NETWORK APPLIANCE INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended January 24, 2003

or

o		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)


Delaware		77-0307520
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares outstanding of the registrant’s common stock, $.001 par value, as of the latest practicable date.


Class		Outstanding at January 24, 2003

Common Stock		339,333,827

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
	Item 5. Other Information
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT 99.1

TABLE OF CONTENTS


	Page
	No.

PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)		3
Condensed Consolidated Balance Sheets as of January 24, 2003 and April 30, 2002		3
Condensed Consolidated Statements of Operations for the three and nine-month periods ended January 24, 2003 and January 25, 2002		4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended January 24, 2003 and January 25, 2002		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		39
Item 5. Other Information		39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		40
Item 2. Changes in Securities		40
Item 3. Defaults Upon Senior Securities		40
Item 4. Submission of Matters to Vote of Securityholders		40
Item 5. Other Information		40
Item 6. Exhibits and Reports on Form 8-K		40
SIGNATURE		41

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands — unaudited)


			January 24,			April 30,
			2003			2002

ASSETS
Current Assets:
	Cash and cash equivalents		$	230,089		$	210,756
	Short-term investments			308,493			243,371
	Accounts receivable, net of allowances of $5,673 at January 24, 2003 and $8,416 at April 30, 2002			169,152			146,511
	Inventories			37,421			23,849
	Prepaid expenses and other			27,117			22,112
	Deferred income taxes			25,615			32,529

		Total current assets		797,887			679,128
Property and Equipment, net				358,046			345,195
Goodwill				49,422			49,422
Intangible Assets, net				4,318			8,828
Other Assets				51,544			26,233

			$	1,261,217		$	1,108,806

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	38,115		$	40,243
	Income taxes payable			44,142			17,073
	Accrued compensation and related benefits			30,984			39,434
	Other accrued liabilities			48,625			42,671
	Deferred revenue			109,169			76,139

		Total current liabilities		271,035			215,560
Long-Term Deferred Revenue				47,219			31,036
Long-Term Obligations				3,254			3,734

		Total liabilities		321,508			250,330

Stockholders’ Equity:
	Common stock			339			335
	Additional paid-in capital			682,094			656,619
	Deferred stock compensation			(1,813	)		(3,777	)
	Retained earnings			259,314			207,665
	Cumulative other comprehensive loss			(225	)		(2,366	)

		Total stockholders’ equity		939,709			858,476

			$	1,261,217		$	1,108,806

See accompanying notes to condensed consolidated financial statements.

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts — unaudited)



			Three Months Ended					Nine Months Ended

			January 24,		January 25,			January 24,			January 25,
			2003		2002			2003			2002

Revenues
	Product revenue		$	205,046	$	180,631		$	585,143		$	544,653
	Service revenue			23,418		17,718			65,320			48,837

		Total revenues		228,464		198,349			650,463			593,490

Cost of Revenues
	Cost of product revenue			71,501		59,572			199,784			203,132
	Cost of service revenue			16,911		15,440			47,172			40,941

		Total cost of revenues		88,412		75,012			246,956			244,073

	Gross margin			140,052		123,337			403,507			349,417

Operating Expenses:
	Sales and marketing			76,969		66,726			225,078			209,290
	Research and development			28,289		28,451			84,530			85,888
	General and administrative			9,833		10,587			26,403			31,401
	Amortization of goodwill and intangible assets			1,364		5,226			4,114			15,678
	Stock compensation(1)			1,238		1,133			3,106			5,755
	Restructuring charges			1,257		—			1,257			7,980

		Total operating expenses		118,950		112,123			344,488			355,992

Income (Loss) from Operations				21,102		11,214			59,019			(6,575	)
Other Income (Expense), net:
	Interest income			3,068		4,023			9,099			14,668
	Other income (expense), net			270		(449	)		(919	)		(865	)
	Impairment loss on investment			—		—			(726	)		(13,008	)
	Gain on sale of intangible asset			—		—			604			—

		Total other income, net		3,338		3,574			8,058			795

Income (Loss) Before Income Taxes				24,440		14,788			67,077			(5,780	)
Provision (Benefit) for Income Taxes				4,769		7,804			15,428			(1,040	)

Net Income (Loss)			$	19,671	$	6,984		$	51,649		$	(4,740	)

Net Income (Loss) per Share:
	Basic		$	0.06	$	0.02		$	0.15		$	(0.01	)

	Diluted		$	0.06	$	0.02		$	0.15		$	(0.01	)

Shares Used in per Share Calculations:
	Basic			338,345		332,403			336,911			330,726

	Diluted			351,114		352,868			349,449			330,726


(1) Stock compensation includes:
		Sales and marketing	$	361	$	263		$	1,228		$	806
		Research and development		796		736			1,638			4,542
		General and administrative		81		134			240			407

			$	1,238	$	1,133		$	3,106		$	5,755

See accompanying notes to condensed consolidated financial statements.

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands — unaudited)



					Nine Months Ended

					January 24,			January 25,
					2003			2002

Cash Flows from Operating Activities:
	Net income (loss)				$	51,649		$	(4,740	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				38,924			33,519
		Amortization of goodwill				—			11,383
		Amortization of intangible assets				4,114			4,295
		Stock compensation				3,106			5,755
		Impairment loss on investments				726			13,008
		Gain on sale of intangible asset				(604	)		—
		Provision for doubtful accounts (reversal)				(1,636	)		6,015
		Deferred income taxes				(16,231	)		(26	)
		Deferred rent				(62	)		(63	)
		Changes in assets and liabilities:
			Accounts receivable			(20,898	)		41,853
			Inventories			(19,619	)		(9,178	)
			Prepaid expenses and other assets			(7,783	)		(460	)
			Accounts payable			(2,128	)		(29,854	)
			Income taxes payable			27,069			(4,164	)
			Accrued compensation and related benefits			(8,450	)		(15,887	)
			Other accrued liabilities			5,537			17,809
			Deferred revenue			49,213			18,932

				Net cash provided by operating activities		102,927			88,197

Cash Flows from Investing Activities:
	Purchases of short-term investments					(261,636	)		(273,464	)
	Redemptions of short-term investments					200,260			178,203
	Purchases of property and equipment					(45,905	)		(22,485	)
	Purchase of equity securities					(650	)		(875	)

				Net cash used in investing activities		(107,931	)		(118,621	)

Cash Flows from Financing Activities:
	Proceeds from sale of common stock, net					24,337			31,262
	Increase in restricted cash					—			(57,284	)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents