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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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 30, 1999
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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) 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
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 28, 1999, was $3,437,341,372 (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 28, 1999, 72,892,671 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 26, 1999, which will be filed with the Securities and Exchange
Commission not later than 120 days after April 30, 1999.
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This Annual Report on Form 10-K contains forward looking statements that are
accompanied by cautionary statements that identify important factors that could
cause actual results to differ materially from those in the forward looking
statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Network Appliance pioneered the concept of the "network appliance," an
extension of the industry trend toward specialized devices that perform a
specific function in the network, similar to the development of the router for
network communications. Today we are the leading supplier of network attached
data storage and access devices, called filers. Our first filer product was
specifically designed to improve the storage and accessibility of data stored on
a network. In late 1997, we introduced an Internet caching appliance, our second
product category, designed to achieve Internet bandwidth savings and to improve
performance by moving data closer to end-users. This product is designed to
benefit customers struggling with Web data traffic that is, according to market
analysts, doubling every three months. Our filers are faster, more highly
available and easier to operate than similarly configured and competitively
priced products. This filer performance is accomplished by a specialized and
patented software system optimized to exclusively perform file service tasks,
thus providing performance advantages as compared to general purpose computers
used as file servers.
Initially, we marketed our filers primarily in the UNIX(R) environment
in high technology companies seeking to achieve leading edge performance.
Thereafter, we significantly expanded our market by supporting heterogeneous
Windows NT(R), UNIX and Web platforms. More recently we began marketing our
products to users of leading database and enterprise software applications, such
as applications offered by Oracle Corp., Sybase, Inc. and SAP AG. In fiscal
1999, we intensified our focus on the Windows NT market and entered into OEM
agreements with Dell Computer Corporation and Fujitsu Limited.
PRODUCTS
Filers. Our first Network Appliance(TM) product was a filer developed
for the UNIX environment. Subsequently, we added the capability for the filer to
handle the heterogeneous network environment of UNIX, Windows NT and HTTP
protocols. Current products include: the NetApp(R) F720, an entry-level filer
targeted for workgroups and smaller application environments, the NetApp F740,
designed to address the needs of large departments, and the NetApp F760, an
enterprise class filer. All filers are based on a PCI-bus architecture and come
packaged in rack mountable enclosures. The NetApp F700-series filers are all
based on the Digital(R) Alpha(R) processor and support either SCSI or fibre
channel arbitrated loop (FC-AL) conventions as storage options.
All of our filers include the Data ONTAP(TM) operating system and one
base or standard protocol (either NFS, CIFS or HTTP). Data ONTAP delivers
simultaneous file service to UNIX, Windows NT and Web clients. Data ONTAP,
versions 5.0 and higher, supports multiple volume server partitioning, a popular
strategy for modularizing, consolidating and administering data according to
applications, data types and organizational needs. Native multi-protocol
functionality can be easily added through licensing non-base protocols at an
additional cost. Cluster failover software technology, which automatically
senses a system failure and switches all file service functions to its cluster
partner, is available on the NetApp F740 and NetApp F760 products. Two software
features were introduced in the fourth quarter of fiscal 1999, SnapMirror(TM)
and SnapRestore(TM) which are based on the Snapshot(TM) technology.
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SnapMirror and SnapRestore allow enterprise, database and e-commerce customers
to implement multi-terabyte data management systems for remote mirroring,
enterprise backup, disaster recovery and data replication. These data protection
tools enhance our filers' performance allowing customers to minimize downtime,
eliminate unnecessary storage investment and time consuming backup routines.
SecureAdmin(TM) is a security product that allows administrators to conduct
encrypted sessions with the filer over the Internet or corporate intranets.
SnapMirror, SnapRestore and SecureAdmin are available with Data ONTAP version
5.3 on our NetApp filer and NetCache(TM) systems.
NetCache Appliances. NetCache appliances were developed to address the
explosive growth of Internet traffic that is slowing Web data access. The rapid
growth and increasing richness of web content, including images, audio, video
and downloadable applications are creating a greater demand for bandwidth.
NetCache appliances scale network infrastructure by distributing content closer
to the end-users and improving end-user performance. Web access delays can be
substantially reduced if frequently accessed data is stored or "cached" nearer
to the end-user. Our NetCache solutions incorporate the following capabilities:
(i) remote deployability requiring little maintenance, (ii) high object caching
"hit rates" so that trips over the Internet are minimized and (iii) high
scalability that can handle many users. Using the proprietary software and
standards-compliant hardware developed for our filers, we developed and are
selling our NetCache family of appliances.
In April 1999, we announced NetCache(R) 3.4, our next generation of
NetCache products to help customers grow network infrastructure and manage
mission critical data. This release includes features that provide customers
with a fast, cost-effective way to administer corporate Internet/Intranet access
policies and offers advanced security features, including user authentication,
filtering and auditing. With our patented Write Anywhere File Layout WAFL(TM)
file system, microkernel OS and advanced caching algorithms, NetCache appliances
provide enhanced response times and throughput. Our NetCache appliance
architecture with integrated RAID (redundant array of independent disks) also
guarantees data and system availability even after a disk failure.
Current products include the entry-level NetApp C720s, a dedicated
caching appliance designed for smaller ISP and enterprise environments, the
NetApp C720, designed for remote, low administrative overhead environments such
as Internet Points-of-Presence (POPs), web hosting and content providers and
larger enterprises, and the NetApp C760, which supports the most demanding,
data-intensive caching environments.
Our product list prices range from $20,000 to $750,000, depending
primarily on the model purchased and product configuration.
SALES AND MARKETING
We seek to market and distribute our products and technology globally.
In North America, we employ a multi-tiered distribution strategy, which focuses
on product sales to end-users through a direct sales force, as well as selected
value-added resellers in certain geographies. In Europe, we employ a mix of
resellers and direct sales channels to sell to end-users. In Asia, our products
are primarily sold through resellers, which are supported by our channel
managers and technical support personnel. We recently entered into OEM
agreements with Dell Computer Corporation and Fujitsu Limited, which are part of
our strategy to increase the worldwide distribution of our filer products. No
single customer accounted for 10% or more of our net sales in fiscal 1999, 1998
or 1997.
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BACKLOG
We manufacture our products based upon forecasts of our customers'
demand. Orders are generally placed by customers on an as-needed basis. Products
are typically shipped within one to four weeks following receipt of an order. In
general, customers may cancel or reschedule orders without penalty. For these
reasons, we do not believe "orders" constitute a firm "backlog" and we believe
orders are not a meaningful indicator of revenues nor material to an
understanding of our business.
CUSTOMER SERVICE AND SUPPORT
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, which is generally one year for hardware and 90
days for software, includes 24-hour telephone support and advanced replacement
of defective hardware shipped on a next business day basis. We also offer
upgraded service during the warranty period, providing for faster on-site
hardware repair. Software support, including the repair of errors or defects,
and new release updates are provided at no extra charge for 90 days after
product shipment. Additional software support is available after the initial
warranty period through the software subscription program. Post-warranty service
programs include:
- cooperative maintenance where the customer purchases replacements or
extra parts and performs self-maintenance tasks;
- a full-service program involving a combination of telephone-based
support and on-site advanced replacement; and
- a software subscription program that includes telephone support and
software upgrades.
In general, we charge for service programs on an annual subscription
basis, with discounts to sites with multiple filers. On-site support is
primarily provided by independent parties both in North America and
internationally.
MANUFACTURING
Our manufacturing operations, located in Santa Clara, California,
include materials procurement, commodity management, component engineering,
manufacturing engineering, product assembly, product assurance, quality control
and final test. We rely on many suppliers for materials, as well as several key
subcontractors for the production of certain sub-assemblies. Our strategy has
been to develop close relationships with our suppliers, exchanging critical
information and implementing joint quality training programs. We are currently
expanding the use of subcontractors for the production of major sub-assemblies.
See "--Risk Factors--We rely upon a limited number of suppliers." This
manufacturing strategy minimizes capital investment and overhead expenditures
and creates flexibility by allowing us to rapidly expand. During May 1997, we
were awarded the ISO 9001 certification.
RESEARCH AND DEVELOPMENT
Since our inception we have made substantial investments in research and
development. We believe that our future performance will depend in large part on
our ability to maintain and enhance our current product line, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet an expanding range of customer requirements. We intend to continuously
expand our existing product offerings and to introduce new products.
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As part of our ongoing development process, we continue to deliver new
data access solutions with enterprise software and database management tools. In
the second quarter of fiscal 1999 we launched the F700 filer product family and
the NetApp cluster failover solution. In the third quarter of fiscal 1999 we
introduced the C700 family, the second generation of our NetCache appliances. In
the fourth quarter of fiscal 1999, we announced new enterprise software
offerings with SnapMirror and SnapRestore, data replication and recovery tools
to facilitate and enhance the management of data for backup and disaster
recovery applications. In addition, we also announced SecureAdmin, a security
product for administrators to conduct encrypted sessions with the filer over the
Internet or corporate intranets. In fiscal 1998 we released version 5.0 of our
Data ONTAP and initiated production shipments of four new filers.
Our future growth depends upon the successful development and
introduction of new hardware and software, however we cannot assure you that
these or other new products will attain market acceptance. See "--Risk
Factors--We depend upon our research and development efforts to develop and
introduce new products" and "--We face risks of technological changes that
affect our products."
Our total expenses for research and development for fiscal years 1999,
1998 and 1997 were $30.5 million, $16.6 million, and $9.0 million, respectively.
We anticipate that research and development expenses will increase in absolute
dollars in future periods.
COMPETITION
The network file server market is intensely competitive and
characterized by rapidly changing technology. We experience competition from
specialized network file server companies such as Auspex Systems, Inc. We also
compete against traditional suppliers of UNIX-based general purpose computers
that are used as network file servers including Sun Microsystems, Inc.,
Hewlett-Packard Company, Silicon Graphics, Inc. and IBM Corporation, among
others. In addition, certain of these large traditional suppliers of general
purpose computers may in the future offer specialized file server products,
which are more directly competitive with our products. We also encounter
competition from manufacturers of PC-based file servers utilizing Windows NT
and emerging standards, as well as competition from manufacturers of open
systems storage solutions such as EMC Corporation and Data General Corp. Our
NetCache appliances compete against a number of software and hardware
solutions, from companies ranging from small start-ups to larger systems
vendors including Cisco Systems Inc., Inktomi Corp., Cacheflow Inc. and Novell,
Inc. See "--Risk Factors--An increase in competition could materially adversely
affect our operating results" and "--We face risks of technological changes
that affect our products."
We believe that the principal competitive factors affecting our market
include product features such as response time, scalability, ease of use, price,
multiprotocol capabilities and customer service and support. Although we believe
that our products currently compete favorably with respect to these factors, we
can not assure you that we can maintain our competitive position against current
and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.
PROPRIETARY RIGHTS
We currently rely on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures, contractual provisions and patents to
protect our proprietary rights. We seek to protect our software, documentation
and other written materials under trade secret, copyright and patent laws, which
afford only limited protection. We have registered our "Network Appliance" name
and logo, "FAServer", "FilerView" and "NetApp" trademarks. We will continue to
evaluate the registration of additional
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trademarks as appropriate. We generally enter into confidentiality agreements
with our employees, resellers and customers. We currently have multiple U.S. and
international patent applications pending and one U.S. patent issued. See
"--Risk Factors--If we are unable to protect our intellectual property, we may
be subject to increased competition which could materially adversely affect our
operating results."
EMPLOYEES
As of May 31, 1999, we had approximately 816 employees. Of the total,
425 were in sales and marketing, 202 in research and development, 86 in finance
and administration and 103 in operations. Our future performance depends in
significant part upon our key technical and senior management personnel, none of
whom is bound by an employment agreement. We have never had a work stoppage and
consider relations with our employees to be good.
EXECUTIVE OFFICERS
Our executive officers and their ages as of May 31, 1999, are as
follows:
NAME AGE POSITION
- ---- --- --------
Daniel J. Warmenhoven 48 President, Chief Executive Officer and Director
M. Helen Bradley 45 Vice President, Engineering
Jeffry R. Allen 47 Vice President, Finance and Operations, Chief
Financial Officer and Secretary
Thomas F. Mendoza 48 Senior Vice President, Worldwide Sales and Marketing
Charles E. Simmons 50 Vice President, Corporate Development
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. Mr. Warmenhoven holds a B.S. degree in electrical
engineering from Princeton University.
M. Helen Bradley has served as our Vice President, Engineering since
September 1995. Prior to that, Ms. Bradley owned a management consulting
business from January 1995 to September 1995. She also served as Senior Vice
President, Technology Development at Openvision, Inc., a client-server
applications company, from May 1994 to January 1995. From August 1990 to April
1994, Ms. Bradley was the Vice President, Systems Software at Sun Microsystems,
Inc. Ms. Bradley holds a B.S. degree in mathematics from the Massachusetts
Institute of Technology and an M.S. degree in computer science from the Georgia
Institute of Technology.
Jeffry R. Allen has served as our Vice President, Finance and Operations,
Chief Financial Officer and Secretary since December 1996. From October 1994 to
December 1996, Mr. Allen served in various capacities, including Senior Vice
President of Operations and Vice President and Controller of Bay Networks, Inc.,
a networking company. From December 1990 to October 1994, Mr. Allen held various
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positions at SynOptics, Inc., the latest of which was Vice President and
Controller. Before joining SynOptics, Inc., he held various positions, from
December 1973 to November 1990, at Hewlett-Packard Company, the latest of which
was Controller of the Information Networks Group. Mr. Allen holds a B.S. degree
from San Diego State University.
Thomas F. Mendoza has served as our Senior Vice President, Worldwide Sales
since 1998 and Senior Vice President, Marketing since February 1999. Prior to
that he served as Vice President, North American Sales. From November 1993 to
April 1994, Mr. Mendoza served in various capacities including Vice President,
Sales at Work Group Technology, a product data management company. Prior to
that, Mr. Mendoza served in various capacities including Vice President of North
American Sales at Auspex Systems, Inc., a UNIX-based network file server
company, from November 1990 to October 1993. Mr. Mendoza was previously Vice
President of Western Operations at Stratus Computer Corp., a vendor of fault
tolerant computers, from May 1982 to October 1990. Mr. Mendoza holds a B.A.
degree from the University of Notre Dame.
Charles E. Simmons has served as our Vice President, Corporate Development
since February 1999. From May 1996 to February 1999 he served as Vice President,
Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner &
Associates, a consulting firm, from October 1994 to May 1996. From February 1994
to October 1994, Mr. Simmons served as Vice President of Marketing at Voyant
Corporation, a developer of videoconferencing equipment. Prior to that, Mr.
Simmons was with Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems, Inc., from November 1984 to February 1994, most recently as
Director of Business Strategy and Technology Marketing. Mr. Simmons received a
B.S. degree in electrical engineering from Washington University, an M.S. degree
in electrical engineering from the Massachusetts Institute of Technology and an
M.B.A. from Santa Clara University.
RISK FACTORS
FACTORS BEYOND OUR CONTROL COULD CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE.
Although we have experienced significant revenue growth in recent
periods, this growth may not be indicative of our future operating results. As a
result, we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. Many of the factors that could cause our
quarterly operating results to fluctuate significantly in the future are beyond
our control and include the following:
- the level of competition in our target product markets;
- the size, timing and cancellation of significant orders;
- product configuration and mix;
- market acceptance of new products and product enhancements;
- new product announcements or introductions by us or our competitors;
- deferrals of customer orders in anticipation of new products or
product enhancements;
- changes in pricing by us or our competitors;
- our ability to timely develop, introduce and market new products and
enhancements;
- supply constraints;
- technological changes in our target product markets;
- the levels of expenditure on research and development and expansion
of our sales and marketing programs;
- seasonality; and
- general economic trends.
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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 file server market is rapidly evolving and our sales cycle
varies substantially from customer to customer.
Due to all of the foregoing factors, it is possible that in one or more
future quarters our results may fall below the expectations of public market
analysts and investors. In such event, the trading price of our common stock
would likely decrease.
OUR GROSS MARGINS MAY VARY BASED ON THE CONFIGURATION OF OUR PRODUCTS.
We derive a significant portion of our sales from the resale of disk
drives as components of our filers, and the resale market for hard disk drives
is highly competitive and subject to intense pricing pressures. Our sales of
disk drives generate lower gross margin percentages than those of our filer
products. As a result, as we sell more highly configured systems with greater
disk drive content, overall gross margin percentages will be negatively
affected. Consequently, we believe we will experience a modest decline in gross
margins and pre-tax income as a percentage of net sales in fiscal 2000.
Our gross margins have been and may continue to be affected by a variety
of other factors, including:
- competition;
- direct versus indirect sales;
- the mix and average selling prices of products, including software
licensing;
- new product introductions and enhancements; and
- the cost of components and manufacturing labor.
A SIGNIFICANT PERCENTAGE OF OUR EXPENSES ARE FIXED WHICH COULD AFFECT OUR NET
INCOME.
Our expense levels are based in part on our expectations as to future
sales and a significant percentage of our expenses are fixed. As a result, if
sales levels are below expectations, net income may be disproportionately
affected.
OUR FUTURE FINANCIAL PERFORMANCE DEPENDS ON GROWTH IN THE NETWORK FILE SERVER
MARKET AND ANY LACK OF GROWTH WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS.
All of our filer products address the network file server market.
Accordingly, our future financial performance will depend in large part on
continued growth in the network file server market and on emerging standards in
this market. We cannot assure you that the market for network file servers will
continue to grow or that emerging standards in the network file server market
will not adversely affect the growth of UNIX and Windows NT server markets. If
the network file server market grows more slowly than anticipated or if network
file servers based on emerging standards other than those adopted by us become
increasingly accepted by the market, our operating results could be materially
adversely affected.
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THE SUCCESS OF OUR NETCACHE APPLIANCE PRODUCTS DEPENDS UPON MARKET ACCEPTANCE OF
CACHING TECHNOLOGY AND CONTINUED GROWTH IN THE CACHING APPLIANCE MARKET.
In late 1997, we released our NetCache appliance products, a new
category of hardware-based Internet caching appliances designed to speed the
delivery of information stored on the Web. However, hardware-based caching
technology is still in its infancy.
Our future financial performance will depend in part on the acceptance
of caching technology and the acceptance of our NetCache appliance products. We
cannot assure you that the caching appliance market will continue to grow at its
current rate, or at all.
IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS, OR IF OUR NEW PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE, OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED.
We derive a substantial portion of our revenue from the sale of our
network filer products. As a result, a reduction in the demand for our filer
products due to increased competition, a general decline in the market for
network file servers or other factors could materially adversely affect our
operating results. As part of our ongoing development process, we initiated
production shipments of four new filers in fiscal 1998 and in fiscal 1999 we
launched our F700 and C700 filer product family as well as enterprise software
offerings with SnapMirror, SnapRestore and cluster failover. We expect to derive
a substantial portion of our revenue from sales of our F700 and C700 filer
product family and these major data management software products. Additional
product introductions in future periods are expected to impact the sales of
existing products. If we are unable to introduce new products in a timely
manner, effectively manage the introduction of new products and any related
inventory transitions, or if such products do not achieve market acceptance, our
operating results could be materially adversely affected.
IF WE FAIL TO MANAGE OUR EXPANDING BUSINESS EFFECTIVELY OUR OPERATING RESULTS
COULD BE MATERIALLY ADVERSELY AFFECTED.
We have experienced rapid growth. Our future operating results depend to
a large extent on management's ability to successfully manage expansion and
growth, including but not limited to expanding international operations,
forecasting revenues, addressing new markets, controlling expenses, implementing
infrastructure and systems and managing our assets. In addition, an unexpected
decline in the growth rate of revenues without a corresponding and timely
reduction in expense growth or a failure to manage other aspects of growth could
materially adversely affect our operating results.
WE DEPEND ON ATTRACTING AND RETAINING QUALIFIED TECHNICAL AND SALES PERSONNEL.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel. Because
our future success is dependent on our ability to continue to enhance and
introduce new products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with the requisite
education, backgrounds and industry experience. Competition for qualified
engineers, particularly in Silicon Valley, is intense. The loss of the services
of a significant number of our engineers or sales people could be disruptive to
our development efforts or business relationships and could materially adversely
affect our operating results.
RISKS INHERENT IN OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
We conduct business internationally. For the year ended April 30, 1999
approximately 30.7% of our net sales were to international customers (including
United States exports). Accordingly, our future
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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. We do not anticipate any material adverse effect
on our consolidated financial position utilizing the current hedging strategy.
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 adversely affected by seasonality.
We believe that continued growth and profitability will require
successful expansion of our international operations and sales and therefore we
have committed significant resources to such expansion. In order to successfully
expand international sales in future periods, we must strengthen foreign
operations, hire additional personnel and recruit additional international
distributors and resellers. This will require significant management attention
and financial resources and could materially adversely affect our operating
results. To the extent that we are unable to effect these additions in a timely
manner, our growth, if any, in international sales will be limited, and our
operating results could be materially adversely affected. In addition, we cannot
assure you that we will be able to maintain or increase international market
demand for our products.
AN INCREASE IN COMPETITION COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
The network file server market is intensely competitive and
characterized by rapidly changing technology. We compete with specialized
network file server companies such as Auspex Systems, Inc. We also compete
against traditional suppliers of UNIX-based general purpose computers that are
used as network file servers including Sun Microsystems, Inc., Hewlett-Packard
Company, Silicon Graphics, Inc. and IBM Corporation, among others. Many of our
current and potential competitors have significantly greater financial,
technical, marketing and other resources than we do. In addition, certain of
these large traditional suppliers of general purpose computers may in the future
offer specialized file server products which are more directly competitive with
our products. We also encounter competition from manufacturers of PC-based file
servers utilizing Windows NT and emerging standards, as well as competition from
manufacturers of open systems storage solutions such as EMC Corporation and Data
General Corp. Our NetCache appliances compete against a number of software and
hardware solutions, from companies ranging from small start-ups to larger
systems vendors, including Cisco Systems Inc., Inktomi Corp., Cacheflow Inc. and
Novell, Inc.
Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our operating results. As a result, our competitors
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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, scalability, ease of use, price,
multiprotocol capabilities and customer service and support. Although we believe
that our products currently compete favorably with respect to these factors, we
cannot assure you that we can maintain our competitive position against current
and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.
WE RELY UPON A LIMITED NUMBER OF SUPPLIERS AND ANY DISRUPTION OR TERMINATION OF
THESE SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
We rely upon a limited number of suppliers of several key components
utilized in the assembly of our products. We purchase most of our disk drives
through a single supplier. We purchase computer boards and microprocessors from
a limited number of suppliers. Our reliance on a limited number of suppliers
involves several risks, including:
- a potential inability to obtain an adequate supply of required
components because we do not have long-term supply commitments;
- 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 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 OUR OEM RELATIONSHIPS WITH DELL COMPUTER CORPORATION
AND FUJITSU LIMITED WILL GENERATE SIGNIFICANT REVENUE.
While our agreements with Dell Computer Corporation and Fujitsu Limited
are an element of our strategy to increase penetration in the Windows NT market,
neither Dell Computer Corporation nor Fujitsu Limited have made purchase
commitments for our products. In addition, since these agreements
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are new, we do not have a history upon which to base an analysis of their future
success. Currently we do not, and cannot assure you that we will, generate
significant revenue from these agreements.
WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS AND ACCORDINGLY
THERE IS A RISK THAT THOSE DISTRIBUTORS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF
OTHER SUPPLIERS WHICH COULD 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 adversely affect our operating results.
WE DEPEND UPON OUR RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP AND INTRODUCE NEW
PRODUCTS AND ANY FAILURE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY
COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our future growth depends upon the successful development and
introduction of new hardware and software products. We cannot assure you that
these or other new products will be introduced on a timely basis or attain
market acceptance. Due to the complexity of network file servers and Internet
caching devices, and the difficulty in gauging the engineering effort required
to produce new products, new products are subject to significant technical
risks. We cannot assure you that new products will be introduced on a timely
basis or at all. In the past, we have experienced delays in the shipments of our
new products principally due to an inability to qualify component parts from
disk drive and other suppliers, resulting in delay or loss of product sales. If
new products are delayed or do not achieve market acceptance, our operating
results will be materially adversely affected.
WE FACE RISKS OF TECHNOLOGICAL CHANGES THAT AFFECT OUR PRODUCTS.
The markets we serve are characterized by rapid technological change,
changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards could render our existing products
obsolete and unmarketable. Our future success will depend upon our ability to
develop and introduce new products (including new software releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of our customers. We cannot assure you that we will be successful in developing
and marketing new products that respond to technological changes or evolving
industry standards. If we are unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, our operating results will be
materially adversely affected.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS.
Our products may contain undetected software errors or failures when
first introduced or as new versions are released. Despite testing by us and by
current and potential customers, errors may not be found in new products until
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could materially adversely affect our operating
results.
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IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO
INCREASED COMPETITION WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions and patents to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret, copyright and patent laws, which afford
only limited protection. We have registered trademarks including our "Network
Appliance" name and logo, "FAServer", "FilerView" and "NetApp" trademarks. 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 U.S.
and international patent applications pending and one U.S. patent 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.
THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE AND ANY BROAD MARKET
FLUCTUATIONS MAY MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
The market price for our common stock has been volatile in the past, and
several factors could cause the price to fluctuate substantially in the future.
These factors include:
- fluctuations in our operating results;
- fluctuations in the valuation of companies perceived by investors to
be comparable to us;
- a shortfall in revenues or earnings compared to securities analysts'
expectations;
- changes in analysts' recommendations or projections;
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- announcements of new products, applications or product enhancements
by us or our competitors; and
- changes in our relationships with our suppliers or customers.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated to the operating results
of such companies. As a result, the market price of our common stock may
fluctuate significantly in the future and any broad market fluctuations may
adversely affect the market price of our common stock. Due to all of the
foregoing, the current market price of our common stock may not be indicative of
future market prices.
PROTECTIVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MATERIALLY
ADVERSELY AFFECT STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the shareholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Further, certain
provisions of our bylaws pertaining to the future elimination of cumulative
voting and shareholder action by written consent, and the requirement that
shareholders may call a special meeting of shareholders only upon a request of
shareholders owning at least 50% of our common stock, could delay or make more
difficult a proxy contest involving us, which could adversely affect the market
price of our common stock.
YEAR 2000 ISSUES COULD HARM OUR OPERATIONS.
The Year 2000 issue refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. As a result, many
companies' systems and software may need to be upgraded or replaced in order to
function correctly after December 31, 1999.
We are currently conducting a general software upgrade and replacement
program to enhance our computer systems and applications, in particular those
systems and applications related to our manufacturing, distribution and
financial operations. As part of this larger program we are addressing the
critical areas of our internal computer systems, products and relationships with
external organizations for Year 2000 compliance. We are addressing Year 2000
compliance for both our information technology ("IT") and non-IT systems, which
typically include embedded technology such as microcontrollers.
While we believe that the estimated cost of becoming Year 2000 compliant
will not be significant to our operating results, failure to complete all the
work in a timely manner could materially adversely affect our operating results.
While we expect all planned work to be completed, we can not guarantee that all
systems will be in compliance by the Year 2000, the systems of suppliers and
other companies and government agencies on which we rely will be converted in a
timely manner, or that our contingency planning will be able to fully address
all potential interruptions. Therefore, Year 2000 issues could cause delays in
our ability to produce or ship our products, process transactions or otherwise
conduct business in any of our markets. Year 2000 issues could lower demand for
our products while increasing our costs. The occurrence of one or more of these
factors could materially adversely affect our operating results. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000."
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ITEM 2. PROPERTIES
In June, July and August 1998, we executed agreements to acquire
approximately 18 acres of land in Sunnyvale, California and to develop 393,000
square feet of buildings. All of our principal activities will relocate to
Sunnyvale in phases beginning in June 1999. Our manufacturing and research and
development facilities remain located in approximately 120,000 square feet of
space in Santa Clara, California until the Sunnyvale facilities are fully
completed. The Santa Clara facilities are leased under various operating leases
with 100,000 square feet of space expiring in June 2000, and the remainder
expiring in fiscal 2003.
In January, May and June 1999, we assigned our rights and obligations
under all the agreements for the Sunnyvale facilities to a third-party entity
and entered into three operating leases. The leases are for five years and can
be renewed for two five-year periods, subject to the approval of the third-party
entity. At the expiration or termination of the leases, we have the option to
either purchase the property at a pre-determined amount, or arrange for the
purchase by another party at a price equal to the fair market value, and be
contingently liable for any deficiency in price. We lease other sales offices
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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock commenced trading on the Nasdaq National Market on
November 21, 1995 and is traded under the symbol "NTAP." As of May 28, 1999,
there were 334 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 21, 1998 two-for-one stock split.
FISCAL 1999 FISCAL 1998
HIGH LOW HIGH LOW
First Quarter $25.13 $16.56 $10.25 $ 7.00
Second Quarter 30.22 17.38 14.16 9.94
Third Quarter 55.50 27.38 17.75 12.06
Fourth Quarter 63.50 39.63 18.13 13.66
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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, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
------------------------------------------------------------
Net Sales $289,420 $166,163 $ 93,333 $ 46,632 $ 14,796
Income (Loss) From Operations (1) 55,126 32,658 3,083 6,000 (4,913)
Net Income (Loss) (2) 35,613 20,965 250 6,600 (4,764)
Net Income (Loss) Per Share, basic (2) 0.52 0.32 0.00 0.18 (0.28)
Net Income (Loss) Per Share, diluted (2) 0.46 0.29 0.00 0.10 (0.28)
Total Assets 346,347 115,736 68,941 45,449 10,628
Long-Term Obligations 93 163 232 318 11,607
Total Shareholder's Equity (Deficit) 295,724 86,265 54,029 39,029 (5,923)
- ---------------
(1) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $10,519 and the Whipsaw litigation of
$4,300. See Notes 4 and 9 under Item 8 Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements.
(2) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $9,215 (net of taxes) and the Whipsaw
litigation of $2,795 (net of taxes). See Notes 4 and 9 under Item 8 Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the related
notes thereto set forth under "Item 8. Financial Statements and Supplementary
Data." This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in those forward-looking statements as a result of certain factors,
including those set forth in "Item 1. Business - Risk Factors" and elsewhere in
this Annual Report on Form 10-K.
Overview
We pioneered the concept of the "network appliance," an extension of the
industry trend toward specialized devices that perform a specific function in
the network, similar to the adoption of the router
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for network communications. Today we are the leading supplier of network
attached data storage and access devices, called filers.
We derive a substantial portion of our revenue from the sale of our
network filer products. As a result, a reduction in the demand for filer
products due to increased competition, a general decline in the market for
network file servers or other factors could materially adversely affect our
operating results. In fiscal 1998, we initiated product shipments of NetCache
appliances and in the second quarter of fiscal 1999 began shipments of the
second generation of our NetCache proxy server. We expect that NetCache product
sales will become a larger percentage of net sales.
Our gross margin may vary based on the configuration of systems that
are sold. Highly configured systems typically generate lower overall gross
margin percentages due to greater disk drive and memory content. As we sell more
highly configured systems with greater disk drive content, overall gross margin
percentages will be negatively affected. Consequently, we believe we will
experience a modest decline in gross margin and pre-tax income as a percentage
of net sales in fiscal 2000.
Our gross margin has been and may continue to be affected by a variety
of other factors, including:
- competition;
- direct versus indirect sales;
- the mix and average selling prices of products, including software
licensing;
- new product introductions and enhancements; and
- the cost of components and manufacturing labor.
Operating results have not been materially adversely affected by seasonality
in the past. However, because of the significant summer seasonal effects
experienced within the industry, particularly in Europe, our future operating
results could be adversely affected by seasonality.
For the year ended April 30, 1999 approximately 30.7% of our net sales were
derived from international customers (including United States exports).
Accordingly our future operating results could be materially adversely affected
by a variety of factors, some of which are beyond our control. For more
information on risks associated with our international operations, see "Item
1--Business--Risk Factors--Risks inherent in our international operations could
have a material adverse effect on our operating results."
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
YEARS ENDED APRIL 30,
1999 1998 1997
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 40.8 40.7 40.8
------------------------------
Gross Margin 59.2 59.3 59.2
------------------------------
Operating Expenses:
Sales and Marketing 26.1 25.7 26.0
Research and Development 10.5 10.0 9.6
General and Administrative 3.5 3.9 4.4
Purchased In-Process Technology and Related Compensation Charge -- -- 11.3
Litigation Settlement -- -- 4.6
------------------------------
Total Operating Expenses 40.1 39.6 55.9
------------------------------
Income From Operations 19.1 19.7 3.3
Other Income, Net 0.6 0.5 1.0
------------------------------
Income Before Income Taxes 19.7 20.2 4.3
Provision for Income Taxes 7.4 7.6 4.0
------------------------------
Net Income 12.3% 12.6% 0.3%
==============================
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased by 74.2%, to $289.4 million in fiscal 1999 from
$166.2 million in fiscal 1998. This increase was primarily attributable to a
higher volume of units shipped, as compared to the corresponding period of the
prior fiscal year. Factors impacting unit growth include:
- expansion of our direct sales force;
- increased unit shipments principally due to the successful launching
of our F700 filer product family during the second quarter of fiscal
1999;
- increased worldwide shipment of NetApp cluster failover and NetCache
solutions; and
- increased multi-protocol software licensing, software subscription
and service revenues due to a growing installed base, and increased
sales of multi-protocol systems.
Net sales growth was also positively impacted by a higher average
selling price of the newly introduced F700 filer product family due primarily to
the increase in storage content. Factors which partially offset overall net
sales growth include declining unit sales of our older product family and
decreases in base prices of our older product line due to competitive forces.
International net sales (including United States exports) grew by 116.3%
for fiscal 1999 as compared to fiscal 1998. International net sales were $88.8
million, or 30.7%, of total net sales for fiscal 1999. The increase in
international sales for fiscal 1999 was primarily a result of European sales
growth due to increased headcount in the direct sales force, indirect channel
sales through resellers, shipments of filers and sales of our new NetApp cluster
failover solutions and NetCache appliances. Asia Pacific net sales growth for
fiscal 1999 was also driven by indirect sales through resellers, increased
headcount in the
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direct sales force, increased shipments of filers and the sale of NetCache
appliances, as compared to fiscal 1998.
We cannot assure you that our net sales will continue to increase in
absolute dollars or at the rate at which they have grown in recent fiscal
periods.
Gross Margin--Gross margin remained relatively flat decreasing slightly
to 59.2% of net sales for fiscal 1999 as compared to 59.3% for fiscal 1998. The
consistency in gross margin for fiscal 1999 as compared to fiscal 1998 was
primarily attributable to the increase in product volume, lower costs of key
components, increased manufacturing efficiencies, increased market acceptance of
our product line with the continuance of the cost-reduced designs introduced in
the second quarter of fiscal 1999, the introduction of the F700 filer product
family and NetApp cluster failover system during the second quarter of fiscal
1999 and the revenue growth from sales of NetCache appliances. Gross margin was
also favorably impacted by the licensing of multi-protocol software and support
contracts, and by growth in software subscription and service revenues due to a
larger installed base. Primary factors negatively impacting gross margin were
the increase in the sales volume of the F700 product family, which has higher
incremental costs associated with greater disk drive and memory content, and the
effect of base system price reductions across the full range of older generation
filers.
Our gross margin has been and will continue to be affected by a variety
of factors, including:
- competition;
- product configuration;
- direct versus indirect sales;
- the mix and average selling prices of products, including software
licensing;
- new product introductions and enhancements; and
- the cost of components and manufacturing labor.
Our gross margin may also vary based upon the configuration of systems
that are sold and whether they are sold directly or through indirect channels.
Highly configured systems have historically generated lower overall gross margin
percentages due to greater disk drive and memory content.
Sales and Marketing--Sales and marketing expenses consist primarily of
salaries, commissions, advertising and certain promotional expenses and customer
service and support costs. In fiscal 1999, sales and marketing expenses of $75.5
million reflect an increase of 76.5% over fiscal 1998. These expenses were 26.1%
and 25.7% of net sales for fiscal 1999 and 1998, respectively. The increase in
absolute dollars was primarily related to the continued expansion of our sales
and marketing organization, including growth in the domestic and international
direct sales forces and increased commission expenses. We expect to continue to
increase our sales and marketing expenses in an effort to expand domestic and
international markets, introduce new products, establish and expand new
distribution channels and increase product and company awareness. We believe
that our continued growth and profitability is dependent in part on the
successful expansion of our international operations, and therefore, have
committed significant resources intended to increase international sales.
Research and Development--Research and development expenses consist
primarily of salaries and benefits, prototype expenses and fees paid to outside
consultants. Research and development expenses increased 82.9% to $30.5 million
in fiscal 1999 from $16.6 million in fiscal 1998. These expenses represented
10.5% and 10.0% of net sales, respectively, for those periods. Research and
development expenses increased in absolute dollars, primarily as a result of
increased headcount, ongoing support of current and future product development
and enhancement efforts and prototyping expenses
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associated with the development of new products, including the NetApp F700
series filers and the C700 family, the second generation of our NetCache
appliances. We believe that our future performance will depend in large part on
our ability to maintain and enhance our current product line, develop new
products that achieve market acceptance, maintain technological competitiveness
and meet an expanding range of customer requirements. We intend to continuously
expand our existing product offerings and to introduce new products.
Consequently, we expect that such expenditures will continue to increase in
absolute dollars. For both fiscal 1999 and 1998, no software development costs
were capitalized.
General and Administrative--General and administrative expenses
increased 56.1% to $10.2 million in fiscal 1999 from $6.5 million in fiscal
1998. These expenses represented 3.5% and 3.9% of net sales, respectively, for
those periods. Increases in absolute dollars were primarily due to increased
headcount, and increases to the allowance for doubtful accounts and outside
service fees. We believe that our general and administrative expenses will
increase in absolute dollars as we continue to build our infrastructure.
Other Income, Net--Other income, net, was $1.9 million and $0.9 million
in fiscal 1999 and 1998, respectively. The increase was due primarily to
interest income earned on the net proceeds of $138.8 million from our March 1999
follow-on public offering and cash flow from operations, but was partially
offset by foreign currency exchange losses recorded in fiscal 1999.
Provision for Income Taxes--Our effective tax rate was 37.5% for both
fiscal 1999 and 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales--Net sales increased by 78.0% to $166.2 million in fiscal 1998
from $93.3 million in fiscal 1997. The increase in net sales was principally
attributable to a higher volume of filers shipped. The increase in unit
shipments resulted primarily from expansion of our direct sales force and the
introduction of new products during June and July 1997, particularly the
enterprise-class NetApp F630, the NetApp F520 and the NetApp F230. Net sales for
fiscal 1998 were also positively impacted by a shift in product mix toward
higher-end systems, primarily due to the introduction of new products, leading
to higher average selling prices for filers than in the previous fiscal year.
Net sales also grew as a result of increased multiprotocol system shipments, the
licensing of multiprotocol software to pre-existing customers and increased
service and software subscription revenues due to a growing installed base.
International net sales (including U.S. exports) were $41.1 million and
$17.3 million, for fiscal 1998 and 1997, respectively. The increase in
international net sales was primarily a result of European sales growth due to
increased headcount in the direct sales force over the prior fiscal year and to
the introduction of the new products in June and July 1997.
Gross Margin--Gross margin remained relatively flat increasing slightly
to 59.3% of net sales for fiscal 1998 compared to 59.2% of net sales for fiscal
1997. This increase in gross margin was primarily attributable to the increase
in product volume, lower costs of key components, increased manufacturing
efficiencies and by the sale of our new product with cost-reduced designs first
introduced in June and July 1997. Gross margin was also favorably impacted by
the licensing of multiprotocol software and by growth in software subscription
and service revenues due to a growing installed base. Factors contributing to
gross margin growth were partially offset by the sale of 4 gigabyte drives at
reduced prices in fiscal 1998.
Our gross margin has been and will continue to be affected by a variety
of factors, including competition, product configuration, direct versus indirect
sales, the mix and average selling prices of products, new product introductions
and enhancements and the cost of components and manufacturing
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labor. In particular, our gross margin varies based upon the configuration of
systems that are sold and whether they are sold directly or through indirect
channels. Highly configured systems typically generate lower overall gross
margin percentages due to greater disk drive and memory content.
Sales and Marketing--Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 76.3% to $42.8 million
in fiscal 1998, compared to $24.3 million in fiscal 1997. These expenses were
25.7% and 26.0% of net revenues for fiscal 1998 and 1997, respectively. The
increase in absolute dollars was primarily related to the expansion of our sales
and marketing organization, including growth in the domestic and international
direct sales forces and increased commission expenses. During the quarter ended
January 23, 1998, we launched an advertising campaign which contributed to
absolute dollar growth in sales and marketing expenses for fiscal 1998. 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, we have
committed significant resources to international sales.
Research and Development--Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 85.6% to $16.6 million in fiscal 1998, compared
to $9.0 million in the prior fiscal year. These expenses represented 10.0% and
9.6% of net sales in fiscal 1998 and 1997, respectively, and increased as a
result of headcount growth, prototyping expenses associated with the development
of new products and ongoing support of current and future product development
and enhancement efforts. We believe that significant investments in research and
development will be required to remain competitive and expect that such
expenditures will continue to increase in absolute dollars.
General and Administrative--General and administrative expenses were
$6.5 million in fiscal 1998, compared to $4.1 million in fiscal 1997, an
increase of 57.9%. These expenses represented 3.9% and 4.4% of net sales for
such periods and increased in absolute dollars primarily as a result of
headcount growth, increased professional services fees and an increase to the
allowance for doubtful accounts. We believe that our general and administrative
expenses will increase in absolute dollars as we continue to build our
infrastructure.
Litigation Settlement-- In July 1994, we and certain of our former
employees were named as defendants in a lawsuit which alleged that one of our
founders, who left the company in March 1995, misappropriated confidential
information prior to the company's founding in April 1992. In August 1996, we
entered into a settlement with the plaintiff which resulted in a charge to
earnings of $4.3 million in the first quarter of fiscal 1997, which included a
$3.5 million payment to the plaintiffs and $0.8 million of legal fees. As the
payment released us from all liabilities associated with the case, we have no
future obligations to the plaintiffs. We deny any wrongdoing on our part or on
the part of the founder.
Purchased In-Process Technology and Related Compensation Charge-- On
March 17, 1997, we acquired all outstanding shares and options to purchase
shares of IMC common stock by issuing 748,092 shares of our common stock and
options to purchase shares of our common stock. In connection with the
acquisition, intangible assets of $8.4 million were acquired, of which $7.4
million was reflected as a one-time charge to operations for the write-off of
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The remaining intangible assets of $1.0 million, consisting of existing
technology and goodwill, are included in other assets in the accompanying
consolidated balance sheets and are being amortized over their estimated useful
lives of five years.
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Certain key employees of IMC who continued as our employees were also
granted vested options to purchase shares of our common stock at a discount to
the market price of our common stock immediately preceding the acquisition. In
connection with the granting of these options, we recorded a compensation charge
of $3.2 million in the fourth quarter of fiscal 1997.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in our consolidated financial statements. IMC results of operations
included in our consolidated financial statements for fiscal 1997 were not
significant. See Note 4 of Notes to Consolidated Financial Statements for pro
forma financial information.
Other Income, Net--Other income, net, was $0.9 million and $1.0 million
in fiscal 1998 and 1997, respectively. Other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in fiscal 1998.
Provision for Income Taxes--Our effective tax rate for fiscal 1998 was
37.5% compared to 93.8% for fiscal 1997. The fiscal 1997 tax rate was primarily
affected by the one-time charge to operations of $7.4 million for the write-off
of purchased in-process research and development related to the IMC acquisition
which was not deductible for income tax purposes. Excluding the net effect of
the IMC acquisition, the fiscal 1997 effective tax rate would have been 35%. The
higher effective tax rate in fiscal 1998, compared to the fiscal 1997 effective
tax rate, exclusive of the IMC acquisition, relates to increased earnings, which
reduce the impact of research and development and other tax credits on the
effective tax rate. Additionally, fiscal 1997 included a benefit for the
reversal of a valuation allowance previously provided against deferred tax
assets which did not occur in fiscal 1998. As of April 30, 1998 and 1997, a
valuation allowance was deemed unnecessary as management determined that it is
more likely than not that the net deferred tax asset is realizable.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1999, as compared to the April 30, 1998 balances, our
cash, cash equivalents and short-term investments increased by $179.0 million to
$227.1 million. The increase was primarily due to net proceeds of $138.8 million
from our March 1999 follow-on public offering. Working capital increased by
$195.2 million to $264.8 million, impacted primarily by increases in cash and
cash equivalents, accounts receivable, inventories, prepaid expense and other
and deferred taxes, partially offset by increases in accounts payable, deferred
revenue, accrued compensation and related benefits, other accrued liabilities,
and a decrease in short-term investments. We generated cash from operating
activities totaling $45.9 million and $22.7 million in fiscal 1999 and fiscal
1998, respectively. Net cash provided by operating activities in fiscal 1999
principally related to net income of $35.6 million, increases in accounts
payable, income taxes payable, accrued compensation and related benefits,
deferred revenue and other accrued liabilities, coupled with depreciation and
amortization which are non-cash expenses, partially offset by increases in
accounts receivable, inventories, prepaid expenses and other assets and deferred
income taxes.
We used $15.5 million and $8.0 million of cash during fiscal 1999 and
1998, respectively, to purchase property and equipment. We were provided with
$5.0 million during fiscal 1999 from net short-term investment redemptions and
used $3.9 million during 1998 for net short-term investment purchases.
Financing activities provided $155.5 million and $6.9 million during
fiscal 1999 and 1998 respectively. The increase in cash provided by financing
activities in fiscal 1999, compared to fiscal 1998, was due to a follow-on
common stock offering in March 1999 yielding net proceeds of
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approximately $138.8 million, an increased quantity of stock options exercised
at a higher average exercise price and a greater number of employees
participating in the employee stock purchase plan.
In June 1998, we executed an agreement to acquire 5.9 acres of land in
Sunnyvale, California and the accompanying 127,000 square foot building. Under
terms of the agreement, we paid $5.5 million of the $33.8 million purchase price
as a nonrefundable deposit. In January 1999, we assigned our rights and
obligations under the agreement to a third-party entity and in exchange received
back our $5.5 million deposit. We subsequently entered into an operating lease
for this property. Our lease payments will vary based on the London Interbank
Offered Rate (LIBOR) plus a spread and are currently estimated to be
approximately $2.9 million on an annual basis over the lease term. The lease is
for five years and can be renewed for two five-year periods, subject to the
approval of the third-party entity. At the expiration or termination of the
lease, we have the option to either purchase the property for $44.0 million, or
arrange for the sale of the property to a third party for at least $44.0 million
with a contingent liability for any deficiency. If the property is not purchased
or sold as described above, we will be obligated for an additional lease payment
of approximately $37.0 million.
In June 1998, we signed a 25-year operating lease requiring annual lease
payments of $3.1 million commencing in October 1999, for a 6.2-acre plot in
Sunnyvale, California and an option agreement to purchase the 6.2 acres of land.
Under terms of the option agreement, we paid a $4.5 million nonrefundable
deposit. The option allows us to purchase the land, within a 90-day period,
commencing in December 1999 at a purchase price of $23.7 million. This agreement
was subsequently amended in June 1999 to a 25 year and three month term
commencing in July 1999. In June 1999, we assigned our rights and obligations
under the agreement to a third-party entity. We subsequently entered into an
operating lease for this property. Our lease payments will vary based on the
LIBOR plus a spread and are currently estimated to be approximately $3.1 million
on an annual basis over the lease term. The lease is for five years and can be
renewed for two five-year periods, subject to the approval of the third-party
entity. At the expiration or termination of the lease, we have the option to
either purchase the property for $48.0 million, or arrange for the sale of the
property to a third party for at least $48.0 million with a contingent liability
for any deficiency. If the property is not purchased or sold as described above,
we will be obligated for an additional lease payment of approximately $43.9
million.
In August 1998, we entered into an agreement to acquire 6.0 acres of
land in Sunnyvale, California and the accompanying 79,000 square foot building.
Under terms of the agreement, we paid $2.5 million of the $16.8 million purchase
price as a deposit. In May 1999, we assigned our rights and obligations under
the agreement to a third-party entity and in exchange received back our $2.5
million deposit. We subsequently entered into an operating lease for this
property. Our lease payments will vary based on the LIBOR plus a spread and are
currently estimated to be approximately $2.3 million on an annual basis over the
lease term. The lease is for five years and can be renewed for two five-year
periods, subject to the approval of the third-party entity. At the expiration or
termination of the lease, we have the option to either purchase the property for
$36.0 million, or arrange for the sale of the property to a third party for at
least $36.0 million with a contingent liability for any deficiency. If the
property is not purchased or sold as described above, we will be obligated for
an additional lease payment of approximately $32.6 million.
In July 1998, we negotiated a $5.0 million unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility,
which expires in July 1999 (subsequently renewed through October 1999), we must
maintain various financial covenants. Any borrowings under this agreement bear
interest at either LIBOR plus 1% or at the lender's "prime" lending rate, such
rate determined at our discretion. In December 1998, we drew a $2.5 million
letter of credit against our line of credit to facilitate requirements
associated with the acquisition of land in Sunnyvale, California and the
accompanying 79,000 square foot building. In June 1999, the letter of credit was
relieved upon completion of the acquisition of the land and building.
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All three of the operating leases and the revolving credit facility
mentioned above require us to maintain specified financial covenants with which
we were in compliance as of April 30, 1999.
Excluding the commitments related to the aforementioned properties,
which we have assigned to third parties and established as operating leases, 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 the $5.0 million line of credit, are sufficient to
fund our operations for at least the next twelve months.
YEAR 2000
The Year 2000 issue refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. As a result, many
companies' systems and software may need to be upgraded or replaced in order to
function correctly after December 31, 1999.
We are currently conducting a general software upgrade and replacement
program to enhance our computer systems and applications, in particular those
systems and applications related to our manufacturing, distribution and
financial operations. As part of this larger program we are addressing the
critical areas of our internal computer systems, products and relationships with
external organizations for Year 2000 compliance. We are addressing Year 2000
compliance for both our IT and non-IT systems, which typically include embedded
technology such as microcontrollers.
As part of our general systems upgrade we have evaluated and selected
various significant computer software applications which are represented by
vendors as Year 2000 compliant. We expect to complete installation of such
software in our domestic operations by the end of the first quarter of fiscal
2000 followed by installation in our international operations throughout fiscal
2000. Most of our existing business applications are already supported by Year
2000 compliant software. With the system changes implemented to date and other
planned changes, we anticipate that our internal computer software applications
will be Year 2000 compliant prior to December 31, 1999. We believe that our
current products are Year 2000 compliant, and our new products are being
designed to be Year 2000 compliant.
We rely on numerous third party vendors for certain products and
services. We are communicating with our principal service providers and
suppliers to assess their Year 2000 readiness. Responses indicate that our
significant service providers currently have compliant versions of their systems
available or are well into the renovation and testing phases with completion
scheduled prior to December 31, 1999. We are still assessing the effect Year
2000 issues will have on our service providers and suppliers, however, our
principal service providers and suppliers have represented to us that they are
Year 2000 compliant. We can give you no guarantee that the systems and products
of these service providers and suppliers on which we rely are, or will be, Year
2000 compliant.
Our contingency planning for Year 2000 issues relates primarily to the
efforts of our third-party vendors. In the event of any Year 2000 disruptions
related to third-party software, we expect to follow the individual vendor's
contingency directives. With respect to suppliers, we will consider alternative
sources as a contingency plan, if necessary. Contingency planning will continue
throughout 1999 and our plans will be modified based upon the progress of our
remediation efforts, system updates and installations and based upon our
communications with selected suppliers. We have determined that our "worst case"
scenario relates to Year 2000 compliance problems of our third party vendors and
suppliers and other external organizations which if not remedied could
materially adversely affect our operating results.
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The costs we expect to incur in connection with our overall general
systems upgrade program, including both internal and third party costs, are
primarily external costs for software licenses, and implementation and
consulting services. These systems and applications were selected primarily for
features and functionality in addition to Year 2000 compliance. Accordingly, we
do not itemize costs of Year 2000 compliance separately.
Our expectations regarding the impact of Year 2000 issues are forward
looking statements and actual results could vary due to the factors discussed in
this section. While we believe that the estimated cost of becoming Year 2000
compliant will not be significant to our operating results, failure to complete
all the work in a timely manner could materially adversely affect our operating
results. While we expect all planned work to be completed, we can not guarantee
that all systems will be in compliance by the Year 2000, the systems of
suppliers and other companies and government agencies on which we rely will be
Year 2000 compliant, or that our contingency planning will be able to fully
address all potential interruptions. Therefore, Year 2000 issues could cause
delays in our ability to produce or ship our products, process transactions or
otherwise conduct business in any of our markets. Year 2000 issues could lower
demand for our products while increasing our costs. The occurrence of one or
more of these factors could materially adversely affect our operating results.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. On a forward-looking
basis, although we have not fully assessed the implications of this new
statement, we do not believe adoption of this statement will have a material
impact on our consolidated financial position, results of operations or cash
flows.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in interest rates
and in foreign currency exchange rates. We use certain derivative financial
instruments to manage these risks. We do not use derivative financial
instruments for speculative or trading purposes. All financial instruments are
used in accordance with board-approved policies.
Market Interest Risk
Short-term Investments - As of April 30, 1999, we had short-term
investments of $5.8 million. These short-term investments consist of highly
liquid investments with original maturities at the date of purchase between
three and six months. These investments are subject to interest rate risk and
will decrease in value if market interest rates increase. A hypothetical 10
percent increase in market interest rates from levels at April 30, 1999, would
cause the fair value of these short-term investments to decline by an immaterial
amount. Because we have the ability to hold these investments until maturity we
would not expect any significant decline in value of our investments caused by
market interest rate changes. Declines in interest rates over time will,
however, reduce our interest income.
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 trade and intercompany receivables and payables. These contracts reduce
the exposure to fluctuations in exchange rate movements, as the gains and losses
associated with
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foreign currency balances are generally offset with the gains and losses on the
hedge contracts. All hedge instruments are marked to market through earnings
every period.
We do not anticipate any material adverse effect on our consolidated
financial position utilizing the current hedging strategy. 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.
We do not expect to experience a material foreign exchange loss based on
a hypothetical 10% adverse change in the price of the foreign currency against
the U.S. dollar. 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.
The following table provides information about our foreign exchange
forward contracts outstanding on April 30, 1999, (in thousands):
BUY/ FOREIGN CONTRACT VALUE FAIR VALUE
CURRENCY SELL CURRENCY AMOUNT USD IN USD
- -------------------------------------------------------------------------------
GBP Buy 3,500 $ 5,643 $ 5,630
GBP Sell 6,100 $ 9,802 $ 9,813
EUR Buy 1,534 $ 1,631 $ 1,621
EUR Sell 11,900 $12,825 $12,574
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. and its subsidiaries as of April 30, 1999 and 1998, 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, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of Network Appliance, Inc. and its
subsidiaries as of April 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1999 in conformity with generally accepted accounting principles. Also, in our
opinion, the consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 14, 1999 (June 17, 1999 as to the fourth paragraph of Note 3)
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NETWORK APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30,
------------------------
1999 1998
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 221,284 $ 37,315
Short-term investments 5,800 10,800
Accounts receivable, net of allowances of $1,886 in 1999 and $811 in 1998 57,163 34,313
Inventories 13,581 8,707
Prepaid expenses and other 7,384 2,524
Deferred taxes 10,134 5,280
--------- ---------
Total current assets 315,346 98,939
PROPERTY AND EQUIPMENT, NET 19,271 12,217
DEPOSITS 7,000 --
OTHER ASSETS 4,730 4,580
--------- ---------
$ 346,347 $ 115,736
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,126 $ 10,041
Income taxes payable 1,108 1,782
Accrued compensation and related benefits 15,189 8,485
Other accrued liabilities 7,633 4,201
Deferred revenue 11,474 4,799
--------- ---------
Total current liabilities 50,530 29,308
LONG-TERM OBLIGATIONS 93 163
--------- ---------
50,623 29,471
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000 shares authorized;
shares outstanding: none in 1999 and 1998 -- --
Common stock, no par value; 220,000 shares authorized:
shares outstanding: 72,831 in 1999 and 67,296 in 1998 240,807 66,422
Deferred stock compensation (714) (498)
Retained earnings 55,954 20,341
Cumulative other comprehensive loss (323) --
--------- ---------
Total shareholders' equity 295,724 86,265
--------- ---------
$ 346,347 $ 115,736
========= =========
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,
---------------------------------------
1999 1998 1997
---------------------------------------
NET SALES $ 289,420 $ 166,163 $ 93,333
COST OF SALES 118,120 67,549 38,061
---------------------------------------
Gross Margin 171,300 98,614 55,272
---------------------------------------
OPERATING EXPENSES:
Sales and marketing 75,526 42,779 24,268
Research and development 30,457 16,649 8,968
General and administrative 10,191 6,528 4,134
Purchased in-process technology and related compensation charge -- -- 10,519
Litigation settlement -- -- 4,300
---------------------------------------
Total operating expenses 116,174 65,956 52,189
---------------------------------------
INCOME FROM OPERATIONS 55,126 32,658 3,083
OTHER INCOME (EXPENSE):
Interest income 2,645 1,097 1,048
Other expense (781) (208) (88)
---------------------------------------
Total other income, net 1,864 889 960
---------------------------------------
INCOME BEFORE INCOME TAXES 56,990 33,547 4,043
PROVISION FOR INCOME TAXES 21,377 12,582 3,793
---------------------------------------
NET INCOME $ 35,613 $ 20,965 $ 250
=======================================
NET INCOME PER SHARE (1):
Basic $ 0.52 $ 0.32 $ 0.00
=======================================
Diluted $ 0.46 $ 0.29 $ 0.00
=======================================
SHARES USED IN PER SHARE CALCULATIONS (1):
Basic 68,435 64,914 60,978
=======================================
Diluted 77,931 71,902 68,804
=======================================
(1) Share and per share amounts have been adjusted to reflect the two-for-one
stock split which was effective December 21, 1998.
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
RETAINED CUMULATIVE
COMMON STOCK DEFERRED EARNINGS OTHER
----------------------- STOCK (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT COMPENSATION DEFICIT) LOSS TOTAL
--------- --------- ------------ ------------ -------------- ---------
BALANCES, APRIL 30, 1996 64,560 $ 40,286 $ (383) $ (874) $ -- $ 39,029
Net income and comprehensive income -- -- -- 250 -- 250
Issuance of common stock 1,166 1,730 -- -- -- 1,730
Repurchase of common stock (752) (52) -- -- -- (52)
Amortization of deferred stock compensation -- -- 85 -- -- 85
Reversal of deferred stock compensation
due to employee termination -- (244) 244 -- -- --
Income tax benefit from employee stock
transactions -- 2,487 -- -- -- 2,487
Common stock issued for IMC acquisition 690 7,350 -- -- -- 7,350
Compensation charge for IMC acquisition -- 3,150 -- -- -- 3,150
--------- --------- --------- --------- --------- ---------
BALANCES, APRIL 30, 1997 65,664 54,707 (54) (624) -- 54,029
Net income and comprehensive income -- -- -- 20,965 -- 20,965
Issuance of common stock 1,654 6,937 -- -- -- 6,937
Repurchase of common stock (22) (1) -- -- -- (1)
Deferred stock compensation -- 714 (714) -- -- --
Amortization of deferred stock compensation -- -- 270 -- -- 270
Income tax benefit from employee stock
transactions -- 4,065 -- -- -- 4,065
--------- --------- --------- --------- --------- ---------
BALANCES, APRIL 30, 1998 67,296 66,422 (498) 20,341 -- 86,265
Components of comprehensive income:
Net income -- -- -- 35,613 -- 35,613
Currency translation adjustment -- -- -- -- (323) (323)
---------
Total comprehensive income 35,290
Issuance of common stock 2,681 16,942 -- -- -- 16,942
Repurchase of common stock (21) (280) -- -- -- (280)
Issuance of common stock at $50.50 per share
pursuant to follow-on public offering, net 2,875 138,834 -- -- -- 138,834
Deferred stock compensation -- 916 (916) -- -- --
Amortization of deferred stock compensation -- -- 667 -- -- 667
Reversal of deferred stock compensation
due to employee termination -- (33) 33 -- -- --
Other stock compensation expense -- 230 -- -- -- 230
Income tax benefit from employee stock
transactions -- 17,776 -- -- -- 17,776
--------- --------- --------- --------- --------- ---------
BALANCES, APRIL 30, 1999 72,831 $ 240,807 $ (714) $ 55,954 $ (323) $ 295,724
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
-------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,613 $ 20,965 $ 250
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,146 5,548 2,866
Other stock compensation expense 230 -- --
Purchased in-process technology and related compensation charge -- -- 10,519
Provision for doubtful accounts 1,075 481 --
Deferred income taxes (5,084) (1,749) (2,794)
Deferred rent (70) (36) (69)
Loss on disposal of equipment 1,221 -- --
Changes in assets and liabilities:
Accounts receivable (24,188) (20,883) (8,573)
Inventories (4,934) 1,213 (5,095)
Prepaid expenses and other (5,060) (1,484) (1,031)
Accounts payable 5,085 5,626 2,295
Income taxes payable 17,102 4,823 3,010
Accrued compensation and related benefits 6,704 3,819 2,636
Other accrued liabilities 3,432 1,921 338
Deferred revenue 6,675 2,482 1,917
-------------------------------------
Net cash provided by operating activities 45,947 22,726 6,269
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (18,680) (15,050) (17,770)
Redemptions of short-term investments 23,680 11,166 13,836
Purchases of property and equipment (15,474) (7,971) (7,124)
Other assets -- (2,000) --
Cash acquired from IMC purchase -- -- 11
Payment of deposits, net (7,000) -- --
-------------------------------------
Net cash used in investing activities (17,474) (13,855) (11,047)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations -- (12) (17)
Proceeds from sale of common stock, net 16,662 6,936 1,678
Proceeds from follow-on common stock offering, net 138,834 -- --
-------------------------------------
Net cash provided by financing activities 155,496 6,924 1,661
-------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 183,969 15,795 (3,117)
CASH AND CASH EQUIVALENTS:
Beginning of year 37,315 21,520 24,637