIL 30,
---------------------
1998 1997
--------- --------
NET SALES:
North America............................................... $138,379 $83,342
Europe...................................................... 27,784 9,991
-------- -------
Total net sales................................... $166,163 $93,333
======== =======
OPERATING INCOME:
North America............................................... $ 32,285 $ 3,023
Europe...................................................... 373 60
-------- -------
Total operating income............................ $ 32,658 $ 3,083
======== =======
IDENTIFIABLE ASSETS:
North America............................................... $105,601 $66,019
Europe...................................................... 10,135 2,922
-------- -------
Total assets...................................... $115,736 $68,941
======== =======
North America revenues include export sales to Asia which amounted to less
than 10% of total net sales for all periods presented. Sales, operating income
and identifiable assets of the Company's foreign operations were less than 10%
of the comparable amounts on a consolidated basis in fiscal 1996.
No customer accounted for 10% or more of net sales in fiscal 1998, 1997 or
in fiscal 1996.
9. LITIGATION
The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995 a lawsuit of this nature was
filed against the Company and two of its shareholders (the "Whipsaw
Litigation"). During the first quarter of fiscal 1997, the Company settled the
Whipsaw litigation and recorded a pre-tax expense of $4,300 ($3,500 in payments
to the plaintiffs and $800 in legal fees). In connection with the settlement,
the Whipsaw group released the Company from all liabilities.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED APRIL 30, 1998
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
Net sales................................... $33,420 $38,401 $43,984 $50,358
Gross margin................................ 19,850 22,655 26,104 30,005
Net income.................................. 4,221 4,885 5,555 6,304
Net income per share, basic................. 0.13 0.15 0.17 0.19
Net income per share, diluted............... 0.12 0.14 0.15 0.17
YEAR ENDED APRIL 30, 1997
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
Net sales................................... $18,460 $21,048 $24,845 $28,980
Gross margin................................ 10,867 12,466 14,729 17,210
Net income (loss)(1)........................ (491) 2,780 3,380 (5,419)
Net income (loss) per share, basic(1)....... (0.02) 0.09 0.11 (0.17)
Net income (loss) per share, diluted(1)..... (0.02) 0.08 0.10 (0.17)
- ---------------
(1) The first quarter of fiscal 1997 includes the Whipsaw Litigation of $2,795
(net of taxes). See Note 9. The fourth quarter of fiscal 1997 includes the
purchased in-process technology and compensation charge related to the IMC
acquisition of $9,215 (net of taxes). See Note 4.
31
32
11. SUBSEQUENT EVENTS
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5,000 of the $33,750 purchase
price as a nonrefundable deposit. The agreement allows the Company to assign its
rights and obligations to a third-party entity should the Company decide to
enter into an operating lease. It is the Company's intent to assign its rights
and obligations to a third-party entity and enter into an operating lease,
provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4,500
refundable deposit. The option allows the Company to purchase the land, within a
90-day period, commencing in December 1999 at a purchase price of $23,745 and
its rights and obligations under this agreement may be assigned to third
parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5,000 unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility
which expires in July 1999, the Company 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 the
discretion of the Company. As of July 17, 1998, there were no borrowings under
the credit facility.
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 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 the Company's 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 the
Company's Proxy Statement.
32
33
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 the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
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, 1998 and 1997
Consolidated Statements of Income for the years ended April 30, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended April 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended April 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
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.
3. Exhibits.
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1(1) -- Agreement and Plan of Reorganization, dated as of March 17,
1997, between the Registrant and IMC, a California
corporation
2.2(1) -- Agreement of Merger between the Registrant 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
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
33
34
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1(3), (4) -- 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(5) -- Facility sublease, dated August 9, 1996, by and between S3,
Inc. and the Registrant
10.12(6) -- The Company's Amended 1995 Stock Incentive Plan
10.13(6) -- The Company's Special Non-Officer Stock Option Plan
10.14(7) -- Facility lease, dated August 18, 1997, by and between the
McCandless -- San Tomas No. 2 and the Registrant
10.15 -- Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Registrant
10.16 -- Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.17 -- Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.18 -- Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
16.1(3) -- Letter Regarding Change in Independent Auditors
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
- ---------------
(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).
34
35
(4) Confidential treatment requested as to certain portions of these exhibits.
(5) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 7, 1997.
(6) Previously filed as an exhibit with the Company's Annual Report on Form 10-K
dated July 23, 1997.
(7) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 5, 1997.
(8) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 6, 1998.
(b) Reports on Form 8-K.
None.
35
36
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 21, 1998.
NETWORK APPLIANCE, INC.
By: /s/ DANIEL J. WARMENHOVEN
------------------------------------
Daniel J. Warmenhoven
President and 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 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, as
amended, 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 President and Chief Executive July 21, 1998
- -------------------------------------------------------- Officer, Director (Principal
(Daniel J. Warmenhoven) Executive Officer)
/s/ DONALD T. VALENTINE Chairman of the Board, Director July 21, 1998
- --------------------------------------------------------
(Donald T. Valentine)
/s/ JEFFRY R. ALLEN Vice President Finance and July 21, 1998
- -------------------------------------------------------- Operations and Chief Financial
(Jeffry R. Allen) Officer (Principal Financial
and Accounting Officer)
/s/ CAROL A. BARTZ Director July 21, 1998
- --------------------------------------------------------
(Carol A. Bartz)
/s/ LARRY R. CARTER Director July 21, 1998
- --------------------------------------------------------
(Larry R. Carter)
/s/ MICHAEL R. HALLMAN Director July 21, 1998
- --------------------------------------------------------
(Michael R. Hallman)
/s/ ROBERT T. WALL Director July 21, 1998
- --------------------------------------------------------
(Robert T. Wall)
36
37
NETWORK APPLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
Allowance for doubtful account:
1998........................................ $ 330 $ 550 $ 69 $ 811
1997........................................ 330 -- -- 330
1996........................................ 220 110 -- 330
Excess and obsolescence inventory reserve:
1998........................................ $3,016 $1,302 $1,333 $2,985
1997........................................ 1,043 2,551 578 3,016
1996........................................ 345 698 -- 1,043
37
38
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 -- Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Registrant
10.16 -- Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.17 -- Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.18 -- Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
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
38