1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 17, 1997 COMMISSION FILE NUMBER 0-27130 NETWORK APPLIANCE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) CALIFORNIA 77-0307520 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 2770 SAN TOMAS EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (408) 367-3000 319 BERNARDO AVE., MOUNTAIN VIEW, CA 94043 Former name or former address, if changed since last report 2 This report amends the Registrant's report on Form 8-K, initially filed on March 28, 1997, to provide financial statements of Internet Middleware Corporation ("IMC") and to provide pro forma condensed combined financial information not previously available. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Businesses Acquired Pursuant to paragraph (a)(4) of Item 7 of Form 8-K, the following financial statements were omitted from disclosure contained in the Registrant's Current Report on Form 8-K filed on March 28, 1997 but are filed herewith: Audited balance sheet of IMC as of December 31, 1996, the related audited statements of operations, shareholders' deficiency and cash flows for the period from inception (May 6, 1996) to December 31, 1996 and a signed report of Deloitte & Touche LLP with respect to such financial statements, which are attached as Exhibit 99.2 hereto. (b) Pro Forma Financial Information Pursuant to paragraph (b)(2) of Item 7, the unaudited pro forma condensed combined balance sheet of the Registrant and IMC as of January 24, 1997 and the unaudited pro forma condensed combined statements of operations for the fiscal year ended April 30, 1996 and for the nine months ended January 24, 1997 are attached as Exhibit 99.3 hereto. The unaudited pro forma condensed combined financial statements give effect to the merger of the Registrant and IMC on a purchase accounting basis. The pro forma condensed combined balance sheet assumes the merger took place on January 24, 1997 and combines the January 24, 1997 balance sheet of the Registrant with the January 31, 1997 balance sheet of IMC. The pro forma condensed combined statement of operations for the fiscal year ended April 30, 1996 assumes the merger took place as of the beginning of the fiscal year and combines the Registrant's historical results for the fiscal year ended April 30, 1996 (for which period IMC was not in operation) with pro forma adjustments. The pro forma condensed combined statement of operations for the nine months ended January 24, 1997 assumes the merger took place as of the beginning of the most recently completed fiscal year and combines the Registrant's historical results for the nine months ended January 24, 1997 with the historical results of IMC for the period from inception (May 6, 1996) to January 31, 1997. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had the acquisition of IMC by the Registrant been consummated at the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. These pro forma financial statements are based on and should be read in conjunction with the historical consolidated financial statements and the related notes thereto of the Registrant and IMC. 2 3 (a) Exhibits 2.1+ Agreement and Plan of Reorganization, dated as of March 17, 1997, between the Registrant and IMC, a California corporation. 2.2+ Agreement of Merger between the Registrant and IMC as filed with the California Secretary of State on March 17, 1997. 2.3+ Stock Option Agreement between the Registrant and certain former employees of IMC. 23.1 Consent of Deloitte & Touche LLP. 99.1+ Press release of the Registrant, dated March 17, 1997, announcing the completion of the Registrant's acquisition of IMC. 99.2 Audited balance sheet of IMC as of December 31, 1996, the related audited statements of operations, shareholders' deficiency and cash flows for the period from inception (May 6, 1996) to December 31, 1996 and a signed report of Deloitte & Touche LLP with respect to such financial statements. 99.3 Unaudited pro forma condensed combined balance sheet of the Registrant and IMC as of January 24, 1997 and the unaudited pro forma condensed combined statements of operations of the Registrant and IMC for the fiscal year ended April 30, 1996 and for the nine months ended January 24, 1997. + Previously filed 3 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NETWORK APPLIANCE, INC. Dated: April 15, 1997 By: /s/ JEFFRY R. ALLEN ___________________________ Jeffry R. Allen, Vice President Finance and Operations, Chief Financial Officer (Principal Financial Officer) 4 5 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 2.1+ Agreement and Plan of Reorganization, dated as of March 17, 1997, between the Registrant and IMC, a California corporation. 2.2+ Agreement of Merger between the Registrant and IMC as filed with the California Secretary of State on March 17, 1997. 2.3+ Stock Option Agreement between the Registrant and certain former employees of IMC. 23.1 Consent of Deloitte & Touche LLP. 99.1+ Press release of the Registrant, dated March 17, 1997, announcing the completion of the Registrant's acquisition of IMC. 99.2 Audited balance sheet of IMC as of December 31, 1996, the related audited statements of operations, shareholders' deficiency and cash flows for the period from inception (May 6, 1996) to December 31, 1996 and a signed report of Deloitte & Touche LLP with respect to such financial statements. 99.3 Unaudited pro forma condensed combined balance sheet of the Registrant and IMC as of January 24, 1997 and the unaudited pro forma condensed combined statements of operations of the Registrant and IMC for the fiscal year ended April 30, 1996 and for the nine months ended January 24, 1997. + Previously filed 5
1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration No. 33-99638 of Network Appliance, Inc. on Form S-8 of our report dated April 7, 1997 on the financial statements of Internet Middleware Corporation for the period ended December 31, 1996 appearing in this Report on Form 8-K/A of Network Appliance, Inc. /s/ Deloitte & Touche LLP San Jose, California April 14, 1997
1 EXHIBIT 99.2 INTERNET MIDDLEWARE CORPORATION FINANCIAL STATEMENTS FOR THE PERIOD FROM MAY 6, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND INDEPENDENT AUDITORS' REPORT 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Internet Middleware Corporation: We have audited the accompanying balance sheet of Internet Middleware Corporation as of December 31, 1996 and the related statements of operations, shareholders' deficiency and cash flows for the period from May 6, 1996 (inception) to December 31, 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Internet Middleware Corporation at December 31, 1996, and the results of its operations and its cash flows for the above-stated period then ended, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP San Jose, California April 7, 1997 3 INTERNET MIDDLEWARE CORPORATION See notes to financial statements. -2-
BALANCE SHEET DECEMBER 31, 1996 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Accounts receivable $ 35,390 Other current assets 2,473 --------- Total current assets 37,863 PROPERTY AND EQUIPMENT, Net 50,282 --------- TOTAL $ 88,145 ========= LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES: Cash overdraft $ 4,606 Accounts payable 114,572 Accrued payroll and related expenses 107,974 Other accrued expenses 83,786 Notes payable to shareholders 155,000 --------- Total current liabilities 465,938 --------- SHAREHOLDERS' DEFICIENCY: Common stock, no par value; 25,000,000 shares authorized; 4,992,500 outstanding 1,000 Accumulated deficit (378,793) --------- Total shareholders' deficiency (377,793) --------- TOTAL $ 88,145 ========= 4 INTERNET MIDDLEWARE CORPORATION See notes to financial statements. -3-
STATEMENT OF OPERATIONS PERIOD FROM MAY 6, 1996 (INCEPTION) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- NET LICENSE REVENUES $ 211,481 --------- COSTS AND EXPENSES: Cost of license revenues 10,924 Research and development 314,721 General and administrative 230,212 Sales and marketing 31,579 --------- Total costs and expenses 587,436 --------- OPERATING LOSS (375,955) INTEREST INCOME 362 --------- LOSS BEFORE INCOME TAXES (375,593) PROVISION FOR INCOME TAXES 3,200 --------- NET LOSS $(378,793) ========= 5 INTERNET MIDDLEWARE CORPORATION STATEMENT OF SHAREHOLDERS' DEFICIENCY PERIOD FROM MAY 6, 1996 (INCEPTION) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- See notes to financial statements. -4-
Common Stock Total -------------------------- Accumulated Shareholders' Shares Amount Deficit Deficiency BALANCES, May 6, 1996 -- $ -- $ -- $ -- Issuance of common stock 4,992,500 1,000 -- 1,000 Net loss -- -- (378,793) (378,793) --------- --------- --------- --------- BALANCES, December 31, 1996 4,992,500 $ 1,000 $(378,793) $(377,793) ========= ========= ========= ========= 6 INTERNET MIDDLEWARE CORPORATION See notes to financial statements. -5-
STATEMENT OF CASH FLOWS PERIOD FROM MAY 6, 1996 (INCEPTION) TO DECEMBER 31, 1996 - ------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(378,793) Reconciliation of net loss to net cash used in operating activities: Depreciation 8,001 Changes in operating assets and liabilities: Accounts receivable (35,390) Other current assets (2,473) Accounts payable 114,572 Accrued payroll and related expenses 107,974 Other accrued expenses 67,928 --------- Net cash used in operating activities (118,181) --------- CASH FLOWS FROM INVESTING ACTIVITIES - Purchases of property and equipment (42,425) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 1,000 Issuance of notes payable to shareholders 155,000 --------- Net cash provided by financing activities 156,000 --------- NET CHANGE IN CASH (4,606) CASH, Beginning of period -- --------- CASH (OVERDRAFT), End of period $ (4,606) --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid for income taxes $ 2,400 ========= SUPPLEMENTAL NONCASH INVESTING ACTIVITIES - Exchange of services for fixed assets $ 15,858 ========= 7 INTERNET MIDDLEWARE CORPORATION NOTES TO FINANCIAL STATEMENTS PERIOD FROM MAY 6, 1996 (INCEPTION) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization and Description of Business - Internet Middleware Corporation (the Company) was incorporated as a California corporation on May 6, 1996 under the name Netspeed. During 1996, the Company changed its name to Internet Middleware Corporation. The Company designs, markets and distributes software for Internet applications which increases the effectiveness of connection bandwidths. The Company's product is primarily sold to the Internet service providers and companies which have connections to the Internet or internal intranets, and its business is dependent on the growth of the Internet. FINANCIAL STATEMENT ESTIMATES - 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 estimates include the estimated useful life of fixed assets and certain accrued liabilities. Actual results could differ from those estimates. The Company participates in a dynamic high technology industry and believes that changes in any of the following areas, among others, could have a material adverse affect on the Company's future financial position or results of operations: market demand for products under development by the Company, increased competition, the development of new technologies and the ability to attract and retain employees necessary to support its growth. CONCENTRATION OF CREDIT RISK - The Company primarily sells its product to Internet service providers and other companies in the United States, Europe and Asia. The Company generally does not require collateral for sales on credit. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of three years. SOFTWARE DEVELOPMENT COSTS - The Company capitalizes eligible software development costs, which include software enhancement costs, upon establishment of technological feasibility, which occurs upon the completion of a working model. Costs which were eligible for capitalization during the period were insignificant, and thus the Company has charged all software development costs to research and development expense in the accompanying statement of operations. STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." REVENUE RECOGNITION - Revenues from software sales through license arrangements are recognized upon shipment of the product and fulfillment of acceptance terms, if any, and when no significant contractual obligations remain outstanding. Maintenance revenue is deferred and recognized ratably over the term of the maintenance agreement, which is typically one year, and was not significant during the period. INCOME TAXES - The Company accounts for income taxes under an asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and net operating loss and tax credit carryforwards. -6- 8 2. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 consists of the following: 3. SHAREHOLDERS' DEFICIENCY COMMON STOCK The Company issued common stock to employees pursuant to a restricted stock purchase agreement. Under the agreement, one-fourth of the shares shall be released from the Company's repurchase option after one year and one forty-eighth each month thereafter. In the event that the employee is terminated by the Company at any time during the vesting period for any reason, the Company has the option to repurchase, at the original purchase price, any unvested shares as of the date of termination. In the event of a change in control of the Company, 2,681,000 of the unvested shares will be immediately released from the repurchase option; and in the event of a change in control of the Company and constructive termination, an additional 2,305,000 of unvested shares will be immediately released from the repurchase option. As of December 31, 1996, approximately 4,986,000 shares of common stock are subject to this repurchase right. STOCK SPLIT On June 4, 1996, the Company's common stock was split 500 for 1. All references to shares of common stock in these financial statements have been retroactively adjusted to reflect the stock split. STOCK-BASED COMPENSATION Under the Company's 1996 Long-Term Incentive Plan (the Plan), the Company may grant up to 10,000,000 shares of common stock and equity incentives to employees and consultants in the form of stock options, stock appreciation rights, restricted stock awards, stock purchase rights and performance share awards. Stock options can be granted at prices not less than fair market value at date of grant for incentive stock options and not less than 10% of fair market value for nonstatutory stock options. The incentive stock options and nonstatutory stock options expire 10 years and 11 years from the date of grant, respectively. The vesting period of options granted are determined by the Board and set forth in the individual stock option agreements. The vesting period is generally over a four-year period with 25% vesting one year from the date of grant and monthly vesting thereafter. -7-
Computers and equipment $ 55,892 Furniture and fixtures 2,391 -------- 58,283 Accumulated depreciation (8,001) -------- $ 50,282 ======== 9 Stock option activity under the plan is summarized as follows: The 424,290 options outstanding as of December 31, 1996 are exercisable at $0.10 per share and have a weighted average remaining contractual life of 9.7 years. None of the outstanding options were exercisable at December 31, 1996. Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma net income had the Company adopted the fair value method as of the beginning of the period ended December 31, 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing method with the following weighted average assumptions: expected life, five years from the date of grant; volatility, 0%; risk-free interest rates, 6%; and no dividends during the expected term. The Company's calculations are based on a single option valuation approach, and forfeitures are recognized as they occur. If the computed fair values of the 1996 awards had been amortized to expense over the vesting period of the awards, pro forma net loss would have been approximately $380,000. 4. INCOME TAXES The Company's 1996 income tax provision consists of the minimum tax payment for California state tax purposes and foreign withholding tax of $2,400. Significant components of the Company's deferred tax asset at December 31, 1996 include reserves and accruals not currently deductible, net operating loss carryforwards and tax credit carryforwards. The Company has evaluated the likelihood of realization of such deferred tax assets and has determined that it is more likely than not that future benefits from the deferred tax assets will not be realized. As a result, the Company has provided a full valuation allowance against the deferred tax assets at December 31, 1996 of approximately $174,000. -8-
Outstanding Options ---------------------- Weighted Average Shares Number of Exercise Available Shares Price --------- --------- --------- Balances, May 6, 1996 -- -- $ -- Shares subject to the Plan 10,000,000 Granted (weighted average fair value of $.03) (424,290) 424,290 $ 0.10 --------- --------- Balances, December 31, 1996 9,575,710 424,290 $ 0.10 ========= ========= 10 The Company has approximately $10,000 as of available tax credits and approximately $180,000 of net operating loss carryforwards for California income tax purposes which are available through 2001. The Company also has approximately $24,000 of available tax credits and approximately $360,000 of net operating loss carryforwards for federal income tax purposes which are available through 2011. The Tax Reform Act of 1986 and California Conformity Act of 1987 impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an "ownership change," as defined by the Internal Revenue Code. Any such ownership change could significantly limit the Company's ability to utilize its tax carryforwards. 5. RELATED PARTY TRANSACTIONS At December 31, 1996, the Company has notes payable to shareholders of $155,000. Such notes are payable upon demand and bear no interest. 6. MAJOR CUSTOMERS In 1996, license revenue from three customers accounted for 33%, 15% and 11% of total net license revenues. At December 31, 1996, two customers accounted for 47% and 19% of the accounts receivable balance. 7. SUBSEQUENT EVENT On March 17, 1997, the Company entered into a definitive Agreement and Plan for Merger (the Merger) with Network Appliance, Inc., providing for the transactions which will result in the Company's business and related technologies becoming a subsidiary of Network Appliance, Inc. As a result of the Merger, Network Appliance, Inc. became the owner of 100% of the issued and outstanding common stock and outstanding options to purchase common stock of the Company. Each outstanding share of the Company's common stock was converted into 0.0345267 of a share of Network Appliance's common stock. Each outstanding option to purchase shares of the Company's common stock was assumed by Network Appliance, Inc. and converted into an option to purchase 0.0345267 of a share of Network Appliance's common stock at an exercise price per share equal to the exercise price per share of the option immediately prior to the Merger divided by 0.0345267. * * * * * -9-
1 EXHIBIT 99.3 The following unaudited pro forma condensed combined financial statements reflect the acquisition by the Registrant of IMC in exchange for shares of the Registrant's Common Stock and options to purchase shares of the Registrant's Common Stock. The acquisition was accounted for using the purchase method of accounting. The pro forma condensed combined balance sheet assumes the merger took place on January 24, 1997 and combines the January 24, 1997 balance sheet of the Registrant with the January 31, 1997 balance sheet of IMC. The pro forma condensed combined statement of operations for the fiscal year ended April 30, 1996 assumes the acquisition took place as of the beginning of the fiscal year and combines the Registrant's historical results for the fiscal year ended April 30, 1996 (for which period IMC was not in operation) with pro forma adjustments. The pro forma condensed combined statement of operations for the nine months ended January 24, 1997 assumes the acquisition took place as of the beginning of the most recently completed fiscal year and combines the Registrant's historical results for the nine months ended January 24, 1997 with the historical results of IMC for the period from inception (May 6, 1996) to January 31, 1997. The pro forma condensed combined statements of operations exclude the effect of any nonrecurring charges directly attributable to the acquisition. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had the acquisition of IMC by the Registrant been consummated at the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. These pro forma financial statements are based on and should be read in conjunction with the historical consolidated financial statements and the related notes thereto of the Registrant and IMC. 1 2 NETWORK APPLIANCE, INC. AND INTERNET MIDDLEWARE CORPORATION PRO FORMA CONDENSED COMBINED BALANCE SHEET JANUARY 24, 1997 (IN THOUSANDS) (UNAUDITED) (1) Entry to record a deferred tax asset on the compensation charge recognized on the issuance of discounted stock options (2) Entry to record goodwill (3) Entry to capitalize developed technology of IMC (4) Entry to record a deferred tax liability related to the capitalized technology (5) Entry to record acquisition-related expenses (6) Entry to eliminate common stock and the accumulated deficit of IMC (7) Entry to record the acquisition of IMC by the issuance of 187,023 shares of common stock and options to purchase shares of the Registrant's Common Stock (8) Entry to record compensation expense related to the issuance of discounted options to purchase shares of the Registrant's Common Stock (9) Entry to expense in-process technology of IMC See accompanying notes to pro forma condensed combined financial statements. 2
Network Pro Forma Adjustments Pro Forma Appliance IMC Debit Credit Balances --------- --- ----- ------ --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 20,938 $ - $ - $ - $ 20,938 Short-term investments 6,850 - - - 6,850 Accounts receivable, net 12,336 26 - - 12,362 Inventories 9,585 - - - 9,585 Prepaid expenses and other 3,298 2 - - 3,300 -------- -------- -------- -------- -------- Total current assets 53,007 28 - - 53,035 PROPERTY AND EQUIPMENT, net 6,148 48 - - 6,196 OTHER ASSETS 202 - 2,203 (1),(2),(3),(4) 240 (4) 2,165 -------- -------- -------- -------- -------- $ 59,357 $ 76 $ 2,203 $ 240 $ 61,396 ======== ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Current portion of long-term obligations $ 21 $ 155 $ - $ - $ 176 Accounts payable 4,991 193 - 250 (5) 5,434 Income taxes payable 708 - - - 708 Accrued compensation and related benefits 3,131 134 - - 3,265 Other accrued liabilities 2,178 - - - 2,178 Deferred revenue 1,804 22 - - 1,826 -------- -------- -------- -------- -------- Total current liabilities 12,833 504 - 250 13,587 -------- -------- -------- -------- -------- LONG-TERM OBLIGATIONS 233 - - - 233 -------- -------- -------- -------- -------- SHAREHOLDERS' EQUITY (DEFICIENCY): Common stock 41,495 1 1 (6) 10,500 (7),(8) 51,995 Retained earnings (Accumulated deficit) 4,796 (429) 10,519 (8),(9) 1,733 (1),(6) (4,419) -------- -------- -------- -------- -------- 46,291 (428) 10,520 12,233 47,576 -------- -------- -------- -------- -------- $ 59,357 $ 76 $ 10,520 $ 12,483 $ 61,396 ======== ======== ======== ======== ======== 3 NETWORK APPLIANCE, INC. AND INTERNET MIDDLEWARE CORPORATION PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (1) Entry to record amortization of purchased intangibles based on an estimated life of five years (2) Weighted average common and common equivalent shares reflect the shares issued and the impact of dilutive stock options assumed and granted in connection with the acquisition (3) IMC didn't commence operations until May 6, 1996 See accompanying notes to pro forma condensed combined financial statements. 3
Network Pro Forma Adjustments Pro Forma Appliance IMC(3) Debit Credit Results --------- ----- ----- ------ --------- NET SALES $ 46,632 $ - $ - $ - $ 46,632 COST OF SALES 20,557 - 199 (1) - 20,756 -------- -------- -------- -------- -------- GROSS MARGIN 26,075 - (199) - 25,876 -------- -------- -------- -------- -------- OPERATING EXPENSES: Sales and marketing 12,735 - - - 12,735 Research and development 4,762 - - - 4,762 General and administrative 2,578 - - - 2,578 -------- -------- -------- -------- -------- Total operating expenses 20,075 - - - 20,075 -------- -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS 6,000 - (199) - 5,801 OTHER INCOME, net 600 - - - 600 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 6,600 - (199) - 6,401 PROVISION FOR INCOME TAXES - - - - - -------- -------- -------- -------- -------- NET INCOME (NET LOSS) $ 6,600 $ - $ (199) $ - $ 6,401 ======== ======== ======== ======== ======== NET INCOME PER SHARE $ 0.42 $ 0.40 ======== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 15,820 16,075 (2) ======== ======== 4 NETWORK APPLIANCE, INC. AND INTERNET MIDDLEWARE CORPORATION PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 24, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (1) Entry to record amortization of purchased intangibles based on an estimated life of five years (2) Weighted average common and common equivalent shares reflect the shares issued and the impact of dilutive stock options assumed and granted in connection with the acquisition (3) Entry to record tax effect of pro forma adjustment (1) at the statutory rate and to record the tax benefits of losses incurred See accompanying notes to pro forma condensed combined financial statements. 4
Network Pro Forma Adjustments Pro Forma Appliance IMC Debit Credit Results -------- -------- -------- -------- -------- NET SALES $ 64,353 $ 219 $ - $ - $ 64,572 COST OF SALES 26,292 12 149 (1) - 26,453 -------- -------- -------- -------- -------- GROSS MARGIN 38,061 207 (149) - 38,119 -------- -------- -------- -------- -------- OPERATING EXPENSES: Sales and marketing 16,644 39 - - 16,683 Research and development 5,986 366 - - 6,352 General and administrative 3,201 231 - - 3,432 Litigation settlement 4,300 - - - 4,300 -------- -------- -------- -------- -------- Total operating expenses 30,131 636 - - 30,767 -------- -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS 7,930 (429) (149) - 7,352 OTHER INCOME, net 793 - - - 793 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 8,723 (429) (149) - 8,145 PROVISION FOR (BENEFIT OF) INCOME TAXES 3,053 - - 207(3) 2,846 -------- -------- -------- -------- -------- NET INCOME (NET LOSS) $ 5,670 $ (429) $ (149) $ 207 $ 5,299 ======== ======== ======== ======== ======== NET INCOME PER SHARE $ 0.32 $ 0.30 ======== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 17,636 17,903 (2) ======== ======== 5 NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. On March 17, 1997 the Registrant acquired IMC in exchange for approximately 187,023 shares of the Registrant's Common Stock and options to purchase shares of the Registrant's Common Stock. In connection with the acquisition certain former employees of IMC who entered into employment agreements with the Registrant were granted options to purchase shares of the Registrant's Common Stock at a discount to the market price of the Registrant's Common Stock immediately preceding the acquisition. IMC was founded in 1996 to develop and commercialize Internet/Intranet proxy caching software. The acquisition was accounted for as a purchase. In connection with the acquisition, intangible assets of $8.4 million were acquired by the Registrant of which $7.4 million was allocated to in-process research and development and will be charged to operations in the fiscal quarter ending April 30, 1997 as the technology had not achieved technological feasibility and had no alternative future use. The remaining $1.0 million of intangible assets will be amortized over an estimated useful life of five years. Also in connection with the acquisition, a compensation expense of $3.2 million, relating to the granting of discounted stock options, will be charged to operations in the fiscal quarter ending April 30, 1997. The pro forma condensed combined statements of operations for the fiscal year ended April 30, 1996 and for the nine months ended January 24, 1997 exclude the impact of the nonrecurring charge associated with expensing in-process research and development and the one-time compensation charge, net of deferred taxes, related to the granting of options to certain former IMC employees to purchase shares of the Registrant's Common Stock at a discount to the market price of the Registrant's Common Stock immediately preceding the acquisition. The unaudited pro forma condensed combined financial statements give effect to the merger of the Registrant and IMC on a purchase accounting basis. The pro forma condensed combined balance sheet assumes the merger took place on January 24, 1997 and combines the January 24, 1997 balance sheet of the Registrant with the January 31, 1997 balance sheet of IMC. The pro forma condensed combined statement of operations for the fiscal year ended April 30, 1996 assumes the merger took place as of the beginning of the fiscal year and combines the Registrant's historical results for the fiscal year ended April 30, 1996 (for which period IMC was not in operation) with pro forma adjustments. The pro forma condensed combined statement of operations for the nine months ended January 24, 1997 assumes the merger took place as of the beginning of the most recently completed fiscal year and combines the Registrant's historical results for the nine months ended January 24, 1997 with the historical results of IMC for the period from inception (May 6, 1996) to January 31, 1997. 2. The pro forma condensed combined financial statements included herein have been prepared by the Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Registrant believes that the disclosures are adequate to make the information not misleading. These pro forma condensed combined financial statements should be read in conjunction with the financial statements and the notes thereto included in the Registrant's annual report on Form 10-K for the fiscal year ended April 30, 1996 and the financial statements of IMC included in this filing. 3. Net income per share for each period is calculated by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period plus approximately 172,375 shares of the Registrant's Common Stock which was exchanged for all issued and outstanding shares of IMC Common Stock. Common equivalent shares consist of stock options (using the treasury stock method). 5