<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
------------------------
(MARK ONE)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [fee required] for the fiscal year ended April 26, 1996 Amendment
No. 1
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [no fee required]
For the transition period from to
COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
CALIFORNIA 77-0307520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
319 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (415) 428-5100
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
</TABLE>
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 report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of voting stock held by non affiliates of the
Registrant, as of May 31, 1996 was approximately $228,170,000 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On May 31, 1996, approximately 16,156,000 shares of the Registrant's Common
Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders are incorporated
by reference into Part II; such portions of the Annual Report to Shareholders
incorporated by reference are filed as Exhibit 13.1 hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART III
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers for the 1996 fiscal year for services rendered in
all capacities to the Company and its subsidiaries for the 1996 and 1995 fiscal
years. The listed individuals shall be hereinafter referred to as the "Named
Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEARS SALARY($) BONUS OPTIONS(#)(1) COMPENSATION(2)
- -------------------------------- ----- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Daniel J. Warmenhoven........... 1996 $ 190,615 $147,000 100,000 $ 1,306
President and Chief 1995 96,230 -- 700,000 --
Executive Officer
Michael J. McCloskey(3)......... 1996 148,269 85,000 200,000 391
Vice President, Finance 1995 -- -- -- --
and Operations, Chief
Financial Officer, and
Secretary
Thomas F. Mendoza............... 1996 120,000 186,539 -- 835
Vice President, 1995 117,694 60,077 200,000 --
North American Sales
Michael E. Paul................. 1996 120,000 43,179 -- 1,383
Vice President, 1995 90,923 26,191 125,000 --
International Sales
M. Helen Bradley(4)............. 1996 86,538(5) 55,000(6) 100,000 353
Vice President, Engineering 1995 -- -- -- --
</TABLE>
- ---------------
(1) The options listed in the table were granted under the Company's 1993 Stock
Option/Stock Issuance Plan. The options were incorporated into the Company's
1995 Stock Incentive Plan at the time of the Company's initial public
offering, but will continue to be governed by their existing terms.
(2) Represents the cost of term life insurance.
(3) Mr. McCloskey joined the Company in May of 1995.
(4) Ms. Bradley joined the Company in September of 1995.
(5) Ms. Bradley's salary on an annual basis is $150,000.
(6) Includes a $10,000 signing bonus.
2
<PAGE> 3
STOCK OPTIONS
The following table contains information concerning the stock option grants
made to each of the Named Officers for the 1996 fiscal year. No stock
appreciation rights were granted to those individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANT POTENTIAL REALIZABLE
---------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(2) FISCAL YEAR ($/SHARE)(3) DATE 5% 10%
- ---------------------------- ----------- ------------ ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Warmenhoven....... 100,000 5.9% $ 8.10 10/30/05 $509,404 $1,290,930
Michael J. McCloskey........ 200,000 11.8% .28 05/24/05 35,218 89,250
Thomas F. Mendoza........... -- -- -- -- -- --
Michael E. Paul............. -- -- -- -- -- --
M. Helen Bradley............ 100,000 5.9% 7.20 09/25/05 452,804 1,147,495
</TABLE>
- ---------------
(1) There is no assurance provided to the option holder or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the 5% and 10% assumed annual rates of
compounded stock price appreciation.
(2) The options were granted under the Company's 1993 Stock Option/Stock
Issuance Plan on the following dates: Mr. Warmenhoven, November 1, 1995; Mr.
McCloskey, May 25, 1995, and Ms. Bradley, September 26, 1995. Each option
has a maximum term of 10 years measured from the grant date, subject to
earlier termination upon the optionee's cessation of service with the
Company. Mr. Warmenhoven's option is immediately exercisable for 87,655
shares and exercisable for the remaining 12,345 shares on January 3, 1996.
Each of the other granted options is immediately exercisable for all the
option shares. However, any shares purchased under the options are subject
to repurchase by the Company at the option exercise price paid per share,
should the optionee leave the Company prior to vesting in the shares. With
respect to the option granted to Mr. Warmenhoven, the option will vest as to
ten percent (10%) of the shares on the first anniversary of the date of
grant; another twenty percent (20%) of the shares in equal monthly
installments over the twenty-four (24) month period starting from the first
anniversary of the grant date; another thirty percent (30%) of the shares in
equal monthly installments over the twelve-month period starting from the
third anniversary of the grant date; and the remaining forty percent (40%)
of the shares in equal monthly installments over the twelve-month period
starting from the fourth anniversary of the grant date. With respect to the
options granted to Mr. McCloskey and Ms. Bradley, the options will vest as
to twenty-five percent (25%) of the shares upon the optionee's completion of
one year of service measured from May 25, 1995 and September 8, 1995,
respectively, and with respect to the balance of the shares in a series of
equal monthly installments over the thirty-six (36) months of service
thereafter. Full and immediate vesting of Messrs. Warmenhoven's and
McCloskey's options will occur in the event the Company is acquired by
merger or asset sale.
(3) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the Federal and state
income and employment tax liability incurred by the optionee in connection
with such exercise.
3
<PAGE> 4
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option exercises and
option holdings for the 1996 fiscal year by each of the Named Officers. No stock
appreciation rights were exercised during such year or were outstanding at the
end of the year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END AT FY-END(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Warmenhoven.......... -- $ -- 100,000(3) -- $ 2,615,000 --
Michael J. McCloskey........... 200,000 -- -- -- -- --
Thomas F. Mendoza.............. 200,000 30,000 -- -- -- --
Michael E. Paul................ 125,000 18,750 -- -- -- --
M. Helen Bradley............... -- -- 100,000(3) -- 2,705,000 --
</TABLE>
- ---------------
(1) Based on the fair market value (as determined by the Board of Directors) of
the purchased option shares at the time of exercise less the option exercise
price paid for those shares.
(2) Based on the fair market value of the shares at the end of the 1996 fiscal
year ($34.25 per share) less the option exercise price payable for those
shares.
(3) The options are fully exercisable as of the fiscal year end, but any shares
purchased thereunder will be subject to repurchase by the Company at the
original option exercise price paid per share should the optionee leave the
Company prior to vesting in the shares. As of April 26, 1996, Mr.
Warmenhoven and Ms. Bradley had not vested in any shares.
4
<PAGE> 5
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <S>
13.1 The Company's Annual Report to Shareholders, portions of which are incorporated by
reference into this Annual Report on Form 10-K/A and only such portions are deemed
filed as part of this Annual Report on Form 10-K/A.
23.1 Consent of Deloitte and Touche LLP, Independent Auditors.
</TABLE>
5
<PAGE> 1
Network Appliance, Inc.
1996
ANNUAL REPORT
<PAGE> 2
COMPANY DESCRIPTION
Network Appliance, Inc., also known as NetApp, supplies high-performance network
data access devices that provide fast, simple, reliable and cost-effective file
service for network-attached storage environments. Combining specialized,
proprietary software and standards-compliant hardware, the Company pioneered the
concept of the "network appliance," an extension of the industry trend towards
dedicated, specialized devices which perform a single networking function,
similar to the adoption of the router for network communications management.
Customers include leading organizations in the on-line services, financial
services, manufacturing and telecommunications industries, as well as companies
that design computer hardware and software. Products are available through the
Company's direct sales force and resellers worldwide.
<TABLE>
<CAPTION>
Selected Consolidated Financial Data 1996 1995 1994 1993
<S> <C> <C> <C> <C>
Net Sales $ 46,632 $ 14,796 $ 2,244 $ --
Income (Loss) From Operations $ 6,000 $ (4,913) $ (1,955) $ (825)
Net Income (Loss) $ 6,600 $ (4,764) $ (1,874) $ (836)
Net Income (Loss) Per Share $ .42 $ (.38) $ -- $ --
Total Assets $ 45,449 $ 10,628 $ 4,055 $ 612
Long-Term Obligations $ 318 $ 11,607 $ 4,799 $ --
Total Shareholders' Equity (Deficit) $ 39,029 $ (5,923) $ (1,324) $ 545
</TABLE>
[BAR GRAPH]
[BAR GRAPH]
[BAR GRAPH]
[BAR GRAPH]
<PAGE> 3
TO OUR
SHAREHOLDERS
Fiscal 1996 was a year of significant progress and profitable growth for Network
Appliance, Inc. Revenues tripled over the prior year, a reflection of the
strength of our product offerings and the robustness of the market that we
address. During the year we revamped our product line, introducing two new
systems which received rapid market acceptance. We also marked a major milestone
in November with an initial public offering of the Company's common stock.
As we review the year just ended and reflect on our prospects, the trends
encourage us. The market we address is large and rapidly growing;
network-attached data storage and access are increasing in importance in the
world of information technology. Indeed, to quote the Wall Street Journal (April
22, 1996), products such as ours are "taking the spotlight in the computer
industry" as computer usage becomes more centered upon data storage and access.
This fundamental shift in emphasis underway in computing, is a shift in which
our innovative technology positions us for continued rapid growth. The era when
customers focused on their network infrastructure is giving way to a new era,
one in which they are emphasizing and investing heavily in their information
infrastructure. Their focus is on creating an information utility that contains
all of the critical data and which can be accessed by all of the network clients
at any and all times. It is here where our products offer a unique value
proposition: the appliance approach to building a network information utility.
The accelerating adoption of the appliance approach to information systems, an
approach which Network Appliance pioneered and which is a cornerstone of our
strategy, is another of the trends fueling our success. Data storage and access
appliances which are designed specifically for that purpose are faster, simpler,
more reliable and more cost effective than general purpose alternatives.
Customers receive the benefits of lower cost and higher availability of the data
they need, and a reduced administrative burden in managing it. And during the
next year we will provide them with another exceptional capability - the ability
to have a variety of different types of clients such as PCs and UNIX
workstations, which use different network data access technologies,
simultaneously access the same information on a single server.
During the year, we introduced two new system products based on the Intel
Pentium architecture which offer higher performance and greater expandability
than the products they replaced. By embracing industry standards, we have been
able to derive the benefits of rapid time to market with minimal R&D investment.
We have also enjoyed the benefit of significant cost reductions through the use
of high-volume industry standard components.
The rapid time to market is reflected in the introduction rate of our new
products. In September 1995, we introduced the NetApp F330(TM), a departmental
server with capacity up to 100 gigabytes of disk storage. Our workgroup-level
filer, the NetApp F220(TM), was introduced only five months later. In the first
quarter of the new year, FY97, we introduced yet another new product, the NetApp
F540(TM), our third in eight months.
Fiscal 1996 was a year of achievement for Network Appliance, and we established
a solid foundation for our future success. We enter 1997 with a strong product
line, a customer list we reference with pride, and a conviction about our vision
for the future of network data access.
Sincerely,
/s/DANIEL J. WARMENHOVEN
- ------------------------
DANIEL J. WARMENHOVEN
President and Chief Executive Officer
Network Appliance, Inc.
<PAGE> 4
THE
BUSINESS
OF NETWORK APPLIANCE
Our customers invest in information tools and technology to shorten product
development cycles, enhance service to their own customers, lower costs and
improve quality, among other reasons. Moreover, as these organizations continue
to stockpile more data at a faster rate, demand for storage and access grows in
proportion. Disk storage consumption is forecasted to double every year through
the end of this decade, in terms of gigabytes shipped. The market for
storage/access equipment, services and software is expected to reach a dollar
level of more than $87 billion by the year 2000, compared to $44.6 billion in
1995. (source: International Data Corporation).
THE
MARKET
NEED
As corporations require greater storage and improved access for the increasingly
important data they continue to amass, their investment in technology tools and
infrastructure is shifting away from the high-powered computers wired to
networks, to the data attached to the networks. At the same time, the World Wide
Web is evolving into a worldwide platform for commercial transactions, altering
the patterns and systems by which corporations conduct business. As it evolves,
and as customers rely increasingly upon their intranetworks for communication
and information sharing, the information technologies that deliver faster,
simpler, more reliable and cost-effective access to the data will become central
to these organizations' new data infrastructures.
NETAPP FILERS DELIVER CUSTOMER VALUE THAT HAS PROPELLED THE COMPANY'S THREE-FOLD
GROWTH IN THE PAST YEAR.
Along with the rise of Web-based commerce and corporate intranetworking, today's
data-intensive applications - software and computer hardware design, brokerage
and government to name a few - create additional data management needs. The
high-performance hardware and software used for information storage and access
must be affordable, highly available, and easy to manage. It must deliver
uninterrupted service in the event of disk failure. Equally important, today's
networked-computer environments are heterogeneous: different operating systems,
network protocols and interfaces from a myriad of equipment and software
suppliers. The problems of sharing, accessing and managing data in such networks
call for solutions that can easily and inexpensively accommodate this
technological diversity.
2
<PAGE> 5
THE NETAPP
SOLUTION
NETWORK APPLIANCE DELIVERS THE INDUSTRY'S BEST PRICE-PERFORMANCE AND AN
ATTRACTIVE COST PER UNIT OF STORAGE.
Network Appliance pioneered the concept of a "network appliance", a device
uniquely designed for storing data in network environments. NetApp's custom
software-based technology is ideal for the new era of storage-centric data
infrastructures. Specifically designed for simple and reliable high-performance
access to data files of all types, NetApp filers deliver customer value that has
propelled the Company's three-fold growth in the past year.
SIMPLE. Installable typically in an hour, NetApp filers are designed to be easy
for customers to manage. This enables more productive use of staff time, and
helps make the data more available for users on a network.
RELIABLE. Simplicity of design delivers a solution that yields more reliable
data with no cost or performance penalties. Should a disk drive fail, the NetApp
filer will reconstruct the data on a spare drive, with no interruption of data
availability. Other system components, such as power supplies, are designed for
redundancy.
AFFORDABLE. Data infrastructures benefit from inexpensive, expandable solutions
that can scale: grow in cost effective increments. This enables customers to add
or make changes to their network as easily as adding disk drives. NetApp filers
deliver this value without compromising high-performance response time to users.
Appliance-like product features also simplify administration, which enables more
cost-effective deployment of system administrators and further lowers the cost
of ownership. Moreover, Network Appliance delivers the industry's best
price-performance and an attractive cost per unit of storage.
COMPATIBLE. Our multi-protocol approach results in compatibility with a wide
variety of heterogeneous network environments. NetApp's unique software
architecture readily accommodates new file access technologies such as HTTP and
Microsoft's NT. As more network environments contain elements of UNIX and NT,
NetApp filers will bridge those environments and provide shared data access and
administration. Moreover, the simplicity of appliance-like design is
particularly well suited to address data availability and reliability issues
associated with data storage in complex, diverse network environments.
HIGH PERFORMANCE. Response times of NetApp filers exceed general-purpose
computers and specialized hardware-centric file servers. They enable software
and hardware designers to complete projects faster and bring their products to
market more rapidly. Geologists can manipulate seismic data more effectively.
Securities traders can process orders more rapidly. Users of the World Wide Web
and corporate intranets can access data repositories more quickly.
3
<PAGE> 6
NEW
PRODUCTS
IN FISCAL 1996...AND SO FAR IN FISCAL 1997
In September 1995 we introduced the NetApp F330, our department-level server
intended for up to 200 users on a network.
NetApp F220, a filer designed for workgroup computing, was introduced in January
1996. With its attractive entry-level price, low cost per gigabyte and fast
response time, it offers exceptionally high value.
In May 1996, we announced the NetApp F540 - the Company's first enterprise-class
NFS filer - delivering the fastest NFS performance in its class and substantial
improvements in end-user applications. The F540 marked our third new product in
eight months. It is also the Company's first RISC-based system, evidence of the
portability of its custom operating software which is optimized for file
service. All of these products, as well as earlier models, are capable of
running the most current software revisions.
[TIME LINE CHART]
4
<PAGE> 7
LOOKING AHEAD
Our goal is to be a leader in network data-access appliances. To achieve this
objective, we will differentiate our products through software, utilize industry
standards, further penetrate our current market while developing new markets,
and expand the distribution of our products.
SOFTWARE DIFFERENTIATION. NetApp's competitive advantage is derived from our
innovative software technology. By focusing on specialized software we are able
to integrate into future offerings features that provide our customers with
increased performance and value.
INDUSTRY STANDARDS. By utilizing industry-standard processor platforms, we are
able to realize rapid time-to-market of new systems and the benefits of the
industry cost curves. Our software-centric approach, combined with using
industry-standard interfaces, allows our products to adapt to a variety of
network environments.
MARKET PENETRATION AND DEVELOPMENT. NetApp intends to expand its product
offerings to address a wider scope of price, performance and storage capacity.
Our software architecture easily accommodates new file access technologies,
including HTTP, and Microsoft's CIFS protocol which is used in the Windows
family of products. We will continue to extend functionality and platform
support for new standards as they emerge.
DISTRIBUTION. We plan to continue marketing and distributing products globally
through multiple channels: direct sales, selected value-added resellers, and
OEMs.
NETWORK APPLIANCE INTENDS TO BE THE LEADER IN ADDRESSING OPPORTUNITIES FOR NEW
DATA APPLIANCES IN THE ERA OF NETWORK-ATTACHED INFORMATION INFRASTRUCTURE.
Our mission is to deliver single-purpose, network data access appliances. The
appliance approach - high-performance products that are simple, reliable and
cost-effective - will continue to be fundamental to the Company's design
philosophy. With the enormous growth in on-line information, new opportunities
will emerge for additional specialized appliances. Network Appliance intends to
be the leader in addressing opportunities for new network-attached data
appliances in the era of the information infrastructure.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Network Appliance, Inc. was incorporated in April 1992 to design, manufacture,
market and support network data storage appliances. In September 1995, the
Company introduced the NetApp F330, a rack-mounted, Pentium and PCI bus-based
filer, and in January 1996, the Company introduced the NetApp F220, a
rack-mounted, Pentium and PCI bus-based filer designed for workgroup and LAN
environments. The Company's filer products combine specialized proprietary
software and state-of-the-art industry standard hardware to provide a unique
solution for the NFS server market.
The Company initially focused primarily on indirect/reseller sales channels, and
began expansion of its direct sales force in the second half of fiscal 1995. The
significant growth in net sales in fiscal 1996 was due primarily to the shift in
Network Appliance's distribution focus to direct sales in domestic markets, as
well as increased market acceptance of Network Appliance's products and the
"network appliance" concept.
The Company believes that its continued growth and profitability is dependent in
part on the successful expansion of its international operations, and therefore,
has committed significant resources to international sales.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 44.1 53.8 48.3
----- ----- -----
Gross margin 55.9 46.2 51.7
----- ----- -----
Operating expenses:
Sales and marketing 27.3 42.5 67.4
Research and development 10.2 17.6 34.8
General and administrative 5.5 19.3 36.7
----- ----- -----
Total operating expenses 43.0 79.4 138.9
----- ----- -----
Income (loss) from operations 12.9 (33.2) (87.2)
Other income (expense), net 1.3 1.0 3.6
----- ----- -----
Net income (loss) 14.2% (32.2)% (83.6)%
----- ----- -----
- --------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales increased by approximately 215% from $14.8 million in
fiscal 1995 to $46.6 million in fiscal 1996. In fiscal 1995, the Company sold
its products primarily through indirect channels. The increase in net sales in
fiscal 1996 resulted primarily from the Company's expansion of its domestic
direct sales force, increased market acceptance of the Company's products, and
the introduction of two new system products, the NetApp F330 and F220. The
Company also shipped a greater number of units directly to end users in fiscal
1996, which generally purchase more highly configured systems at higher average
selling prices than resellers.
GROSS MARGIN. Gross margin increased from 46.2% in fiscal 1995 to 55.9% in
fiscal 1996. This increase in gross margin was primarily attributable to more
efficient absorption of manufacturing overhead, lower costs of key components
and manufacturing efficiencies achieved during fiscal 1996, all of which were
related to the significant increase in production volume. These factors offset
the effect of increased sales of highly configured systems during fiscal 1996
which generally generate lower gross margins per system.
NETWORK APPLIANCE, INC. 6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, new product
introductions and enhancements, and the cost of components and manufacturing
labor. In particular, the Company's gross margin varies based upon the
configuration of systems that are sold and whether they are sold directly or
through indirect channels. The Company offers both highly configured and
minimally configured systems. Typically, highly configured systems generate
lower overall gross margin percentages due to greater disk drive and memory
content. Highly configured systems are generally sold directly to end users.
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 102.3% from $6.3 million
in fiscal 1995 to $12.7 million in fiscal 1996. These expenses were 27.3% and
42.5% of net sales in fiscal 1996 and 1995, respectively. The increase in
absolute dollars was primarily related to the expansion of the Company's sales
and marketing organization, particularly the increase in the direct sales force,
and increased commission expenses related to higher sales volumes. The Company
expects to continue to increase its sales and marketing expenses in an effort to
expand domestic and international markets, introduce new products, and establish
and expand new distribution channels.
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 82.6% from $2.6 million in fiscal
1995 to $4.8 million in fiscal 1996. These expenses represented 10.2% and 17.6%,
of net sales in fiscal 1996 and 1995, respectively. These expenses increased in
absolute dollars primarily as a result of increased headcount, prototyping
expenses associated with the development of new products and the support of the
current and future product development and enhancement efforts. The Company
believes that significant investments in research and development will be
required to remain competitive and expects that such expenditures will continue
to increase in absolute dollars. To date, no software development costs have
been capitalized as amounts that qualify for capitalization have been
immaterial.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $2.6 million in fiscal 1996, compared to $2.9 million in fiscal
1995. These expenses represented 5.5% and 19.3%, respectively, of net sales for
such periods. The higher level of general and administrative expenses during
fiscal 1995 related primarily to certain litigation expenses, severance costs
and increases in the provision for bad debts. In fiscal 1996, the Company
continued its investments in additional staffing, facilities expansion and
related occupancy costs and information system investments necessary to manage
and support the Company's growth. The Company believes that its general and
administrative expenses will increase in absolute dollars as the Company
continues to build its infrastructure and incurs the additional expenses of
being a public company. In addition, the Company may incur significant legal
expenses related to the Whipsaw Litigation in the future. See Note 10 of Notes
to Consolidated Financial Statements.
OTHER INCOME, NET. Other income, net, was approximately $600,000 and $149,000 in
fiscal 1996 and 1995, respectively. In both of these periods, other income, net,
represented less than 2% of net sales. Other income, net, increased in fiscal
1996 due primarily to interest income earned on the net proceeds of
approximately $25.7 million from the Company's initial public offering that was
completed in November 1995.
7 NETWORK APPLIANCE, INC.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION FOR INCOME TAXES. The Company did not incur state or federal income
taxes in fiscal 1994 or 1995 due to operating losses incurred during those
periods. In fiscal 1996, the Company's federal and state income tax liabilities
were offset by the realization of a portion of its net deferred tax assets. The
Company has recognized a benefit for its net deferred tax assets to the extent
that they are recoverable through tax refunds in the event of future net
operating losses. The Company has recorded a valuation allowance for the balance
of its net deferred tax assets as a result of significant uncertainties
regarding the realization of the assets, including the limited operating history
of the Company, a recent history of losses and the variability of operating
results.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123). In October 1995,
the Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method of
accounting for stock options and other equity instruments, and will be effective
for the Company beginning in fiscal 1997. As provided under SFAS 123, the
Company will continue to account for equity transactions under the provisions of
existing accounting rules and will disclose in the footnotes to the financial
statements the pro forma effect that adoption of SFAS 123 would have on net
income and net income per share.
FISCAL YEAR 1995 COMPARED TO FISCAL 1994
NET SALES. Net sales increased 559.4% from $2.2 million in fiscal 1994 to $14.8
million in fiscal 1995. The increase in net sales was primarily due to the
introduction of new products at the end of fiscal 1994, the growing market
acceptance of the Company's products, as well as a shift in focus during fiscal
1995 towards direct sales.
GROSS MARGIN. The Company's gross margin decreased from 51.7% in fiscal 1994 to
46.2% in fiscal 1995. This decrease was primarily attributable to a significant
increase in shipments of highly configured systems to end users through direct
sales, higher manufacturing costs associated with the establishment and growth
of manufacturing operations and the introduction of three new system products in
late fiscal 1994. In addition, in fiscal 1995, the Company significantly
increased the level of its inventories in anticipation of higher demand for its
products, and as a result it incurred higher inventory carrying costs, including
procurement costs, and increased its reserves by $300,000 for excess and
obsolete inventory.
SALES AND MARKETING. Sales and marketing expenses were $6.3 million and $1.5
million in fiscal 1995 and 1994, respectively. For fiscal 1995 and fiscal 1994,
such expenses represented 42.5% and 67.4% of net sales, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization and increased commission expenses
related to higher sales volumes.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.6 million
and $780,000 in fiscal 1995 and 1994, respectively. For fiscal 1995 and 1994,
such expenses represented 17.6% and 34.8% of net sales, respectively. The
increase in absolute dollars from fiscal 1994 to fiscal 1995 was primarily due
to increases in headcount and prototype expenses associated with the development
of the Company's NetApp F330 product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.9
million and $823,000 in fiscal 1995 and 1994, respectively. For fiscal 1995 and
1994, such expenses represented 19.3% and 36.7% of net sales, respectively. The
increase from fiscal 1994 to fiscal 1995 was primarily the result of increased
staffing, severance costs (including settlement costs of approximately $400,000
related to the termination in April 1995 of Michael Malcolm, a former executive
officer) and other legal and settlement costs of approximately $500,000, an
increase to the provision for bad debts of $210,000, and to a lesser extent,
facilities expansion and related occupancy costs, and information system
investments necessary to manage and support the Company's growth.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1996, the Company's liquidity primarily consisted of cash and
cash equivalents of $24.6 million and short-term investments of $3.0 million.
The Company generated cash from operating activities totaling $3.5 million in
fiscal 1996 and used cash for operating activities totaling $5.8 million in
fiscal 1995. The use of cash in fiscal 1995 was primarily attributable to
significant operating losses and increased levels of accounts receivable and
inventories. Net cash provided by operating activities in fiscal 1996
principally related to net income of $6.6 million, offset by increases in
accounts receivable, inventory and prepaid expenses, and a decrease in accounts
payable. The increase in prepaid expenses related primarily to the Company's
realization of $2.1 million of its net deferred tax assets.
The Company used approximately $1.5 million and $4.3 million of cash during
fiscal 1995 and 1996, respectively, to purchase property and equipment. In
addition, the Company used approximately $3.0 million in fiscal 1996 to purchase
short-term investments. Financing activities provided $6.7 million and $26.6
million during fiscal 1995 and 1996, respectively, due primarily to the sale of
preferred stock in fiscal 1995 and the initial public offering of the Company's
common stock in November 1995, which generated proceeds of $25.7 million.
The Company currently has no significant capital commitments other than
commitments under operating and capital leases. The Company believes that its
existing liquidity and capital resources are sufficient to fund its operations
for at least the next twelve months.
This Annual Report to shareholders contains forward-looking statements about
future results which are subject to risks and uncertainties. Network Appliance's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, the level of competition; the size and timing of
significant orders; product configuration and mix; market acceptance of new
products and product enhancements; new product announcements or introductions by
the Company or its competitors; deferrals of customer orders in anticipation of
new products or product enhancements; changes in pricing by the Company or its
competitors; the ability of the Company to develop, introduce and market new
products and product enhancements on a timely basis; hardware component costs;
supply constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the network file server market; the mix of
sales among the Company's sales channels; levels of expenditure on research and
development; changes in Company strategy; personnel changes; general economic
trends and other factors. Although the Company has not experienced seasonality
in the past, because of the significant seasonal effects experienced within the
industry and the Company's goal to expand international sales, there can be no
assurance that the Company's future operating results will not be adversely
affected by seasonality. The Company is subject to a variety of other additional
risk factors, more fully described in the Company's Annual Report on Form 10-K.
Shareholders are strongly encouraged to review the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
9
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. (formerly Network Appliance Corporation) and its subsidiaries as
of April 30, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended April 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have 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 statement referred to above
present fairly, in all material respects, the financial position of Network
Appliance, Inc. and its subsidiaries as of April 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
May 10, 1996
(August 16, 1996 as to Note 10)
10
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30,
--------------------
(In thousands, except share amounts) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 24,637 $ 1,791
Short-term investments 2,982 --
Accounts receivable, net of allowances of $330 and $220 5,330 3,170
Inventories 4,825 3,644
Prepaid expenses and other 2,628 136
-------- --------
Total current assets 40,402 8,741
Property and Equipment, net 4,849 1,822
Other Assets 198 65
-------- --------
$ 45,449 $ 10,628
-------- --------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term obligations $ 19 $ 27
Accounts payable 2,099 3,514
Income taxes payable 500 --
Accrued compensation and related benefits 2,015 950
Other accrued liabilities 1,110 472
Deferred revenue 378 8
-------- --------
Total current liabilities 6,121 4,971
-------- --------
Long-Term Obligations, net of current portion 31 45
-------- --------
Deferred Rent 268 181
-------- --------
Commitments and Contingencies (Notes 5 and 10)
Redeemable Convertible Preferred Stock, no par value:
Series B shares outstanding: none in 1996 and 3,800,000 in 1995 -- 4,799
Series C shares outstanding: none in 1996 and 2,349,461 in 1995 -- 6,555
-------- --------
-- 11,354
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, no par value; 20,000,000 shares authorized; Series
A shares outstanding:
none in 1996 and 1,186,922 in 1995 -- 1,340
Common stock, no par value; 40,000,000 shares
authorized; shares outstanding: 16,140,083 in 1996 and
5,066,146 in 1995 40,286 211
Deferred stock compensation (383) --
Accumulated deficit (874) (7,474)
-------- --------
Total shareholders' equity (deficit) 39,029 (5,923)
-------- --------
$ 45,449 $ 10,628
-------- --------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
11 NETWORK APPLIANCE, INC.
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended April 30,
----------------------------------------
(In thousands, except per share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 46,632 $ 14,796 $ 2,244
Cost of Sales 20,557 7,957 1,083
-------- -------- --------
Gross margin 26,075 6,839 1,161
-------- -------- --------
OPERATING EXPENSES
Sales and marketing 12,735 6,284 1,513
Research and development 4,762 2,608 780
General and administrative 2,578 2,860 823
-------- -------- --------
Total operating expenses 20,075 11,752 3,116
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 6,000 (4,913) (1,955)
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 668 157 84
Interest and other expense (68) (8) (3)
-------- -------- --------
Total other income (expense) 600 149 81
-------- -------- --------
NET INCOME (Loss) $ 6,600 $ (4,764) $ (1,874)
-------- -------- --------
NET INCOME (Loss) per Share $ .42 $ (.38)
-------- --------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 15,820 12,590
-------- --------
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
NETWORK APPLIANCE, INC. 12
<PAGE> 15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE DEFERRED
PREFERRED STOCK COMMON STOCK STOCK ACCUMULATED
----------------------- ------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, APRIL 30, 1993 1,186,922 $ 1,340 4,039,500 $ 41 $ -- $ (836) $ 545
Sale of common stock -- -- 50,000 5 -- -- 5
Net loss -- -- -- -- -- (1,874) (1,874)
--------- ----------- ---------- ----------- ------- ----------- -----------
BALANCES, APRIL 30, 1994 1,186,922 1,340 4,089,500 46 -- (2,710) (1,324)
Sale of common stock -- -- 375,635 59 -- -- 59
Exercise of stock options -- -- 843,589 108 -- -- 108
Repurchase of common stock -- -- (242,578) (2) -- -- (2)
Net loss -- -- -- -- -- (4,764) (4,764)
--------- ----------- ---------- ----------- ------- ----------- -----------
BALANCES, APRIL 30, 1995 1,186,922 1,340 5,066,146 211 -- (7,474) (5,923)
Exercise of stock options -- -- 1,437,328 274 -- -- 274
Exercise of warrants -- -- 359,690 708 -- -- 708
Issuance of common stock in
connection with the Company's
initial public offering, net -- -- 2,155,000 25,714 -- -- 25,714
Repurchase of common stock -- -- (214,464) (68) -- -- (68)
Conversion of Series A preferred
stock into common stock (1,186,922) (1,340) 1,186,922 1,340 -- -- --
Conversion of Series B and C
preferred stock into common stock -- -- 6,149,461 11,354 -- -- 11,354
Deferred stock compensation -- -- -- 515 (515) -- --
Amortization of deferred
stock compensation -- -- -- -- 132 -- 132
Income tax benefit from employee
stock transactions -- -- -- 238 -- -- 238
Net income -- -- -- -- -- 6,600 6,600
--------- ----------- --------- ----------- ------- ----------- -----------
BALANCES, APRIL 30, 1996 -- $ -- 16,140,083 $ 40,286 $ (383) $ (874) $ 39,029
--------- ----------- ---------- ----------- ------- ----------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
13 NETWORK APPLIANCE, INC.
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended April 30,
------------------------------------
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 6,600 $ (4,764) $ (1,874)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,254 389 79
Amortization of deferred stock compensation 132 -- --
Provision for doubtful accounts 110 210 10
Deferred income taxes (2,100) -- --
Deferred rent 87 125 56
Changes in assets and liabilities:
Accounts receivable (2,270) (2,860) (530)
Inventories (1,181) (3,214) (372)
Prepaid expenses and other (525) (154) (43)
Accounts payable (1,415) 3,119 330
Accrued compensation and related benefits 1,065 869 79
Income taxes payable 500 -- --
Other accrued liabilities 876 424 48
Deferred revenue 370 8 --
-------- -------- --------
Net cash provided by (used in) operating activities 3,503 (5,848) (2,217)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,281) (1,504) (625)
Purchases of short-term investments (2,982) -- --
-------- -------- --------
Net cash used in investing activities (7,263) (1,504) (625)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,250 -- --
Repayments of long-term obligations (1,272) (3) --
Proceeds from issuance of convertible notes payable -- -- 500
Proceeds from sale of common stock, net 26,628 165 5
Proceeds from sale of preferred stock, net -- 6,555 4,299
-------- -------- --------
Net cash provided by financing activities 26,606 6,717 4,804
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,846 (635) 1,962
CASH AND CASH EQUIVALENTS
Beginning of year 1,791 2,426 464
-------- -------- --------
End of year $ 24,637 $ 1,791 $ 2,426
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 60 $ 8 $ 3
Income taxes paid $ 1,362 $ -- $ --
NONCASH INVESTING AND FINANCING ACTIVITIES
Deferred stock compensation $ 515 $ -- $ --
Conversion of preferred stock into common stock $ 12,694 $ -- $ --
Income tax benefit from employee stock transactions $ 238 $ -- $ --
Equipment acquired under capital lease $ -- $ 75 $ --
Conversion of convertible notes and accrued interest into
preferred stock $ -- $ -- $ 500
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
NETWORK APPLIANCE, INC. 14
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Network Appliance, Inc., incorporated in the state of California on April
22, 1992, and its subsidiaries (the Company) operates in a single industry
segment and is involved in the design, manufacturing, marketing and support of
network data storage appliances. Effective October 3, 1995, the Company changed
its name from Network Appliance Corporation to Network Appliance, Inc.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation. Beginning in fiscal 1996, the Company's fiscal year
ends on the Friday nearest to April 30, which in fiscal 1996 was April 26. For
presentation purposes, the Company reflects April 30 as the fiscal year end for
all periods presented in the accompanying financial statements.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
investments with original maturities of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS. The Company's short-term investments consist of
certificates of deposit and commercial paper with original maturities of more
than three months and less than one year. All of the Company's investments are
classified as available-for-sale, and are stated at amortized cost (specific
identification basis), which approximates fair market value. There were no
realized gains and losses in fiscal 1996.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost and is
depreciated on a straight-line basis over estimated useful lives which range
from three to five years. Equipment under capital lease is stated at the present
value of the future minimum lease payments at the inception of the lease. Such
equipment and leasehold improvements are amortized over their estimated useful
lives or the term of the lease, whichever is shorter.
REVENUE RECOGNITION. The Company recognizes revenue and records estimated
product return and warranty reserves upon shipment if no material obligations
remain outstanding and the collectibility of receivables is deemed to be
probable. Service revenues are recognized over the term of the related
contractual period, and were not significant in any periods presented. Software
revenues consist primarily of subscriptions for software updates, and are
recognized over the term of the related contractual period. Software revenues
were not significant in any of the periods presented. The Company extends
limited product return and price protection rights to certain distributors and
resellers. Such rights are generally limited to a certain percentage of sales
over a three-month period. Historically, actual amounts of product returns and
price protection have not been significant.
SOFTWARE DEVELOPMENT COSTS. The Company capitalizes eligible computer software
development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occurs upon the completion of
a working model. In fiscal 1996, 1995 and 1994, costs which were eligible for
capitalization were insignificant, and thus, the Company has charged all
software development costs to research and development expense in the
accompanying consolidated statements of operations.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's foreign
subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are translated at average exchange rates in effect during the
period. Transaction and translation gains and losses, which are included in
other income (expense) in the accompanying consolidated statements of
operations, have not been significant.
INCOME TAXES. Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS
109) for all periods presented. This statement requires an asset and liability
approach to account for income taxes and requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
15 NETWORK APPLIANCE, INC.
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
allowance for doubtful accounts receivable, inventory reserves, certain
accruals, valuation allowances for deferred tax assets and warranty reserves.
Actual results could differ from those estimates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivable. Cash equivalents consist primarily of money market funds and are
held with two financial institutions. The Company sells its products primarily
to large organizations in different industries and geographies. Credit risk is
further mitigated by the Company's credit evaluation process and limited payment
terms. The Company does not require collateral or other security to support
accounts receivable. While the Company maintains an allowance for potential
credit losses, such losses have not been significant.
The Company is subject to certain risks as more fully described in its Form
S-1 Registration Statement, including without limitation risks relating to
history of operating losses, fluctuating operating results, dependence on new
products, rapid technological change, the Whipsaw litigation, dependence on
growth in the network file server market, expansion of international operations,
product concentration, changing product mix, competition, recent management
additions, management of expanding operations, dependence on high quality
components, dependence on proprietary technology, intellectual property rights,
dependence on key personnel, volatility of stock price, shares eligible for
future sale, concentration of stock ownership, effect of certain anti-takeover
provisions and dilution.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares include preferred stock (using the
"if converted" method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is anti-dilutive except that, pursuant to the Securities and Exchange
Commission's Staff Accounting Bulletins and staff policy, such computations
include all common and common equivalent shares issued within the 12 months
preceding the initial filing date of the Company's Form S-1 Registration
Statement (October 6, 1995) as if they were outstanding for all periods
presented. In addition, all outstanding preferred stock that converted in
connection with the initial public offering is included in the computation as
common equivalent shares even when the effect is anti-dilutive. Historical net
income (loss) per share information prior to fiscal 1995 has not been presented
since such amounts are not deemed meaningful due to the significant change in
the Company's capital structure that occurred in connection with its initial
public offering.
Supplementary net income (loss) per share data giving effect to the use of
a portion of the proceeds from the initial public offering for the retirement of
debt has not been presented as such amounts do not differ materially from
amounts presented.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123). In October 1995,
the Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method of
accounting for stock options and other equity instruments, such as stock
purchase plans. Under this method, compensation cost is measured based on the
fair market value of the stock award when granted and is recognized as an
expense over the related service period, which is usually the vesting period.
This standard will be effective for the Company beginning in fiscal 1997, and
requires measurement of awards made beginning in fiscal 1996.
As provided under SFAS 123, the Company will continue to account for equity
transactions under the provisions of existing accounting rules. The Company will
disclose in the footnotes to the financial statements the pro forma effect that
adoption of SFAS 123 would have on net income and net income per share.
NOTE 3. INVENTORIES
NETWORK APPLIANCE, INC. 16
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories consist of the following:
<TABLE>
<CAPTION>
April 30,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased components $2,161 $3,205
Work in process 970 --
Finished goods 1,694 439
------ ------
$4,825 $3,644
------ ------
- --------------------------------------------------------------------------------
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
April 30,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Computers, related equipment and purchased software $ 5,691 $ 2,036
Furniture and fixtures 397 175
Leasehold improvements 494 90
------- -------
6,582 2,301
Accumulated depreciation and amortization (1,733) (479)
$ 4,849 $ 1,822
------- -------
- --------------------------------------------------------------------------------
</TABLE>
NOTE 5. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS
Certain equipment is leased under capital lease agreements. As of April 30,
1996 and 1995, the net book value of equipment under capital lease was $43,000
and $63,000 (net of accumulated amortization of $17,000 and $12,000),
respectively.
The Company leases its facilities under operating leases. The Company is
responsible for certain maintenance costs, taxes and insurance under the leases.
Future minimum annual lease payments as of April 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
(IN THOUSANDS) OPERATING CAPITAL
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 635 $ 25
1998 593 25
1999 612 10
2000 260 --
Total lease payments $ 2,100 60
------- --------
Amounts representing interest at 15% to 16% (10)
-------
50
--------
Current portion (19)
Long-term portion $ 31
--------
- --------------------------------------------------------------------------------
</TABLE>
Rent expense was approximately $755,000, $566,000 and $110,000 for the
years ended April 30, 1996, 1995 and 1994, respectively. Rent expense under the
Company's primary facility lease is recognized on a straight-line basis over the
term of the lease. The difference between the amounts paid and the amounts
expensed is classified as deferred rent in the accompanying consolidated balance
sheets.
17 NETWORK APPLIANCE, INC.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PREFERRED STOCK AND COMMON STOCK
INITIAL PUBLIC OFFERING. In November 1995, the Company completed its initial
public offering of 2,155,000 shares of its common stock. Net proceeds from the
offering were approximately $25.7 million. In conjunction with the offering, all
outstanding shares of preferred stock automatically converted into common stock.
In addition, the Company issued 181,119 shares of common stock upon the exercise
of Series A warrants, and 178,571 shares of common stock upon the exercise of
Series C warrants. The Company received total proceeds of approximately $708,000
from the exercise of these warrants.
STOCK OPTION PLANS. The Company adopted the 1993 Stock Option/Stock Issuance
Plan (the 1993 Plan) in April 1993. In September 1995, the Board of Directors
and shareholders adopted the 1995 Stock Incentive Plan (the "1995 Plan"). The
1995 Plan replaced the 1993 Plan, and provides for the grant of options and the
issuance of common stock under terms substantially the same as those provided
under the 1993 Plan. Accordingly, all options and shares issued under the 1993
Plan were incorporated into the 1995 Plan upon the effectiveness of the
Company's initial public offering. No further options will be granted under the
1993 Plan.
Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of the Company's common
stock. The exercise price for an incentive stock option and a nonqualified stock
option cannot be less than 100% and 85%, respectively, of the fair market value
of the Company's common stock as determined by the Board of Directors on the
date of grant. Options granted under the 1995 Plan are immediately exercisable,
subject to a right of repurchase in favor of the Company for all unvested
shares. Options granted under the 1995 Plan generally vest, and the Company's
rights to repurchase shares sold pursuant to the 1995 Plan lapse, at a rate of
25% on the first anniversary of the vesting commencement date and then ratably
over the following 36 months. Options expire as determined by the Board of
Directors, but not more than ten years after the date of grant.
A summary of the combined activity under the 1993 and 1995 Plans is as
follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING OPTIONS
AVAILABLE NUMBER
FOR GRANT OF SHARES PRICE PER SHARE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, April 30, 1993 898,000 102,000 $ .10
Options granted (457,000) 457,000 .10 .13
Options canceled 10,000 (10,000) .10
---------- ----------
Balances, April 30, 1994 451,000 549,000 .10 - .13
Shares reserved for plan 1,400,000
Options granted (1,832,500) 1,832,500 .13 - .20
Options exercised (843,589) .10 - .20
Options canceled 149,428 (149,428) .10 - .20
---------- ----------
Balances, April 30, 1995 167,928 1,388,483 .10 - .20
Shares reserved for plan 3,250,000
Options granted (1,793,190) 1,793,190 .28 - 27.00
Options exercised (1,437,328) .10 - 3.00
Options canceled 147,721 (147,721) .10 - 11.00
---------- ----------
Balances, April 30, 1996 1,772,459 1,596,624 $ .10 - $ 27.00
---------- ----------
- ---------------------------------------------------------------------------------
</TABLE>
As of April 30, 1996, options for the purchase of approximately 98,000
shares of common stock were vested and approximately 1,383,000 of unvested
common shares issued under the 1995 Plan are subject to repurchase by the
Company. The Company has reserved a total of 3,369,083 shares of common stock
for issuance under the 1995 plan.
NETWORK APPLIANCE, INC. 18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK PURCHASE PLAN. The Company's Employee Stock Purchase Plan ("The
Purchase Plan") was adopted by the Company's Board of Directors and shareholders
in September 1995. The Purchase Plan enables eligible employees to purchase
common stock at 85% of the lower of the fair market value of the Company's
common stock on the first day or last day of each semiannual purchase date. A
total of 350,000 shares of common stock have been reserved for sale under the
Purchase Plan, none of which have been issued as of April 30, 1996.
DEFERRED STOCK COMPENSATION. In May 1995, the Company issued stock options for
the purchase of 531,500 shares of common stock at $.28 per share. The Company
recognized $515,000 of deferred compensation in May 1995 equal to the difference
between the option price as determined by the Board of Directors and $1.25 (the
deemed fair value for financial reporting purposes) for each option. The Company
is amortizing the deferred compensation expense ratably over the four-year
period in which the options vest.
NOTE 7. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan. Employees
meeting the eligibility requirements, as defined, may contribute specified
percentages of their salaries. The Company has not contributed to the 401(K)
plan to date.
NOTE 8. INCOME TAXES
The Company generated losses for financial reporting and tax purposes in
fiscal 1995 and 1994, and accordingly did not record a provision for income
taxes in these periods. In fiscal 1996, the provision for income taxes consisted
of the following:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
CURRENT
<S> <C>
Federal $ 1,880
State 220
-------
Total current 2,100
-------
DEFERRED (PREPAID)
Federal (1,880)
State (220)
-------
Total deferred (prepaid) (2,100)
-------
Provision for income taxes $ --
=======
- --------------------------------------------------------------------------------
</TABLE>
Deferred (prepaid) income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes, as well as net
operating loss and credit carryforwards.
The provision for income taxes in fiscal 1996 differs from the amount
computed by applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Statutory tax $ 2,310
State income taxes, net of Federal benefit 405
Research and development credit (50)
Investment tax credit (150)
Change in valuation allowance (2,510)
Other (5)
-------
Provision for income taxes $ --
=======
- --------------------------------------------------------------------------------
</TABLE>
19 NETWORK APPLIANCE, INC.
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
<S> <C> <C>
Capitalized research and development costs $ 696 $ 1,635
Reserves not currently deductible for tax purposes 1,828 689
Net operating loss carryforwards 141 663
Research and development credits -- 270
Other 108 (74)
------- -------
2,773 3,183
Valuation allowance (673) (3,183)
------- -------
Net deferred tax asset $ 2,100 $ --
======= =======
</TABLE>
The Company has recorded a valuation allowance based upon management's
assessment under the guidelines of SFAS 109 that it is more likely than not that
a portion of the deferred tax assets will not be realized due to certain
factors, including the limited operating history of the Company, a recent
history of losses and the variability of operating results.
As of April 30, 1996, the Company had federal net operating loss
carryforwards of approximately $400,000 available to offset future taxable
income. These carryforwards expire in 2010.
NOTE 9. SIGNIFICANT CUSTOMERS AND INTERNATIONAL SALES
No customer accounted for 10% or more of net sales in fiscal 1996. One
customer accounted for 10% and 20% of net sales in fiscal 1995 and 1994,
respectively. In fiscal 1995, another customer accounted for 10% of net sales. A
third customer accounted for 10% of net sales in fiscal 1994.
International sales, substantially all of which were export sales to Asia
and Europe, accounted for approximately 20%, 16% and 36% of net sales in fiscal
1996, 1995, and 1994, respectively.
NOTE 10. LITIGATION
In July 1994, the Company and certain of its former employees were named
as defendants in a lawsuit which alleged that one of the Company's founders,
who left the Company in March 1995, misappropriated confidential information
prior to the Company's founding in April 1992.
In August 1996, the Company reached a settlement in principle with the
plaintiffs which resulted in a charge to earnings of $4.3 million in the first
quarter of fiscal 1997, which includes a $3.5 million payment to the plaintiffe
and $800,000 of legal fees. The payment releases the Company from all
liabilities associated with the case. The Company has no future obligations to
the plaintiffs. The Company denies any wrongdoing on its part or on the part of
the founder.
NETWORK APPLIANCE, INC. 20
<PAGE> 23
CORPORATE DIRECTORY
DIRECTORS CORPORATE OFFICERS
Donald Valentine (Chairman) Daniel Warmenhoven
Founder, Sequoia Capital President and Chief Executive Officer
Carol Bartz Helen Bradley
Chairman, President, and CEO Vice President, Engineering
Autodesk, Inc.
Christabel Carlton
Michael Hallman Vice President, Human Resources
President, The Hallman Group
James Lau
Kurt Jaggers Chief Technical Officer
Principal, TA Associates
Michael McCloskey
Robert Wall Vice President Operations,
Chairman, President and CEO Chief Financial Officer and Secretary
Theatrix Interactive, Inc.
Thomas Mendoza
Daniel Warmenhoven Vice President, North American Sales
President and Chief Executive Officer
Network Appliance, Inc. Michael Paul
Vice President, International Sales
Charles Simmons
Vice President, Marketing
- --------------------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR STOCK PRICES AND
DIVIDEND POLICY
The Harris Trust Company of California
The Company's common stock is traded
INDEPENDENT AUDITORS on the Nasdaq Stock Market under the
symbol "NTAP". As of May 31, 1996,
Deloitte & Touche LLP there were approximately 260
San Jose, California shareholders of record of the
Company's common stock.
SEC FORM 10-K
The following table sets forth for the
If you would like a copy of our periods indicated the range of high
Annual Report on SEC Form 10-K, and low sales prices for the Company's
you mauy obtain it without charge. common stock.
Please direct your request to:
Quarter High Low
Network Appliance, Inc.
319 North Bernardo Avenue Q3 1996 $ 41.12 $13.50
Mountain View, CA 94043 Q4 1996 $ 38.75 $27.00
The Company has never paid cash
dividends on its capital stock. The
Company currently anticipates that it
will retain all available funds for
use in its business and does not
anticipate paying any cash
dividends.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of
Network Appliance, Inc.
We consent to the incorporation by reference in Registration Statement No.
33-99638 on Form S-8 of our report dated May 10, 1996 (August 16, 1996 as to
Note 10), incorporated by reference in this Annual Report on Form 10-KA of
Network Appliance, Inc. for the year ended April 30, 1996.
/s/ Deloitte & Touche LLP
San Jose, California
October 24, 1996
