<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 25, 1996
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)
<TABLE>
<S> <C>
CALIFORNIA 77-0307520
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
319 NORTH BERNARDO AVENUE,
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (ZIP CODE)
</TABLE>
(415) 428-5100
Registrant's telephone number, including area code
------------------------
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 the number of shares outstanding of the issuer's class of common
stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OCTOBER 25, 1996
---------------------------------------------- ----------------
<S> <C>
Common Stock.................................. 16,126,520
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
NETWORK APPLIANCE, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.............................. 3
3
Condensed Consolidated Balance Sheets as of October 25, 1996
and April 30, 1996.......................................................
4-5
Condensed Consolidated Statements of Operations for the three and six
month periods ended October 25, 1996 and October 27, 1995..............
6
Condensed Consolidated Statements of Cash Flows for the six month periods
ended October 25, 1996 and October 27, 1995............................
7
Notes to Condensed Consolidated Financial Statements.....................
Item 2. Management's Discussion and Analysis of Financial Condition and 8-11
Results of Operations....................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 12
Item 2. Changes in Securities.................................................... 12
Item 3. Defaults Upon Senior Securities.......................................... 12
Item 4. Submission of Matters to a Vote of Securityholders....................... 12
Item 5. Other Information........................................................ 12
Item 6. Exhibits and Reports on Form 8-K......................................... 12
SIGNATURES.......................................................................... 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, 1996
OCTOBER 25, 1996 --------------
----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 15,244 $ 24,637
Short-term investments...................................... 8,850 2,982
Accounts receivable, net.................................... 10,866 5,330
Inventories................................................. 8,318 4,825
Prepaid expenses and other.................................. 3,036 2,628
------- -------
Total current assets................................ 46,314 40,402
PROPERTY AND EQUIPMENT, net................................... 5,841 4,849
------- -------
OTHER ASSETS.................................................. 190 198
------- -------
$ 52,345 $ 45,449
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................... $ 20 $ 19
Accounts payable............................................ 4,402 2,099
Income taxes payable........................................ 501 500
Other accrued liabilities................................... 3,809 3,125
Deferred revenue............................................ 1,493 378
------- -------
Total current liabilities........................... 10,225 6,121
------- -------
LONG-TERM OBLIGATIONS......................................... 256 299
------- -------
SHAREHOLDERS' EQUITY:
Common stock................................................ 40,448 39,903
Retained earnings (Accumulated deficit)..................... 1,416 (874)
------- -------
41,864 39,029
------- -------
$ 52,345 $ 45,449
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
OCTOBER 25, 1996 OCTOBER 27, 1995
---------------- ----------------
<S> <C> <C>
NET SALES..................................................... $ 21,048 $ 10,023
COST OF SALES................................................. 8,582 4,537
------- -------
GROSS MARGIN.................................................. 12,466 5,486
------- -------
OPERATING EXPENSES:
Sales and marketing......................................... 5,538 2,870
Research and development.................................... 1,980 973
General and administrative.................................. 932 534
------- -------
Total operating expenses............................ 8,450 4,377
------- -------
INCOME FROM OPERATIONS........................................ 4,016 1,109
OTHER INCOME (EXPENSE), net................................... 261 (13)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES...................... 4,277 1,096
PROVISION FOR INCOME TAXES.................................... 1,497 --
------- -------
NET INCOME.................................................... $ 2,780 $ 1,096
======= =======
NET INCOME PER SHARE.......................................... $ 0.16 $ 0.07
======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES.................................... 17,403 14,689
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------
OCTOBER 25, 1996 OCTOBER 27, 1995
---------------- ----------------
<S> <C> <C>
NET SALES..................................................... $ 39,508 $ 17,603
COST OF SALES................................................. 16,176 8,065
------- -------
GROSS MARGIN.................................................. 23,332 9,538
------- -------
OPERATING EXPENSES:
Sales and marketing......................................... 10,206 5,110
Research and development.................................... 3,703 1,740
General and administrative.................................. 2,152 1,054
Litigation settlement....................................... 4,300 --
------- -------
Total operating expenses............................ 20,361 7,904
------- -------
INCOME FROM OPERATIONS........................................ 2,971 1,634
OTHER INCOME (EXPENSE), net................................... 552 (9)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES...................... 3,523 1,625
PROVISION FOR INCOME TAXES.................................... 1,233 --
------- -------
NET INCOME.................................................... $ 2,290 $ 1,625
======= =======
NET INCOME PER SHARE.......................................... $ 0.13 $ 0.11
======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES.................................... 17,353 14,734
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------
OCTOBER 25, 1996 OCTOBER 27, 1995
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,290 $ 1,625
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 1,222 430
Amortization of deferred stock compensation............ 52 66
Deferred rent.......................................... (36) 60
Changes in assets and liabilities:
Accounts receivable.................................. (5,536) (913)
Inventories.......................................... (3,493) (647)
Prepaid expenses and other........................... (398) (149)
Accounts payable..................................... 2,303 (614)
Accrued liabilities and deferred revenue............. 1,799 239
------- -------
Net cash provided by (used in) operating
activities...................................... (1,797) 97
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net.................. (5,868) --
Purchases of property and equipment....................... (2,214) (1,206)
------- -------
Net cash used in investing activities.................. (8,082) (1,206)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- 1,250
Repayments of long-term obligations....................... (7) (154)
Proceeds from sale of common stock, net................... 493 267
------- -------
Net cash provided by financing activities.............. 486 1,363
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (9,393) 254
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 24,637 1,791
------- -------
End of period............................................. $ 15,244 $ 2,045
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Network Appliance, Inc. (the Company) without audit and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position and the results of operations of the
Company for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles. The results of operations for the
three and six month periods ended October 25, 1996 are not necessarily
indicative of the operating results to be expected for the full fiscal year or
future operating periods. The information included in this report should be read
in conjunction with the audited financial statements and notes thereto for the
fiscal year ended April 30, 1996 and the risk factors as set forth in the
Company's Annual Report on Form 10-K, including, without limitation, risks
relating to history of operating losses, fluctuating operating results,
dependence on new products, rapid technological change, 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. Any party interested in reviewing these publicly available documents
should write to the SEC or the Chief Financial Officer of the Company.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 25, 1996 APRIL 30, 1996
---------------- --------------
<S> <C> <C>
Purchased components......................... $4,425 $2,161
Work in process.............................. 1,421 970
Finished goods............................... 2,472 1,694
------ ------
$8,318 $4,825
====== ======
</TABLE>
3. NET INCOME PER SHARE
Net income 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.
4. LITIGATION SETTLEMENT
In July 1994, the Company and certain of its former employees were named as
defendants in a lawsuit which alleged that one of the Company's founders, who
left the Company in March 1995, misappropriated confidential information prior
to the Company's founding in April 1992.
In August 1996, the Company reached a settlement with the plaintiffs 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 $800,000 of
legal fees. The payment released the Company from all liabilities associated
with the case. The Company has no future obligations to the plaintiffs. The
Company denies any wrongdoing on its part or on the part of the founder.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Network Appliance 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. In May 1996, the Company introduced the NetApp F540, an
enterprise-class file server appliance. 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 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>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 25, OCTOBER 27, OCTOBER 25, OCTOBER 27,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 40.8 45.3 40.9 45.8
----- ----- ----- -----
Gross margin.................................. 59.2 54.7 59.1 54.2
Operating expenses:
Sales and marketing......................... 26.3 28.6 25.8 29.0
Research and development.................... 9.4 9.7 9.4 9.9
General and administrative.................. 4.4 5.3 5.5 6.0
Litigation settlement....................... -- -- 10.9 --
----- ----- ----- -----
Total operating expenses............ 40.1 43.6 51.6 44.9
----- ----- ----- -----
Income from operations........................ 19.1 11.1 7.5 9.3
Other income (expense), net................... 1.2 (0.2) 1.4 (.1)
----- ----- ----- -----
Income before income taxes.................... 20.3 10.9 8.9 9.2
Provision for income taxes.................... 7.1 -- 3.1 --
----- ----- ----- -----
Net income.................................... 13.2% 10.9% 5.8% 9.2%
===== ===== ===== =====
</TABLE>
Net Sales. Net sales increased by approximately 110.0% from $10.0 million
for the three months ended October 27, 1995 to $21.0 million for the three
months ended October 25, 1996. For the six month period ended October 25, 1996,
net sales of $39.5 million reflect an increase of 124% over the comparable
period of fiscal 1996. The increase in net sales in these periods resulted
primarily from the Company's continuing expansion of its domestic direct sales
force, as well as the growth of its domestic indirect sales channel and
international direct sales channel, increased market acceptance of the Company's
products and the introduction of the NetApp F330, F220 and F540. The Company
also shipped more units directly to end users, which generally purchase more
highly configured systems at higher average selling prices than resellers.
Gross Margin. Gross margin increased from 54.7% for the three months ended
October 27, 1995 to 59.2% for the three months ended October 25, 1996. Gross
margin for the six months ended October 25, 1996 was 59.1%, compared to 54.2%
for the comparable period of fiscal 1996. This increase in gross margin was
primarily attributable to lower costs of key components and manufacturing
efficiencies achieved during the three and six month periods ended October 25,
1996, both of which were related to the significant increase in
8
<PAGE> 9
production volume. These factors offset the effect of increased sales of highly
configured systems during these periods which generally generate lower gross
margins per system.
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 products in both highly configured
systems, as well as in minimally configured systems. Typically, highly
configured systems generate lower overall gross margins 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 93.0% from $2.9
million for the three months ended October 27, 1995 to $5.5 million for the
three months ended October 25, 1996. For the six months ended October 25, 1996,
sales and marketing expense of $10.2 million reflects an increase of 99.7% over
the comparable period of fiscal 1996. These expenses were 26.3% and 28.6% of net
sales for the three months ended October 25, 1996 and October 27, 1995,
respectively, and were 25.8% and 29.0%, respectively, of net sales for the six
months then ended. The increase in absolute dollars was primarily related to the
expansion of the Company's sales and marketing organization, particularly
increases in the domestic and international sales forces, 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 103.5% from $973,000
for the three months ended October 27, 1995 to $2.0 million for the three months
ended October 25, 1996. These expenses represented 9.4% and 9.7% of net sales
for the quarters ended October 25, 1996 and October 27, 1995, respectively. For
the six month periods, research and development expenses increased 112.8% from
$1.7 million in fiscal 1996 to $3.7 million in fiscal 1997 and represented 9.4%
and 9.9% of net sales, respectively, for those periods. These expenses increased
in absolute dollars primarily as a result of increased headcount, consulting
fees, prototyping expenses associated with the development of new products and
ongoing support of current and future product development and enhancement
efforts. The Company believes that significant investments in research and
development will be required to remain competitive and expects that such
expenditures will continue to increase in absolute dollars. 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 $932,000 in the three months ended October 25, 1996, compared to
$534,000 in the three months ended October 27, 1995. These expenses represented
4.4% and 5.3%, respectively, of net sales for such periods. For the six month
periods, general and administrative expenses increased 104.2% from $1.1 million
in fiscal 1996 to $2.2 million in fiscal 1997 and represented 6.0% and 5.5% of
net sales, respectively, for those periods. Increases in general and
administrative expenses related primarily to certain litigation expenses,
increased staffing, professional fees, 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 as the Company continues to build its
infrastructure.
Litigation Settlement. In July 1994, the Company and certain of its former
employees were named as defendants in a lawsuit which alleged that one of the
Company's founders, who left the Company in March 1995, misappropriated
confidential information prior to the Company's founding in April 1992. In
August 1996, the Company reached a settlement with the plaintiffs which resulted
in a charge to earnings of $4.3 million in the quarter ended July 26, 1996,
which included a $3.5 million payment to the plaintiffs and
9
<PAGE> 10
$800,000 of legal fees. The payment released the Company from all liabilities
associated with the case. The Company has no future obligations to the
plaintiffs.
Other Income, net. Other income, net, was approximately $261,000 and
$(13,000) in the three months ended October 25, 1996 and October 27, 1995,
respectively. During the six months ended October 25, 1996 and October 27, 1995,
other income, net, was approximately $552,000 and $(9,000), respectively. In
each of these periods, other income, net, represented less than 2% of net sales.
Other income, net, increased in the three and six month periods ended October
25, 1996 compared to the same periods of the prior year 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.
Provision for Income Taxes. 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, and accordingly no provision for income taxes was
incurred in the three and six months ended October 27, 1995. The Company has
recorded a provision for income taxes in the three and six months ended October
25, 1996 utilizing an income tax rate of 35%, which is the anticipated effective
tax rate for fiscal 1997.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including the
level of competition; the size 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.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network file server market is rapidly evolving and the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations in any
particular quarter; and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company's expense levels are based, in part, on its expectations as to
future sales. As a result, if sales levels are below expectations, net income
may be disproportionately affected. Although the Company has experienced
significant revenue growth in recent periods, the Company does not believe such
growth is indicative of future operating results. The Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indicator of future performance.
Due to all of the foregoing factors, it is possible that in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
This Form 10-Q 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. 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 filed
with the Securities and Exchange Commission.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of October 25, 1996, the Company's liquidity primarily consisted of cash
and cash equivalents of $15.2 million and short-term investments of $8.8
million.
The Company used cash from operating activities totaling $1.8 million in
the six months ended October 25, 1996 and generated cash from operating
activities totaling $97,000 in the six months ended October 27, 1995. The use of
cash in the six months ended October 25, 1996 was primarily attributable to the
settlement of a lawsuit which resulted in the payment of $4.3 million in the
quarter ended October 25, 1996, an increase in accounts receivable of $5.5
million and an increase in inventories of $3.5 million, partially offset by net
income of $2.3 million. Net cash provided by operating activities in the six
months ended October 27, 1995 principally related to net income of $1.6 million,
offset by increases in accounts receivable and inventories and a decrease in
accounts payable.
The Company used approximately $2.2 million and $1.2 million of cash during
the six months ended October 25, 1996 and October 27, 1995, respectively, to
purchase property and equipment. In addition, the Company used approximately
$5.9 million in the six months ended October 25, 1996 to purchase short-term
investments. Financing activities provided $486,000 and $1.4 million during the
six months ended October 25, 1996 and October 27, 1995, respectively, due
primarily to the sale of common stock in the first six months of fiscal 1997 and
the issuance of long-term debt in the first quarter of fiscal 1996.
The Company currently has no significant capital commitments other than
commitments under operating and capital leases. The Company believes that its
existing liquidity will satisfy the Company's projected working capital and
other cash requirements for at least the next twelve months.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1994, the Whipsaw group, Robert and Ellen Cousins, and certain
other individuals (collectively the "Whipsaw Group") filed suit alleging breach
of contract, breach of fiduciary duty, fraud, misappropriation of trade secrets
and other related claims against the Company, Michael Malcolm (a former
officer), Owen Brown and Migration Software Systems, Ltd. (the "Whipsaw
Litigation"). The plaintiffs allege that they disclosed trade secrets and
proprietary information to Messrs. Brown and Malcolm under written and/or oral
confidentiality agreements, and that Messrs. Brown and Malcolm misappropriated
those trade secrets and that the Company is based entirely on the trade secrets
and proprietary information misappropriated from the Whipsaw Group. On August
14, 1996, the Company agreed to settle this lawsuit brought against them by the
Whipsaw Group. In connection with the settlement, the Company recorded a pre-tax
charge of $4.3 million in the quarter ended July 26, 1996, which included a $3.5
million payment to the plaintiffs and $800,000 of legal fees. The total
settlement with the plaintiffs consisted of a single cash payment made in the
second quarter of fiscal 1997 and released the Company from all liabilities.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The following proposals were voted upon by the Company's shareholders at
the Annual Meeting of Shareholders held on October 23, 1996 ("Annual
Shareholders Meeting"):
1. The following persons were elected as directors of the Company to serve
for a term ending upon the Annual Shareholders Meeting indicated beside their
respective names and until their successors are elected and qualified:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
---------- --------------
<S> <C> <C>
Daniel J. Warmenhoven..................................... 10,568,784 750
Donald T. Valentine....................................... 10,568,784 750
Carol A. Bartz............................................ 10,568,784 750
Michael R. Hallman........................................ 10,568,784 750
Kurt R. Jaggers........................................... 10,568,784 750
Robert T. Wall............................................ 10,568,784 750
</TABLE>
2. A proposal to ratify the election of Deloitte & Touche LLP, as the
Company's independent auditors for the fiscal year ending April 30, 1997 was
approved as follows:
<TABLE>
<CAPTION>
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
- ---------- ------- -------- ----------------
<S> <C> <C> <C>
10,569,534 11,967 950 --
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 -- Financial Data Schedule
(b) Reports on Form 8-K. A Current Report on Form 8-K dated August 14,
1996 reporting certain Other Events under Item 5 was filed during the fiscal
quarter covered by this Report on Form 10-Q.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NETWORK APPLIANCE, INC.
(Registrant)
/s/ DANIEL J. WARMENHOVEN
--------------------------------------
By: Daniel J. Warmenhoven
President and Chief Executive Officer
(Principal Financial Officer)
Date: December 6, 1996
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> JUL-27-1996
<PERIOD-END> OCT-25-1996
<EXCHANGE-RATE> 1
<CASH> 15,244
<SECURITIES> 8,850
<RECEIVABLES> 10,866
<ALLOWANCES> 0
<INVENTORY> 8,318
<CURRENT-ASSETS> 46,314
<PP&E> 5,841
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,345
<CURRENT-LIABILITIES> 10,225
<BONDS> 0
0
0
<COMMON> 40,448
<OTHER-SE> 1,416
<TOTAL-LIABILITY-AND-EQUITY> 52,345
<SALES> 21,048
<TOTAL-REVENUES> 21,048
<CGS> 8,582
<TOTAL-COSTS> 8,582
<OTHER-EXPENSES> 8,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,277
<INCOME-TAX> 1,497
<INCOME-CONTINUING> 2,780
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,780
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.00
</TABLE>
