<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 23, 1998
OR
[X] 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 INCORPORATION OR IRS EMPLOYER IDENTIFICATION
ORGANIZATION
2770 SAN TOMAS EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 367-3000
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 JANUARY 23, 1998
----- ----------------
<S> <C>
Common Stock 33,515,805
</TABLE>
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of January 23, 1998
and April 30, 1997.......................................... 3
Condensed Consolidated Statements of Income for the three
and nine-month periods ended January 23, 1998 and January
24, 1997.................................................... 4-5
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended January 23, 1998 and January 24,
1997........................................................ 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 13
Item 2. Changes in Securities....................................... 13
Item 3. Defaults Upon Senior Securities............................. 13
Item 4. Submission of Matters to a Vote of Securityholders.......... 13
Item 5. Other Information........................................... 13
Item 6. Exhibits and Reports on Form 8-K............................ 13
SIGNATURE............................................................ 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 23, 1998 APRIL 30, 1997
---------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $39,302 $21,520
Short-term investments.................................... 5,250 6,916
Accounts receivable, net.................................. 26,684 13,911
Inventories............................................... 9,045 9,920
Prepaid expenses and other................................ 1,936 1,253
Deferred taxes............................................ 3,177 3,100
------- -------
Total current assets.............................. 85,394 56,620
------- -------
PROPERTY AND EQUIPMENT, NET................................. 10,564 9,238
OTHER ASSETS................................................ 2,950 3,083
------- -------
$98,908 $68,941
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,904 $ 4,415
Income taxes payable...................................... 2,680 1,023
Accrued compensation and related benefits................. 7,099 4,666
Other accrued liabilities................................. 4,017 2,280
Deferred revenue.......................................... 4,422 2,317
------- -------
Total current liabilities......................... 25,122 14,701
------- -------
LONG-TERM OBLIGATIONS....................................... 170 211
SHAREHOLDERS' EQUITY:
Common stock.............................................. 59,579 54,653
Retained earnings (Accumulated deficit)................... 14,037 (624)
------- -------
Total shareholders' equity........................ 73,616 54,029
------- -------
$98,908 $68,941
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
JANUARY 23, 1998 JANUARY 24, 1997
---------------- ----------------
<S> <C> <C>
NET SALES................................................... $43,984 $24,845
COST OF SALES............................................... 17,880 10,116
------- -------
Gross margin.............................................. 26,104 14,729
------- -------
OPERATING EXPENSES:
Sales and marketing....................................... 11,187 6,438
Research and development.................................. 4,420 2,283
General and administrative................................ 1,852 1,049
------- -------
Total operating expenses............................... 17,459 9,770
------- -------
INCOME FROM OPERATIONS...................................... 8,645 4,959
OTHER INCOME, NET........................................... 243 241
------- -------
INCOME BEFORE INCOME TAXES.................................. 8,888 5,200
PROVISION FOR INCOME TAXES.................................. 3,333 1,820
------- -------
NET INCOME.................................................. $ 5,555 $ 3,380
======= =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.17 $ 0.11
======= =======
Diluted................................................... $ 0.15 $ 0.10
======= =======
WEIGHTED AVERAGE COMMON SHARES.............................. 32,711 30,829
======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES........ 36,250 35,030
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------
JANUARY 23, 1998 JANUARY 24, 1997
---------------- ----------------
<S> <C> <C>
NET SALES................................................... $115,805 $64,353
COST OF SALES............................................... 47,196 26,292
-------- -------
Gross margin........................................... 68,609 38,061
-------- -------
OPERATING EXPENSES:
Sales and marketing....................................... 29,352 16,644
Research and development.................................. 11,738 5,986
General and administrative................................ 4,701 3,201
Litigation settlement..................................... -- 4,300
-------- -------
Total operating expenses............................... 45,791 30,131
-------- -------
INCOME FROM OPERATIONS...................................... 22,818 7,930
OTHER INCOME, NET........................................... 640 793
-------- -------
INCOME BEFORE INCOME TAXES.................................. 23,458 8,723
PROVISION FOR INCOME TAXES.................................. 8,797 3,053
-------- -------
NET INCOME.................................................. $ 14,661 $ 5,670
======== =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.45 $ 0.19
======== =======
Diluted................................................... $ 0.41 $ 0.16
======== =======
WEIGHTED AVERAGE COMMON SHARES.............................. 32,281 30,351
======== =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES........ 35,724 34,731
======== =======
</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>
NINE MONTHS ENDED
------------------------------------
JANUARY 23, 1998 JANUARY 24, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 14,661 $ 5,670
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,885 1,967
Provision for doubtful accounts........................ 216 --
Deferred income taxes.................................. (77) --
Deferred rent.......................................... (29) (52)
Changes in assets and liabilities:
Accounts receivable.................................. (12,989) (7,006)
Inventories.......................................... 875 (4,760)
Prepaid expenses and other assets.................... (764) (674)
Accounts payable..................................... 2,489 2,892
Income taxes payable................................. 1,657 208
Accrued compensation and related benefits............ 2,433 1,116
Other accrued liabilities............................ 1,737 1,068
Deferred revenue..................................... 2,105 1,426
-------- --------
Net cash provided by operating activities......... 16,199 1,855
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (7,600) (13,200)
Redemptions of short-term investments..................... 9,266 9,332
Purchases of property and equipment....................... (4,886) (3,206)
-------- --------
Net cash used in investing activities............. (3,220) (7,074)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations....................... (12) (12)
Proceeds from sale of common stock, net................... 4,815 1,532
-------- --------
Net cash provided by financing activities......... 4,803 1,520
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 17,782 (3,699)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 21,520 24,637
-------- --------
End of period............................................. $ 39,302 $ 20,938
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock compensation............................... $ 714 $ --
</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 nine-month periods ended January 23, 1998 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 consolidated financial statements and notes
thereto for the fiscal year ended April 30, 1997 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 and the effect of certain anti-takeover provisions. Any party
interested in reviewing these publicly available documents should contact the
SEC or the Chief Financial Officer of the Company.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 23, 1998 APRIL 30, 1997
---------------- --------------
<S> <C> <C>
Purchased components............................ $2,950 $6,775
Work in process................................. 1,934 1,524
Finished goods.................................. 4,161 1,621
------ ------
$9,045 $9,920
====== ======
</TABLE>
3. COMMON STOCK AND NET INCOME PER SHARE
On September 25, 1997, the Company's shareholders approved a 1,600,000
share increase (3,200,000 on a post-split basis) in the number of shares of
common stock authorized for issuance under the Network Appliance 1995 Stock
Incentive Plan. On November 11, 1997, the Board of Directors approved a
two-for-one stock split of the Company's common stock which was effective
December 18, 1997. The net income per share and number of shares used in the
per-share calculations for all periods presented reflect the two-for-one stock
split that was effective December 18, 1997.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), during the third quarter of fiscal 1998. SFAS
128 requires a dual presentation of basic and diluted net income per share.
Basic net income per share is computed using the weighted average number of
common shares outstanding for the period. Diluted 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 stock
options (using the treasury stock method). Common equivalent shares are excluded
from the computation if their effect is anti-dilutive.
Net income per share data for the three and nine-month periods ended
January 24, 1997 has been restated to conform with SFAS 128.
7
<PAGE> 8
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -----------------------------------
JANUARY 23, 1998 JANUARY 24, 1997 JANUARY 23, 1998 JANUARY 24, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET INCOME (NUMERATOR):
Net income, basic and diluted.... $ 5,555 $ 3,380 $14,661 $ 5,670
======= ======= ======= =======
SHARES (DENOMINATOR):
Weighted average common shares
outstanding................... 33,352 32,262 33,117 32,289
Weighted average common shares
outstanding subject to
repurchase.................... (641) (1,433) (836) (1,938)
------- ------- ------- -------
Shares used in basic
computation................... 32,711 30,829 32,281 30,351
======= ======= ======= =======
Weighted average common shares
outstanding subject to
repurchase.................... 641 1,433 836 1,938
Weighted average common
equivalent shares............. 2,898 2,768 2,607 2,442
------- ------- ------- -------
Shares used in diluted
computation................... 36,250 35,030 35,724 34,731
======= ======= ======= =======
NET INCOME PER SHARE:
Basic............................ $ 0.17 $ 0.11 $ 0.45 $ 0.19
======= ======= ======= =======
Diluted.......................... $ 0.15 $ 0.10 $ 0.41 $ 0.16
======= ======= ======= =======
</TABLE>
Options to purchase 124,000 and 51,000 shares during the three-month
periods ended January 23, 1998 and January 24, 1997, respectively, and 841,000
and 825,000 shares during the nine months then ended, respectively, were
outstanding but excluded from the diluted net income per share computations
because the exercise prices were greater than the average market prices of
common shares.
4. LITIGATION SETTLEMENT
The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995, a lawsuit of this nature was
filed against the Company and two of its shareholders (the Whipsaw Litigation).
During the first quarter of fiscal 1997, the Company settled the Whipsaw
litigation and recorded a pre-tax expense of $4.3 million ($3.5 million in
payments to the plaintiffs and $0.8 million in legal fees). In connection with
the settlement, the Whipsaw group released the Company from all liabilities.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. The adoption is
not expected to have a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). This statement requires that
financial information be reported on the basis used internally for evaluating
segment performance and deciding how to allocate resources to segments. SFAS 131
will be effective for the Company's fiscal year 1999 and requires restatement of
all previously reported information for comparative purposes.
The Financial Accounting Standards Board recently approved the American
Institute of Certified Public Accountants Statement of Position 97-2 (SOP 97-2)
on software revenue recognition which will be effective for the Company's fiscal
year 1999. The Company is currently assessing the impact of SOP 97-2 on its
revenue recognition policies.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
JANUARY 23, JANUARY 24, JANUARY 23, JANUARY 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales............................... 40.7 40.7 40.8 40.9
----- ----- ----- -----
Gross margin...................... 59.3 59.3 59.2 59.1
----- ----- ----- -----
Operating Expenses:
Sales and marketing....................... 25.4 25.9 25.3 25.8
Research and development.................. 10.0 9.2 10.1 9.3
General and administrative................ 4.2 4.2 4.1 5.0
Litigation settlement..................... -- -- -- 6.7
----- ----- ----- -----
Total operating expenses.......... 39.6 39.3 39.5 46.8
----- ----- ----- -----
Income from operations...................... 19.7 20.0 19.7 12.3
Other income, net........................... 0.5 0.9 0.6 1.2
----- ----- ----- -----
Income before income taxes.................. 20.2 20.9 20.3 13.5
Provision for income taxes.................. 7.6 7.3 7.6 4.7
----- ----- ----- -----
Net Income........................ 12.6% 13.6% 12.7% 8.8%
===== ===== ===== =====
</TABLE>
Net Sales -- Net sales were $44.0 million for the three months ended
January 23, 1998 and $115.8 million for the nine months ended January 23, 1998,
representing increases of 77.0% and 80.0%, respectively, over the comparable
periods of the prior fiscal year. The increase in net sales for these periods
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from the Company's expansion of its direct
sales force and the introduction of new products during June and July 1997,
particularly the enterprise-class NetApp(TM) F630, the NetApp F520 and the
NetApp F230. Net sales also grew for the three and nine-month periods as a
result of increased multiprotocol system shipments, the licensing of
multiprotocol software to pre-existing customers and increased service and
software subscription revenues due to a growing installed base.
International net sales (including United States exports) grew by 166.0%
and 156.1% for the three and nine-month periods ended January 23, 1998,
respectively, compared to comparable periods of the prior fiscal year.
International net sales were $11.7 million, or 26.6% of total net sales, and
$27.7 million, or 24.0% of total net sales, for three and nine months ended
January 23, 1998, respectively. The increase in international net sales was
primarily a result of European sales growth.
There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal periods.
Gross Margin -- For the three months ended January 23, 1998, compared to
the comparable period of the prior fiscal year, gross margin as a percentage of
net sales remained at 59.3%. For the nine months ended January 23, 1998, gross
margin increased to 59.2% of net sales compared to 59.1% of net sales for the
comparable period of the prior fiscal year. This increase in gross margin was
primarily attributable to the increase in product volume, lower costs of key
components, increased manufacturing efficiencies and by the sale of the
Company's new product with cost-reduced designs first introduced in June and
July 1997. Gross margin was also favorably impacted by the licensing of
multiprotocol software and by growth in software subscription and service
revenues due to a growing installed base. Factors contributing to gross margin
growth were partially offset by the sale of 4 gigabyte drives at reduced prices
in the first and second quarters of the current fiscal year.
9
<PAGE> 10
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, including
software licensing, 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. Highly configured systems
typically generate lower overall gross margin percentages due to greater disk
drive and memory content.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 73.8% to $11.2 million
for the three months ended January 23, 1998, compared to $6.4 million for the
three months ended January 24, 1997. For the nine months ended January 23, 1998,
sales and marketing expenses of $29.4 million reflect an increase of 76.4% over
the comparable period of the prior fiscal year. Sales and marketing expenses
were 25.4% and 25.9% of net sales for the three months ended January 23, 1998
and January 24, 1997, respectively, and were 25.3% and 25.8%, respectively, of
net sales for the nine months then ended. The increase in absolute dollars was
primarily related to the expansion of the Company's sales and marketing
organization, including growth in the domestic and international direct sales
forces and increased commission expenses. During the quarter ended January 23,
1998, the Company launched an advertising campaign which contributed to absolute
dollar growth in sales and marketing expenses for the three and nine-month
periods of the current fiscal year. Sales and marketing expenses are expected to
increase in an effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels and increase
product and company awareness. 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.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 93.6% to $4.4 million for the three months ended
January 23, 1998 from $2.3 million for the three months ended January 24, 1997.
These expenses represented 10.0% and 9.2% of net sales for the quarters ended
January 23, 1998 and January 24, 1997, respectively. For the nine-month periods,
research and development expenses increased 96.1% to $11.7 million in fiscal
1998 from $6.0 million in fiscal 1997 and represented 10.1% and 9.3% of net
sales, respectively, for those periods. Expenses for the three and nine-month
periods increased as a result of increased headcount, 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. For the three and nine months ended January 23, 1998 and
January 24, 1997, no software development costs were capitalized as amounts that
qualified for capitalization were immaterial.
General and Administrative -- General and administrative expenses were $1.9
million for the three months ended January 23, 1998, compared to $1.0 million
for the three months ended January 24, 1997. These expenses represented 4.2% of
net sales for both periods. For the nine-month periods, general and
administrative expenses increased 46.9% to $4.7 million in fiscal 1998 from $3.2
million in fiscal 1997 and represented 4.1% and 5.0% of net sales, respectively,
for those periods. Increases in absolute dollars related primarily to increased
headcount, growth in professional services fees and an increase to the allowance
for bad debt. The Company believes that its general and administrative expenses
will increase as the Company continues to build its infrastructure.
Litigation Settlement -- The computer industry is characterized by frequent
litigation regarding intellectual property rights. During fiscal 1995, a lawsuit
of this nature was filed against the Company and two of its shareholders (the
Whipsaw Litigation). During the first quarter of fiscal 1997, the Company
settled the Whipsaw litigation and recorded a pre-tax expense of $4.3 million
($3.5 million in payments to the plaintiffs and $0.8 million in legal fees). In
connection with the settlement, the Whipsaw group released the Company from all
liabilities.
10
<PAGE> 11
Other Income, net -- Other income, net, was $0.2 million for both the three
months ended January 23, 1998 and January 24, 1997. For the nine months ended
January 23, 1998, other income, net was $0.6 million, compared to $0.8 million
in the corresponding period of the prior year. For the nine months ended January
23, 1998, other income, net, decreased over the corresponding period of the
prior year due primarily to foreign currency exchange losses recorded in the
current fiscal year.
Provision for Income Taxes -- The Company's effective tax rate during the
three and nine months ended January 23, 1998 was 37.5% compared with 35.0% for
the corresponding periods of the prior year. The higher tax rate in fiscal 1998
relates to increased earnings, which reduce the impact of research and
development and other tax credits on the effective tax rate. Additionally,
fiscal 1997 included a benefit for the reversal of a valuation allowance
previously provided against deferred tax assets which will not occur in fiscal
1998.
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; the Company's ability to
successfully expand international operations; general economic trends and other
factors.
The Company conducts business internationally. Accordingly, the Company's
future operating results could be materially adversely affected by a variety of
uncontrollable and changing factors including foreign currency exchange rates,
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements and government
spending patterns, among other factors. Although operating results have not been
materially adversely affected by seasonality in the past, because of the
significant seasonal effects experienced within the industry and the Company's
international sales growth and goal to continue international expansion, 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, such growth may not be indicative
of future operating results. 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 may contain 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.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended January 23, 1998, the Company's cash, cash
equivalents and short-term investments increased by $16.1 million to $44.6
million. The Company's working capital increased during the nine months ended
January 23, 1998 by $18.4 million to $60.3 million. For the nine months ended
January 23, 1998, the Company generated cash from operating activities totaling
$16.2 million, principally related to net income, non-cash expenses and
increases in current liabilities, partially offset by increases in accounts
receivable. Net cash provided by operating activities during the nine months
ended January 24, 1997 principally related to net income, non-cash expenses and
increases in current liabilities, partially offset by increases in accounts
receivable, inventories and prepaid expenses.
The Company used $4.9 million and $3.2 million to purchase property and
equipment during the nine-month periods ended January 23, 1998 and January 24,
1997, respectively. Net maturities of short-term investments provided $1.7
million for the nine months ended January 23, 1998. The Company used $3.9
million during the nine months ended January 24, 1997 for net investment
purchases. Financing activities provided $4.8 million and $1.5 million for the
nine months ended January 23, 1998 and January 24, 1997, respectively, due
primarily to proceeds from the sale of common stock in such periods.
The Company currently has no significant capital commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources are sufficient to fund its operations for at
least the next twelve months.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
3.1 Restated Articles of Incorporation
27.1 Financial Data Schedule
(b)REPORTS ON FORM 8-K
On November 26, 1997, the Company filed a current report on Form 8-K,
announcing the Board of Directors approval of a two-for-one stock split.
13
<PAGE> 14
SIGNATURE
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/ JEFFRY R. ALLEN
--------------------------------------
By: Jeffry R. Allen
Vice President Finance and
Operations, Chief Financial Officer
(Principal Financial Officer)
Date: March 5, 1998
14
<PAGE> 15
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 3.1
A469794
ENDORSED
FILED
IN THE OFFICE OF THE SECRETARY OF STATE
OF THE STATE OF CALIFORNIA
DEC 22, 1995
/s/ BILL JONES
SECRETARY OF STATE
RESTATED
ARTICLES OF INCORPORATION
OF NETWORK APPLIANCE, INC.
a California Corporation
The undersigned, Daniel J. Warmanhoven and Michael J. McCloskey, hereby
certify that:
ONE: They are the duly elected and acting President and Secretary
respectively, of said corporation.
TWO: The Articles of Incorporation of said corporation shall be amended
and restated to read in full as follows:
ARTICLE I
The name of this corporation is Network Appliance, Inc.
ARTICLE II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. Class of Stock. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares that this corporation is authorized to issue is sixty
million (60,000,000) shares. Fifty five million (55,000,000) shares shall be
Common Stock and five million (5,000,000) shares shall be Preferred Stock.
B. Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by these Amended and Restated Articles of
Incorporation may be issued from time to time in one or more series. The Board
of Directors is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon additional series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or of any of them. Subject to compliance with applicable
protective voting rights that have been or may be granted to the Preferred Stock
or series thereof in Certificates of Determination or this corporation's
Articles of Incorporation ("Protective Provisions"), but notwithstanding any
other rights of the Preferred Stock or any
<PAGE> 2
series thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or senior to any of those of any present or future class or series of Preferred
or Common Stock. Subject to compliance with applicable Protective Provisions,
the Board of Directors is also authorized to increase or decrease the number of
shares of any series, prior or subsequent to the issue of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1. Repurchase of Shares. In connection with repurchases by this
Corporation of its Common Stock pursuant to its agreements with certain of the
holders thereof, Sections 502 and 503 of the California General Corporation Law
shall not apply in whole or in part with respect to such repurchases.
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
liquidation, upon the liquidation, dissolution or winding up of this
corporation, the assets of this corporation shall be distributed to the holders
of Common Stock.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any shareholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE IV
Section 1. The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
Section 2. This corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
bylaw provisions,
2.
<PAGE> 3
agreements with the agents, vote of shareholders or disinterested directors, or
otherwise in excess of the indemnification otherwise permitted by Section 317 of
the California Corporations Code, subject only to applicable limits set forth in
Section 204 of the California Corporations Code with respect to actions for
breach of duty to this corporation and its shareholders.
* * *
THREE: The foregoing amendment has been approved by the Board of Directors
of said corporation.
FOUR: All of the outstanding Series A, Series B and Series C Preferred
Stock, including any options, warrants or rights to purchase such shares of
Series A, Series B or Series C Preferred Stock, have been converted into Common
Stock, or options, warrants or rights to purchase such shares of Common Stock,
of the corporation pursuant to Section 4.(b) of Division B of Article III of the
present Articles of Incorporation.
FIVE: The present Articles of Incorporation of the corporation provide in
Section 7 of Division (B) of Article III that in the event shares of Series A,
Series B or Series C Preferred Stock shall be converted pursuant to Section 4
thereof, the shares so converted shall be cancelled and shall not be issuable by
the corporation. Therefore upon such conversion and cancellation, the total
authorized number of shares of the corporation became 60,000,000 and the
authorized number of shares of Preferred Stock of the corporation became
5,000,000.
SIX: The foregoing amendments reducing the number of shares of authorized
Preferred Stock and deleting reference to Series A, Series B and Series C
Preferred Stock do not require approval of the shareholders of the corporation
pursuant to Section 510(b) of the California Corporations Code, which states
that if all of the shares of a series are acquired by the issuer and their
reissue is prohibited by the articles, then the articles shall also be amended,
without shareholder approval, to reduce the authorized number of shares of that
class accordingly and to eliminate therefrom any statement of rights,
preferences, privileges and restrictions relating solely to that series.
3.
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this certificate on
December 20, 1995.
/s/ DANIEL J. WARMENHOVEN
---------------------------------
Daniel J. Warmenhoven
President
/s/ MICHAEL McCLOSKEY
---------------------------------
Michael McCloskey
Secretary
Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true and correct of his
knowledge, and that this declaration was executed on December 20, 1995, at Palo
Alto, California.
/s/ DANIEL J. WARMENHOVEN
---------------------------------
Daniel J. Warmenhoven
President
/s/ MICHAEL McCLOSKEY
---------------------------------
Michael McCloskey
Secretary
4.
<PAGE> 5
A501693
STATE OF CALIFORNIA
SECRETARY OF STATE
[S E A L]
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the attached transcript has been compared with the record on file in
this office, of which it purports to be a copy, and that it is full, true and
correct.
IN WITNESS WHEREOF, I execute this certificate
and affix the Great Seal of the State of
California this
DEC 23, 1997
/s/ BILL JONES
Secretary of State
[SEAL]
<PAGE> 6
A501693
ENDORSED - FILED
In the office of the Secretary of State
of the State of California
DEC 18 1997
BILL JONES, Secretary of State
CERTIFICATE OF AMENDMENT
OF THE RESTATED ARTICLES OF INCORPORATION OF
NETWORK APPLIANCE, INC.
The undersigned, Daniel J. Warmenhoven and Jeffry R. Allen, hereby certify
that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
TWO: The Restated Articles of Incorporation of said corporation, filed on
December 22, 1995, shall be amended as set forth in this Certificate of
Amendment.
THREE: Section A of ARTICLE III of the Amended and Restated Articles of
Incorporation is amended to read in its entirety as follows:
"(A) CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares that the corporation is
authorized to issue is One Hundred Fifteen Million (115,000,000) shares.
One Hundred Ten Million (110,000,000) shares shall be Common Stock and
Five Million (5,000,000) shares shall be Preferred Stock.
As of December 18, 1997, each share of Common Stock outstanding is
split into two (2) shares of Common Stock."
* * *
FOUR: The foregoing Certificate of Amendment has been duly approved by the
Board of Directors of the Corporation.
FIVE: The foregoing Certificate of Amendment of the Restated Articles of
Incorporation does not require shareholder approval pursuant to Section 902(c)
of the General Corporation Law of the State of California. No shares of
Preferred Stock are outstanding.
<PAGE> 7
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment on December 1, 1997.
/s/ Daniel J. Warmenhoven
-------------------------------------
Daniel J. Warmenhoven
/s/ Jeffry R. Allen
-------------------------------------
Jeffry R. Allen
Secretary
The undersigned certify under penalty of perjury that they have read the
foregoing Certificate of Amendment and know the contents thereof, and that the
statements therein are true.
Executed at Santa Clara, California, on December 1, 1997
/s/ Daniel J. Warmenhoven
-------------------------------------
Daniel J. Warmenhoven
/s/ Jeffry R. Allen
-------------------------------------
Jeffry R. Allen
[SEAL]
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-24-1998
<PERIOD-START> APR-26-1997
<PERIOD-END> JAN-23-1998
<CASH> 39,302
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0
0
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