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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED APRIL 26, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM --------------- TO
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COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0307520
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
319 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive office, including Zip Code)
(415) 428-5100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock (no par
value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of May 31, 1996 was approximately $228,170,000 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market System for the last trading day prior to that date).
Shares of Common Stock held by each executive officer, director, and holder of
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On May 31, 1996 approximately 16,156,000 shares of the Registrant's Common
Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Annual Report to Shareholders are incorporated
by reference into Part II; such portions of the Annual Report to Shareholders
incorporated by reference are filed as Exhibit 13.1 hereof.
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This Annual Report on Form 10-K contains forward looking statements that
are accompanied by cautionary statements that identify important factors that
could cause actual results to differ materially from those in the forward
looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Network Appliance, Inc. (the "Company" or "Network Appliance") designs,
manufactures, markets and supports high performance network data storage devices
which provide fast, simple, reliable and cost effective file service for
data-intensive network environments. The Company pioneered the concept of the
"network appliance," an extension of the industry trend towards dedicated,
specialized devices which perform a single function in the network, similar to
the adoption of the router for network communications management. 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.
INDUSTRY BACKGROUND
In response to competitive pressures, businesses and other organizations
are increasingly investing in information systems to shorten product development
cycles, enhance customer responsiveness, lower costs, and improve the quality of
their products and services. Networked computing offers these organizations the
ability to increase productivity through the distribution of computing power
across their enterprises, providing large numbers of users with access to
applications, information and data. In this environment, it has become important
for organizations to manage the storage of and access to large volumes of data,
which increasingly represent critical information resources.
Data-Intensive Network Environment
Network computing environments that require large volumes of data, perform
intensive processing or computation of data, or involve frequent user access to
data can be characterized as "data-intensive." Increasingly, organizations are
deploying data-intensive applications and services as core business resources.
In addition, Internet and on-line service related businesses have grown
significantly. The data-intensity of the network environment is expected to
continue to increase substantially due to the development of new applications
and services and the more prevalent use of stored digital graphics, voice and
video, requiring dramatically more data capacity than equivalent alphanumeric
information. Examples of data-intensive applications and services include:
Data-Intensive Applications. Data-intensive applications have become
increasingly prevalent in a variety of industries. Computer-aided design,
manufacturing and engineering ("CAD/CAM/CAE") are data-intensive applications in
which teams of engineers collaborate on a common design for a product such as a
semiconductor device, computer system, aircraft or automobile. Software
development is also inherently data-intensive, involving the creation and
compilation by teams of developers of hundreds of thousands of lines of software
code which must be continuously tested, revised and recompiled. Energy, seismic
and satellite-related applications also involve the storage and manipulation of
large quantities of graphics and imaging data. Within the securities industry,
large volumes of trading and other market data need to be compiled and rapidly
processed in order to support trading decisions. Airline reservation systems
also involve the access to and processing of large quantities of data related to
flight schedules, equipment configurations, passenger information and seat
availability.
Data-Intensive Services. Internet and public on-line services have become
increasingly data intensive. Organizations are also providing internal on-line
data repositories that can be accessed internally as well as by outside users.
As these services have proliferated, they have become "information utilities"
where increasing amounts of data are stored for broad availability to large
numbers of distributed users.
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Issues in Data Management and Network Computing. Organizations utilizing
data-intensive applications and services in network computing environments
generally share a common set of requirements in order to derive the benefits
that they are designed to provide. In this context, data management has become
increasingly complex and challenging. Specifically, three significant problem
areas have emerged: (i) data access performance; (ii) data administration; and
(iii) data availability and reliability.
Data Access Performance. Traditionally, management information systems
("MIS") managers and network providers improved performance on a network by
increasing CPU performance or increasing the underlying network bandwidth. In
today's data-intensive network environment, performance of applications and
services is increasingly limited by the time to read or write to hard disk
drives. Improvements in performance for most applications and services have been
limited by disk input/output ("I/O") performance, which because of the
mechanical nature of disk drives, has not improved as rapidly as central
processing unit ("CPU") performance or network bandwidth.
Data Administration. A key requirement in data administration is the
management of hardware and software systems that store the data. In the
data-intensive network environment, data management is difficult and complex due
to the large number of users accessing the data, the multiple servers storing
the data and the large volume of data. Furthermore, because data may be widely
distributed throughout the network, administrative functions such as back-up or
expansion of the file system become substantially more difficult. Finally, the
budgetary constraints of most organizations require that this increasingly
complex administration be accomplished cost-effectively, without increased
staffing.
Data Availability and Reliability. As the data-intensive network
environment grows, data availability becomes critical to the organization's
productivity, time-to-market and responsiveness to customers. Achieving a high
level of data availability is particularly difficult because hard disk drives
are mechanical devices, which are prone to failure over extended periods of
intensive use. An organization may experience costly down-time or loss of data
from the failure of a single low-cost, network-attached disk drive. This is
particularly important to network service providers whose business is providing
network-stored data to their users. Therefore, it is imperative that systems
which are repositories of network-based data and services have low failure
rates, rapid recovery times and the ability to provide uninterrupted service in
the event of failure of a disk drive.
File Servers
The requirements of the data-intensive network environment have contributed
to the growing importance of the network file service function, the process of
reading and writing files to and from shared data storage over the network.
Until recently, the file service function had been performed exclusively by
larger, general purpose computer systems which also executed other tasks such as
print serving, application processing and communications functions. As networks
evolved, network managers increasingly dedicated general purpose systems
specifically to the file service task in order to enhance performance, simplify
administration and reduce vulnerability to other application-related failures.
These dedicated systems became known as "file servers."
Systems vendors have offered a variety of specially configured and add-on
solutions for general purpose systems deployed as file servers. Selected vendors
have also introduced highly specialized, hardware-intensive systems architected
to exclusively perform the file service task. These approaches, such as the use
of hardware accelerators and the introduction of specialized hardware
architectures, were generally optimized for throughput (the number of I/O
requests processed by the CPU). Although these file server approaches addressed
throughput issues, they were not designed to address the specific problem of
response time (the speed at which an I/O request is satisfied) which is critical
in the data intensive network environment. In addition, because these approaches
lack the flexibility to easily integrate additional network, file system and/or
disk interfaces or protocols associated with today's heterogeneous networks,
these approaches do not directly address the reliability issues associated with
data storage on a network. Consequently, users are searching for cost-effective,
flexible solutions to address data access performance, data administration and
data availability and reliability issues in the data-intensive network
environment.
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THE NETWORK APPLIANCE SOLUTION
Network Appliance pioneered the concept of a "network appliance," a fast,
simple, reliable and cost-effective device designed to perform a specific
network data management function. The network appliance concept is part of the
trend towards the specialization of network devices, including the development
of routers, dedicated devices that manage network communications functions
previously performed by general purpose computer systems. The Company's first
network appliance product line consists of network data storage appliances or
"filers," developed to address the specific market requirements of
data-intensive network environments. These products utilize an efficient
software kernel optimized to exclusively perform the file service task. Unlike
previous file server approaches, these products are not burdened by a general
purpose operating system or file system overhead. By using a proprietary
software architecture, Network Appliance is able to use industry standard
hardware components rather than specialized hardware. The core elements of the
Network Appliance solution are:
Fast Response Time. Network Appliance uses its proprietary Write Anywhere
File Layout ("WAFL") software architecture and a sophisticated caching scheme
coupled with industry standard processor architectures and I/O buses to achieve
response time over the network substantially faster than competing products.
Faster response times result in faster execution of applications and services in
data-intensive network environments. The filer's response time is significantly
faster than either general purpose computers or specialized hardware-centric
file servers. In addition, the Company's products are characterized by less
variation in response times under increasing aggregate loads than competing
products.
Network Appliance believes its approach enables its customers to meet the
performance needs of future data-intensive applications and services. The
Company's technology has allowed it to achieve substantial improvements in
response time by adopting faster industry standard microprocessors, while
competitive solutions have been generally limited by disk access time. For
example, successive releases of Network Appliance software on the Intel
486-based platform, in addition to supporting incremental functionality, have
succeeded in reducing response times.
Ease of Administration. Network Appliance products are easy to use and
install. Installation by a systems administrator typically requires less than an
hour. Administration requires knowledge of less than 40 system commands, versus
the hundreds of commands typical of alternative products. Network Appliance's
Snapshot feature allows on-line back-up of an active file system without
interrupting users. This feature also allows users online access to earlier
versions of their data without involving the systems administrator. Together,
these features simplify administration, permit more efficient use of personnel
resources and increase data availability.
High Levels of Data Availability and Reliability. Network Appliance
products are designed to provide high levels of data availability. Traditional
servers do not have an integrated facility to efficiently and reliably maintain
the availability of data upon disk drive failure. The approach to provide
increased data-availability for these systems has been to incrementally add RAID
(redundant array of independent disks) devices which are costly and are often
performance-limiting. Network Appliance's unique software integration of RAID
provides a solution at no incremental cost that yields more reliable data with
no performance penalties. In the event of a disk drive failure, the Network
Appliance filer will reconstruct the failed data on a spare drive which may be
hot-swapped with the failed drive on the NetApp F220 or NetApp F330 without any
interruption of data availability to client users. Upon disruption of the
system, Network Appliance servers automatically reboot (with full data
availability) at a speed of approximately one minute regardless of storage
capacity (versus alternative systems that may take up to one minute per gigabyte
to reboot with full data availability). The Network Appliance architecture
allows system administrators to add storage capacity or replace a failed disk
drive without service interruption or loss of data.
Scalability. The architecture of Network Appliance products is designed to
be scalable so that throughput and storage capacity can cost effectively grow on
an incremental basis. Adding an additional server to a network under this
architecture is as simple as adding an additional disk drive to many other
systems. The system can be easily expanded to terabytes of data, while
maintaining a relatively consistent response time.
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Compatibility with Networking Environment. Network Appliance products are
compatible with major network and peripheral interfaces and protocols. This is
accomplished through the use of industry standard bus architectures, providing
compatibility with common network interfaces and protocols and disk
interconnects. Network Appliance's software is designed to be extendable to
additional network environments and interface standards, as appropriate.
Cost-Effectiveness. By combining Network Appliance's software-centric
architecture with state of-the-art industry standard microprocessors and hard
disk products, Network Appliance is able to achieve fast response times at a low
cost per unit of storage.
STRATEGIES
Network Appliance's goal is to be a leader in the network data storage
appliance market, building on the initial success of its NFS filers. The Company
seeks to achieve this goal by employing the following core strategies:
Focus on Software Differentiation. Network Appliance seeks to continue to
differentiate its products by focusing on the development of specialized
proprietary software. Network Appliance believes this approach allows it to
cost-effectively integrate desirable features such as intelligent caching, the
WAFL architecture, software integrated RAID and automated on-line backup through
its Snapshot feature.
Embrace Industry Standards. Network Appliance will continue to integrate
its specialized software solutions with state-of-the-art industry standard
hardware components and software interfaces. Industry standard hardware is
generally less expensive and more readily available than proprietary hardware.
For instance, since its first product introduction, successive generations of
Network Appliance products have migrated from industry standard architecture
("ISA") to peripheral connect interchange ("PCI")-bus. Network Appliance
believes this approach allows more rapid and cost-effective development and the
delivery of high performance products at attractive prices. Utilizing industry
standard interfaces enables Network Appliance products to be adaptable to a
variety of network environments.
Broaden Penetration Into NFS Market. Network Appliance's initial focus has
been on providing NFS file servers for departmental and enterprise applications.
The Company is seeking to expand its product offerings to include a wider range
of price, performance and storage capacities.
Develop New Markets. Network Appliance is developing a multi-protocol file
server capable of providing simultaneous NFS and System Management Block ("SMB")
file service, the standard file service protocol for Microsoft Windows products.
This product is being designed to meet file server requirements for the emerging
Windows NT market. The Windows NT market is expected to be driven by trends
toward the distributing and downsizing of centralized data-intensive
applications, the consolidation of smaller, independent PC-based LANs, and the
emergence of multi-media as a significant corporate communications and training
tool.
Expand Distribution. Network Appliance seeks to market and distribute its
products and technology globally. In North America, the Company employs a
multi-tiered distribution strategy which focuses on product sales to end-users
through a direct sales force, as well as selected value-added resellers in
certain geographies. In the Pacific Rim and in Europe, Network Appliance
products are sold through resellers, which are supported by Network Appliance
channel managers and technical support personnel. In addition, the Company seeks
to distribute its products through original equipment manufacturers ("OEMs")
and, where appropriate, through licensing arrangements with computer systems
companies.
SALES AND MARKETING
Network Appliance has established multiple distribution channels to
accelerate market penetration of its products. The Company initially marketed
its products primarily through indirect sales channels both domestically and
internationally. In fiscal 1995, the Company shifted its emphasis domestically
to direct sales and significantly expanded its direct sales force. The Company
continues to rely primarily on indirect sales internationally. Network Appliance
has established several domestic selling locations, including in Colorado,
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California, Massachusetts, Maryland, Michigan, Minnesota, New Jersey, New York,
Oregon, Texas, Virginia and Washington, D.C. Additionally, the Company has
international offices in London and Paris.
Network Appliance's sales personnel are responsible for the overall sales
functions of the Company, including prospecting, lead processing, account
strategies and development, distribution channels and other activities. The
Company's marketing department is responsible for product planning, positioning,
pricing, customer and sales force training, and overall promotion of Network
Appliance products through press, direct mail, seminars, trade shows and
advertising. Network Appliance expects to continue to increase its sales and
marketing activities.
No customers accounted for 10% or more of the Company's net sales in fiscal
1996. In fiscal 1995, sales to ITOCHU and MTI each accounted for approximately
10% of net sales. In fiscal 1994, sales to ITOCHU accounted for approximately
20% of net sales. The Company has entered into a Distributor Agreement with
ITOCHU under which the Company granted ITOCHU a nonexclusive, nontransferable
license to, among other things, market and distribute certain of the Company's
products in Japan, with payments to the Company in U.S. dollars and a term that
is automatically renewed each year. The Distributor Agreement had an initial
term through March 31, 1994, which is automatically renewed for additional one
year terms unless terminated 45 days prior to the end of a term. The agreement
may also be terminated with or without cause upon 90 days written notice by
either party and upon certain events of default by either party. The Company
generally has not entered into long-term volume purchase contracts with its
other end user customers or resellers. The Company terminated its relationship
with MTI in the second quarter of fiscal 1996.
PRODUCTS
Network Appliance currently markets three filer products: the NetApp F220,
the NetApp F330 and the NetApp F540. All filers are based on a PCI-bus
architecture and come packaged in rack mountable enclosures. The NetApp F220 and
F330 filers are based on Pentium processors. The NetApp F540 is based on a
Digital Alpha processor and is the Company's first RISC-based NFS filer.
Network Appliance recently began shipments of Release 3.1, which is based
on the Company's specialized proprietary software architecture. Release 3.1 is
standard on all new filer products shipped as of February 1996. Installed base
customers running previous versions of the software can upgrade to Release 3.1
at no charge if they are on the Company's Software Subscription Program, or by
paying a per-incident upgrade price. Some customers are eligible for a free
upgrade depending on the date of their filer purchase. Release 3.1 contains all
of the core functionality available on prior releases and includes improvements
in NFS throughput and NFS response time, as well as additional functionality,
relative to prior releases of the software.
The current base list price for Network Appliance filers is $28,440 for the
NetApp F220, $45,440 for the NetApp F330 and $66,135 for the NetApp F540 with
four 4-gigabyte disk drive package. Network Appliance's discounting policy
varies based primarily on volume purchases, sales geography and channels of
distribution.
CUSTOMER SERVICE AND SUPPORT
Network Appliance's customer service and support organization provides
customers with technical support, education and training. Network Appliance
believes that providing a high level of customer service and technical support
is critical to customer satisfaction and the Company's success. In providing
service and support to customers, the Company uses its own products extensively.
Warranty coverage includes 24 hour telephone support plus next business day
hardware repair. For an additional charge, the Company also offers upgraded
service during the warranty period, providing for faster on-site hardware
repair.
Post-warranty service programs include: telephone support only; cooperative
maintenance where the customer purchases spares and performs self-maintenance
tasks, and full-service programs (standard, premium and ultra) involving various
combinations of telephone-based support and on-site repair. The
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Company charges for service programs on an annual subscription basis, with
discounts to sites with multiple filers.
MANUFACTURING
Network Appliance's manufacturing operations, located in Mountain View,
California, consist of procurement of materials, product assembly, product
assurance, quality control and final test. Network Appliance relies on many
suppliers for the procurement of materials, as well as several key
subcontractors for the production of certain board level assemblies. The
Company's manufacturing strategy has been to develop close relationships with
its suppliers, exchanging critical information and implementing joint quality
training programs. This manufacturing strategy minimizes capital investment and
overhead expenditures and creates flexibility by providing the capacity for
rapid expansion.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. The Company
purchases disk drives and enclosures from Digital Equipment Corporation. The
Company's reliance on its suppliers involves several risks, including a
potential inability to obtain an adequate supply of required components, price
increases, timely delivery and component quality. This risk is particularly
significant with respect to suppliers of disk drives because in order to meet
product performance requirements, the Company must obtain disk drives with
extremely high quality and capacity. In addition, there is currently a
significant market demand for disk drives and for semiconductor memory
components, which could result in component shortages, selective supply
allocations and increased prices of such components. Although to date the
Company has been able to purchase its requirements of such components, there is
no assurance that the Company will be able to obtain its full requirements of
such components in the future or that prices of such components will not
increase. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect of
on the Company's business, operating results and financial condition. Such
delays could also damage relationships with current and prospective customers.
The Company's resellers often purchase minimally configured systems from
the Company and source additional disk drives and memory components from other
vendors. In addition, certain end-users also purchase disk drives and memories
from other suppliers. Since these components do not undergo the Company's
rigorous sourcing and testing procedures, they may experience more failures when
deployed in the Company's products. Any such higher failure rate could
negatively impact the Company's reputation and, as a result, could materially
adversely affect its business, operating results and financial condition.
RESEARCH AND DEVELOPMENT
Since its inception, Network Appliance has made substantial investments in
research and development. Network Appliance believes that its future performance
will depend in large part on its ability to maintain and enhance its current
product line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new products for the network file server market.
As part of the Company's ongoing development process, the Company
introduced the NetApp F330 in September 1995 and the Netapp F220 in January
1996, and announced the NetApp F540 in May 1996. In addition, the Company has
under development new network file servers that it anticipates announcing in
fiscal 1997. The Company's future growth depends upon the success of these and
other new products, however there can be no assurance that these or other new
products will attain market acceptance. Due to the complexity of network file
servers and the difficulty in gauging the engineering effort required to produce
new products, new products are subject to significant technical risks. There can
be no assurance that new products will be introduced on a timely basis or at
all. In the past, the Company has experienced delays in the shipments of its new
products principally due to an inability to qualify component parts from disk
drive and other suppliers, resulting in delay or loss of product sales. The
Company has currently qualified disk drives manufactured by Seagate Technology
Inc. If new products are delayed or do not achieve market acceptance, the
Company's
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business, operating results and financial condition will be materially adversely
affected. In addition, there can be no assurance that customers will not defer
orders in anticipation of new product introductions by the Company or its
competitors.
The network file server market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. The Company's future success will depend
upon its ability to develop and introduce new products (including new software
releases and enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected.
Network file server products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The Company's total expenses for research and development for fiscal years
1996, 1995 and 1994 were $4.8 million, $2.6 million and $780,000, respectively.
The Company anticipates that research and development expenses will increase in
absolute dollars in future periods, however, the amount of such increases cannot
be accurately determined.
COMPETITION
The network file server market is intensely competitive and characterized
by rapidly changing technology. The Company experiences substantial competition
from specialized network file server companies, such as Auspex Systems, Inc.
("Auspex"), as well as from traditional suppliers of UNIX systems and PC
products that are used as network file servers such as Sun Microsystems, Digital
Equipment Corporation, Hewlett-Packard Company, Silicon Graphics Inc. and IBM
Corporation, among others. In addition, certain of these large traditional
suppliers of general purpose computers may in the future offer specialized file
server products which are more directly competitive with those of the Company.
The Company also expects new and emerging competition in the network file server
market, including competition from manufacturers of PC-based file servers based
upon Windows NT and other emerging standards. While the Company believes that
the price-performance characteristics of its products are currently competitive,
increased competition is likely to result in price reductions, reduced gross
margin and loss of market share, any of which could materially adversely affect
the Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than the Company. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. In addition, the Company derives a
significant portion of its sales from the resale of disk drives as components of
its filers and therefore experiences competition from disk drive resellers. The
market for the resale of disk drives is highly competitive and subject to
intense price pressures. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive
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pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
The Company believes that the principal competitive factors affecting its
market include product features such as response time, scalability and ease of
use, price and customer service and support. Although the Company believes that
its products currently compete favorably with respect to these factors, there
can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
PROPRIETARY RIGHTS
Network Appliance's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company has registered
its FAServer trademark and will continue to evaluate the registration of
additional trademarks as appropriate. The Company generally enters into
confidentiality agreements with its employees and with its resellers and
customers. The Company currently has three U.S. patent applications pending and
three corresponding international patent applications pending. There can be no
assurance that the pending applications will be approved, or that if issued,
such patents will not be challenged, and if such challenges are brought, that
such patents will not be invalidated. There can be no assurance that the Company
will develop proprietary products or technologies that are patentable, that any
issued patent will provide the Company with any competitive advantages or will
not be challenged by third parties, or that the patents of others will not have
a material adverse effect on the Company's ability to do business. Litigation
may be necessary to protect the Company's proprietary technology. Any such
litigation may be time-consuming and costly. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's products or
design around patents issued to the Company or other intellectual property
rights of the Company.
There have also been substantial amounts of litigation in the computer
industry regarding intellectual property rights. The Company is currently
involved in litigation related to the alleged infringement of third party rights
and other claims, which resulted not only in the Company incurring significant
legal fees and related costs but also in a substantial diversion of management
attention. In addition, the Company has from time to time received claims that
it is infringing third parties' intellectual property rights, and there can be
no assurance that third parties will not in the future claim infringement by the
Company with respect to current or future products, trademarks or other
proprietary rights. The Company expects that companies in the file server market
will increasingly be subject to infringement claims as the number of products
and competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims could be
time-consuming, result in costly litigation, cause product shipment delays,
require the Company to redesign its products or require the Company to enter
into royalty or licensing agreements, any of which could have a material adverse
effect upon the Company's business, operating results and financial condition.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all.
In July 1992, the Company received a letter from counsel to Auspex Systems,
Inc. ("Auspex") expressing concern over the potential for misuse of Auspex trade
secrets, infringement of Auspex copyrighted material, and infringement of Auspex
patents. In March 1993, the Company filed suit against Auspex seeking a ruling
that the Company had not taken Auspex trade secrets and damages based upon
Auspex assertions, which was settled in December 1993 on terms mutually
acceptable to Auspex and the Company. In October and November 1994, the Company
received letters from counsel to Auspex requesting that the Company enter into
negotiations regarding a license under a continuation in-part of a previously
issued patent granted to
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Auspex in October 1994. Based upon an opinion of D'Alessandro & Ritchie, the
Company believes that it does not infringe any valid claims under the October
1994 patent. Although Auspex has not contacted the Company since late 1994
regarding this patent, there can be no assurance that Auspex will not bring a
legal action against the Company on this patent and if Auspex does commence a
lawsuit with regard to this patent, there can be no assurance that the outcome
of any such litigation will not have a material adverse effect on the Company's
business, operating results and financial condition. In addition, any claims or
litigation against the Company could result in substantial expense and
significant diversions of management attention.
EMPLOYEES
As of April 26, 1996, Network Appliance had a total of 145 employees. Of
the total, 61 were in sales and marketing, 9 in customer support, 37 in research
and development, 17 in finance and administration and 21 in operations. The
Company's future performance also depends in significant part upon the continued
service of its key technical and senior management personnel, none of whom is
bound by an employment agreement. The loss of the services of one or more of the
Company's officers or other key employees could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical and management personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key technical and management employees or that it can attract, assimilate or
retain other highly qualified technical and management personnel in the future.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.
OTHER FACTORS AFFECTING THE COMPANY
History of Operating Losses; Potential Fluctuations in Quarterly
Results. The Company was organized in April 1992 and first shipped products in
June 1993. The Company had an accumulated deficit of $874,000 as of April 26,
1996. While the Company generated net income in fiscal 1996, it incurred
significant losses in fiscal 1995 and in each of its prior fiscal years. There
can be no assurance that the Company will remain profitable on a quarterly or
annual basis.
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
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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.
Dependence on Growth in the Network File Server Market. All of the
Company's products address the network file server market. The Company's future
financial performance will depend in large part on continued growth in the
network file server market and on emerging standards in this market. There can
be no assurance that the market for network file servers will continue to grow
or that emerging standards in the network file server market, such as Windows
NT, will not adversely affect the growth of the NFS server market on which the
Company has focused to date. If the network file server market fails to grow,
grows more slowly than anticipated, or if network file servers based on emerging
standards other than those adopted by the Company become increasingly accepted
by the market, the Company's business, operating results and financial condition
would be materially adversely affected. During recent years, segments of the
computer industry have experienced significant economic downturns characterized
by decreased product demand, production overcapacity, price erosion, work
slowdowns and layoffs. The Company's operations may in the future experience
substantial fluctuations from period-to-period as a consequence of such industry
patterns, general economic conditions affecting the timing of orders from major
customers and other factors affecting capital spending. There can be no
assurance that such factors will not have a material adverse effect on the
Company's business, operating results and financial condition.
Expansion of International Operations. The Company believes that its
continued growth and profitability will require successful expansion of its
international operations and sales and therefore the Company has committed
significant resources to such expansion. International sales represented
approximately 20%, 16% and 36% of the Company's net sales in fiscal 1996, 1995
and fiscal 1994, respectively. In order to successfully expand international
sales in fiscal 1997 and subsequent periods, the Company must establish foreign
operations, hire additional personnel and recruit additional international
distributors and resellers. This will require significant management attention
and financial resources and could materially adversely affect the Company's
business, operating results and financial condition. To the extent that the
Company is unable to effect these additions in a timely manner, the Company's
growth, if any, in international sales will be limited, and the Company's
business, operating results and financial condition could be materially
adversely affected. In addition, there can be no assurance that the Company will
be able to maintain or increase international market demand for the Company's
products. The Company currently sells a significant portion of its products
internationally through resellers, most significantly, ITOCHU, which in fiscal
1995, accounted for approximately 10% of the Company's net sales. There can be
no assurance that ITOCHU or any of the Company's international resellers or
customers will continue to distribute or purchase the Company's products.
The Company's international sales are principally denominated in U.S.
dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. As the Company expands its
foreign operations, it expects that it will face increasing pressure to
denominate product sales in local currencies, which will subject the Company to
risks associated with currency fluctuations. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, if any, in foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, and the burdens of complying with
a wide variety of foreign laws. The Company has not received ISO 9000
certification which in the future could impact its ability to sell its products
in international markets. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results and financial condition.
Product Concentration; Changing Product Mix . The Company derives
substantially all of its revenues from the sale of its network filer product
line. As a result, a reduction in the demand for filer products due to increased
competition, a general decline in the market for network file servers or other
factors would have a
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material adverse effect on the Company's business, operating results and
financial condition. Prior to fiscal 1996, the Company derived substantially all
of its revenue from the sale of its FAServer 450 and 1400 products. The mix of
products sold by the Company has changed substantially with the introduction of
the NetApp F220, NetApp F330 and NetApp F540. Additional product introductions
in fiscal 1997 are expected to impact the sales of existing products. If the
Company is unable to introduce these new products in a timely manner,
effectively manage the introduction of new products and any related inventory
transitions or if such products do not achieve market acceptance, the Company's
business, operating results and financial condition could be materially
adversely affected.
Concentration of Sales. Historically, a significant portion of the
Company's sales have been made to a limited number of end user customers and
resellers. In fiscal 1996, no customers accounted for 10% or more of net sales.
In fiscal 1995, sales to resellers ITOCHU Corporation ("ITOCHU") and MTI
Technology Corporation ("MTI") each accounted for approximately 10% of net
sales. In fiscal 1994, ITOCHU accounted for approximately 20% of net sales. The
Company's relationship with MTI terminated in the second quarter of fiscal 1996.
The Company generally has not entered into long term volume purchase contracts
with its end user customers or resellers, and such end user customers or
resellers may have certain rights to extend or delay the shipment of their
orders. The loss of a major end user customer or reseller, the reduction, delay
or cancellation of orders or a delay in shipment of the Company's products to
such end user customer or reseller could materially adversely affect the
Company's business, operating results and financial condition. In addition,
should one or more of these resellers choose to promote products competitive
with the Company's products, the Company's business, operating results and
financial condition could be materially adversely affected.
Recent Management Additions and Management of Expanding
Operations. Certain of the Company's senior management joined the Company
during the last year. The Company's Chief Financial Officer/Vice President of
Operations joined in May 1995, its Vice President of Engineering joined in
September 1995 and its Vice President of Marketing joined in May 1996. The
Company is in the process of implementing a number of new financial and
management controls, reporting systems and procedures. In addition to its senior
management, the Company has recently hired a significant number of employees,
including sales staff, and plans to further increase its total employee base.
The Company also plans to expand the geographic scope of its customer base and
operations. This expansion has resulted and will continue to result in
substantial demands on the Company's management systems and resources. The
Company's ability to compete effectively and to manage future expansion of its
operations, if any, will require the Company to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and effectively expand, train and manage its work force. If the Company's
efforts are not successful, the Company's business, operating results and
financial condition could be materially adversely affected.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock could be subject to wide fluctuations in response to a number of
factors, including quarterly variations in operating results, announcements of
technological innovations or new products, applications or product enhancements
by the Company or its competitors, changes in financial estimates by securities
analysts and other events. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
Concentration of Stock Ownership. The present directors, executive
officers and principal shareholders of the Company and their affiliates will
beneficially own approximately 43% of the outstanding Common Stock. Upon the
anticipated elimination of cumulative voting rights currently held by the
Company's shareholders, the foregoing shareholders will be able to control all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may have the effect of delaying or preventing a change in control of the
Company.
Effect of Certain Charter Provisions; Anti-takeover Effects of Provisions
of the Bylaws. The Company's Board of Directors has the authority to issue up
to 5,000,000 shares of Preferred Stock and to determine the
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price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the shareholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Bylaws pertaining to the future elimination of cumulative voting and
shareholder action by written consent, and the requirement that shareholders may
call a special meeting of shareholders only upon a request of shareholders
owning at least 50% of the Company's Common Stock, could delay or make more
difficult a proxy contest involving the Company, which could adversely affect
the market price of the Company's Common Stock.
ITEM 2. PROPERTIES
Network Appliance's principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
51,000 square feet of space in Mountain View, California. This facility is
leased through October 1999. The Company leases other sales offices throughout
the U.S. and in Europe. The Company believes that the existing facilities are
adequate for its current needs and that additional space will be available as
needed.
ITEM 3. LEGAL PROCEEDINGS
WHIPSAW LITIGATION
In July 1994, the Whipsaw Group, Robert and Ellen Cousins, and certain
other individuals 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, that Messrs. Brown
and Malcolm misappropriated those trade secrets and that Network Appliance is
based entirely on the trade secrets and proprietary information misappropriated
from the Whipsaw Group. These allegations are based upon contacts from September
through November 1991 between Mr. Cousins and other members of the Whipsaw Group
and Messrs. Malcolm and Brown. During November 1991, Messrs. Malcolm and Brown
reviewed a business plan prepared by the Whipsaw Group and had various
discussions with Mr. Cousins and other members of the Whipsaw Group relating to
the formation and funding of a company to develop low cost network file servers.
Although Mr. Malcolm had written an unpublished paper in 1988 on a similar file
server concept, he did not actively pursue the formation and funding of a
company based upon the concept until after his meetings with the Whipsaw Group.
In December 1991, Mr. Malcolm initiated contact with Messrs. Hitz and Lau which
ultimately led to the formation of Network Appliance. Mr. Brown was an early
investor in the Company and Migration Software Systems, Ltd. is a company with
which he is affiliated. Plaintiffs are seeking an injunction against further use
of their trade secrets and confidential information, unspecified damages and the
imposition of a constructive trust on the things of value defendants are alleged
to have obtained by their use of the plaintiffs' alleged trade secrets and
proprietary information. While the damages are unspecified, based upon
settlement demands made by the plaintiffs to date, the Company believes that any
demand for damages at trial would be substantial and could include a one-time or
ongoing payments. The trial is currently scheduled to commence on August 5, 1996
in Santa Clara County Superior Court. The Company believes that it has
meritorious defenses to such claims and intends to defend the litigation
vigorously. However, due to the nature of the litigation, the Company cannot
determine the total expense or possible loss, if any, that may ultimately be
incurred either in the context of a trial or as a result of a negotiated
settlement. Regardless of the ultimate outcome of the Whipsaw Litigation, it
could result in significant diversion of time by the Company's technical and
managerial personnel. While after consideration of the nature of the claims and
facts relating to the litigation, including the results of preliminary
discovery, and after consultation with legal counsel, management believes that
the resolution of this matter will not have a material adverse effect on the
Company's business, operating results and financial condition, the results of
these proceedings, including any potential settlement, are uncertain and there
can be no assurance that they will not have a material adverse effect on the
Company's business, operating results and financial condition. In
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connection with Mr. Malcolm's termination of services with the Company, the
Company entered into a settlement and release agreement with Mr. Malcolm under
which the Company may be required to indemnify and defend Mr. Malcolm in
connection with the Whipsaw Litigation, and therefore, the costs incurred by the
Company could be increased. Mr. Malcolm's employment relationship with the
Company terminated for reasons unrelated to the Whipsaw Litigation. The Company
does not have any agreement with Mr. Brown or Migration Software Systems, Ltd.
regarding the Whipsaw Litigation. Mr. Brown settled with the plaintiffs in May
1996 and is no longer a defendant in this matter.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
April 26, 1996, are as follows:
NAME AGE POSITION
- - - --------------------------- ---- ----------------------------------------------------
Daniel J. Warmenhoven...... 45 President, Chief Executive Officer and Director
Donald T. Valentine........ 63 Chairman of the Board and Director
M. Helen Bradley........... 41 Vice President, Engineering
Michael J. McCloskey....... 38 Vice President, Finance and Operations, Chief
Financial Officer, and Secretary
Thomas F. Mendoza.......... 44 Vice President, North American Sales
Michael E. Paul............ 54 Vice President, International Sales
Charles E. Simmons......... 47 Vice President, Marketing
Carol A. Bartz(1).......... 47 Director
Michael R. Hallman(2)...... 50 Director
Kurt R. Jaggers(2)......... 37 Director
Robert T. Wall(1).......... 50 Director
- - - ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Daniel J. Warmenhoven joined the Company in October 1994 as President and
Chief Executive Officer, and has been a member of the Board of Directors since
October 1994. Prior to joining the Company, Mr. Warmenhoven served in various
capacities, including President, Chief Executive Officer and Chairman of the
Board of Directors of Network Equipment Technologies, Inc., a telecommunications
company, from November 1989 to January 1994. Mr. Warmenhoven presently serves on
the Board of Directors of Brooktree Corporation, a semiconductor company. Mr.
Warmenhoven holds a B.S. degree in electrical engineering from Princeton
University.
Donald T. Valentine has been a director of the Company and Chairman of the
Board of Directors since September 1994. Mr. Valentine has been a general
partner of Sequoia Capital, a venture capital firm, since 1972. He is also
Chairman of the Board of C-Cube Microsystems Inc., a semiconductor video
compression company, and Elantec Semiconductor, Inc., an analog integrated
circuit company, Vice Chairman of Cisco Systems, Inc., an internetworking
communications company, and a director of Sierra Semiconductor, Inc., a
communications semiconductor company.
M. Helen Bradley joined the Company as Vice President, Engineering in
September 1995. Prior to that, Ms. Bradley owned a management consulting
business from January 1995 to September 1995. She also served as Senior Vice
President, Technology Development at Openvision, a client-server applications
company, from May 1994 to January 1995. From August 1990 to April 1994, Ms.
Bradley was the Vice President, Systems Software at Sun Microsystems. Ms.
Bradley holds a B.S. degree in mathematics from the Massachusetts Institute of
Technology and an M.S. degree in computer science from the Georgia Institute of
Technology.
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Michael J. McCloskey joined the Company in May 1995 as Vice President,
Finance and Operations, Chief Financial Officer and Secretary. From September
1993 to May 1995, Mr. McCloskey served as Executive Vice President and Chief
Financial Officer at Digital Microwave Corporation, a telecommunications
company. From September 1991 to September 1993, Mr. McCloskey was the Chief
Operating Officer and a member of the Board of Directors of Wavefront
Technologies, a 3-D graphics visualization software development company. From
September 1986 to September 1991, he served as Chief Financial Officer at Everex
Systems, Inc., a PC and PC peripherals company. Mr. McCloskey received his B.S.
degree in business from Santa Clara University.
Thomas F. Mendoza joined the Company in May 1994 as Vice President, North
American Sales. From November 1993 to April 1994, Mr. Mendoza served in various
capacities including Vice President, Sales at Work Group Technology, a product
data management company. Prior to that, Mr. Mendoza served in various capacities
including Vice President of North American Sales at Auspex, a UNIX-based network
file server company, from November 1990 to October 1993. Mr. Mendoza was
previously Vice President of Western Operations at Stratus Computer, a vendor of
fault tolerant computers, from May 1982 to October 1990. Mr. Mendoza holds a
B.A. degree from the University of Notre Dame.
Michael E. Paul joined the Company as Vice President, International Sales
in July 1994. Prior to that, Mr. Paul served as Vice President of World Wide
Sales at Trade, Inc., an international trade statistics data-base company, from
December 1993 to June 1994. In March 1991, Mr. Paul joined Ultra Network
Technologies, a network company, as Vice President of Sales and was named
President and Chief Executive Officer in March 1991 and served in that capacity
until July 1993. Mr. Paul served as Vice President of North American Sales at
MIPS Computer Systems, a RISC technology company, from April 1988 to February
1991. Mr. Paul holds a B.S. degree in electrical and mechanical engineering and
naval science from the U.S. Naval Academy.
Charles E. Simmons joined the Company in May 1996 as Vice President,
Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner &
Associates, a consulting firm, from January 1995 to May 1995. From February 1994
to October 1994, Mr. Simmons served as Vice President of Marketing at Voyant
Corporation, a developer of videoconferencing equipment. Prior to that, Mr.
Simmons was with Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems, Inc., from November 1984 to February 1994, most recently as
Director of Business Strategy and Technology Marketing. Mr. Simmons received a
B.S. degree in electrical engineering from Washington University, an M.S. degree
in electrical engineering from the Massachusetts Institute of Technology and an
MBA from Santa Clara University.
Carol A. Bartz has been a member of the Board of Directors since September
1995. Since April 1992, Ms. Bartz has been Chairman of the Board, President and
Chief Executive Officer of Autodesk, Inc., a PC software company and supplier of
design software. Prior to that, Ms. Bartz was with Sun Microsystems from
September 1983 to April 1992, most recently as Vice President of Worldwide Field
Operations. Ms. Bartz also currently serves on the Board of Directors of
Airtouch Communications, Cadence Design Systems, Inc. and BEA Systems, Inc. Ms.
Bartz received a B.A. degree in computer science from the University of
Wisconsin.
Michael R. Hallman has been a member of the Board of Directors since August
1994. Mr. Hallman is the President of The Hallman Group, a management consulting
firm, which he founded in June 1992. Prior to that, he served as President and
Chief Operating Officer of Microsoft Corporation, a microcomputer software
company, from March 1990 to March 1992. He presently serves on the Board of
Directors of Amdahl Corporation, a manufacturer of mainframe computers and
peripherals, InFocus Systems, a computer peripherals company, Intuit, a
microcomputer software company, Keytronics Corporation, an input device company,
and Timeline, a developer of financial reporting software. Mr. Hallman holds
B.B.A. and M.B.A. degrees from the University of Michigan.
Kurt R. Jaggers has been a member of the Board of Directors since August
1993. Mr. Jaggers has been at TA Associates, an equity investment firm, since
August 1990 and has been a Principal there since January 1993. Mr. Jaggers
presently serves on the Board of Directors of JDA Software Group, Inc. Mr.
Jaggers received B.S. and M.S. degrees in electrical engineering and an M.B.A.
degree from Stanford University.
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Robert T. Wall has been a member of the Board of Directors since January
1993. Mr. Wall has been the Chairman of the Board, President and Chief Executive
Officer of Theatrix Interactive, Inc., a consumer educational software
publisher, since April 1994. From June 1989 to December 1990, Mr. Wall served as
Co-Head of Investment and Merchant Banking at Cowen & Company, an investment
banking firm. In August 1984, he founded On Point Developments Inc., a venture
management and investment banking company, where he has served as President
since its formation. He received an A.B. degree in economics from De Pauw
University and an M.B.A. degree from Harvard Business School.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
on November 21, 1995 and is traded under the symbol "NTAP." As of May 31, 1996
there were approximately 260 holders of record of the Common Stock. The
following table sets forth for the periods indicated the high and low closing
sale prices for the Common Stock as reported on the Nasdaq National Market.
FISCAL 1996 HIGH LOW
------------------------------------------------------------------- ------ ------
Third Quarter...................................................... $41.12 $13.50
Fourth Quarter..................................................... $38.75 $27.00
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in its
business and does not anticipate paying any cash dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is included under the caption
"Selected Consolidated Financial Data" in the Company's Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Shareholders and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included under the captions
"Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated
Statement of Operations," "Consolidated Statements of Shareholders' Equity
(Deficit)," "Consolidated Statements of Cash Flows" and "Notes to Consolidated
Financial Statements" in the Company's Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In January 1995, the Company's Board of Directors retained Deloitte &
Touche LLP as its independent auditors and dismissed the Company's former
auditors, Coopers & Lybrand LLP. The decision to change independent auditors was
approved by resolution of the Board of Directors. The former independent
auditors' report on the Company's financial statements for the years ended March
31, 1993 and 1994 did not contain an adverse opinion, a disclaimer of opinion or
any qualifications or modifications related to uncertainty, limitation of audit
scope or application of accounting principles. In addition, the former
independent auditors' report does not cover any of the consolidated financial
statements of the Company incorporated by reference in this Annual Report on
Form 10-K. Coopers & Lybrand LLP was not engaged to audit the Company's
financial statements for any other period. There were no disagreements with the
former auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure with respect to the
Company's consolidated financial statements up through the time of dismissal
which, if not resolved to the former auditors' satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report. Prior to retaining Deloitte & Touche LLP, the Company had not
consulted with Deloitte & Touche LLP regarding accounting principles.
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PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's directors,
executive officers and key employees is included under the caption "Executive
Officers and Directors" in Part I of this Annual Report on Form 10-K.
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission (the "SEC") initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten percent
(10%) shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based upon (i) the copies of Section 16(a) reports which the Company
received from such persons for their 1996 fiscal year transactions in the Common
Stock and their Common Stock holdings, and (ii) the written representations
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the 1996 fiscal year, the Company believes that
all executive officers and Board members complied with all their reporting
requirements under Section 16(a) for such fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers for the 1996 fiscal year for services rendered in
all capacities to the Company and its subsidiaries for the 1996 and 1995 fiscal
years. The listed individuals shall be hereinafter referred to as the "Named
Officers."
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SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEARS SALARY($) BONUS OPTIONS(#)(1) COMPENSATION(2)
- - - -------------------------------- ----- --------- -------- ------------- ---------------
Daniel J. Warmenhoven........... 1996 $ 190,615 $147,000 100,000 $ 1,306
President and Chief 1995 96,230 -- 700,000 --
Executive Officer
Michael J. McCloskey(3)......... 1996 148,269 85,000 200,000 391
Vice President, Finance 1995 -- -- -- --
and Operations, Chief
Financial Officer, and
Secretary
Thomas F. Mendoza............... 1996 120,000 186,539 -- 835
Vice President, 1995 117,694 60,077 200,000 --
North American Sales
Michael E. Paul................. 1996 120,000 43,179 -- 1,383
Vice President, 1995 90,923 26,191 125,000 --
International Sales
M. Helen Bradley(4)............. 1996 86,538(5) 55,000(6) 100,000 353
Vice President, Engineering 1995 -- -- -- --
- - - ---------------
(1) The options listed in the table were granted under the Company's 1993 Stock
Option/Stock Issuance Plan. The options were incorporated into the Company's
1995 Stock Incentive Plan at the time of the Company's initial public
offering, but will continue to be governed by their existing terms.
(2) Represents the cost of term life insurance.
(3) Mr. McCloskey joined the Company in May of 1995.
(4) Ms. Bradley joined the Company in September of 1995.
(5) Ms. Bradley's salary on an annual basis is $150,000.
(6) Includes a $10,000 signing bonus.
STOCK OPTIONS
The following table contains information concerning the stock option grants
made to each of the Named Officers for the 1996 fiscal year. No stock
appreciation rights were granted to those individuals during such year.
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
---------------------------------------- ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(2) FISCAL YEAR ($/SHARE)(3) DATE 5% 10%
- - - ----------------------------- ---------- ------------ ------------ ---------- -------- ----------
Daniel J. Warmenhoven........ 100,000 7.7% $ 8.10 10/30/05 $509,404 $1,290,930
Michael J. McCloskey......... 200,000 15.3% .28 05/24/05 35,218 89,250
Thomas F. Mendoza............ -- -- -- -- -- --
Michael E. Paul.............. -- -- -- -- -- --
M. Helen Bradley............. 100,000 7.7% 7.20 09/25/05 452,804 1,147,495
- - - ---------------
(1) There is no assurance provided to the option holder or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the 5% and 10% assumed annual rates of
compounded stock price appreciation.
(2) The options were granted under the Company's 1993 Stock Option/Stock
Issuance Plan on the following dates: Mr. Warmenhoven, November 1, 1995; Mr.
McCloskey, May 25, 1995, and Ms. Bradley, September 26, 1995. Each option
has a maximum term of 10 years measured from the grant date, subject
19
20
to earlier termination upon the optionee's cessation of service with the
Company. Mr. Warmenhoven's option is immediately exercisable for 87,655
shares and exercisable for the remaining 12,345 shares on January 3, 1996.
Each of the other granted options is immediately exercisable for all the
option shares. However, any shares purchased under the options are subject
to repurchase by the Company at the option exercise price paid per share,
should the optionee leave the Company prior to vesting in the shares. With
respect to the option granted to Mr. Warmenhoven, the option will vest as to
ten percent (10%) of the shares on the first anniversary of the date of
grant; another twenty percent (20%) of the shares in equal monthly
installments over the twenty-four (24) month period starting from the first
anniversary of the grant date; another thirty percent (30%) of the shares in
equal monthly installments over the twelve-month period starting from the
third anniversary of the grant date; and the remaining forty percent (40%)
of the shares in equal monthly installments over the twelve-month period
starting from the fourth anniversary of the grant date. With respect to the
options granted to Mr. McCloskey and Ms. Bradley, the options will vest as
to twenty-five percent (25%) of the shares upon the optionee's completion of
one year of service measured from May 25, 1995 and September 8, 1995,
respectively, and with respect to the balance of the shares in a series of
equal monthly installments over the thirty-six (36) months of service
thereafter. Full and immediate vesting of Messrs. Warmenhoven's and
McCloskey's options will occur in the event the Company is acquired by
merger or asset sale. Full and immediate vesting of Ms. Bradley's option
will occur in the event the Company is acquired by merger or asset sale,
unless the option is assumed by the acquiring company.
(3) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the Federal and state
income and employment tax liability incurred by the optionee in connection
with such exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option exercises and
option holdings for the 1996 fiscal year by each of the Named Officers. No stock
appreciation rights were exercised during such year or were outstanding at the
end of the year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END AT FY-END(2)
ACQUIRED ON VALUE ----------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - ------------------------- ----------- ----------- ----------- ------------- ----------- -------------
Daniel E. Warmenhoven.... -- $ -- 100,000(3) -- $ 2,615,000 --
Michael J. McCloskey..... 200,000 -- -- -- -- --
Thomas F. Mendoza........ 200,000 30,000 -- -- -- --
Michael E. Paul.......... 125,000 18,750 -- -- -- --
M. Helen Bradley......... -- -- 100,000(3) -- 2,705,000 --
- - - ---------------
(1) Based on the fair market value (as determined by the Board of Directors) of
the purchased option shares at the time of exercise less the option exercise
price paid for those shares.
(2) Based on the fair market value of the shares at the end of the 1996 fiscal
year ($34.25 per share) less the option exercise price payable for those
shares.
(3) The options are fully exercisable as of the fiscal year end, but any shares
purchased thereunder will be subject to repurchase by the Company at the
original option exercise price paid per share should the optionee leave the
Company prior to vesting in the shares. As of April 26, 1996, Mr.
Warmenhoven and Ms. Bradley had not vested in any shares.
20
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 1996 by (i) each person
who is known by the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors and Named Officers
and (iii) all current executive officers and directors as a group.
SHARES
BENEFICIALLY
OWNED(1)
5% SHAREHOLDERS, NAMED OFFICERS, DIRECTORS AND ---------------------
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP NUMBER PERCENT
- - - ------------------------------------------------------------------------- --------- -------
TA Associates Group(2)................................................... 2,135,263 13.2%
435 Tasso St., Suite 200
Palo Alto, CA 94301
Entities Affiliated with Sequoia Capital(3).............................. 1,768,353 11.0%
3000 Sand Hill Road
Bldg. 4, Suite 280
Menlo Park, CA 94025
Michael A. Malcolm....................................................... 884,868 5.5%
48 South Avalon Drive
Los Altos, CA 94022
David Hitz............................................................... 827,500 5.1%
319 North Bernardo Avenue
Mountain View, CA 94043
Daniel J. Warmenhoven(4)................................................. 457,000 2.8%
Michael J. McCloskey..................................................... 200,500 1.2%
Thomas F. Mendoza(5)..................................................... 200,000 1.2%
Michael E. Paul.......................................................... 126,000 *
M. Helen Bradley(6)...................................................... 100,000 *
Donald T. Valentine(3)................................................... 1,768,353 10.9%
Robert T. Wall(7)........................................................ 197,857 1.2%
Michael R. Hallman(8).................................................... 133,478 *
Carol A. Bartz(9)........................................................ 81,423 *
Kurt R. Jaggers(10)...................................................... 55,737 *
All directors and executive officers as a group
(10 persons)(11)....................................................... 7,142,242 43.5%
- - - ---------------
* Less than 1%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Includes 1,835,226 shares held by Advent VII L.P., 378,818 shares held by
Advent Atlantic and Pacific II Limited Partnership, 183,456 shares held by
Advent New York L.P., 136,540 shares held by Advent Industrial II L.P. and
27,518 shares held by TA Venture Investors, L.P. Advent VII L.P., Advent
Atlantic and Pacific II Limited Partnership, Advent Industrial II Limited
Partnership, Advent New York L.P., and TA Venture Investors, L.P. are part
of an affiliated group of investment partnerships referred to,
collectively, as the TA Associates Group. The general partner of Advent VII
L.P. is TA Associates VII L.P. The general partner of each of Advent New
York L.P. and Advent Industrial II L.P. is TA Associates VI, L.P. The
general partner of Advent Atlantic and Pacific II Limited Partnership is TA
Associates AAP II Partners, L.P. The general partner of each of TA
Associates VII, L.P., TA Associates VI, L.P. and TA Associates AAP II
Partners, L.P. is TA Associates, Inc. In such capacity, TA Associates, Inc.
exercises sole voting and investment power with respect to all of the
shares held of record by the named investment partnerships, with the
exception of those shares held by TA Venture Investors, L.P.; individually
no stockholder, director or officer of TA Associates, Inc. is deemed to
have or share such voting or investment power. Principals and employees of
TA Associates, Inc. (including Mr. Jaggers, a director of the Company)
comprise the general partners of TA Venture
21
22
Investors, L.P. In such capacity, Mr. Jaggers may be deemed to share voting
and investment power with respect to the 27,518 shares held of record by TA
Venture Investors, L.P. Mr. Jaggers disclaims beneficial ownership of such
shares, except to the extent of the 5,860 shares as to which he holds a
pecuniary interest.
(3) Includes 999,566 shares held by Sequoia Capital Growth Fund, 641,539 shares
held by Sequoia Capital VI, 63,801 shares held by Sequoia Technology
Partners III, 35,248 shares held by Sequoia Technology Partners VI and
28,199 shares held by Sequoia XXIV. Mr. Valentine, the Chairman of the
Company's Board of Directors, is an affiliate of the foregoing entities and
may be deemed to share voting and investment power with respect to such
shares. Mr. Valentine disclaims beneficial ownership of such shares, except
to the extent of his pecuniary interest in such shares arising from his
interests in the entities referred to above.
(4) Includes 457,000 shares held by Daniel J. Warmenhoven & Charmaine A.
Warmenhoven, trustees to The Warmenhoven 1987 Revocable Trust UTA dated
12/16/87, as amended, of which Mr. Warmenhoven is a trustee and shares
voting and investment powers. Excludes 8,500 shares held by Charmaine A.
Warmenhoven, Mr. Warmenhoven's spouse, as separate property. Also excludes
200,000 shares held by Richard A. Andre, trustee to The Warmenhoven 1995
Children's Trust, under trust agreement dated 5/1/95, and 9,000 shares held
by Richard A. Andre, trustee to the Daniel J. Warmenhoven 1991 Children's
Trust, as Mr. Warmenhoven disclaims beneficial ownership over the shares
held by such trusts.
(5) Does not include 16,000 shares held by Mr. Mendoza's spouse.
(6) Includes 100,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan.
(7) Includes 40,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan. Some of these
shares are subject to a repurchase right of the Company. In addition,
includes 17,857 shares held by Wampum Partners II. Mr. Wall, a director of
the Company, is the Managing Joint Venturer of Wampum Partners II, an
investment joint venture. In such capacity, Mr. Wall exercises sole voting
and investment power with respect to all of the shares held of record by
Wampum Partners II. Mr. Wall disclaims beneficial ownership of such shares
held by Wampum Partners II, except to the extent of his pecuniary interest
in 3,657 of such shares. Also includes 1,000 shares held by Mr. Wall as
custodian for each of his two adult children and 1,000 shares held by Mr.
Wall as trustee of a trust for the benefit of his children. Mr. Wall
disclaims beneficial ownership of these 3,000 shares.
(8) Includes 80,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan.
(9) Includes 30,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan. In addition,
includes 51,423 shares held by the Carol Ann Bartz Trust UAD 10/14/87.
(10) Includes 30,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan. In addition,
includes 27,518 shares held by TA Venture Investors, L.P., all of which
shares are included in the 2,041,933 shares described in footnote (2)
above. Mr. Jaggers disclaims beneficial ownership to such shares, except to
the extent of the 5,860 shares as to which he holds a pecuniary interest.
Does not include any shares beneficially owned by Advent VII L.P., Advent
Atlantic and Pacific II Limited Partnership, Advent Industrial II L.P. or
Advent New York L.P., of which Mr. Jaggers disclaims beneficial ownership.
(11) Includes a total of 280,000 shares of Common Stock issuable upon the
exercise of options exercisable within 60 days of May 31, 1996. Also,
includes all shares held by TA Associates Group and entities affiliated
with Sequoia Capital. Mr. Jaggers disclaims beneficial ownership of the
shares held by TA Associates Group except to the extent of his pecuniary
interest in TA Venture Investors, L.P., and Mr. Valentine disclaims
beneficial ownership of the shares held by entities affiliated by Sequoia
Capital except to the extent of his pecuniary interest in such entities.
22
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1995, the Company and Mr. Michael Malcolm, a greater than five
percent shareholder and former director and executive officer of the Company,
entered into a Settlement Agreement and General Release (the "Settlement
Agreement") relating to Mr. Malcolm's termination of services with the Company.
Under the material terms of the Settlement Agreement, Mr. Malcolm and the
Company release each other of any claims, damages, and causes of action that
they might have against each other arising out of Mr. Malcolm's employment with
the Company. The Company also agreed to pay Mr. Malcolm the lump sum of $220,000
and a monthly consulting fee, which terminated in November 1995, of $15,000. In
addition, the Company agreed to indemnify and defend Mr. Malcolm under certain
circumstances in connection with the Whipsaw Litigation.
The Company has also granted options to certain of its directors and
executive officers.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
23
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
1. The following consolidated financial statements of Network Appliance,
Inc. are incorporated by reference into Part II, Item 8 of this
Report on Form 10-K from the Company's Annual Report to Shareholders
filed as Exhibit 13.1 hereof:
Independent Auditors' Report
Consolidated Balance Sheets -- April 30, 1996 and 1995
Consolidated Statements of Operations for the years ended April
30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended April 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended April
30, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule of the Company is filed in
Part IV, Item 14(d) of this Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the consolidated financial statements or
notes thereto.
3. Exhibits.
EXHIBIT NO. DESCRIPTION
- - - ----------- ------------------------------------------------------------------------------
3.1 -- Restated Articles of Incorporation of the Company
3.2(1) -- Bylaws of the Company
4.1(1) -- Reference is made to Exhibits 3.1 and 3.2
4.2(1) -- Specimen Common Stock certificate
4.3(1) -- Amended and Restated Investors' Rights Agreement, dated September 23, 1994,
among the Company and the investors and the founders named therein, as amended
4.4(1) -- Amended and Restated Shareholders Agreement, dated September 23, 1994, among
the Company and the employee holders and the Preferred Stock investors named
therein
4.5(1) -- Forms of Warrants to Purchase Shares of Series A and Series C Preferred Stock
10.1(1)(2) -- Distributor Agreement, dated June 1, 1993, by and among the Company, ITOCHU
Corporation and CTC Supply Sales
10.2(1) -- Forms of Indemnification Agreements entered into between the Company and its
directors and officers
10.3(1) -- The Company's 1993 Stock Option/Stock Issuance Plan
10.4(1) -- The Company's 1993 Stock Incentive Plan
10.5(1) -- The Company's Employee Stock Purchase Plan
10.6(1) -- Series C Preferred Stock and Common Stock and Warrant to Purchase Series C
Preferred Stock Purchase Agreement, dated September 23, 1994, among the
Company and the purchasers named therein
10.7(1) -- Office Lease dated October 21, 1993, between Company and Vanni Business Park
General Partnership ("Vani") and Office Lease Amendment, dated October 20,
1994, between Company and Vani
24
25
EXHIBIT NO. DESCRIPTION
- - - ----------- ------------------------------------------------------------------------------
10.8(1) -- Agreement dated June 19, 1995, between Company and Imperial Bank, as amended,
Promissory Note issued thereunder and ancillary documents
10.9(1) -- Settlement Agreement and General Release, dated June 28, 1995, between the
Company and Michael Malcolm
10.10(1) -- Security and Loan Agreement, Credit Terms and Conditions and General Security
Agreement between Company and Imperial Bank, dated August 31, 1994, as amended
13.1 -- The Company's Annual Report to Shareholders, portions of which are
incorporated by reference into this Annual Report on Form 10-K and only such
portions are deemed filed as part of this Annual Report on Form 10-K
16.1(1) -- Letter Regarding Change in Independent Auditors
23.1 -- Independent Auditors' Consent and Report on Schedule (see page 28)
24.1 -- Power of Attorney (see signature page)
27.1 -- Financial Data Schedule
- - - ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-97864).
(2) Confidential treatment requested as to certain portions of these exhibits.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on July 25, 1996.
NETWORK APPLIANCE, INC.
By: DANIEL J. WARMENHOVEN
------------------------------------
Daniel J. Warmenhoven
President and Chief Executive
Officer
26
27
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Daniel J. Warmenhoven and Michael J.
McCloskey, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - - ---------------------------------------- ------------------------------------ --------------
DANIEL J. WARMENHOVEN President and Chief Executive July 25, 1996
- - - ---------------------------------------- Officer (Principal Executive
(Daniel J. Warmenhoven) Officer)
DONALD T. VALENTINE Chairman of the Board, Director July 25, 1996
- - - ----------------------------------------
(Donald T. Valentine)
MICHAEL J. MCCLOSKEY Vice President, Finance and July 25, 1996
- - - ---------------------------------------- Operations, Chief Financial Officer
(Michael J. McCloskey) and Secretary (Principal Financial
and Accounting Officer)
CAROL A. BARTZ Director July 25, 1996
- - - ----------------------------------------
(Carol A. Bartz)
MICHAEL R. HALLMAN Director July 25, 1996
- - - ----------------------------------------
(Michael R. Hallman)
KURT R. JAGGERS Director July 25, 1996
- - - ----------------------------------------
(Kurt R. Jaggers)
ROBERT T. WALL Director July 25, 1996
- - - ----------------------------------------
(Robert T. Wall)
27
28
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Shareholders of
Network Appliance, Inc.
We consent to the incorporation by reference in Registration Statement No.
33-99638 on Form S-8 of our report dated May 10, 1996, incorporated by reference
in this Annual Report on Form 10-K of Network Appliance, Inc. for the year ended
April 30, 1996.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Network Appliance, Inc.,
listed in Item 14.(a)2. The financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELIOTTE & TOUCHE LLP
San Jose, California
July 23, 1996
28
29
SCHEDULE II
NETWORK APPLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1996, 1995 AND 1994
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
Allowance for doubtful accounts:
1996..................................... $220 $110 $ -- $ 330
1995..................................... 10 210 -- 220
1994..................................... -- 10 -- 10
Excess and obsolescence inventory reserve:
1996..................................... $345 $698 $ -- $1,043
1995..................................... 45 300 -- 345
1994..................................... -- 45 -- 45
29
1
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF NETWORK APPLIANCE, INC.
a California Corporation
The undersigned, Daniel J. Warmenhoven 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. 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 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
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.
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.
4
IN WITNESS WHEREOF, the undersigned have executed this certificate
on December 20, 1995.
___________________________________
Daniel J. Warmenhoven
President
___________________________________
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.
___________________________________
Daniel J. Warmenhoven
President
___________________________________
Michael McCloskey
Secretary
4.
1
Network Appliance, Inc.
1996
ANNUAL REPORT
2
COMPANY DESCRIPTION
Network Appliance, Inc., also known as NetApp, supplies high-performance network
data access devices that provide fast, simple, reliable and cost-effective file
service for network-attached storage environments. Combining specialized,
proprietary software and standards-compliant hardware, the Company pioneered the
concept of the "network appliance," an extension of the industry trend towards
dedicated, specialized devices which perform a single networking function,
similar to the adoption of the router for network communications management.
Customers include leading organizations in the on-line services, financial
services, manufacturing and telecommunications industries, as well as companies
that design computer hardware and software. Products are available through the
Company's direct sales force and resellers worldwide.
Selected Consolidated Financial Data 1996 1995 1994 1993
Net Sales $ 46,632 $ 14,796 $ 2,244 $ --
Income (Loss) From Operations $ 6,000 $ (4,913) $ (1,955) $ (825)
Net Income (Loss) $ 6,600 $ (4,764) $ (1,874) $ (836)
Net Income (Loss) Per Share $ .42 $ (.38) $ -- $ --
Total Assets $ 45,449 $ 10,628 $ 4,055 $ 612
Long-Term Obligations $ 318 $ 11,607 $ 4,799 $ --
Total Shareholders' Equity (Deficit) $ 39,029 $ (5,923) $ (1,324) $ 545
[BAR GRAPH]
[BAR GRAPH]
[BAR GRAPH]
[BAR GRAPH]
3
TO OUR
SHAREHOLDERS
Fiscal 1996 was a year of significant progress and profitable growth for Network
Appliance, Inc. Revenues tripled over the prior year, a reflection of the
strength of our product offerings and the robustness of the market that we
address. During the year we revamped our product line, introducing two new
systems which received rapid market acceptance. We also marked a major milestone
in November with an initial public offering of the Company's common stock.
As we review the year just ended and reflect on our prospects, the trends
encourage us. The market we address is large and rapidly growing;
network-attached data storage and access are increasing in importance in the
world of information technology. Indeed, to quote the Wall Street Journal (April
22, 1996), products such as ours are "taking the spotlight in the computer
industry" as computer usage becomes more centered upon data storage and access.
This fundamental shift in emphasis underway in computing, is a shift in which
our innovative technology positions us for continued rapid growth. The era when
customers focused on their network infrastructure is giving way to a new era,
one in which they are emphasizing and investing heavily in their information
infrastructure. Their focus is on creating an information utility that contains
all of the critical data and which can be accessed by all of the network clients
at any and all times. It is here where our products offer a unique value
proposition: the appliance approach to building a network information utility.
The accelerating adoption of the appliance approach to information systems, an
approach which Network Appliance pioneered and which is a cornerstone of our
strategy, is another of the trends fueling our success. Data storage and access
appliances which are designed specifically for that purpose are faster, simpler,
more reliable and more cost effective than general purpose alternatives.
Customers receive the benefits of lower cost and higher availability of the data
they need, and a reduced administrative burden in managing it. And during the
next year we will provide them with another exceptional capability - the ability
to have a variety of different types of clients such as PCs and UNIX
workstations, which use different network data access technologies,
simultaneously access the same information on a single server.
During the year, we introduced two new system products based on the Intel
Pentium architecture which offer higher performance and greater expandability
than the products they replaced. By embracing industry standards, we have been
able to derive the benefits of rapid time to market with minimal R&D investment.
We have also enjoyed the benefit of significant cost reductions through the use
of high-volume industry standard components.
The rapid time to market is reflected in the introduction rate of our new
products. In September 1995, we introduced the NetApp F330(TM), a departmental
server with capacity up to 100 gigabytes of disk storage. Our workgroup-level
filer, the NetApp F220(TM), was introduced only five months later. In the first
quarter of the new year, FY97, we introduced yet another new product, the NetApp
F540(TM), our third in eight months.
Fiscal 1996 was a year of achievement for Network Appliance, and we established
a solid foundation for our future success. We enter 1997 with a strong product
line, a customer list we reference with pride, and a conviction about our vision
for the future of network data access.
Sincerely,
/s/DANIEL J. WARMENHOVEN
- - - ------------------------
DANIEL J. WARMENHOVEN
President and Chief Executive Officer
Network Appliance, Inc.
4
THE
BUSINESS
OF NETWORK APPLIANCE
Our customers invest in information tools and technology to shorten product
development cycles, enhance service to their own customers, lower costs and
improve quality, among other reasons. Moreover, as these organizations continue
to stockpile more data at a faster rate, demand for storage and access grows in
proportion. Disk storage consumption is forecasted to double every year through
the end of this decade, in terms of gigabytes shipped. The market for
storage/access equipment, services and software is expected to reach a dollar
level of more than $87 billion by the year 2000, compared to $44.6 billion in
1995. (source: International Data Corporation).
THE
MARKET
NEED
As corporations require greater storage and improved access for the increasingly
important data they continue to amass, their investment in technology tools and
infrastructure is shifting away from the high-powered computers wired to
networks, to the data attached to the networks. At the same time, the World Wide
Web is evolving into a worldwide platform for commercial transactions, altering
the patterns and systems by which corporations conduct business. As it evolves,
and as customers rely increasingly upon their intranetworks for communication
and information sharing, the information technologies that deliver faster,
simpler, more reliable and cost-effective access to the data will become central
to these organizations' new data infrastructures.
NETAPP FILERS DELIVER CUSTOMER VALUE THAT HAS PROPELLED THE COMPANY'S THREE-FOLD
GROWTH IN THE PAST YEAR.
Along with the rise of Web-based commerce and corporate intranetworking, today's
data-intensive applications - software and computer hardware design, brokerage
and government to name a few - create additional data management needs. The
high-performance hardware and software used for information storage and access
must be affordable, highly available, and easy to manage. It must deliver
uninterrupted service in the event of disk failure. Equally important, today's
networked-computer environments are heterogeneous: different operating systems,
network protocols and interfaces from a myriad of equipment and software
suppliers. The problems of sharing, accessing and managing data in such networks
call for solutions that can easily and inexpensively accommodate this
technological diversity.
2
5
THE NETAPP
SOLUTION
NETWORK APPLIANCE DELIVERS THE INDUSTRY'S BEST PRICE-PERFORMANCE AND AN
ATTRACTIVE COST PER UNIT OF STORAGE.
Network Appliance pioneered the concept of a "network appliance", a device
uniquely designed for storing data in network environments. NetApp's custom
software-based technology is ideal for the new era of storage-centric data
infrastructures. Specifically designed for simple and reliable high-performance
access to data files of all types, NetApp filers deliver customer value that has
propelled the Company's three-fold growth in the past year.
SIMPLE. Installable typically in an hour, NetApp filers are designed to be easy
for customers to manage. This enables more productive use of staff time, and
helps make the data more available for users on a network.
RELIABLE. Simplicity of design delivers a solution that yields more reliable
data with no cost or performance penalties. Should a disk drive fail, the NetApp
filer will reconstruct the data on a spare drive, with no interruption of data
availability. Other system components, such as power supplies, are designed for
redundancy.
AFFORDABLE. Data infrastructures benefit from inexpensive, expandable solutions
that can scale: grow in cost effective increments. This enables customers to add
or make changes to their network as easily as adding disk drives. NetApp filers
deliver this value without compromising high-performance response time to users.
Appliance-like product features also simplify administration, which enables more
cost-effective deployment of system administrators and further lowers the cost
of ownership. Moreover, Network Appliance delivers the industry's best
price-performance and an attractive cost per unit of storage.
COMPATIBLE. Our multi-protocol approach results in compatibility with a wide
variety of heterogeneous network environments. NetApp's unique software
architecture readily accommodates new file access technologies such as HTTP and
Microsoft's NT. As more network environments contain elements of UNIX and NT,
NetApp filers will bridge those environments and provide shared data access and
administration. Moreover, the simplicity of appliance-like design is
particularly well suited to address data availability and reliability issues
associated with data storage in complex, diverse network environments.
HIGH PERFORMANCE. Response times of NetApp filers exceed general-purpose
computers and specialized hardware-centric file servers. They enable software
and hardware designers to complete projects faster and bring their products to
market more rapidly. Geologists can manipulate seismic data more effectively.
Securities traders can process orders more rapidly. Users of the World Wide Web
and corporate intranets can access data repositories more quickly.
3
6
NEW
PRODUCTS
IN FISCAL 1996...AND SO FAR IN FISCAL 1997
In September 1995 we introduced the NetApp F330, our department-level server
intended for up to 200 users on a network.
NetApp F220, a filer designed for workgroup computing, was introduced in January
1996. With its attractive entry-level price, low cost per gigabyte and fast
response time, it offers exceptionally high value.
In May 1996, we announced the NetApp F540 - the Company's first enterprise-class
NFS filer - delivering the fastest NFS performance in its class and substantial
improvements in end-user applications. The F540 marked our third new product in
eight months. It is also the Company's first RISC-based system, evidence of the
portability of its custom operating software which is optimized for file
service. All of these products, as well as earlier models, are capable of
running the most current software revisions.
[TIME LINE CHART]
4
7
LOOKING AHEAD
Our goal is to be a leader in network data-access appliances. To achieve this
objective, we will differentiate our products through software, utilize industry
standards, further penetrate our current market while developing new markets,
and expand the distribution of our products.
SOFTWARE DIFFERENTIATION. NetApp's competitive advantage is derived from our
innovative software technology. By focusing on specialized software we are able
to integrate into future offerings features that provide our customers with
increased performance and value.
INDUSTRY STANDARDS. By utilizing industry-standard processor platforms, we are
able to realize rapid time-to-market of new systems and the benefits of the
industry cost curves. Our software-centric approach, combined with using
industry-standard interfaces, allows our products to adapt to a variety of
network environments.
MARKET PENETRATION AND DEVELOPMENT. NetApp intends to expand its product
offerings to address a wider scope of price, performance and storage capacity.
Our software architecture easily accommodates new file access technologies,
including HTTP, and Microsoft's CIFS protocol which is used in the Windows
family of products. We will continue to extend functionality and platform
support for new standards as they emerge.
DISTRIBUTION. We plan to continue marketing and distributing products globally
through multiple channels: direct sales, selected value-added resellers, and
OEMs.
NETWORK APPLIANCE INTENDS TO BE THE LEADER IN ADDRESSING OPPORTUNITIES FOR NEW
DATA APPLIANCES IN THE ERA OF NETWORK-ATTACHED INFORMATION INFRASTRUCTURE.
Our mission is to deliver single-purpose, network data access appliances. The
appliance approach - high-performance products that are simple, reliable and
cost-effective - will continue to be fundamental to the Company's design
philosophy. With the enormous growth in on-line information, new opportunities
will emerge for additional specialized appliances. Network Appliance intends to
be the leader in addressing opportunities for new network-attached data
appliances in the era of the information infrastructure.
5
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Network Appliance, Inc. was incorporated in April 1992 to design, manufacture,
market and support network data storage appliances. In September 1995, the
Company introduced the NetApp F330, a rack-mounted, Pentium and PCI bus-based
filer, and in January 1996, the Company introduced the NetApp F220, a
rack-mounted, Pentium and PCI bus-based filer designed for workgroup and LAN
environments. The Company's filer products combine specialized proprietary
software and state-of-the-art industry standard hardware to provide a unique
solution for the NFS server market.
The Company initially focused primarily on indirect/reseller sales channels, and
began expansion of its direct sales force in the second half of fiscal 1995. The
significant growth in net sales in fiscal 1996 was due primarily to the shift in
Network Appliance's distribution focus to direct sales in domestic markets, as
well as increased market acceptance of Network Appliance's products and the
"network appliance" concept.
The Company believes that its continued growth and profitability is dependent in
part on the successful expansion of its international operations, and therefore,
has committed significant resources to international sales.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated.
YEARS ENDED APRIL 30,
----------------------------------------
1996 1995 1994
- - - --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 44.1 53.8 48.3
----- ----- -----
Gross margin 55.9 46.2 51.7
----- ----- -----
Operating expenses:
Sales and marketing 27.3 42.5 67.4
Research and development 10.2 17.6 34.8
General and administrative 5.5 19.3 36.7
----- ----- -----
Total operating expenses 43.0 79.4 138.9
----- ----- -----
Income (loss) from operations 12.9 (33.2) (87.2)
Other income (expense), net 1.3 1.0 3.6
----- ----- -----
Net income (loss) 14.2% (32.2)% (83.6)%
----- ----- -----
- - - --------------------------------------------------------------------------------
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales increased by approximately 215% from $14.8 million in
fiscal 1995 to $46.6 million in fiscal 1996. In fiscal 1995, the Company sold
its products primarily through indirect channels. The increase in net sales in
fiscal 1996 resulted primarily from the Company's expansion of its domestic
direct sales force, increased market acceptance of the Company's products, and
the introduction of two new system products, the NetApp F330 and F220. The
Company also shipped a greater number of units directly to end users in fiscal
1996, which generally purchase more highly configured systems at higher average
selling prices than resellers.
GROSS MARGIN. Gross margin increased from 46.2% in fiscal 1995 to 55.9% in
fiscal 1996. This increase in gross margin was primarily attributable to more
efficient absorption of manufacturing overhead, lower costs of key components
and manufacturing efficiencies achieved during fiscal 1996, all of which were
related to the significant increase in production volume. These factors offset
the effect of increased sales of highly configured systems during fiscal 1996
which generally generate lower gross margins per system.
NETWORK APPLIANCE, INC. 6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, new product
introductions and enhancements, and the cost of components and manufacturing
labor. In particular, the Company's gross margin varies based upon the
configuration of systems that are sold and whether they are sold directly or
through indirect channels. The Company offers both highly configured and
minimally configured systems. Typically, highly configured systems generate
lower overall gross margin percentages due to greater disk drive and memory
content. Highly configured systems are generally sold directly to end users.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
commissions, advertising and promotional expenses and customer service and
support costs. Sales and marketing expenses increased 102.3% from $6.3 million
in fiscal 1995 to $12.7 million in fiscal 1996. These expenses were 27.3% and
42.5% of net sales in fiscal 1996 and 1995, respectively. The increase in
absolute dollars was primarily related to the expansion of the Company's sales
and marketing organization, particularly the increase in the direct sales force,
and increased commission expenses related to higher sales volumes. The Company
expects to continue to increase its sales and marketing expenses in an effort to
expand domestic and international markets, introduce new products, and establish
and expand new distribution channels.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and benefits, prototype expenses, and fees paid to outside consultants.
Research and development expenses increased 82.6% from $2.6 million in fiscal
1995 to $4.8 million in fiscal 1996. These expenses represented 10.2% and 17.6%,
of net sales in fiscal 1996 and 1995, respectively. These expenses increased in
absolute dollars primarily as a result of increased headcount, prototyping
expenses associated with the development of new products and the support of the
current and future product development and enhancement efforts. The Company
believes that significant investments in research and development will be
required to remain competitive and expects that such expenditures will continue
to increase in absolute dollars. To date, no software development costs have
been capitalized as amounts that qualify for capitalization have been
immaterial.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $2.6 million in fiscal 1996, compared to $2.9 million in fiscal
1995. These expenses represented 5.5% and 19.3%, respectively, of net sales for
such periods. The higher level of general and administrative expenses during
fiscal 1995 related primarily to certain litigation expenses, severance costs
and increases in the provision for bad debts. In fiscal 1996, the Company
continued its investments in additional staffing, facilities expansion and
related occupancy costs and information system investments necessary to manage
and support the Company's growth. The Company believes that its general and
administrative expenses will increase in absolute dollars as the Company
continues to build its infrastructure and incurs the additional expenses of
being a public company. In addition, the Company may incur significant legal
expenses related to the Whipsaw Litigation in the future. See Note 10 of Notes
to Consolidated Financial Statements.
OTHER INCOME, NET. Other income, net, was approximately $600,000 and $149,000 in
fiscal 1996 and 1995, respectively. In both of these periods, other income, net,
represented less than 2% of net sales. Other income, net, increased in fiscal
1996 due primarily to interest income earned on the net proceeds of
approximately $25.7 million from the Company's initial public offering that was
completed in November 1995.
7 NETWORK APPLIANCE, INC.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION FOR INCOME TAXES. The Company did not incur state or federal income
taxes in fiscal 1994 or 1995 due to operating losses incurred during those
periods. In fiscal 1996, the Company's federal and state income tax liabilities
were offset by the realization of a portion of its net deferred tax assets. The
Company has recognized a benefit for its net deferred tax assets to the extent
that they are recoverable through tax refunds in the event of future net
operating losses. The Company has recorded a valuation allowance for the balance
of its net deferred tax assets as a result of significant uncertainties
regarding the realization of the assets, including the limited operating history
of the Company, a recent history of losses and the variability of operating
results.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123). In October 1995,
the Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method of
accounting for stock options and other equity instruments, and will be effective
for the Company beginning in fiscal 1997. As provided under SFAS 123, the
Company will continue to account for equity transactions under the provisions of
existing accounting rules and will disclose in the footnotes to the financial
statements the pro forma effect that adoption of SFAS 123 would have on net
income and net income per share.
FISCAL YEAR 1995 COMPARED TO FISCAL 1994
NET SALES. Net sales increased 559.4% from $2.2 million in fiscal 1994 to $14.8
million in fiscal 1995. The increase in net sales was primarily due to the
introduction of new products at the end of fiscal 1994, the growing market
acceptance of the Company's products, as well as a shift in focus during fiscal
1995 towards direct sales.
GROSS MARGIN. The Company's gross margin decreased from 51.7% in fiscal 1994 to
46.2% in fiscal 1995. This decrease was primarily attributable to a significant
increase in shipments of highly configured systems to end users through direct
sales, higher manufacturing costs associated with the establishment and growth
of manufacturing operations and the introduction of three new system products in
late fiscal 1994. In addition, in fiscal 1995, the Company significantly
increased the level of its inventories in anticipation of higher demand for its
products, and as a result it incurred higher inventory carrying costs, including
procurement costs, and increased its reserves by $300,000 for excess and
obsolete inventory.
SALES AND MARKETING. Sales and marketing expenses were $6.3 million and $1.5
million in fiscal 1995 and 1994, respectively. For fiscal 1995 and fiscal 1994,
such expenses represented 42.5% and 67.4% of net sales, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization and increased commission expenses
related to higher sales volumes.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.6 million
and $780,000 in fiscal 1995 and 1994, respectively. For fiscal 1995 and 1994,
such expenses represented 17.6% and 34.8% of net sales, respectively. The
increase in absolute dollars from fiscal 1994 to fiscal 1995 was primarily due
to increases in headcount and prototype expenses associated with the development
of the Company's NetApp F330 product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.9
million and $823,000 in fiscal 1995 and 1994, respectively. For fiscal 1995 and
1994, such expenses represented 19.3% and 36.7% of net sales, respectively. The
increase from fiscal 1994 to fiscal 1995 was primarily the result of increased
staffing, severance costs (including settlement costs of approximately $400,000
related to the termination in April 1995 of Michael Malcolm, a former executive
officer) and other legal and settlement costs of approximately $500,000, an
increase to the provision for bad debts of $210,000, and to a lesser extent,
facilities expansion and related occupancy costs, and information system
investments necessary to manage and support the Company's growth.
8
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1996, the Company's liquidity primarily consisted of cash and
cash equivalents of $24.6 million and short-term investments of $3.0 million.
The Company generated cash from operating activities totaling $3.5 million in
fiscal 1996 and used cash for operating activities totaling $5.8 million in
fiscal 1995. The use of cash in fiscal 1995 was primarily attributable to
significant operating losses and increased levels of accounts receivable and
inventories. Net cash provided by operating activities in fiscal 1996
principally related to net income of $6.6 million, offset by increases in
accounts receivable, inventory and prepaid expenses, and a decrease in accounts
payable. The increase in prepaid expenses related primarily to the Company's
realization of $2.1 million of its net deferred tax assets.
The Company used approximately $1.5 million and $4.3 million of cash during
fiscal 1995 and 1996, respectively, to purchase property and equipment. In
addition, the Company used approximately $3.0 million in fiscal 1996 to purchase
short-term investments. Financing activities provided $6.7 million and $26.6
million during fiscal 1995 and 1996, respectively, due primarily to the sale of
preferred stock in fiscal 1995 and the initial public offering of the Company's
common stock in November 1995, which generated proceeds of $25.7 million.
The Company currently has no significant capital commitments other than
commitments under operating and capital leases. The Company believes that its
existing liquidity and capital resources are sufficient to fund its operations
for at least the next twelve months.
This Annual Report to shareholders contains forward-looking statements about
future results which are subject to risks and uncertainties. Network Appliance's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, the level of competition; the size and timing of
significant orders; product configuration and mix; market acceptance of new
products and product enhancements; new product announcements or introductions by
the Company or its competitors; deferrals of customer orders in anticipation of
new products or product enhancements; changes in pricing by the Company or its
competitors; the ability of the Company to develop, introduce and market new
products and product enhancements on a timely basis; hardware component costs;
supply constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the network file server market; the mix of
sales among the Company's sales channels; levels of expenditure on research and
development; changes in Company strategy; personnel changes; general economic
trends and other factors. Although the Company has not experienced seasonality
in the past, because of the significant seasonal effects experienced within the
industry and the Company's goal to expand international sales, there can be no
assurance that the Company's future operating results will not be adversely
affected by seasonality. The Company is subject to a variety of other additional
risk factors, more fully described in the Company's Annual Report on Form 10-K.
Shareholders are strongly encouraged to review the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
9
12
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. (formerly Network Appliance Corporation) and its subsidiaries as
of April 30, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended April 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statement referred to above
present fairly, in all material respects, the financial position of Network
Appliance, Inc. and its subsidiaries as of April 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
May 10, 1996
10
13
CONSOLIDATED BALANCE SHEETS
April 30,
--------------------
(In thousands, except share amounts) 1996 1995
- - - ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 24,637 $ 1,791
Short-term investments 2,982 --
Accounts receivable, net of allowances of $330 and $220 5,330 3,170
Inventories 4,825 3,644
Prepaid expenses and other 2,628 136
-------- --------
Total current assets 40,402 8,741
Property and Equipment, net 4,849 1,822
Other Assets 198 65
-------- --------
$ 45,449 $ 10,628
-------- --------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term obligations $ 19 $ 27
Accounts payable 2,099 3,514
Income taxes payable 500 --
Accrued compensation and related benefits 2,015 950
Other accrued liabilities 1,110 472
Deferred revenue 378 8
-------- --------
Total current liabilities 6,121 4,971
-------- --------
Long-Term Obligations, net of current portion 31 45
-------- --------
Deferred Rent 268 181
-------- --------
Commitments and Contingencies (Notes 5 and 10)
Redeemable Convertible Preferred Stock, no par value:
Series B shares outstanding: none in 1996 and 3,800,000 in 1995 -- 4,799
Series C shares outstanding: none in 1996 and 2,349,461 in 1995 -- 6,555
-------- --------
-- 11,354
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, no par value; 20,000,000 shares authorized; Series
A shares outstanding:
none in 1996 and 1,186,922 in 1995 -- 1,340
Common stock, no par value; 40,000,000 shares
authorized; shares outstanding: 16,140,083 in 1996 and
5,066,146 in 1995 40,286 211
Deferred stock compensation (383) --
Accumulated deficit (874) (7,474)
-------- --------
Total shareholders' equity (deficit) 39,029 (5,923)
-------- --------
$ 45,449 $ 10,628
-------- --------
- - - ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
11 NETWORK APPLIANCE, INC.
14
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended April 30,
----------------------------------------
(In thousands, except per share amounts) 1996 1995 1994
- - - ---------------------------------------------------------------------------------------------------
NET SALES $ 46,632 $ 14,796 $ 2,244
Cost of Sales 20,557 7,957 1,083
-------- -------- --------
Gross margin 26,075 6,839 1,161
-------- -------- --------
OPERATING EXPENSES
Sales and marketing 12,735 6,284 1,513
Research and development 4,762 2,608 780
General and administrative 2,578 2,860 823
-------- -------- --------
Total operating expenses 20,075 11,752 3,116
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 6,000 (4,913) (1,955)
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 668 157 84
Interest and other expense (68) (8) (3)
-------- -------- --------
Total other income (expense) 600 149 81
-------- -------- --------
NET INCOME (Loss) $ 6,600 $ (4,764) $ (1,874)
-------- -------- --------
NET INCOME (Loss) per Share $ .42 $ (.38)
-------- --------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 15,820 12,590
-------- --------
- - - ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NETWORK APPLIANCE, INC. 12
15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
SERIES A
CONVERTIBLE DEFERRED
PREFERRED STOCK COMMON STOCK STOCK ACCUMULATED
----------------------- ------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
- - - ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, APRIL 30, 1993 1,186,922 $ 1,340 4,039,500 $ 41 $ -- $ (836) $ 545
Sale of common stock -- -- 50,000 5 -- -- 5
Net loss -- -- -- -- -- (1,874) (1,874)
--------- ----------- ---------- ----------- ------- ----------- -----------
BALANCES, APRIL 30, 1994 1,186,922 1,340 4,089,500 46 -- (2,710) (1,324)
Sale of common stock -- -- 375,635 59 -- -- 59
Exercise of stock options -- -- 843,589 108 -- -- 108
Repurchase of common stock -- -- (242,578) (2) -- -- (2)
Net loss -- -- -- -- -- (4,764) (4,764)
--------- ----------- ---------- ----------- ------- ----------- -----------
BALANCES, APRIL 30, 1995 1,186,922 1,340 5,066,146 211 -- (7,474) (5,923)
Exercise of stock options -- -- 1,437,328 274 -- -- 274
Exercise of warrants -- -- 359,690 708 -- -- 708
Issuance of common stock in
connection with the Company's
initial public offering, net -- -- 2,155,000 25,714 -- -- 25,714
Repurchase of common stock -- -- (214,464) (68) -- -- (68)
Conversion of Series A preferred
stock into common stock (1,186,922) (1,340) 1,186,922 1,340 -- -- --
Conversion of Series B and C
preferred stock into common stock -- -- 6,149,461 11,354 -- -- 11,354
Deferred stock compensation -- -- -- 515 (515) -- --
Amortization of deferred
stock compensation -- -- -- -- 132 -- 132
Income tax benefit from employee
stock transactions -- -- -- 238 -- -- 238
Net income -- -- -- -- -- 6,600 6,600
--------- ----------- --------- ----------- ------- ----------- -----------
BALANCES, APRIL 30, 1996 -- $ -- 16,140,083 $ 40,286 $ (383) $ (874) $ 39,029
--------- ----------- ---------- ----------- ------- ----------- -----------
- - - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
13 NETWORK APPLIANCE, INC.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 30,
------------------------------------
(In thousands) 1996 1995 1994
- - - ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 6,600 $ (4,764) $ (1,874)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,254 389 79
Amortization of deferred stock compensation 132 -- --
Provision for doubtful accounts 110 210 10
Deferred income taxes (2,100) -- --
Deferred rent 87 125 56
Changes in assets and liabilities:
Accounts receivable (2,270) (2,860) (530)
Inventories (1,181) (3,214) (372)
Prepaid expenses and other (525) (154) (43)
Accounts payable (1,415) 3,119 330
Accrued compensation and related benefits 1,065 869 79
Income taxes payable 500 -- --
Other accrued liabilities 876 424 48
Deferred revenue 370 8 --
-------- -------- --------
Net cash provided by (used in) operating activities 3,503 (5,848) (2,217)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,281) (1,504) (625)
Purchases of short-term investments (2,982) -- --
-------- -------- --------
Net cash used in investing activities (7,263) (1,504) (625)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,250 -- --
Repayments of long-term obligations (1,272) (3) --
Proceeds from issuance of convertible notes payable -- -- 500
Proceeds from sale of common stock, net 26,628 165 5
Proceeds from sale of preferred stock, net -- 6,555 4,299
-------- -------- --------
Net cash provided by financing activities 26,606 6,717 4,804
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,846 (635) 1,962
CASH AND CASH EQUIVALENTS
Beginning of year 1,791 2,426 464
-------- -------- --------
End of year $ 24,637 $ 1,791 $ 2,426
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 60 $ 8 $ 3
Income taxes paid $ 1,362 $ -- $ --
NONCASH INVESTING AND FINANCING ACTIVITIES
Deferred stock compensation $ 515 $ -- $ --
Conversion of preferred stock into common stock $ 12,694 $ -- $ --
Income tax benefit from employee stock transactions $ 238 $ -- $ --
Equipment acquired under capital lease $ -- $ 75 $ --
Conversion of convertible notes and accrued interest into
preferred stock $ -- $ -- $ 500
- - - ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NETWORK APPLIANCE, INC. 14
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Network Appliance, Inc., incorporated in the state of California on April
22, 1992, and its subsidiaries (the Company) operates in a single industry
segment and is involved in the design, manufacturing, marketing and support of
network data storage appliances. Effective October 3, 1995, the Company changed
its name from Network Appliance Corporation to Network Appliance, Inc.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation. Beginning in fiscal 1996, the Company's fiscal year
ends on the Friday nearest to April 30, which in fiscal 1996 was April 26. For
presentation purposes, the Company reflects April 30 as the fiscal year end for
all periods presented in the accompanying financial statements.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
investments with original maturities of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS. The Company's short-term investments consist of
certificates of deposit and commercial paper with original maturities of more
than three months and less than one year. All of the Company's investments are
classified as available-for-sale, and are stated at amortized cost (specific
identification basis), which approximates fair market value. There were no
realized gains and losses in fiscal 1996.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost and is
depreciated on a straight-line basis over estimated useful lives which range
from three to five years. Equipment under capital lease is stated at the present
value of the future minimum lease payments at the inception of the lease. Such
equipment and leasehold improvements are amortized over their estimated useful
lives or the term of the lease, whichever is shorter.
REVENUE RECOGNITION. The Company recognizes revenue and records estimated
product return and warranty reserves upon shipment if no material obligations
remain outstanding and the collectibility of receivables is deemed to be
probable. Service revenues are recognized over the term of the related
contractual period, and were not significant in any periods presented. Software
revenues consist primarily of subscriptions for software updates, and are
recognized over the term of the related contractual period. Software revenues
were not significant in any of the periods presented. The Company extends
limited product return and price protection rights to certain distributors and
resellers. Such rights are generally limited to a certain percentage of sales
over a three-month period. Historically, actual amounts of product returns and
price protection have not been significant.
SOFTWARE DEVELOPMENT COSTS. The Company capitalizes eligible computer software
development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occurs upon the completion of
a working model. In fiscal 1996, 1995 and 1994, costs which were eligible for
capitalization were insignificant, and thus, the Company has charged all
software development costs to research and development expense in the
accompanying consolidated statements of operations.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's foreign
subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are translated at average exchange rates in effect during the
period. Transaction and translation gains and losses, which are included in
other income (expense) in the accompanying consolidated statements of
operations, have not been significant.
INCOME TAXES. Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS
109) for all periods presented. This statement requires an asset and liability
approach to account for income taxes and requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
15 NETWORK APPLIANCE, INC.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
allowance for doubtful accounts receivable, inventory reserves, certain
accruals, valuation allowances for deferred tax assets and warranty reserves.
Actual results could differ from those estimates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivable. Cash equivalents consist primarily of money market funds and are
held with two financial institutions. The Company sells its products primarily
to large organizations in different industries and geographies. Credit risk is
further mitigated by the Company's credit evaluation process and limited payment
terms. The Company does not require collateral or other security to support
accounts receivable. While the Company maintains an allowance for potential
credit losses, such losses have not been significant.
The Company is subject to certain risks as more fully described in its Form
S-1 Registration Statement, including without limitation risks relating to
history of operating losses, fluctuating operating results, dependence on new
products, rapid technological change, the Whipsaw litigation, dependence on
growth in the network file server market, expansion of international operations,
product concentration, changing product mix, competition, recent management
additions, management of expanding operations, dependence on high quality
components, dependence on proprietary technology, intellectual property rights,
dependence on key personnel, volatility of stock price, shares eligible for
future sale, concentration of stock ownership, effect of certain anti-takeover
provisions and dilution.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares include preferred stock (using the
"if converted" method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is anti-dilutive except that, pursuant to the Securities and Exchange
Commission's Staff Accounting Bulletins and staff policy, such computations
include all common and common equivalent shares issued within the 12 months
preceding the initial filing date of the Company's Form S-1 Registration
Statement (October 6, 1995) as if they were outstanding for all periods
presented. In addition, all outstanding preferred stock that converted in
connection with the initial public offering is included in the computation as
common equivalent shares even when the effect is anti-dilutive. Historical net
income (loss) per share information prior to fiscal 1995 has not been presented
since such amounts are not deemed meaningful due to the significant change in
the Company's capital structure that occurred in connection with its initial
public offering.
Supplementary net income (loss) per share data giving effect to the use of
a portion of the proceeds from the initial public offering for the retirement of
debt has not been presented as such amounts do not differ materially from
amounts presented.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123). In October 1995,
the Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method of
accounting for stock options and other equity instruments, such as stock
purchase plans. Under this method, compensation cost is measured based on the
fair market value of the stock award when granted and is recognized as an
expense over the related service period, which is usually the vesting period.
This standard will be effective for the Company beginning in fiscal 1997, and
requires measurement of awards made beginning in fiscal 1996.
As provided under SFAS 123, the Company will continue to account for equity
transactions under the provisions of existing accounting rules. The Company will
disclose in the footnotes to the financial statements the pro forma effect that
adoption of SFAS 123 would have on net income and net income per share.
NOTE 3. INVENTORIES
NETWORK APPLIANCE, INC. 16
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories consist of the following:
April 30,
(in thousands) 1996 1995
- - - --------------------------------------------------------------------------------
Purchased components $2,161 $3,205
Work in process 970 --
Finished goods 1,694 439
------ ------
$4,825 $3,644
------ ------
- - - --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
April 30,
(in thousands) 1996 1995
- - - --------------------------------------------------------------------------------
Computers, related equipment and purchased software $ 5,691 $ 2,036
Furniture and fixtures 397 175
Leasehold improvements 494 90
------- -------
6,582 2,301
Accumulated depreciation and amortization (1,733) (479)
$ 4,849 $ 1,822
------- -------
- - - --------------------------------------------------------------------------------
NOTE 5. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS
Certain equipment is leased under capital lease agreements. As of April 30,
1996 and 1995, the net book value of equipment under capital lease was $43,000
and $63,000 (net of accumulated amortization of $17,000 and $12,000),
respectively.
The Company leases its facilities under operating leases. The Company is
responsible for certain maintenance costs, taxes and insurance under the leases.
Future minimum annual lease payments as of April 30, 1996 are as follows:
YEARS ENDING APRIL 30,
(IN THOUSANDS) OPERATING CAPITAL
- - - --------------------------------------------------------------------------------
1997 $ 635 $ 25
1998 593 25
1999 612 10
2000 260 --
Total lease payments $ 2,100 60
------- --------
Amounts representing interest at 15% to 16% (10)
-------
50
--------
Current portion (19)
Long-term portion $ 31
--------
- - - --------------------------------------------------------------------------------
Rent expense was approximately $755,000, $566,000 and $110,000 for the
years ended April 30, 1996, 1995 and 1994, respectively. Rent expense under the
Company's primary facility lease is recognized on a straight-line basis over the
term of the lease. The difference between the amounts paid and the amounts
expensed is classified as deferred rent in the accompanying consolidated balance
sheets.
17 NETWORK APPLIANCE, INC.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PREFERRED STOCK AND COMMON STOCK
INITIAL PUBLIC OFFERING. In November 1995, the Company completed its initial
public offering of 2,155,000 shares of its common stock. Net proceeds from the
offering were approximately $25.7 million. In conjunction with the offering, all
outstanding shares of preferred stock automatically converted into common stock.
In addition, the Company issued 181,119 shares of common stock upon the exercise
of Series A warrants, and 178,571 shares of common stock upon the exercise of
Series C warrants. The Company received total proceeds of approximately $708,000
from the exercise of these warrants.
STOCK OPTION PLANS. The Company adopted the 1993 Stock Option/Stock Issuance
Plan (the 1993 Plan) in April 1993. In September 1995, the Board of Directors
and shareholders adopted the 1995 Stock Incentive Plan (the "1995 Plan"). The
1995 Plan replaced the 1993 Plan, and provides for the grant of options and the
issuance of common stock under terms substantially the same as those provided
under the 1993 Plan. Accordingly, all options and shares issued under the 1993
Plan were incorporated into the 1995 Plan upon the effectiveness of the
Company's initial public offering. No further options will be granted under the
1993 Plan.
Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of the Company's common
stock. The exercise price for an incentive stock option and a nonqualified stock
option cannot be less than 100% and 85%, respectively, of the fair market value
of the Company's common stock as determined by the Board of Directors on the
date of grant. Options granted under the 1995 Plan are immediately exercisable,
subject to a right of repurchase in favor of the Company for all unvested
shares. Options granted under the 1995 Plan generally vest, and the Company's
rights to repurchase shares sold pursuant to the 1995 Plan lapse, at a rate of
25% on the first anniversary of the vesting commencement date and then ratably
over the following 36 months. Options expire as determined by the Board of
Directors, but not more than ten years after the date of grant.
A summary of the combined activity under the 1993 and 1995 Plans is as
follows:
SHARES OUTSTANDING OPTIONS
AVAILABLE NUMBER
FOR GRANT OF SHARES PRICE PER SHARE
- - - ---------------------------------------------------------------------------------
Balances, April 30, 1993 898,000 102,000 $ .10
Options granted (457,000) 457,000 .10 .13
Options canceled 10,000 (10,000) .10
---------- ----------
Balances, April 30, 1994 451,000 549,000 .10 - .13
Shares reserved for plan 1,400,000
Options granted (1,832,500) 1,832,500 .13 - .20
Options exercised (843,589) .10 - .20
Options canceled 149,428 (149,428) .10 - .20
---------- ----------
Balances, April 30, 1995 167,928 1,388,483 .10 - .20
Shares reserved for plan 3,250,000
Options granted (1,793,190) 1,793,190 .28 - 27.00
Options exercised (1,437,328) .10 - 3.00
Options canceled 147,721 (147,721) .10 - 11.00
---------- ----------
Balances, April 30, 1996 1,772,459 1,596,624 $ .10 - $ 27.00
---------- ----------
- - - ---------------------------------------------------------------------------------
As of April 30, 1996, options for the purchase of approximately 98,000
shares of common stock were vested and approximately 1,383,000 of unvested
common shares issued under the 1995 Plan are subject to repurchase by the
Company. The Company has reserved a total of 3,369,083 shares of common stock
for issuance under the 1995 plan.
NETWORK APPLIANCE, INC. 18
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK PURCHASE PLAN. The Company's Employee Stock Purchase Plan ("The
Purchase Plan") was adopted by the Company's Board of Directors and shareholders
in September 1995. The Purchase Plan enables eligible employees to purchase
common stock at 85% of the lower of the fair market value of the Company's
common stock on the first day or last day of each semiannual purchase date. A
total of 350,000 shares of common stock have been reserved for sale under the
Purchase Plan, none of which have been issued as of April 30, 1996.
DEFERRED STOCK COMPENSATION. In May 1995, the Company issued stock options for
the purchase of 531,500 shares of common stock at $.28 per share. The Company
recognized $515,000 of deferred compensation in May 1995 equal to the difference
between the option price as determined by the Board of Directors and $1.25 (the
deemed fair value for financial reporting purposes) for each option. The Company
is amortizing the deferred compensation expense ratably over the four-year
period in which the options vest.
NOTE 7. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan. Employees
meeting the eligibility requirements, as defined, may contribute specified
percentages of their salaries. The Company has not contributed to the 401(K)
plan to date.
NOTE 8. INCOME TAXES
The Company generated losses for financial reporting and tax purposes in
fiscal 1995 and 1994, and accordingly did not record a provision for income
taxes in these periods. In fiscal 1996, the provision for income taxes consisted
of the following:
(in thousands)
- - - --------------------------------------------------------------------------------
CURRENT
Federal $ 1,880
State 220
-------
Total current 2,100
-------
DEFERRED (PREPAID)
Federal (1,880)
State (220)
-------
Total deferred (prepaid) (2,100)
-------
Provision for income taxes $ --
=======
- - - --------------------------------------------------------------------------------
Deferred (prepaid) income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes, as well as net
operating loss and credit carryforwards.
The provision for income taxes in fiscal 1996 differs from the amount
computed by applying the statutory federal income tax rate as follows:
(in thousands)
- - - --------------------------------------------------------------------------------
Statutory tax $ 2,310
State income taxes, net of Federal benefit 405
Research and development credit (50)
Investment tax credit (150)
Change in valuation allowance (2,510)
Other (5)
-------
Provision for income taxes $ --
=======
- - - --------------------------------------------------------------------------------
19 NETWORK APPLIANCE, INC.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the Company's net deferred tax asset are as follows:
APRIL 30,
----------------------
(IN THOUSANDS) 1996 1995
- - - --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Capitalized research and development costs $ 696 $ 1,635
Reserves not currently deductible for tax purposes 1,828 689
Net operating loss carryforwards 141 663
Research and development credits -- 270
Other 108 (74)
------- -------
2,773 3,183
Valuation allowance (673) (3,183)
------- -------
Net deferred tax asset $ 2,100 $ --
======= =======
The Company has recorded a valuation allowance based upon management's
assessment under the guidelines of SFAS 109 that it is more likely than not that
a portion of the deferred tax assets will not be realized due to certain
factors, including the limited operating history of the Company, a recent
history of losses and the variability of operating results.
As of April 30, 1996, the Company had federal net operating loss
carryforwards of approximately $400,000 available to offset future taxable
income. These carryforwards expire in 2010.
NOTE 9. SIGNIFICANT CUSTOMERS AND INTERNATIONAL SALES
No customer accounted for 10% or more of net sales in fiscal 1996. One
customer accounted for 10% and 20% of net sales in fiscal 1995 and 1994,
respectively. In fiscal 1995, another customer accounted for 10% of net sales. A
third customer accounted for 10% of net sales in fiscal 1994.
International sales, substantially all of which were export sales to Asia
and Europe, accounted for approximately 20%, 16% and 36% of net sales in fiscal
1996, 1995, and 1994, respectively.
NOTE 10. LITIGATION
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"). A trial date of August 5, 1996 has been set for this lawsuit. The
Company believes it has meritorious defenses to the claims under this lawsuit
and intends to defend this litigation vigorously. Although the ultimate outcome
of this matter is not presently determinable, after consideration of the nature
of the claims and facts relating to the litigation and after consultation with
legal counsel, management believes that the resolution of this matter will not
have a material adverse effect on the Company's operating results and financial
condition. However, litigation of this nature is inherently uncertain and there
can be no assurance that the outcome of this matter will not have a material
adverse effect on the Company's operating results and financial condition.
NETWORK APPLIANCE, INC. 20
23
CORPORATE DIRECTORY
DIRECTORS CORPORATE OFFICERS
Donald Valentine (Chairman) Daniel Warmenhoven
Founder, Sequoia Capital President and Chief Executive Officer
Carol Bartz Helen Bradley
Chairman, President, and CEO Vice President, Engineering
Autodesk, Inc.
Christabel Carlton
Michael Hallman Vice President, Human Resources
President, The Hallman Group
James Lau
Kurt Jaggers Chief Technical Officer
Principal, TA Associates
Michael McCloskey
Robert Wall Vice President Operations,
Chairman, President and CEO Chief Financial Officer and Secretary
Theatrix Interactive, Inc.
Thomas Mendoza
Daniel Warmenhoven Vice President, North American Sales
President and Chief Executive Officer
Network Appliance, Inc. Michael Paul
Vice President, International Sales
Charles Simmons
Vice President, Marketing
- - - --------------------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR STOCK PRICES AND
DIVIDEND POLICY
The Harris Trust Company of California
The Company's common stock is traded
INDEPENDENT AUDITORS on the Nasdaq Stock Market under the
symbol "NTAP". As of May 31, 1996,
Deloitte & Touche LLP there were approximately 260
San Jose, California shareholders of record of the
Company's common stock.
SEC FORM 10-K
The following table sets forth for the
If you would like a copy of our periods indicated the range of high
Annual Report on SEC Form 10-K, and low sales prices for the Company's
you mauy obtain it without charge. common stock.
Please direct your request to:
Quarter High Low
Network Appliance, Inc.
319 North Bernardo Avenue Q3 1996 $ 41.12 $13.50
Mountain View, CA 94043 Q4 1996 $ 38.75 $27.00
The Company has never paid cash
dividends on its capital stock. The
Company currently anticipates that it
will retain all available funds for
use in its business and does not
anticipate paying any cash
dividends.
24
[LOGO]
NETWORK APPLIANCE, INC.
- - - -----------------------
Network Appliance, Inc.
319 North Bernardo Avenue
Mountain View, CA 94043
Phone: 415.428.5100
Fax: 415.428.5151
http://www.netapp.com
Specifications are subject to change
without notice. (C) Copyright 1996
Network Appliance, Inc.
The Network Appliance logo, NetApp
F220, NetApp F330, and NetApp F540 are
trademarks of Network Appliance, Inc.
FAServer 450 and FAServer 1400 are
registered trademarks of Network
Appliance, Inc.
All other brands or products are
trademarks or registered trademarks of
their respective holders and should be
treated as such.
CORP-AR96
5
0001002047
N/A
1
U.S. DOLLAR
YEAR
APR-26-1996
MAY-01-1995
APR-26-1996
1
24,637
2,982
5,330
330
4,825
4,402
6,582
(1,733)
45,449
6,121
0
0
0
39,903
0
45,449
46,632
46,632
20,557
20,557
20,075
110
(600)
6,600
0
6,600
0
0
0
6,600
.42
0
