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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 27, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
495 EAST JAVA DRIVE,
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 822-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (NO PAR VALUE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of May 25, 2001, was $8,461,957,777 (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 25, 2001, 329,003,024 shares of the Registrant's common stock, no
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference from
the definitive Proxy Statement for our annual meeting of shareholders to be held
on October 18, 2001, which will be filed with the Securities and Exchange
Commission not later than 120 days after April 27, 2001.
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In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements. These statements may contain words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates," or other
words indicating future results. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statement. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the following sections entitled "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Given these
risks and uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Network Appliance is the worldwide leader in network-attached data
management and storage solutions. Network Appliance(TM) hardware, software, and
service offerings are used to create, manage and scale seamless data fabrics,
moving information to users globally. Network Appliance systems offer our
customers faster access to, greater control over, and greater availability of
data, thereby increasing data value and user productivity and resulting in
significant competitive advantages. Network Appliance data management and
storage infrastructure products are the information foundation for leading
businesses, government agencies, and universities worldwide.
Network Appliance was founded in 1992 by a group of computer scientists who
were seeking to simplify data access using different types of computer systems.
Network Appliance shipped its first system in 1984 and today is a multinational
corporation with over 2,000 employees in more than 70 countries.
Network Appliance systems adhere to the appliance philosophy: do one thing,
do it simply, and do it well. This philosophy drives our entire company, from
product design and system operation through our support processes. Everything is
implemented as simply as possible and no simpler. Our drive for simplicity has
yielded dramatic results:
- Lower total cost of ownership than our competitors since system
administrators can manage greater amounts of information;
- Business agility -- the ability to react quickly to changes via rapid
deployment or reconfiguration; and
- Improved information availability, because simplicity drives reliability.
Network Appliance created the storage networking market. Our goal of
seamless, reliable access to information regardless of protocol, location, or
time has been achieved through a number of significant milestones. The shipment
of Network Appliance's first storage product (coined a filer) in 1994 allowed
UNIX(R) users on a network direct access to information bypassing sub-optimal
general purpose servers. The shipment of the world's first multiprotocol filer
in 1996 allowed UNIX, Windows(R) and Web users to access and share the exact
same information, natively. The shipment of the world's first caching appliance,
NetCache(R), in 1997 improved users experiences by placing copies of information
closer to them. Integration of these filer and caching systems via Network
Appliance's ContentDirector(TM) and ContentReporter(TM) software management
products have allowed our customers to design, deploy, scale, and manage global
Center-to-Edge(TM) data fabrics, providing users access to information anytime,
anywhere.
Network Appliance's Center-to-Edge data fabrics provide the storage
infrastructure for leading software applications such as those offered by: IBM
Corp., Informix Software, Inc., Microsoft Corp., Oracle Corp., SAP AG, Siebel
Systems, Inc., and Sybase, Inc. Our products are also marketed to users of
technical applications such as those offered by Cadence Design Systems, Dassault
Systems, Landmark Graphics, Parametric Technology Corp., Rational Software
Corp., Schlumberger Technology Corp., Structural Dynamics Research Corp. (SDRC),
Synopsys Inc., and Unigraphics Solutions Inc. As companies become
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increasingly global and users become increasingly remote simple, cost-effective
Center-to-Edge data fabric infrastructures will be required to satisfy the
information access needs of the future.
PRODUCTS
Our products consist of filer storage and caching appliances, data
management and content delivery software, and support services.
The demand for our network storage filers and caching appliances is driven
by the need to store and manage the rapid growth in sheer data volume, types of
data, and geographic dispersion.
Filers
Network Appliance storage appliances, or filers, are systems which provide
highly reliable data storage management. Our filers consolidate data from UNIX,
Windows NT(R), and Web computing environments, using industry standard NFS,
CIFS, and HTTP file sharing protocols, respectively, to simplify the management
and storage of information for a variety of business applications.
Current products include:
- NetApp(R) F840c, a large-scale clustered enterprise filer providing
maximized data availability in mission-critical environments for large
enterprises;
- NetApp F840, a large-scale enterprise filer providing an ideal solution
for enterprise consolidation;
- NetApp F820c, a clustered enterprise filer providing maximized data
availability in mission-critical environments for midrange enterprises;
- NetApp F820, an enterprise filer for small- to medium-sized enterprises
allowing for the consolidation of heterogeneous data for entry-level
Internet service providers (ISPs), application service providers, storage
service providers, and commercial, as well as scientific, applications;
- NetApp F740, an entry-level enterprise filer providing department-level
performance and productivity for applications such as software
development, computer-aided design, simulation applications, and
medium-sized ISPs; and
- NetApp F85, a remote office/workgroup filer with multiplatform capability
at an economical price. Ideal for remote offices/branch offices as well
as small- to medium-sized workgroups and ISPs.
In addition, during fiscal 2001, the F760 and F720 filers continued to ship
and have since been replaced by newer models.
All filers are based on a PCI-bus architecture and come packaged in
rack-mountable enclosures that may be factory-installed in cabinets. NetApp
filers are based on either the Intel(R) Pentium(R) or Digital(R) Alpha(R)
processors and support either Fibre Channel arbitrated loop (FC-AL) or Small
Computer System Interface (SCSI) as storage interconnect options.
All of our filers include the Data ONTAP(TM) operating system, using our
patented Write Anywhere File Layout (WAFL(TM)) file system and a base file
sharing protocol (either NFS, CIFS, or HTTP) for data access. In a multiprotocol
configuration, native multiprotocol functionality can be easily added through
licensing non-base protocols at an additional cost. Data ONTAP delivers
simultaneous file service to UNIX, Windows NT, and Web clients. Data ONTAP
allows our customers to virtualize their storage infrastructures. This enables
them to administer data logically according to applications, data types, and
organizational needs instead of physical topology. Data ONTAP also includes
Snapshot(TM) technology, which allows rapid access to previous versions of data
without requiring complete separate copies. This eliminates the need to recover
previous versions from tape archive. In addition, Data ONTAP provides support
for Fibre Channel and SCSI-attached tape options with industry-standard backup
software support from leading vendors such as Legato and Veritas.
Our latest version of Data ONTAP, version 6.1, adds support for Windows
2000 in addition to continued support of UNIX, Windows, and Web environments.
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Caching
NetCache appliances allow our customers to scale network infrastructure,
reduce bandwidth costs, ease network bottlenecks, and simplify data management
and content delivery. NetCache appliances deliver high-quality audio and video
streams, enabling a host of next-generation network services such as online
training, executive broadcasts, and large-scale video-on-demand and other
value-added services. Like our filers, all of our NetCache appliances include
the Data ONTAP operating system using our patented WAFL file system for rapid
data access. Our NetCache appliances simplify information flow by consolidating
support for all major streaming media formats, including Apple(R) QuickTime(TM),
Microsoft(R) Windows Media(TM) Server, RealNetworks(R) Streaming Server, as well
as industry-standard protocols such as HTTP, FTP, and NNTP. This multiprotocol
support on our NetCache appliances minimizes rack space and simplifies network
design, providing increased reliability while driving down cost.
Our NetCache products further assist customers in growing network
infrastructure and managing mission-critical data by providing advanced security
features, including user authentication, URL filtering, and auditing. With our
WAFL file system, Data ONTAP software, and advanced caching algorithms, these
appliances provide enhanced response time and throughput over competitive
offerings.
Our NetCache appliances effectively deliver content and information to
users at the edge of the network. Our content delivery software seamlessly
distributes and manages information and offers our customers the ability to
analyze content usage, performance, and infrastructure load across the network.
Current products include:
- NetCache C6100, targeting large data centers and carrier-class bandwidth
requirements;
- NetCache C3100, for remote data centers and large regional offices; and
- NetCache C1100, designed for remote or branch offices.
In addition, during fiscal 2001, we continued to ship NetCache C760 and
C720 appliances. We expect that the C760 and C720 products will be phased out as
we introduce new products.
Data Management and Content Delivery Software
In today's rapidly changing business environment, enterprises are demanding
cost-effective data and content management solutions to handle the explosive
growth of data in their networks. NetApp filers and NetCache appliances can
efficiently store and deliver all data and content between UNIX, Windows, and
Web servers. Our NetApp software offers a unique set of features to ensure
mission-critical availability and reduce the complexity of enterprise storage
management, while lowering the total cost of ownership. These software features
include:
- Snapshot software makes daily online backups easy;
- SnapMirror(TM) remote mirroring software permits automated file system
replication between sites. SnapMirror leverages the Data ONTAP Snapshot
technology and enables customers to quickly recover from site disasters,
replicate critical data, and deploy centralized backup architectures;
- SnapRestore(TM) software allows restoration of a file system version to
an earlier state within seconds. SnapRestore is based on the Data ONTAP
Snapshot technology and enables customers to greatly minimize recovery
time in the event of a data corruption or loss;
- Support for the NDMP protocol, in conjunction with tape SAN backup
solutions based on both Fibre Channel and Gigabit Ethernet, enables
customers to maximize their infrastructure investments and reduce the
time required to do tape backups;
- Clustered Failover software for filers ensures high data availability for
business-critical environments;
- SnapManager(TM) software for Microsoft Exchange allows customers to
perform online backup and rapid data recovery in Microsoft Exchange
environments;
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- ApplianceWatch(TM) software allows IT professionals to centrally manage,
administer, and optimize our systems for superior performance;
- FilerView(R) software, a Web-based administration tool, provides remote
administration allowing IT administrators to use Web browsers to manage
filers from remote locations on the network;
- ContentDirector software provides secure distribution of content from
storage appliances across global networks to multiple content delivery
appliances. In addition, it fully automates distribution and
synchronization of Internet content, including streaming media,
applications, and graphics;
- ContentReporter software integrates seamlessly with NetApp appliances to
provide network administrators a comprehensive, simple, flexible and
scalable method to gauge the effectiveness of their content delivery
system. Network administrators can now gain visibility to file usage
patterns, activity levels, and errors rates for both streaming and
Web-based content. It provides the capability to proactively manage the
content delivery infrastructure and plan for future growth; and
- DataFabric(TM) Manager offers the ability to manage multiple filers or
NetCache appliances from a single administrative console, reducing
administrative complexity and total cost of ownership.
Our configured filer and NetCache appliance prices range from $4,000 to
$850,000.
Center-to-Edge
Combined with our content delivery software which seamlessly distributes
and manages information flow across networks, our filers and NetCache appliances
allow our customers to build and manage state of the art content delivery
networks.
Effective and reliable content distribution solutions require tight
integration between network devices and application software. By linking Netapp
filers, NetCache appliances, and ContentDirector software, NetApp provides the
tools necessary to fully automate distribution and synchronization of content,
including streaming media, applications, and graphics from the data center to
the network edge. ContentReporter software provides network administrators the
information they need on network usage and Web-site activity to most effectively
manage the content in their networks.
SALES AND MARKETING
We market and distribute our products globally. In North America, we employ
a multichannel distribution strategy, which focuses on product sales to end
users through a direct sales force, as well as selected value-added resellers in
certain geographies. In Europe, we employ a mix of resellers and direct sales
channels to sell to end-users. In Asia, our products are primarily sold through
resellers, which are supported by our channel sales representatives and
technical support personnel. No single customer accounted for 10% or more of our
net sales in fiscal 2001, 2000, or 1999. See additional discussion regarding
sales and marketing in "Note 8 -- Segment, Geographic, and Customer Information
under Item 8. Financial Statements and Supplementary Data -- Notes to
Consolidated Financial Statements."
BACKLOG
We manufacture our products based on forecasts of our customers' demands.
Orders are generally placed by customers on an as-needed basis. Products are
typically shipped within one to four weeks following receipt of an order. In
certain circumstances, customers may cancel or reschedule orders without
penalty. For these reasons, we do not believe "orders" constitute a firm
"backlog," and we believe orders are not a meaningful indicator of revenues or
material to an understanding of our business.
CUSTOMER SERVICE AND SUPPORT
Support Services. Our customer service and support organization provides
technical support, education and training. We believe that providing a high
level of customer service and technical support is critical to customer
satisfaction and our success. Warranty coverage provides customers with free
24x7-telephone
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support for emergency situations for one year from the date of purchase along
with the same day shipment of replacement parts, and access to our self-service
online Web site, NetApp on the Web (NOW). In addition, our customers receive 90
days of software subscription -- online access to all entitled software updates.
Additional software support can be purchased through our Warranty Plus offering,
which includes:
- Access to NOW and information subscription services;
- AutoSupport, our "phone home" diagnostic capability;
- Software subscription service;
- Next-business-day parts delivery (disks and system hardware); and
- 24x7 emergency telephone support and 24x7 Web case support for
Non-Emergency situations.
Additional service options available in-warranty or post-warranty include:
- Non-Emergency telephone support;
- Upgraded hardware services for disks;
- Upgraded hardware services for system hardware;
- Global Advisor, providing a customer with access to a team of advisors
and tools that will monitor all service-based activity for its account;
and
- Global Advisor Plus, providing immediate phone access to our back-line
engineers for non-emergency situations. This service allows incoming
requests to be automatically upgraded to receive emergency support, thus
immediately escalating the case to the highest-level resource available
at the time the call is received.
Professional Services. Our professional services organization offers a
comprehensive service designed to optimize performance and improve reliability
for enterprise-wide data management, enabling more cost-effective network and
information technology administration.
Professional services programs include:
- System availability management, providing proactive system administration
involving global support center call-activity review, regular site
inspections, and system availability reviews, plus upgraded services
involving on-site and 24-hour emergency response from a professional
services engineer;
- Expert consulting services available on an hourly or daily rate basis to
help customers develop customized solutions; and
- Time-and-materials consulting services for short-term consulting.
In general, we charge for service programs on an annual subscription basis.
On-site support is primarily provided by independent parties both in North
America and internationally.
MANUFACTURING
Our manufacturing operations, primarily located in Sunnyvale, California,
include materials procurement, commodity management, component engineering, test
engineering, manufacturing engineering, product assembly, product assurance,
quality control, and final test. We rely on many suppliers for materials, as
well as several key subcontractors for the production of certain subassemblies
and finished systems. Our strategy has been to develop close relationships with
our suppliers, exchanging critical information and implementing joint
quality-training programs. We are currently expanding the use of subcontractors
for the production of major subassemblies. See "-- Risk Factors -- We rely on a
limited number of suppliers." This manufacturing strategy minimizes capital
investment and overhead expenditures and creates flexibility by allowing us to
rapidly expand. We were awarded the ISO 9001 certification on May 29, 1997, and
continue to be ISO certified.
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RESEARCH AND DEVELOPMENT
During Fiscal 2001, we began shipping a new series of enterprise-class
systems, the F800 family of filers, targeting business and technical
applications requiring high-performance, mission-critical availability and large
storage capacity. Additionally, we brought to market our F85 filer, expanding
our presence in remote office and workgroup environments with an economical
solution, while leveraging the proven availability and manageability of our
high-end offerings. We released two new versions of our Data ONTAP microkernel
operating system. Data ONTAP 6.0 brought support for instantaneous Snapshots and
enhanced data protection and recovery. The subsequent release of Data ONTAP 6.1
enabled native support of Windows 2000, giving full integration with Microsoft's
Active Directory, LDAP, and Kerberos. We continued to enhance our data
availability by providing third-party applications such as virus scanning and
extended our data protection solutions through Fibre Channel switch connectivity
for tape backup.
We further expanded our content delivery solutions by delivering the
carrier-class NetCache C6100, the mid-range C3100, and the entry-level C1100 and
C1105 platforms. Operating with the new NetCache 5.0 software, these systems
offer live and video-on-demand capabilities through our product support of Apple
QuickTime, Microsoft Windows Media, and RealNetworks RealSystem(TM) G2 video
servers. Additionally, NetApp, in conjunction with Akamai Technologies, Inc.,
led an industry-wide effort to develop a protocol to enable value-added
services, such as ad insertion and content filtering.
NetApp's ContentDirector and ContentReporter software, new in fiscal 2001,
provide policy-based content management, distribution, and reporting
functionality -- important additions to our Center-to-Edge data management and
delivery strategy. This suite of products enables users to centrally manage and
push content to geographically distributed locations, improving response time
and the overall end-user experience. These products also allow administrators to
analyze Web traffic and integrate with third-party billing applications.
During fiscal 2000, we shipped two new storage management software
solutions -- SnapManager for Microsoft Exchange and ApplianceWatch software. New
caching product introductions in fiscal 2000 included NetCache software release
4.0 and NetCache 4.1 software, adding streaming media support for Apple
QuickTime, Microsoft Windows Media and RealNetworks Real System(TM) G2(TM)
users, delivering live broadcasting on the Internet.
Our future growth depends on the successful development and introduction of
new hardware and software, however, we cannot assure you that these, or other
new products, will attain market acceptance. See "-- Risk Factor -- If we are
unable to develop and introduce new products and respond to technological
change, or if our new products do not achieve market acceptance, our operating
results could be materially adversely affected."
Our total expenses for research and development for fiscal years 2001,
2000, and 1999 were $120.9 million, $61.6 million, and $30.0 million,
respectively. We anticipate that research and development expenses will increase
moderately in absolute dollars in fiscal 2002.
COMPETITION
The storage and content delivery markets are intensely competitive and are
characterized by rapidly changing technology.
In the storage market, our filer appliances and data management software
compete primarily against storage products and data management software from EMC
Corporation, Hitachi Data Systems, Compaq Computer Corporation, Sun
Microsystems, Inc., Hewlett-Packard Company, and IBM Corporation. We also
encounter less frequent competition from companies including MTI Corp., Procom
Technology, LSI Logic Corp., and Auspex Systems, Inc.
In the content delivery market, our NetCache appliances and content
delivery software compete against caching appliance and content delivery
software vendors including Cisco Systems, Inc., CacheFlow, Inc., Inktomi Corp.,
Akamai Technologies, Inc., and Volera.
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This past year has seen an increasing number of new, privately held
companies attempting to enter our markets, some of which may become significant
competitors in the future.
We believe that the principal competitive factors affecting our market
include but are not limited to:
- Response time and performance
- Scalability
- Data availability
- Multiprotocol data sharing
- Acquisition price and low overall total cost of ownership
- Ease-of-use and deployment
- Customer service and support
Network Appliance believes that we have significant demonstrable advantages
over our competitors. Although we believe that our products currently compete
favorably with respect to these factors, we can not assure you that we can
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical, and other resources.
See "-Risk Factors -- An increase in competition could materially adversely
affect our operating results" and "- If we are unable to develop and introduce
new products and respond to technological change, or if our new products do not
achieve market acceptance."
We believe that the principal competitive factors affecting our market
include product benefits such as response time, reliability, data availability,
scalability, ease-of-use, price, multiprotocol capabilities, and customer
service and support. Although we believe that our products currently compete
favorably with respect to these factors, we can not assure you that we can
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical, and other resources.
PROPRIETARY RIGHTS
We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, contractual provisions and patents to
protect our proprietary rights. We seek to protect our software, documentation,
and other written materials under trade secret, copyright, and patent laws,
which afford only limited protection. We have registered our "Network Appliance"
name and logo, "FAServer(R)," "FilerView," "NetApp," "NetCache," and
"SecureShare(R)" trademarks in the United States. Other United States trademarks
and some of the other United States registered trademarks are registered
internationally as well. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into confidentiality
agreements with our employees, resellers, and customers. We currently have
multiple United States and international patent applications pending and
multiple United States patents issued. See "-- Risk Factors -- If we are unable
to protect our intellectual property we may be subject to increased competition
that could materially adversely affect our operating results."
EMPLOYEES
As of April 27, 2001, we had 2,403 employees. Of the total, 1,277 were in
sales and marketing, 566 in research and development, 253 in finance and
administration and 307 in operations. Our future performance depends in
significant part on our key technical and senior management personnel, none of
whom is bound by an employment agreement. We have never had a work stoppage and
consider relations with our employees to be good.
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EXECUTIVE OFFICERS
Our executive officers and their ages as of May 25, 2001, are as follows:
NAME AGE POSITION
---- --- --------
Daniel J. 50 Chief Executive Officer and Director
Warmenhoven..........
Thomas F. Mendoza...... 50 President
Jeffry R. Allen........ 49 Executive Vice President, Finance and Operations,
Chief Financial Officer
David Hitz............. 38 Executive Vice President, Engineering
James K. Lau........... 42 Executive Vice President and Chief Strategy Officer
Daniel J. Warmenhoven has served as our President and Chief Executive
Officer and has been a member of the Board of Directors since October 1994.
Prior to joining us, Mr. Warmenhoven served in various capacities, including
President, Chief Executive Officer and Chairman of the Board of Directors of
Network Equipment Technologies, Inc., a telecommunications company, from
November 1989 to January 1994. He presently serves on the Board of Directors of
Redback Networks, Inc., a communications products company. Mr. Warmenhoven holds
a B.S. degree in electrical engineering from Princeton University.
Thomas F. Mendoza was appointed to President in May 2000. Previously he
served as our Senior Vice President, Worldwide Sales and Marketing from February
1999 and Senior Vice President, Worldwide Sales from 1998. Prior to that he
served as Vice President, North American Sales. Prior to April 1994, Mr. Mendoza
served in various capacities including Vice President, Sales at Work Group
Technology, Vice President of North American Sales at Auspex Systems, Inc., and
Vice President of Western Operations at Stratus Computer Corp. Mr. Mendoza holds
a B.A. degree from the University of Notre Dame.
Jeffry R. Allen was appointed to Executive Vice President, Finance and
Operations in May 2000 and has served as our Chief Financial Officer, Executive
Vice President of Operations, and Secretary since December 1996. From October
1994 to December 1996, Mr. Allen served in various capacities, including Senior
Vice President of Operations and Vice President and Controller of Bay Networks,
Inc. Prior to October 1994, Mr. Allen held various positions at SynOptics, Inc.,
the latest of which was Vice President and Controller. Before joining SynOptics,
Inc., he held various positions 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.
David Hitz, a founder of Network Appliance, was appointed to Executive Vice
President, Engineering in May 2000 and has served as our Senior Vice President,
Engineering since February 2000. Prior to 1992, Mr. Hitz worked as a senior
engineer at Auspex Systems, Inc., and held various engineering positions at MIPS
Computer. Mr. Hitz holds a B.S. degree in computer science and electrical
engineering from Princeton University.
James K. Lau, a founder of Network Appliance, was appointed to Executive
Vice President and Chief Strategy Officer in May 2000. Mr. Lau has served as our
Vice President, Chief Technical Officer and Vice President of Engineering since
April 1992. Prior to that, he served as director of software development at
Auspex Systems, Inc. Prior to Auspex, he served as group manager of PC products
at Bridge Communications, now known as 3Com. Mr. Lau holds a B.S. degree in
computer science and mathematics from the University of California, Berkeley and
a master's degree in computer engineering from Stanford University.
RISK FACTORS
The following risk factors and other information included in this Annual
Report on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we presently deem less
significant may also impair our business operations. If any of the following
risks actually occur, our business, operating results, and financial condition
could be materially adversely affected.
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FACTORS BEYOND OUR CONTROL COULD CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE.
Although we have experienced significant revenue growth in recent periods
prior to the third quarter of fiscal 2001, this growth may not be indicative of
our future operating results. As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance. Many of the
factors that could cause our quarterly operating results to fluctuate
significantly in the future are beyond our control and include the following:
- general economic trends;
- global trends related to Information Technology spending;
- demand for storage and content delivery products;
- the level of competition in our target product markets;
- the size, timing, and cancellation of significant orders;
- product configuration and mix;
- market acceptance of new products and product enhancements;
- new product announcements or introductions by us or our competitors;
- deferrals of customer orders in anticipation of new products or product
enhancements;
- changes in pricing by us or our competitors;
- our ability to develop, introduce, and market new products and
enhancements in a timely manner;
- supply constraints;
- technological changes in our target product markets;
- the levels of expenditure on research and development and expansion of
our sales and marketing programs; and
- seasonality.
In addition, sales for any future quarter may vary and accordingly be
inconsistent with our plans. We generally operate with limited order backlog
because our products are typically shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network storage market is rapidly evolving and our sales cycle
varies substantially from customer to customer.
Due to all of the foregoing factors, it is possible that in one or more
future quarters our results may fall below the expectations of public market
analysts and investors, as has been the case through the last two quarters of
fiscal 2001. In such event, the trading price of our common stock would likely
decrease.
OUR GROSS MARGINS MAY VARY BASED ON THE CONFIGURATION OF OUR PRODUCTS.
We derive a significant portion of our sales from the resale of disk drives
as components of our filers, and the resale market for hard disk drives is
highly competitive and subject to intense pricing pressures. Our sales of disk
drives generate lower gross margin percentages than those of our filer products.
As a result, as we sell more highly configured systems with greater disk drive
content, overall gross margin percentages will be negatively affected.
Conversely, we believe our increased licensing of add-on software products may
favorably impact gross margins.
Our gross margins have been and may continue to be affected by a variety of
other factors, including:
- demand for storage and content delivery products;
- discount levels and price competition;
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- direct versus indirect sales;
- the mix of software as a percentage of revenue;
- the mix and average selling prices of products;
- new product introductions and enhancements; and
- the cost of components, manufacturing labor, and quality.
A SIGNIFICANT PERCENTAGE OF OUR EXPENSES ARE FIXED WHICH COULD AFFECT OUR NET
INCOME.
Our expense levels are based in part on our expectations as to future sales
and a significant percentage of our expenses are fixed. As a result, if sales
levels are below expectations, as has been the case through the second half of
fiscal 2001, net income will be disproportionately affected.
OUR FUTURE FINANCIAL PERFORMANCE DEPENDS ON GROWTH IN THE NETWORK STORAGE AND
CONTENT DELIVERY MARKET AND ANY LACK OF GROWTH WILL HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
All of our products address the storage and content delivery market.
Accordingly, our future financial performance will depend in large part on
continued growth in the storage and content delivery market and on emerging
standards in these markets. We cannot assure you that the market for storage and
content delivery will continue to grow or that emerging standards in these
markets will not adversely affect the growth of UNIX, Windows NT and the World
Wide Web server markets. In addition, our business also depends on general
economic and business conditions. A reduction in demand for network storage and
content delivery caused by weakening economic conditions and decreases in
corporate spending has resulted in decreased revenues or lower revenue growth
rates. The network storage and content delivery market growth declined
significantly beginning in the third quarter of fiscal 2001, causing both our
revenues and operating results to decline. If the network storage and content
delivery markets grow more slowly than anticipated or if network storage and
content delivery based on emerging standards other than those adopted by us
become increasingly accepted by the market, our operating results could be
materially adversely affected.
THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE.
The market price for our common stock has been volatile in the past, and
several factors could cause the price to fluctuate substantially in the future.
These factors include:
- fluctuations in our operating results;
- fluctuations in the valuation of companies perceived by investors to be
comparable to us;
- a shortfall in revenues or earnings compared to securities analysts'
expectations;
- changes in analysts' recommendations or projections;
- announcements of new products, applications or product enhancements by us
or our competitors; and
- changes in our relationships with our suppliers, customers and strategic
partners.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies. Additionally, certain macro economic factors such as
changes in interest rates as well as market climate for the high technology
sector could also have an impact on the trading price of our stock. As a result,
the market price of our common stock may fluctuate significantly in the future
and any broad market decline, as well as our own operating results, may
materially adversely affect the market price of our common stock.
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THE SUCCESS OF OUR NETCACHE APPLIANCE PRODUCTS DEPENDS UPON MARKET ACCEPTANCE OF
CACHING TECHNOLOGY AND CONTINUED GROWTH IN THE CONTENT DELIVERY MARKET.
In late 1997, we released our NetCache appliance products, a new category
of hardware-based Internet caching appliances designed to speed and manage the
delivery of information stored on the Web. However, hardware-based caching
technology is still developing.
Our future financial performance will depend in part on the acceptance of
caching technology and the acceptance of our NetCache appliance products. We
cannot assure you that the caching appliance market will continue to grow at
previous rates or at all.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND RESPOND TO
TECHNOLOGICAL CHANGE, OR IF OUR NEW PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE,
OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
Our future growth depends upon the successful development and introduction
of new hardware and software products. Due to the complexity of storage
sub-systems and Internet caching devices, and the difficulty in gauging the
engineering effort required to produce new products, such products are subject
to significant technical risks. During fiscal 2001, we began shipping the F85,
and F800 series, the NetCache C6100, the NetCache C3100, the NetCache C1100, and
ContentDirector and ContentReporter content management software products. The
NetCache platform with NetCache 5.0 software offers live and video-on-demand
capability. However, we cannot assure you that any of our new products will
achieve market acceptance. Additional product introductions in future periods
may also impact the sales of existing products. In addition, our new products
must respond to technological changes and evolving industry standards. If we are
unable, for technological or other reasons, to develop and introduce new
products in a timely manner in response to changing market conditions or
customer requirements, or if such products do not achieve market acceptance, our
operating results could be materially adversely affected.
WE DEPEND ON ATTRACTING AND RETAINING QUALIFIED TECHNICAL AND SALES PERSONNEL.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel. Because
our future success is dependent on our ability to continue to enhance and
introduce new products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with the requisite
education, backgrounds and industry experience. Competition for qualified
engineers, particularly in Silicon Valley, is intense. The loss of the services
of a significant number of our engineers or sales people could be disruptive to
our development efforts or business relationships and could materially adversely
affect our operating results.
RISKS INHERENT IN OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
We conduct business internationally. For the year ended April 27, 2001
approximately 38.0% of our net sales were to international customers (including
United States exports). Accordingly, our future operating results could be
materially adversely affected by a variety of factors, some of which are beyond
our control, including regulatory, political or economic conditions in a
specific country or region, trade protection measures and other regulatory
requirements and government spending patterns.
Our international sales are denominated in U.S. dollars and in foreign
currencies. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in foreign markets. For international sales and expenditures
denominated in foreign currencies, we are subject to risks associated with
currency fluctuations. We hedge risks associated with foreign currency
transactions in order to minimize the impact of changes in foreign currency
exchange rates on earnings. We utilize forward contracts to hedge trade and
intercompany receivables and payables. All hedge contracts are marked to market
through earnings every period. There can be no assurance that such hedging
strategy will be successful and that currency exchange rate fluctuations will
not have a material adverse effect on our operating results.
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Additional risks inherent in our international business activities
generally include, among others, longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. Such factors could materially adversely affect our future
international sales and, consequently, our operating results.
Although operating results have not been materially adversely affected by
seasonality in the past, because of the significant seasonal effects experienced
within the industry, particularly in Europe, our future operating results could
be materially adversely affected by seasonality.
We cannot assure you that we will be able to maintain or increase
international market demand for our products. We believe our net sales will not
increase in fiscal 2002 at the rate at which they grew in fiscal 2001.
AN INCREASE IN COMPETITION COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
The storage and content delivery markets are intensely competitive and are
characterized by rapidly changing technology
In the storage market, our filer appliances and data management software
compete primarily against storage products and data management software from EMC
Corporation, Hitachi Data Systems, Compaq Computer Corporation, Sun
Microsystems, Inc., Hewlett-Packard Company, and IBM Corporation. We also
encounter less frequent competition from companies including MTI Corp., Procom
Technology, LSI Logic Corp., and Auspex Systems, Inc.
In the content delivery market, our NetCache appliances and content
delivery software compete against caching appliance and content delivery
software vendors including Cisco Systems, Inc., CacheFlow, Inc., Inktomi Corp.,
Akamai Technologies, Inc., and Volera.
This past year has seen an increasing number of new, privately held
companies attempting to enter our markets, some of which may become significant
competitors in the future.
We believe that the principal competitive factors affecting our market
include but are not limited to:
- Response time and performance
- Scalability
- Data availability
- Multiprotocol data sharing
- Acquisition price and low overall total cost of ownership
- Ease-of-use and deployment
- Customer service and support
Although we believe that our products currently compete favorably with
respect to these factors, we can not assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical,
and other resources.
Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our operating results. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements, or
devote greater resources to the development, promotion, sale and support of
their products. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We cannot
assure you that we will be able to compete successfully against current or
future competitors. Competitive pressures we face could materially adversely
affect our operating results.
We believe that the principal competitive factors affecting our market
include product features such as response time, reliability, data availability,
scalability, ease of use, price, multi-protocol capabilities and customer
service and support. Although we believe that our products currently compete
favorably with respect
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to these factors, we cannot assure you that we can maintain our competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS AND ANY DISRUPTION OR TERMINATION OF
THESE SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
We rely on a limited number of suppliers of several key components utilized
in the assembly of our products. We purchase most of our disk drives through a
single supplier. We purchase computer boards and microprocessors from a limited
number of suppliers. Our reliance on a limited number of suppliers involves
several risks, including:
- a potential inability to obtain an adequate supply of required components
because we do not have long-term supply commitments;
- supplier capacity constraints;
- price increases;
- timely delivery; and
- component quality.
In the future, we intend to increasingly rely on contract manufacturers to
assemble our products. If our contract manufacturers' operations were
interrupted for any reason, our ability to meet scheduled product deliveries to
customers would be materially adversely affected.
Component quality is particularly significant with respect to our supplier
of disk drives. In order to meet product performance requirements, we must
obtain disk drives of extremely high quality and capacity. In addition, there
are periodic supply and demand issues for disk drives, microprocessors and for
semiconductor memory components, which could result in component shortages,
selective supply allocations and increased prices of such components. We cannot
assure you that we will be able to obtain our full requirements of such
components in the future or that prices of such components will not increase. In
addition, problems with respect to yield and quality of such components and
timeliness of deliveries could occur. Disruption or termination of the supply of
these components could delay shipments of our products and could materially
adversely affect our operating results. Such delays could also damage
relationships with current and prospective customers.
WE CANNOT ASSURE YOU THAT WE WILL NOT INCUR PROBLEMS WITH CURRENT OR FUTURE
EQUITY INVESTMENTS AND ACQUISITIONS OR THAT WE WILL REALIZE VALUE FROM SUCH
STRATEGIC RELATIONSHIPS.
We are continuously evaluating alliances and external investment in
technologies related to our business. We have already made relatively small
strategic investments in a number of network storage related technology
companies and acquired two companies since the beginning of fiscal 2001. Equity
investments may result in the loss of investment capital. Acquisitions of
companies or products and alliances and strategic investments entail numerous
risks, and we cannot assure you that we will be able to successfully integrate
acquired operations and products or to realize anticipated synergies, economies
of scale, or other value. In addition, we may experience a diversion of
management's attention, the loss of key employees of acquired operations or the
inability to recover strategic investments in development stage entities. Any
such problems could have a material adverse effect on our business, financial
condition and results of operation.
WE CANNOT ASSURE YOU THAT OUR OEM RELATIONSHIPS WITH DELL COMPUTER CORPORATION
AND FUJITSU LIMITED WILL GENERATE SIGNIFICANT REVENUE.
While our agreements with Dell Computer Corporation and Fujitsu Limited are
an element of our strategy to increase penetration in the Windows NT market,
neither Dell Computer Corporation nor Fujitsu Limited have made purchase
commitments for our products. Currently we do not, and cannot assure you that we
will generate significant revenue from these agreements.
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WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS AND ACCORDINGLY
THERE IS A RISK THAT THOSE DISTRIBUTORS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF
OTHER SUPPLIERS WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our distribution customers generally offer products of several different
companies, including products of our competitors. Accordingly, there is risk
that these distributors may give higher priority to products of other suppliers,
which could materially adversely affect our operating results.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. Despite testing by us and by current
and potential customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could materially adversely affect our operating results.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO
INCREASED COMPETITION THAT COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions and patents to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret, copyright and patent laws, which afford
only limited protection. We have registered trademarks including our "Network
Appliance" name and logo, "FAServer," "FilerView," "NetApp," "NetCache" and
"SecureShare" trademarks in the United States. Other United States trademarks
and some of the other United States -- registered trademarks are registered
internationally as well. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into confidentiality
agreements with our employees and with our resellers and customers. We currently
have multiple United States and international patent applications pending and
multiple United States patents issued. The pending applications may not be
approved and if patents are issued, such patents may be challenged. If such
challenges are brought, the patents may be invalidated. We cannot assure you
that we will develop proprietary products or technologies that are patentable,
that any issued patent will provide us with any competitive advantages or will
not be challenged by third parties, or that the patents of others will not
materially adversely affect our ability to do business.
Litigation may be necessary to protect our proprietary technology. Any such
litigation may be time-consuming and costly. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect proprietary rights
to as great an extent as do the laws of the United States. We cannot assure you
that our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology, duplicate our
products or design around patents issued to us or other intellectual property
rights of ours.
We are subject to intellectual property infringement claims. We may, from
time to time receive claims that we are infringing third parties' intellectual
property rights. In fiscal 1997, we settled litigation related to the alleged
infringement of third party rights and other claims, which resulted in a pre-tax
expense of $4.3 million ($3.5 million in payments to the plaintiffs and $0.8
million in legal fees). Third parties may in the future claim infringement by us
with respect to current or future products, patents, trademarks or other
proprietary rights. We expect that companies in the appliance market will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims could be time-consuming,
result in costly litigation, cause product shipment delays, require us to
redesign our products or require us to enter into royalty or licensing
agreements, any of which could materially adversely affect our operating
results. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to us or at all.
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PROTECTIVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MATERIALLY
ADVERSELY AFFECT STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. The rights of the holders of common stock will be
subject to, and may be materially adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Further, certain
provisions of our bylaws pertaining to the future elimination of cumulative
voting and shareholder action by written consent could delay or make more
difficult a proxy contest involving us, which could materially adversely affect
the market price of our common stock.
WE RELY ON A CONTINUOUS POWER SUPPLY AND ANY POWER SHORTAGE COULD INTERRUPT OUR
MANUFACTURING OPERATIONS AND COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below certain
critical levels, California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts. We currently have limited
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our
customers/suppliers may suffer as a result of any interruption in our power
supply. If blackouts interrupt our power supply or our suppliers' power supply,
we could be temporarily unable to continue operations at our California
facilities. Any such interruption in our ability to continue operations at our
facilities or our suppliers' facilities to manufacture products could damage our
reputation, harm our ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could materially
adversely affect our operating results.
ITEM 2. PROPERTIES
In fiscal 2000, we executed agreements to acquire approximately 37.7 acres
of land in Sunnyvale, California. These sites will support expansion of
approximately 800,000 square feet to accommodate future growth. In fiscal 1999,
we executed agreements to acquire approximately 18 acres of land in Sunnyvale,
California and to develop 393,000 square feet of buildings. This headquarter
site consolidated general administration, sales and marketing, research and
development, customer services and manufacturing operations.
We have commitments related to operating lease arrangements, under which we
have an option to purchase various properties for an aggregate of $309.0
million, or arrange for the sale of the properties to a third party for at least
the option price with a contingent liability for any deficiency. We lease other
sales offices and research and development facilities throughout the United
States and internationally. We believe that our existing facilities and those
being developed in Sunnyvale are adequate for our requirements over at least the
next two years and that additional space will be available as needed.
See additional discussion regarding properties in "Note 4 under Item 8.
Financial Statements and Supplementary Data -- Notes to Consolidated Financial
Statements" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock commenced trading on the Nasdaq National Market on
November 21, 1995 and is traded under the symbol "NTAP." As of April 27, 2001,
there were 883 holders of record of the common stock. The following table sets
forth for the periods indicated the high and low closing sale prices for our
common stock as reported on the Nasdaq National Market, adjusted to reflect the
effect of the December 20, 1999 and March 22, 2000 two-for-one stock splits.
FISCAL 2001 FISCAL 2000
----------------- -----------------
HIGH LOW HIGH LOW
------- ------ ------- ------
First Quarter................................. $112.56 $57.94 $ 15.84 $ 9.91
Second Quarter................................ 148.63 76.94 19.58 12.78
Third Quarter................................. 121.00 49.38 59.06 18.50
Fourth Quarter................................ 59.94 11.81 120.19 50.19
We believe that a number of factors may cause the market price of our
common stock to fluctuate significantly. See "Item 1. Business -- Risk Factors."
We have never paid cash dividends on our capital stock. We currently
anticipate retaining all available funds, if any, to finance internal growth and
product development. Payment of dividends in the future will depend upon our
earnings and financial condition and such other factors as the directors may
consider or deem appropriate at the time.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE FISCAL YEARS ENDED APRIL 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 1998 1997
---------- -------- -------- -------- -------
Net Sales........................... $1,006,186 $579,300 $289,420 $166,163 $93,333
Income From Operations.............. 109,657 105,368 55,126 32,658 3,083
Net Income.......................... 74,886 73,792 35,613 20,965 250
Net Income Per Share, Basic......... 0.23 0.25 0.13 0.08 0.00
Net Income Per Share, Diluted....... 0.21 0.21 0.11 0.07 0.00
Total Assets........................ 1,036,252 592,233 346,347 115,736 68,941
Long-Term Obligations............... 13,031 333 93 163 232
Total Shareholder's Equity.......... 804,448 478,746 295,724 86,265 54,029
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the related
notes thereto set forth under "Item 8. Financial Statements and Supplementary
Data." This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in those forward-looking statements as a result of certain factors,
including those set forth in "Item 1. Business -- Risk Factors" and elsewhere in
this Annual Report on Form 10-K.
Overview
We pioneered the concept of the "network appliance" for storage -- an
extension of the industry trend toward dedicated, specialized products that
perform a single function. Today we are a leader in delivering high-performance
network storage and content delivery solutions on a network. Our storage and
content delivery platforms (filers and NetCache appliances) are coupled with
content distribution and reporting software. This Center-to-Edge solution offers
seamless data management from the back-end data center to the edge of the
network quickly, simply, and reliably.
We derive a substantial portion of our revenue from the sales of our
network filer and caching appliances. As a result, a reduction in the demand for
our filer and NetCache appliances due to increased competition, a general
decline in the market for network storage and content delivery or other factors
could materially adversely affect our operating results.
Our gross margin has been and may continue to be affected by a variety of
other factors, including:
- demand for storage and content delivery products;
- discount levels and price competition;
- product configuration;
- direct versus indirect sales;
- the mix of software as a percentage of revenue;
- the mix and average selling prices of products;
- new product introductions and enhancements; and
- the cost of components, manufacturing labor and quality.
Operating results have not been materially adversely affected by
seasonality in the past. However, because of the significant summer seasonal
effects experienced within the industry, particularly in Europe, our future
operating results could be materially adversely affected by seasonality.
For the year ended April 30, 2001 approximately 38.0% of our net sales were
derived from international customers (including United States exports).
Accordingly our future operating results could be materially adversely affected
by a variety of factors, some of which are beyond our control. For more
information on risks associated with our international operations, see "Item
1 -- Business -- Risk Factors -- Risks inherent in our international operations
could have a material adverse effect on our operating results."
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
YEARS ENDED APRIL 30,
-----------------------
2001 2000 1999
----- ----- -----
Net Sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 39.9 40.7 40.8
----- ----- -----
Gross Margin.............................................. 60.1 59.3 59.2
----- ----- -----
Operating Expenses:
Sales and Marketing....................................... 28.7 26.6 26.0
Research and Development.................................. 12.0 10.6 10.4
General and Administrative................................ 4.0 3.6 3.4
Amortization of Intangible Assets......................... 1.2 -- --
In-process Research and Development....................... 2.7 -- --
Stock Compensation........................................ 0.6 0.2 0.3
----- ----- -----
Total Operating Expenses.......................... 49.2 41.1 40.1
----- ----- -----
Income From Operations...................................... 10.9 18.2 19.1
Other Income, Net........................................... 2.3 1.5 0.6
----- ----- -----
Income Before Income Taxes.................................. 13.2 19.7 19.7
Provision for Income Taxes.................................. 5.8 7.0 7.4
----- ----- -----
Net Income.................................................. 7.4% 12.7% 12.3%
===== ===== =====
FISCAL 2001 COMPARED TO FISCAL 2000
Business Combinations -- During the first quarter of fiscal 2001, we
acquired Orca Systems, Inc. for a purchase price of $50.0 million in common
stock, assumed options and cash, with an obligation to provide 264,497 shares of
common stock, which will result in additional stock compensation charges if
certain performance criteria are achieved. We also paid certain transaction
costs and assumed certain operating assets and liabilities. The acquisition was
accounted for as a purchase. The purchase price of the transaction was allocated
to the acquired assets and liabilities based on their estimated fair values as
of the date of the acquisition. Amounts allocated to existing workforce and
goodwill are being amortized on a straight-line basis over three-and five-year
periods, respectively. Approximately $26.7 million was allocated to in-process
research and development and charged to operations because the acquired
technology had not reached technological feasibility and had no alternative
uses.
During the third quarter of fiscal 2001, we acquired WebManage
Technologies, Inc. for $59.4 million in common stock, assumed options and cash,
with an obligation to provide shares of common stock to be valued at $3.0
million, if certain performance criteria are achieved. The performance criteria
were met in March 2001 and the contingent consideration has been recorded as
stock compensation in the fourth quarter of 2001. We also paid certain
transaction costs and assumed certain operating assets and liabilities. The
acquisition was accounted for as a purchase. The purchase price of the
transaction was allocated to the acquired assets and liabilities based on their
estimated fair values as of the date of the acquisition. Amounts allocated to
existing technology and workforce are being amortized on a straight-line basis
over three years and amounts allocated to goodwill are being amortized over five
years.
Net Sales -- Net sales increased by 73.7% to $1,006.2 million in fiscal
2001, from $579.3 million in fiscal 2000. Net sales growth was across all
geographies, products and markets. This increase in net sales was primarily
attributable to a higher volume of units shipped, as compared to the
corresponding period of the
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prior fiscal year. This growth in volume declined in the second half of fiscal
2001. Factors impacting unit growth include:
- demand for our F700 filers utilizing primarily fibre-channel disks;
- introduction of our new higher capacity F840, mid-range F820 and F85
entry-level filer products;
- increased worldwide demand for our NetCache appliances and content
delivery network solutions;
- increased worldwide shipment of NetApp Cluster Failover solutions, which
require another filer to take over in the event of a hardware failure;
- increased demand for the SnapMirror software option, which requires
multiple filers to provide remote mirroring of data for quick disaster
recovery and backup at remote sites;
- expansion of our sales organization to 976 in fiscal 2001 from 582 in
fiscal 2000; and
- increased sales through indirect channels, including sales through our
OEM partners, representing 23.9% and 28.0% of total net sales for fiscal
2001 and 2000, respectively.
Net sales growth was also positively impacted by:
- a higher average selling price of our add-on software options:
SnapMirror, SnapRestore and SnapManager for Microsoft Exchange and
Cluster Failover, supporting mission-critical applications;
- a higher average selling price of our new high-end F840 filer;
- a higher average selling price due to the introduction of NetCache
software features, including ContentReporter and ContentDirector;
- the increase in storage capacity;
- increased add-on software revenue from Multi-Protocol solutions; and
- higher software subscription and service revenues to support a growing
installed base.
Overall net sales growth was partially offset by:
- declining demand for our products in the second half of fiscal 2001;
- declining average selling price of the F700 filers and caching products
due to competitive pricing; and
- declining unit sales of our older product family.
International net sales (including United States exports) grew by 115.0%
for fiscal 2001 as compared to fiscal 2000. International net sales were $382.5
million, or 38.0% of total net sales for fiscal 2001. The increase in
international sales for fiscal 2001, was primarily a result of European and Asia
Pacific net sales growth, due to increased headcount in the direct sales force,
increased indirect channel sales, increased shipments of filers, Cluster
Failover solutions and NetCache appliances and increased sales of add-on
software licenses, as compared to the corresponding periods of the prior fiscal
year. We expect to continue to selectively add sales capacity in an effort to
expand domestic and international markets, introduce new products, establish and
expand new distribution channels and increase product and company awareness. We
believe our international net sales will not increase in fiscal 2002 at the rate
at which they grew in fiscal 2001.
Gross Margin -- Gross margin increased to 60.1% of net sales for fiscal
2001, from 59.3% for fiscal 2000.
Gross margin was favorably impacted by:
- increased licensing of add-on software options such as Multi-Protocol,
Cluster Failover, SnapMirror, SnapRestore, SnapManager and new software
introductions including ContentReporter and ContentDirector;
- growth in software subscriptions due primarily to a larger installed
base;
- lower costs of key components;
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- the increase in product volume;
- increased manufacturing efficiencies; and
- a mix shift to high-end F840 systems sold as diskless upgrades, carrying
higher margin than configured systems.
Gross margin was negatively impacted by sales price reductions on storage
products due to competitive pricing pressure, higher disk content with an
expanded storage capacity for the F840 filer, lower sales volume in the second
half of fiscal 2001, lower of cost or market adjustments to inventory and
increased investments in customer service.
Our gross margin has been and may continue to be affected by a variety of
factors, including:
- demand for our products;
- discount levels and price competition;
- product configuration;
- direct versus indirect sales;
- the mix of software as a percentage of revenue;
- the mix and average selling prices of products;
- new product introductions and enhancements; and
- the cost of components, manufacturing labor and quality.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and certain customer
service and support costs. Sales and marketing expenses increased 87.8% to
$289.0 million for fiscal 2001 from $153.9 million for fiscal 2000. These
expenses were 28.7% and 26.6% of net sales for fiscal 2001 and 2000,
respectively. The increase in absolute dollars was primarily related to the
continued worldwide expansion of our sales and customer service organizations,
expansion of various marketing and industry initiatives, increased commission
expenses in the first three quarters and disposal of certain capital assets in
the fourth quarter. Sales and marketing headcount increased to 1,277 in fiscal
2001 from 775 in fiscal 2000. We expect to continue to selectively add sales
capacity in an effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels and increase
product and company awareness. We do not expect to increase our sales and
marketing expenses materially in fiscal 2002.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses, non-recurring
engineering charges and fees paid to outside consultants. Research and
development expenses increased 96.4% to $120.9 million in fiscal 2001 from $61.6
million in fiscal 2000. These expenses represented 12.0% and 10.6% of net sales,
for fiscal year 2001 and 2000, respectively. Research and development expenses
increased in absolute dollars, primarily as a result of increased headcount,
operating impact of Orca and WebManage acquisitions, ongoing support of current
and future product development and enhancement efforts, prototyping expenses and
non-recurring engineering charges associated with the development of new
products and technologies, including the NetApp F85, F800 series filers and the
new generation of our NetCache appliances coupled with our content distribution
and reporting software. Research and development headcount increased to 566 in
fiscal 2001 from 327 in fiscal 2000. We believe that our future performance will
depend in large part on our ability to maintain and enhance our current product
line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. We intend to continuously expand our existing product offerings
and introduce new products and expect that such expenditures will continue to
increase moderately in absolute dollars. For both fiscal 2001 and 2000, no
software development costs were capitalized.
General and Administrative -- General and administrative expenses increased
90.7% to $40.2 million in fiscal 2001, from $21.5 million in fiscal 2000. These
expenses represented 4.0% and 3.6% of net sales, for fiscal
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2001 and 2000, respectively. Increases in absolute dollars were primarily due to
increased headcount, expenses associated with initiatives to enhance
enterprise-wide management information systems and increased professional
service fees. General and administrative headcount increased to 253 in fiscal
2001 from 162 in fiscal 2000. We believe that our general and administrative
expenses will not increase significantly in absolute dollars in fiscal 2002.
Amortization of Intangible Assets -- Amortization of intangible assets
represents the excess of the aggregate purchase price over the fair value of the
tangible and identifiable intangible assets acquired by us. Intangible assets as
of April 30, 2001, including goodwill, existing workforce and technology, are
being amortized over the estimated useful life of three to five-year periods. We
assess the recoverability of intangible assets by determining whether the
amortized asset over its useful life may be recovered through estimated useful
cash flows. Amortization of intangible assets charged to operations was $11.7
million and $0.2 million in fiscal 2001 and 2000, respectively.
In-process Research and Development -- We incurred in-process research and
development charges of approximately $26.7 million in fiscal 2001 related to the
acquisition of Orca. The purchase price of the transaction was allocated to the
acquired assets and liabilities based on their estimated fair values as of the
date of the acquisition. Approximately $26.7 million was allocated to in-process
research and development and charged to operations, because the acquired
technology had not reached technological feasibility and had no alternative
uses. The value was determined by estimating the costs to develop the acquired
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the acquired
in-process technology. These estimates are subject to change, given the
uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur. Excluding the charge that may
result from 264,497 contingently issuable common shares, research and
development costs to bring the products from Orca to technological feasibility
are not expected to have a material impact on our future results of operations
or financial condition.
We believe we can utilize the Orca acquisition to develop the first virtual
interface-based (VI) next generation of network storage systems. We are
leveraging VI architecture to develop the Direct Access File System (DAFS)
protocol. DAFS enables data transfers straight from the file server, allowing
clusters of application servers in heterogeneous environments to share data from
the memory of one system to the memory of another without involving
general-purpose operating systems, thereby improving CPU utilization and
speeding up data access. We expect to continue the development of products using
this protocol and believe that there is a reasonable chance of successfully
delivering initial products in calendar year 2001. However, there is risk
associated with the completion of the in-process project and there can be no
assurance that such project will meet with either technological or commercial
success. Failure to successfully develop and commercialize this in-process
project would result in the loss of the expected economic return inherent in the
fair value allocation. Additionally, the value of other intangible assets
acquired may become impaired. The risks associated with the research and
development are still considered high and no assurance can be made that upcoming
products will meet market expectations or gain market acceptance.
Stock Compensation -- We account for stock-based employee compensation
arrangements in accordance with provisions of APB No. 25, "Accounting for Stock
Issued to Employees," for employee compensation awards and comply with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for
non-employee compensation awards. Accordingly, we recognize the intrinsic value
for employees and the fair value for non-employees as stock compensation expense
over the vesting terms of the awards. Stock compensation expenses were $6.2
million and $1.3 million in fiscal 2001 and 2000, respectively. This increase
was primarily attributable to the recognition of stock compensation of unvested
options assumed in the WebManage acquisition, issuance of contingently issuable
milestones shares, increased participation in the salaried stock option grant
program by certain highly compensated employees and non-employee stock options
awards.
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Total Other Income, net -- Total other income, net, was $23.4 million and
$9.0 million in fiscal 2001 and 2000, respectively. The increase in interest
income was primarily due to increased cash and short-term investments generated
from operations and net proceeds from stock option exercises.
Provision for Income Taxes -- Our effective tax was 34.5%, excluding the
effect of non-deductible amortization of goodwill and acquired in-process
research and development of $35.5 million for fiscal 2001. The effective tax
rate for fiscal 2000 was 35.5%. The effective tax rates differed from the U.S.
statutory rate primarily due to state taxes, credits, tax exempt interest,
goodwill amortization and acquired in-process research and development.
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales -- Net sales increased by 100.2% to $579.3 million in fiscal
2000, from $289.4 million in fiscal 1999. Net sales growth was across all
geographies, products and markets. This increase was primarily attributable to a
higher volume of units shipped, as compared to the corresponding period of the
prior fiscal year. Factors impacting unit growth include:
- strong demand for our F700 filer products utilizing primarily
fibre-channel connectivity;
- increased worldwide demand for our NetCache solutions;
- increased worldwide shipment of NetApp Cluster Failover solutions, which
require another filer to take over in the event of a hardware failure;
- increased demand for the SnapMirror software option, which requires
multiple filers to provide remote mirroring of data for quick disaster
recovery and backup at remote sites;
- expansion of our sales organization to 582 in fiscal 2000, from 309 in
fiscal 1999; and
- increased sales through indirect channels, representing 28.0% of total
sales compared to 25.2% in the prior year, including sales through our
two OEM partners.
Net sales growth was also positively impacted by:
- a higher average selling price due to the introduction of new software
features: SnapMirror, SnapRestore and Cluster Failover, supporting
mission-critical applications;
- the increase in storage capacity;
- increased add-on software revenue from multi-protocol solutions; and
- higher software subscription and service revenues to support a growing
installed base.
Overall net sales growth was partially offset by declining unit sales of
our older products and declining average selling price of the caching products
due primarily to competitive pricing pressure.
International net sales (including United States exports) grew by 100.4%
for fiscal 2000, as compared to fiscal 1999. International net sales were $177.9
million, or 30.7% of total net sales for fiscal 2000. The increase in
international sales for fiscal 2000, was primarily a result of European sales
growth, due to increased headcount in the direct sales force, increased indirect
channel sales, increased shipments of filers, Cluster Failover solutions,
NetCache appliances and increased sales of add-on software licenses. Asia
Pacific net sales growth for fiscal 2000, was also primarily driven by increased
sales through resellers, increased headcount in the direct sales force,
increased shipments of filers, and NetCache appliances and increased sales of
add-on software licenses, as compared to fiscal 1999.
We cannot assure you that our net sales will continue to increase in
absolute dollars or at the rate at which they have grown in recent fiscal
periods.
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Gross Margin -- Gross margin increased slightly to 59.3% of net sales for
fiscal 2000, from 59.2% for fiscal 1999.
Gross margin was favorably impacted by:
- increased licensing of add-on software options such as: multi-protocol,
Cluster Failover, SnapMirror and SnapRestore associated with new filers
shipped;
- growth in software subscription due primarily to a larger installed base;
- increased manufacturing efficiencies;
- the increase in product volume; and
- lower costs of key components.
Gross margin was negatively impacted by sales price reductions on storage
products due to competitive pricing pressure from other storage vendors and
increased investments in customer service personnel in areas such as logistics
and professional services.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and certain customer
service and support costs. Sales and marketing expenses increased 104.4% to
$153.9 million for fiscal 2000 from $75.3 million for fiscal 1999. These
expenses were 26.6% and 26.0% of net sales for fiscal 2000 and 1999,
respectively. The increase in absolute dollars was primarily related to the
continued worldwide expansion and increased headcount growth of our sales and
customer service organizations, and increased commission expenses. Sales and
marketing headcount increased from 411 at April 30, 1999 to 775 at April 30,
2000. In fiscal 2000, we launched various marketing and advertising programs,
which also contributed to absolute dollar increases in sales and marketing
expenses. We expect to continue to increase our sales and marketing expenses in
an effort to expand domestic and international markets, introduce new products,
establish and expand new distribution channels and increase product and company
awareness. We believe that our continued growth and profitability is dependent
in part on the successful expansion of our international operations, and
therefore, have committed significant resources to increase international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses, non-recurring
engineering charges and fees paid to outside consultants. Research and
development expenses increased 105.5% to $61.6 million in fiscal 2000 from $30.0
million in fiscal 1999. These expenses represented 10.6% and 10.4% of net sales,
for fiscal 2000 and 1999, respectively. Research and development expenses
increased in absolute dollars, primarily as a result of increased headcount,
ongoing support of current and future product development and enhancement
efforts, prototyping expenses and non-recurring engineering charges associated
with the development of new products and technologies. Research and development
headcount increased from 198 at April 30, 1999 to 327 at April 30, 2000. In
fiscal 2000, we shipped new enterprise software offerings and data management
tools with SnapManager for Microsoft Exchange and ApplianceWatch. We also
introduced new caching products which included NetCache software release 4.0 and
NetCache 4.1, adding streaming media support for Apple QuickTime, Microsoft
Windows Media and RealNetworks Real System G2 users, delivering live
broadcasting on the Internet. In fiscal 1999, we introduced the F700 series
filers, the Cluster Failover solutions, the C700 caching products, SnapMirror,
SnapRestore, and SecureAdmin(TM). We believe that our future performance will
depend in large part on our ability to maintain and enhance our current product
line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. We intend to continuously expand our existing product offerings
and introduce new products and expect that such expenditures will continue to
increase in absolute dollars. For both fiscal 2000 and 1999, no software
development costs were capitalized.
General and Administrative -- General and administrative expenses increased
114.1% to $21.1 million in fiscal 2000, from $9.9 million in fiscal 1999. These
expenses represented 3.6% and 3.4% of net sales, for fiscal 2000 and 1999,
respectively. Increases in absolute dollars were primarily due to increased
headcount, expenses associated with initiatives to implement enterprise-wide
management information systems, increases in
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professional services, consulting fees and outside service fees. General and
administrative headcount increased from 80 at April 30, 1999 to 162 at April 30,
2000. We believe that our general and administrative expenses will increase in
absolute dollars as we continue to build our infrastructure.
Total Other Income, Net -- Total other income, net, was $9.0 million and
$1.9 million in fiscal 2000 and 1999, respectively. The increase was due
primarily to interest income earned on the net proceeds from the March 1999
follow-on public offering, cash generated from operations, and net proceeds from
stock option exercises. Fiscal 1999 included losses from foreign currency
transactions as compared to fiscal 2000, where gains or losses from foreign
transactions have been partially mitigated through our hedging program.
Provision for Income Taxes -- Our effective tax rate was 35.5% for fiscal
2000 compared to 37.5% for the fiscal 1999. The effective tax rates differed
from the U.S. statutory rate primarily due to state taxes, credits and tax
exempt interest.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2001, as compared to the April 30, 2000 balances, our cash,
cash equivalents and short-term investments increased by $10.5 million to $364.0
million. Working capital decreased by $3.1 million to $416.7 million. The
decrease was primarily a result of $193.7 million restricted cash used to
collateralize our operating leases. We generated cash from operating activities
totaling $218.4 million and $118.1 million in fiscal 2001 and fiscal 2000,
respectively. Net cash provided by operating activities in fiscal 2001 was
principally related to net income of $74.9 million, increases in accounts
payable, income taxes payable, accrued compensation and related benefits and
deferred revenue, decreases in prepaid expenses and other, coupled with
depreciation, in-process research and development, amortization of intangibles,
stock compensation amortization, partially offset by increases in accounts
receivable, inventories, deferred income taxes and decrease in other accrued
liabilities.
We used $83.7 million and $40.8 million of cash in fiscal 2001 and fiscal
2000, respectively, for capital expenditures. The increase was primarily
attributed to upgrades of software and computer equipment purchases and
furniture and fixtures for the Sunnyvale headquarters facility. We have used
$14.3 million and $68.9 in fiscal 2001 and fiscal 2000, respectively, for net
purchases of short-term investments. In June 2000, we acquired Orca for a
purchase price of approximately $50.0 million, including common stock,
contingently issuable common stock, assumed options, cash payments of $2.0
million and related transaction costs. In November 2000, we acquired WebManage
for a purchase price of approximately $59.4 million, including common stock,
contingently issuable common stock, assumed options, cash payments of $5.0
million and related transaction costs. Investing activities in fiscal 2001 also
included new equity investments of $7.0 million.
We have used $113.3 million in fiscal 2001 for financing activities and
received $53.8 million for the corresponding period of the prior fiscal year.
The increase in cash provided by sales of common stock in fiscal 2001, compared
to the corresponding period of the prior fiscal year, was due to an increased
quantity of stock options exercised at a higher average exercise price and a
greater number of employees participating in the employee stock purchase plan.
Offsetting this increase for the fiscal year 2001 was restricted cash of $193.7
million used to collateralize operating leases. See Note 4 to the Notes to the
Condensed Consolidated Financial Statements.
Excluding the commitments related to operating lease arrangements for
various properties in our Sunnyvale headquarters, which aggregate $309.0
million, we currently have no significant commitments other than commitments
under operating leases. We believe that our existing liquidity and capital
resources, including the available amounts under our $5.0 million line of
credit, are sufficient to fund our operations for at least the next twelve
months.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting
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standards for derivative instruments, including certain derivative instrument
embedded in other contracts, and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives may now meet the
definition of a derivative. We will adopt SFAS effective May 1, 2001 and do not
expect that the adoption will have a significant impact on our financial
position, results of operations or cash flow.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in interest rates,
market prices and in foreign currency exchange rates. We use certain derivative
financial instruments to manage these risks. We do not use derivative financial
instruments for speculative or trading purposes. All financial instruments are
used in accordance with board-approved policies.
Market Interest and Interest Income Risk
Interest and Investment Income -- As of April 27, 2001, we had short-term
investments of $92.1 million. Our investment portfolio consists of highly liquid
investments with original maturities at the date of purchase between three and
twelve months and investment in marketable equity securities in certain
technology companies. These highly liquid investments, consisting primarily of
government and corporate debt securities, are subject to interest rate and
interest income risk and will decrease in value if market interest rates
increase. A hypothetical 10 percent increase in market interest rates from
levels at April 27, 2001, would cause the fair value of these short-term
investments to decline by an immaterial amount. Because we have the ability to
hold these investments until maturity we would not expect any significant
decline in value of our investments caused by market interest rate changes.
Declines in interest rates over time will, however, reduce our interest income.
We do not use derivative financial instruments in our investment portfolio.
Operating Lease Commitments -- As of April 27, 2001, we have outstanding
lease commitments to a third-party entity under operating lease agreements,
which vary based on a monthly London Interbank Offered Rate (LIBOR) rate plus a
spread. A hypothetical 10 percent increase in interest rates would increase our
annual rent expense under operating lease commitments by approximately $1.5
million. Increases in interest rates could, however, increase our rent expenses
associated with future lease payments. We do not currently hedge against
interest rate increases. Our investment portfolio offers a natural hedge against
interest rate risk from our operating lease commitments in the event of a
significant increase in the market interest rate. Moreover, a total of $193.7
million in operating leases are collateralized with investments that have
similar, and thus offsetting, interest rate characteristics.
Market Price Risk
Equity Securities -- We are also exposed to market price risk on our equity
securities included in our short-term investments. These investments are in high
technology companies in the volatile high-technology industry sector. We do not
attempt to reduce or eliminate our market exposure on these securities and as a
result, the amount of income or loss and cash flow that we ultimately realize
from these investments in future periods may vary materially from the current
unrealized amount. A 50% adverse change in the equity price would result in an
approximate $4.1 million decrease in the fair value of our equity securities as
of April 27, 2001 (no such equity securities were held as of April 30, 2000).
The hypothetical changes and assumptions discussed above will be different
from what actually occurs in the future. Furthermore, such computations do not
anticipate actions that may be taken by management, should the hypothetical
market changes actually occur over time. As a result, the effect on actual
earnings in the future will differ from those described above.
Foreign Currency Exchange Rate Risk
We hedge risks associated with foreign currency transactions in order to
minimize the impact of changes in foreign currency exchange rates on earnings.
We utilize forward contracts to hedge against the short-term impact of foreign
currency fluctuations on certain assets and liabilities denominated in foreign
currencies. All hedge instruments are marked to market through earnings every
period. We believe that these forward
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contracts do not subject us to undue risk due to foreign exchange movements
because gains and losses on these contracts are offset by losses and gains on
the underlying assets and liabilities.
All contracts have a maturity of less than one year and we do not defer any
gains and losses, as they are all accounted for through earnings every period.
The following table provides information about our foreign exchange forward
contracts outstanding on April 27, 2001, (in thousands):
FOREIGN CONTRACT VALUE FAIR VALUE
CURRENCY BUY/SELL CURRENCY AMOUNT USD IN USD
-------- -------- --------------- -------------- ----------
AUD............................. Sell 17,312 $ 8,693 $ 8,733
CHF............................. Sell 5,300 $ 3,082 $ 3,048
GBP............................. Sell 18,085 $25,845 $25,878
EUR............................. Sell 50,728 $44,324 $44,726
The following table provides information about our foreign exchange forward
contracts outstanding on April 30, 2000, (in thousands):
FOREIGN CONTRACT VALUE FAIR VALUE
CURRENCY BUY/SELL CURRENCY AMOUNT USD IN USD
-------- -------- --------------- -------------- ----------
CHF............................. Sell 4,013 $ 2,300 $ 2,333
GBP............................. Sell 6,929 $10,231 $10,885
EUR............................. Sell 6,005 $ 5,464 $ 4,595
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. and its subsidiaries as of April 30, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended April 30, 2001. Our audits also included the consolidated financial
statement schedule listed in Item 14(a)(2). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Network Appliance,
Inc. and its subsidiaries as of April 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 2001 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the consolidated
financial statement schedule listed in Item 14(a)(2), when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 14, 2001
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NETWORK APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30,
----------------------
2001 2000
---------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 271,931 $279,014
Short-term investments.................................... 92,094 74,477
Accounts receivable, net of allowances of $4,030 in 2001
and $3,039 in 2000..................................... 186,956 108,902
Inventories............................................... 22,504 20,434
Prepaid expenses and other................................ 25,745 27,958
Deferred income taxes..................................... 36,287 22,215
---------- --------
Total current assets.............................. 635,517 533,000
RESTRICTED CASH............................................. 193,747 --
PROPERTY AND EQUIPMENT, NET................................. 103,238 47,949
INTANGIBLE ASSETS........................................... 79,510 389
OTHER ASSETS................................................ 24,240 10,895
---------- --------
$1,036,252 $592,233
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 64,892 $ 34,061
Income taxes payable...................................... 21,844 507
Accrued compensation and related benefits................. 50,523 34,902
Other accrued liabilities................................. 23,198 20,781
Deferred revenue.......................................... 58,316 22,903
---------- --------
Total current liabilities......................... 218,773 113,154
LONG-TERM DEFERRED REVENUE.................................. 12,882 279
LONG-TERM OBLIGATIONS....................................... 149 54
---------- --------
231,804 113,487
---------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000 shares authorized;
shares outstanding: none in 2001 and 2000.............. -- --
Common stock, no par value; 880,000 shares authorized:
shares outstanding: 328,746 in 2001 and 311,803 in
2000................................................... 616,595 352,693
Deferred stock compensation............................... (12,044) (1,174)
Retained earnings......................................... 204,632 129,746
Cumulative other comprehensive loss....................... (4,735) (2,519)
---------- --------
Total shareholders' equity........................ 804,448 478,746
---------- --------
$1,036,252 $592,233
========== ========
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30,
----------------------------------
2001 2000 1999
---------- -------- --------
NET SALES................................................. $1,006,186 $579,300 $289,420
COST OF SALES............................................. 401,707 235,846 118,120
---------- -------- --------
Gross margin............................................ 604,479 343,454 171,300
---------- -------- --------
OPERATING EXPENSES:
Sales and marketing..................................... 289,003 153,877 75,267
Research and development................................ 120,938 61,566 29,958
General and administrative.............................. 40,238 21,098 9,852
Amortization of intangible assets....................... 11,732 200 200
In-process research and development..................... 26,688 -- --
Stock compensation(1)................................... 6,223 1,345 897
---------- -------- --------
Total operating expenses........................ 494,822 238,086 116,174
---------- -------- --------
INCOME FROM OPERATIONS.................................... 109,657 105,368 55,126
OTHER INCOME (EXPENSE):
Interest income......................................... 22,204 10,846 2,645
Other income (expense), net............................. 1,148 (1,808) (781)
---------- -------- --------
Total other income, net......................... 23,352 9,038 1,864
---------- -------- --------
INCOME BEFORE INCOME TAXES................................ 133,009 114,406 56,990
PROVISION FOR INCOME TAXES................................ 58,123 40,614 21,377
---------- -------- --------
NET INCOME................................................ $ 74,886 $ 73,792 $ 35,613
========== ======== ========
NET INCOME PER SHARE:
Basic................................................... $ 0.23 $ 0.25 $ 0.13
========== ======== ========
Diluted................................................. $ 0.21 $ 0.21 $ 0.11
========== ======== ========
SHARES USED IN PER SHARE CALCULATIONS:
Basic................................................... 320,435 299,370 273,740
========== ======== ========
Diluted................................................. 359,824 345,171 311,724
========== ======== ========
- ---------------
(1) Deferred stock compensation:
Sales and marketing................................ $ 1,054 $ 619 $ 259
Research and development........................... 1,738 499 499
General and administrative......................... 431 227 139
Milestones shares (Note 11):
Research and development........................... 1,000 -- --
General and administrative......................... 2,000 -- --
---------- -------- --------
$ 6,223 $ 1,345 $ 897
========== ======== ========
See notes to consolidated financial statements.
29
31
NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
RETAINED CUMULATIVE
COMMON STOCK DEFERRED EARNINGS OTHER
------------------ STOCK (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT COMPENSATION DEFICIT) LOSS TOTAL
------- -------- ------------ ------------ ------------- --------
BALANCES, APRIL 30, 1998...................... 269,184 $ 66,422 $ (498) $ 20,341 $ -- $ 86,265
Components of comprehensive income:
Net income...............