================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 26, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0307520
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
495 EAST JAVA DRIVE,
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 822-6000
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 [ ]
Number of shares outstanding of the registrant's common stock, $.001 par
value, as of the latest practicable date.
OUTSTANDING AT
CLASS OCTOBER 26, 2001
----- ----------------
Common Stock........................ 331,130,974
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TABLE OF CONTENTS
PAGE NO.
--------
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of October 26, 2001 and April 30, 2001 2
Condensed Consolidated Statements of Operations for the three and six-month periods
ended October 26, 2001 and October 27, 2000 3
Condensed Consolidated Statements of Cash Flows for the six-month periods ended
October 26, 2001 and October 27, 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to Vote of Securityholders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURE 30
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 26, APRIL 30,
2001 2001
----------- -----------
(UNAUDITED) **
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 177,760 $ 271,931
Short-term investments 155,505 92,094
Accounts receivable, net 172,329 186,956
Inventories 22,069 22,504
Prepaid expenses and other 22,831 25,745
Deferred income taxes 37,649 36,287
----------- -----------
Total current assets 588,143 635,517
RESTRICTED CASH 262,791 193,747
PROPERTY AND EQUIPMENT, NET 101,032 103,238
INTANGIBLE ASSETS, NET 69,058 79,510
OTHER ASSETS 14,752 24,240
----------- -----------
$ 1,035,776 $ 1,036,252
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 48,577 $ 64,892
Income taxes payable 10,771 21,844
Accrued compensation and related benefits 40,797 50,523
Other accrued liabilities 39,816 23,198
Deferred revenue 60,105 58,316
----------- -----------
Total current liabilities 200,066 218,773
LONG-TERM DEFERRED REVENUE 20,392 12,882
LONG-TERM OBLIGATIONS 366 149
----------- -----------
Total liabilities 220,824 231,804
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 633,996 616,595
Deferred stock compensation (8,607) (12,044)
Retained earnings 192,908 204,632
Cumulative other comprehensive loss (3,345) (4,735)
----------- -----------
Total stockholders' equity 814,952 804,448
----------- -----------
$ 1,035,776 $ 1,036,252
=========== ===========
** Derived from audited consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
2
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET SALES $ 194,715 $260,777 $ 395,141 $491,936
COST OF SALES 80,984 99,314 169,061 188,771
--------- -------- --------- --------
Gross Margin 113,731 161,463 226,080 303,165
--------- -------- --------- --------
OPERATING EXPENSES:
Sales and marketing 70,922 72,236 142,564 136,054
Research and development 28,354 28,217 57,437 51,840
General and administrative 10,552 10,150 20,814 19,029
Amortization of intangible assets 5,226 1,273 10,452 1,939
In-process research and development -- -- -- 26,688
Stock compensation (1) 1,923 443 4,622 872
Restructuring charges 7,980 -- 7,980 --
--------- -------- --------- --------
Total operating expenses 124,957 112,319 243,869 236,422
--------- -------- --------- --------
INCOME (LOSS) FROM OPERATIONS (11,226) 49,144 (17,789) 66,743
--------- -------- --------- --------
OTHER INCOME (EXPENSE), NET:
Interest income and other, net 4,735 5,511 10,229 9,891
Impairment loss on investments (13,008) -- (13,008) --
--------- -------- --------- --------
Total other income (expense), net (8,273) 5,511 (2,779) 9,891
--------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES (19,499) 54,655 (20,568) 76,634
PROVISION (BENEFIT) FOR INCOME TAXES (8,288) 19,295 (8,844) 36,298
--------- -------- --------- --------
NET INCOME (LOSS) $ (11,211) $ 35,360 $ (11,724) $ 40,336
========= ======== ========= ========
NET INCOME (LOSS) PER SHARE:
Basic $ (0.03) $ 0.11 $ (0.04) $ 0.13
========= ======== ========= ========
Diluted $ (0.03) $ 0.10 $ (0.04) $ 0.11
========= ======== ========= ========
SHARES USED IN PER SHARE CALCULATIONS:
Basic 330,440 318,223 329,888 315,891
========= ======== ========= ========
Diluted 330,440 364,035 329,888 361,906
========= ======== ========= ========
(1) Stock compensation:
Sales and marketing $ 230 $ 209 $ 543 $ 449
Research and development 1,563 140 3,806 222
General and administrative 130 94 273 201
--------- -------- --------- --------
$ 1,923 $ 443 $ 4,622 $ 872
========= ======== ========= ========
See accompanying notes to condensed consolidated financial statements.
3
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------------
OCTOBER 26, 2001 OCTOBER 27, 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,724) $ 40,336
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 21,884 12,594
In-process research and development -- 26,688
Amortization of intangible assets 10,452 1,939
Stock compensation 4,622 872
Impairment loss on investments 13,008 --
Provision for doubtful accounts 3,701 813
Deferred income taxes 901 (6,356)
Deferred rent (54) (2)
Changes in assets and liabilities, net of effects of businesses acquired:
Accounts receivable 10,906 (53,968)
Inventories (1,949) (10,735)
Prepaid expenses and other assets 685 2,696
Accounts payable (16,315) 24,431
Income taxes payable (11,073) 44,960
Accrued compensation and related benefits (9,726) 24,577
Other accrued liabilities 16,889 16,269
Deferred revenue 9,299 22,574
--------- ---------
Net cash provided by operating activities 41,506 147,688
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (185,909) (125,894)
Redemptions of short-term investments 121,525 70,829
Purchases of property and equipment (17,665) (39,386)
Purchase of equity securities (800) (1,000)
Purchase of businesses, net of cash acquired -- (2,161)
--------- ---------
Net cash used in investing activities (82,849) (97,612)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 16,216 39,891
Increase in restricted cash (69,044) (63,150)
--------- ---------
Net cash used in financing activities (52,828) (23,259)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (94,171) 26,817
CASH AND CASH EQUIVALENTS:
Beginning of period 271,931 279,014
--------- ---------
End of period $ 177,760 $ 305,831
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Income tax benefit from employee stock transactions $ -- $ 41,000
Conversion of evaluation inventory to fixed assets 2,225 7,066
Common stock issued and options assumed for acquired businesses -- 47,579
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid 62 54
See accompanying notes to condensed consolidated financial statements.
4
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Network Appliance, Inc. without audit and reflect all adjustments,
which are, in the opinion of management, necessary for a fair presentation of
our financial position, results of operations and cash flows for the interim
periods presented. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission ("SEC") for interim
financial statements. Accordingly, they do not include all information and
footnotes required by accounting principles generally accepted in the United
States of America for annual financial statements.
These financial statements should be read in conjunction with the
audited consolidated financial statements and accompanying notes included in our
Annual Report on Form 10-K for the year ended April 27, 2001. The results of
operations for the three and six-month periods ended October 26, 2001 are not
necessarily indicative of the operating results to be expected for the full
fiscal year or future operating periods.
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior-period balances, none
of which affected our financial position, results of operations and cash flows,
to present the consolidated financial statements on a consistent basis.
3. SIGNIFICANT ACCOUNTING POLICIES
Foreign Currency Translation - In the first quarter of fiscal 2002, we
determined that the functional currency of one of our subsidiaries had changed
from the Euro to the US Dollar. Accordingly, all monetary assets and liabilities
were translated at the current exchange rate in effect as of the balance sheet
date, nonmonetary assets and liabilities were translated at historical rates and
net sales and expenses were translated at average exchange rates in effect
during the period. Transaction gains and losses, which are included in other
income (expense) in the accompanying consolidated statements of operations, were
not significant in any of the periods presented.
4. INVENTORIES
Inventories consist of the following:
OCTOBER 26, APRIL 30,
2001 2001
----------- ---------
Purchased components $ 7,440 $11,106
Work in process 297 560
Finished goods 14,332 10,838
------- -------
$22,069 $22,504
======= =======
5
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
5. STOCK COMPENSATION
We record stock compensation in accordance with provisions of Accounting
Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees," for
employee awards and Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," for non-employee awards.
Accordingly, we recognize the intrinsic value for employees and the fair value
for non-employees as stock compensation expense over the vesting terms of the
awards. During the first and second quarters of fiscal 2002, under terms of the
acquisition agreement with Orca Systems, Inc. ("Orca"), we issued an additional
66 and 66 shares, respectively, of common stock to former Orca shareholders upon
meeting certain performance criteria. The fair market values of the shares of
$1,434 and $1,006, respectively, were measured on the date the performance
criteria were met and were recognized as stock compensation during the first and
second quarters of fiscal 2002.
6. DERIVATIVE INSTRUMENTS
Effective May 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. SFAS No. 133 requires
that all derivatives be recognized as either assets or liabilities at fair
value. Derivatives that are not designated as hedges are adjusted to fair value
through earnings. If the derivative is designated as a hedge, depending on the
nature of the exposure being hedged, changes in fair value will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of the hedge
is recognized in earnings immediately.
As a result of our significant international operations, we are subject
to risks associated with fluctuating exchange rates. We use foreign currency
forward contracts, to attempt to minimize the impact of exchange rate movements
on our balance sheet relating to certain foreign currency assets and
liabilities. Gains and losses on these undesignated derivatives offset gains and
losses on the assets and liabilities being hedged and the net amount is included
in earnings. For the first quarter of fiscal 2002, net losses generated by
hedged assets and liabilities totaled $246, which were offset by gains on the
related derivative instruments of $265. For the second quarter of fiscal 2002,
net gains generated by hedged assets and liabilities totaled $1,142, which were
offset by losses on the related derivative instruments of $1,585. We do not
enter into derivative financial instruments for speculative or trading purposes.
Currently, we do not enter into any foreign exchange forward contracts
to hedge exposures related to forecasted transactions, firm commitments or
equity investments. The adoption of SFAS No. 133 did not have a significant
impact on our financial position, results of operations or cash flow.
6
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
7. EARNINGS PER SHARE
Basic and diluted net income (loss) per share are computed using
weighted-average common shares outstanding in accordance with SFAS No. 128,
"Earnings Per Share." Diluted net income per share also includes the dilutive
effect of stock options.
During the three and six-month periods ended October 26, 2001, we had
options outstanding which could potentially dilute basic earnings per share in
the future, but were excluded in the computation of diluted earnings per share
in such periods, as their effect would have been antidilutive due to the net
loss reported in such periods, or the options' exercise prices were above the
average market prices. At October 26, 2001 and October 27, 2000, 74,186 and
1,377 shares of common stock options with a weighted average exercise price of
$20.77 and $118.52, respectively, were excluded from the diluted net income
(loss) per share computation.
The following is a reconciliation of the numerators and denominators of
the basic and diluted net income (loss) per share computations for the periods
presented:
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET INCOME (LOSS) (NUMERATOR):
Net income (loss), basic and diluted $ (11,211) $ 35,360 $ (11,724) $ 40,336
========= ========= ========= =========
SHARES (DENOMINATOR):
Weighted average common shares outstanding 330,576 318,520 330,063 316,136
Weighted average common shares outstanding
subject to repurchase (136) (297) (175) (245)
--------- --------- --------- ---------
Shares used in basic computation 330,440 318,223 329,888 315,891
Weighted average common shares outstanding
subject to repurchase -- 297 -- 245
Common shares issuable upon exercise of stock
options -- 45,515 -- 45,770
--------- --------- --------- ---------
Shares used in diluted computation 330,440 364,035 329,888 361,906
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic $ (0.03) $ 0.11 $ (0.04) $ 0.13
========= ========= ========= =========
Diluted $ (0.03) $ 0.10 $ (0.04) $ 0.11
========= ========= ========= =========
7
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
8. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, were as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income (loss) $(11,211) $ 35,360 $(11,724) $ 40,336
Foreign currency translation adjustment 84 (1,556) (179) (1,392)
Unrealized gain (loss) on investments 2,285 (6,674) 1,569 4,793
-------- -------- -------- --------
Comprehensive income (loss) $ (8,842) $ 27,130 $(10,334) $ 43,737
======== ======== ======== ========
9. COMMITMENTS
We have commitments related to operating lease arrangements for our
headquarter site in Sunnyvale, California, under which we have options to
purchase various properties at the expiration or termination of the leases for
$309,000, or arrange for the sale of the property to third parties for at least
$309,000 with a contingent liability for any deficiency. If the property is not
purchased or sold as described above, we will be obligated for additional lease
payments of approximately $276,566.
Restricted cash, classified as non-current assets collateralizing these
leases, was $250,709 at October 26, 2001. The lease payments under operating
leases collateralized by restricted cash, will vary based on London Interbank
Offered Rate (LIBOR) plus a spread (2.7% at October 26, 2001). The operating
leases mentioned above require us to maintain specified financial covenants with
which we were in compliance as of October 26, 2001.
We also entered into agreements and established Network Appliance
accounts with Deutsche Banc Alex Brown whereby we guarantee any defaults by two
corporate officers, of certain margin loans made to them by these financial
institutions on their Network Appliance stock. The amount of the guarantee is
limited to the difference between the amount of such loans and fair market value
of the Network Appliance stock securing the loans. As of October 26, 2001, the
ending balance in these accounts was approximately $12,082 in order to
collaterize the margin requirement and as of that date the amount Network
Appliance would owe, that was not covered by the value of the stock, was $0. The
balance under these accounts mentioned above was classified as restricted cash.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 141, all business combinations initiated
after June 30, 2001 must be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually for impairment (or more frequently if
indicators of impairment arise). Separable intangible assets that are not deemed
to have indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and
8
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS
No. 142 effective April 27, 2002. Upon adoption of SFAS No. 142, we will stop
the amortization of goodwill with a net carrying value of approximately $48,912
at April 26, 2002 and the annual amortization of $14,575 that resulted from
business combinations initiated prior to the adoption. We will evaluate goodwill
under the SFAS No. 142 transitional impairment test. Any transitional impairment
loss will be recognized as a change in accounting principle on the date of
adoption. If any impairment of goodwill is recognized, under existing
pronouncement rules, prior to the date of adoption, the loss will be charged to
operating expenses.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to Be Disposed Of." Adoption of SFAS No. 144 is
required for our fiscal year beginning April 27, 2002. We are currently
evaluating the potential impact of adoption of SFAS No. 144 on our financial
position and results of operations and have not yet determined the impact of
adopting this statement.
11. RESTRUCTURING CHARGES
In August 2001, we implemented a restructuring plan, which included a
reduction in workforce by approximately 200 employees and a consolidation of
facilities. The action was required to properly align and manage the business
commensurate with our current revenue levels. All functional areas of the
Company were affected by the reduction. We completed our actions during the
second quarter of fiscal 2002. As a result of this restructuring, we incurred a
charge of $7,980. The restructuring charge included $4,796 of severance-related
amounts, $2,656 of committed excess facilities and facility closure expenses,
and $528 in fixed assets write off.
The following analysis sets forth the significant components of the
restructuring reserve at October 26, 2001:
Severance- Fixed Assets
related amounts write-off Facility Total
--------------- ------------ -------- -------
Restructuring charge $ 4,796 $ 528 $ 2,656 $ 7,980
Cash payments (4,128) -- (81) (4,209)
Non-cash portion -- (528) -- (528)
------- ----- ------- -------
Reserve balance at October 26, 2001 $ 668 $ -- $ 2,575 $ 3,243
======= ===== ======= =======
Of the reserve balance at October 26, 2001, $2,972 was included in other
accrued liabilities and the remaining $271 classified as long-term obligations.
We expect to utilize the restructuring reserve over the next four years.
9
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
12. IMPAIRMENT LOSS ON INVESTMENTS
We perform periodic reviews of our investments for impairment. Our
investments in publicly held companies are generally considered impaired when a
decline in the fair value of an investment as measured by quoted market prices
is less than its carrying value and such a decline is not considered temporary.
Our investments in privately held companies are considered impaired when a
review of the investees operations and other indicators of impairment indicate
that the carrying value of the investment is not likely to be recoverable. Such
indicators include, but are not limited to, limited capital resources, limited
prospects of receiving additional financing, and prospects for liquidity of the
related securities. In the second quarter of fiscal 2002, we recorded a non
cash, other-than-temporary write down of $13,008 related to impairments of our
investments in publicly traded and private companies. There were no realized
gains or losses on equity investments in the three or six-month periods of
fiscal 2001.
13. CONTINGENCIES
We are subject to various legal proceedings and claims which arise in
the normal course of business. We do not believe that any current litigation or
claims will have a material adverse effect on the Company's business, operating
results or financial condition.
14. EQUITY
Network Appliance was incorporated in California in April 1992, and
reincorporated in Delaware in November 2001. We have established our common
stock at $.001 par value.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements may contain words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," or other words indicating future results.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those reflected in the
forward-looking statement. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the following
sections entitled "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." This discussion should be read
in conjunction with our Annual Report on Form 10-K for the year ended April 27,
2001. We undertake no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
OVERVIEW
Based in Sunnyvale, California, Network Appliance was incorporated in
California in April 1992, and reincorporated in Delaware in November 2001. We
pioneered the concept of the "network appliance" for storage, an extension of
the industry trend toward dedicated, specialized products that perform a single
function. Our storage and content delivery platforms (filers and NetCache(R)
appliances) are coupled with content distribution and reporting software. This
Center-to-Edge(TM) solution offers seamless data management from the back-end
data center to the edge of the network quickly, simply, and reliably. The
Network Appliance product portfolio utilizes our innovative data access
software, known as the Data ONTAP(TM) operating system, as well as
standards-compliant hardware. It also offers multiprotocol support and
integration for UNIX(R) and Windows(R) environments.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data as a percentage of net sales for the periods indicated:
11
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 41.6 38.1 42.8 38.4
----- ----- ----- -----
Gross margin 58.4 61.9 57.2 61.6
----- ----- ----- -----
Operating expenses:
Sales and marketing 36.4 27.7 36.1 27.7
Research and development 14.6 10.8 14.5 10.5
General and administrative 5.4 3.9 5.3 3.9
Amortization of intangible assets 2.7 0.4 2.6 0.4
In-process research and development -- -- -- 5.4
Stock compensation 1.0 0.2 1.2 0.1
Restructuring charges 4.1 -- 2.0 --
----- ----- ----- -----
Total operating expenses 64.2 43.0 61.7 48.0
----- ----- ----- -----
Income (loss) from operations (5.8) 18.9 (4.5) 13.6
Total other income (expense), net (4.2) 2.1 (0.7) 2.0
----- ----- ----- -----
Income (loss) before income taxes (10.0) 21.0 (5.2) 15.6
Provision (benefit) for income taxes (4.2) 7.4 (2.2) 7.4
----- ----- ----- -----
Net income (loss) (5.8)% 13.6% (3.0)% 8.2%
===== ===== ===== =====
Net Sales -- Net sales decreased by 25.3% to $194.7 million for the
three-month period ended October 26, 2001, from $260.8 million for the
three-month period ended October 27, 2000. Net sales decreased by 19.7% to
$395.1 million for the six-month period ended October 26, 2001, from $491.9
million for the six-month period ended October 27, 2000. The decline in net
sales was due to a decrease in sales to Internet-based companies and weak
capital spending among technology companies across all geographies, but
primarily in North America. This decrease in net sales was specifically
attributable to a lower volume of units and software licenses shipped, as
compared to the corresponding period of the prior fiscal year.
Factors negatively impacting net sales include:
- - reduced demand for our products resulting from deteriorating macro economic
conditions;
- - continued weakness in technology spending from Internet- and
technology-related customers;
- - decreased sales through indirect channels, including sales through our OEM
partners, representing 16.0% and 17.5% of total net sales for the three and
six-month periods ended October 26, 2001, respectively, as compared to 25.7%
and 26.1% of total net sales for three and six-month periods ended October
27, 2000;
- - declining average selling price of the F700 filers and older caching
products; and
- - declining unit sales of our older products.
Net sales were favorably impacted by the following factors:
- - competitive advantage relating to pricing and technology;
- - a higher average selling price of our new products: our first multiprocessor
high-end F880, higher capacity F840, mid-range F820 and entry-level F85
filer products as well as new NetCache appliances and software features;
- - Center-to-Edge data fabric solutions that bundle filers with caching and
content delivery software providing for enterprise storage infrastructure
and disaster recovery capability;
- - increased revenue and units shipped from our new content delivery solutions,
including new NetCache platforms C6100, C3100, C1105 and C1100 and new
NetCache software;
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- - competitive pricing advantage offered by the Total Cost of Ownership (TCO)
proposition in four aspects: lower acquisition cost, reduced administrative
overhead, minimized service cost and reduced downtime of critical business
applications;
- - data management and content delivery software offering a unique set of
features to ensure mission-critical availability, while reducing the
complexity of enterprise storage management;
- - increased sales from new industry verticals: energy, telecommunications,
financial services, manufacturing, Life Sciences and the government;
- - higher software subscription and service revenues to support a growing
installed base;
- - increased add-on software revenue from Multi-Protocol solutions; and
- - expansion of our sales organization to 921 as of October 26, 2001 from 806
as of October 27, 2000.
International net sales (including United States exports) decreased by
10.2% and 2.3% for the three and six-month periods ended October 26, 2001 as
compared to the same periods ended October 27, 2000, respectively. International
net sales were $75.8 million, or 38.9% of total net sales, and $153.9 million,
or 39.0% of total net sales, for the three and six-month periods ended October
26, 2001, respectively. The decline in international sales for the three and six
month periods ended October 26, 2001 was primarily a result of a slower demand
in Europe and Asia Pacific markets offset by our increased sales and marketing
efforts internationally. We expect to continue to selectively add sales capacity
in an effort to expand domestic and international markets, introduce new
products, establish and expand new distribution channels and increase product
and company awareness. We believe our international net sales will not increase
in fiscal 2002 at the rate at which they grew in fiscal 2001.
Gross Margin -- Gross margin decreased to 58.4% for the three-month
period ended October 26, 2001 from 61.9% for the three-month period ended
October 27, 2000. Gross margin decreased to 57.2% for the six-month period ended
October 26, 2001 from 61.6% for the six-month period ended October 27, 2000.
Gross margin was negatively impacted by:
- - the decrease in product sales volume;
- - sales price reductions due to competitive pricing pressure and selective
pricing discounts;
- - lower of cost or market adjustments to inventory;
- - lower average selling price of certain add-on software options; and
- - higher disk content with an expanded storage capacity for the higher-end
filers including the F840 and F880 filers.
Gross margin was favorably impacted by:
- - lower costs of key components;
- - higher average selling prices for our new products;
- - cost control and reduction efforts, including the restructuring impact;
- - increased licensing of new NetCache software, including
ContentReporter(TM)and ContentDirector(TM); and
- - growth in software subscriptions due primarily to a larger installed base.
The overall gross margin decline during the six-month periods ended
October 26, 2001 compared to October 27, 2000 was generally attributed to the
same factors cited above for the second quarters of fiscal 2002 and 2001. In
addition, gross margin was also negatively impacted by increased investments in
customer service and positively impacted by a one week facility shutdown for the
six-month period ended October 26, 2001 compared to the same period a year ago.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and certain customer
service and support costs. Sales and marketing expenses decreased 1.8% to $70.9
million for the three-month period ended October 26, 2001 from $72.2 million for
the three-month periods ended October 27, 2000. These expenses were 36.4% and
27.7% of net
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sales for the three-month periods ended October 26, 2001 and October 27, 2000,
respectively. The decrease in absolute dollars was attributed to various cost
control and reduction measures, restructuring impact, lower commission expenses
and other profit-dependent payroll related expenses, partially offset by the
continued worldwide investment in our sales and customer service organizations.
Sales and marketing expenses increased 4.8% to $142.6 million for the
six-month period ended October 26, 2001 from $136.1 million for the six-month
period ended October 27, 2000. These expenses were 36.1% and 27.7% of net sales
for the six-month periods ended October 26, 2001 and October 27, 2000,
respectively. The increase in absolute dollars was primarily related to the
continued worldwide investment in our sales and customer service organizations,
partially offset by various cost control and reduction measures, restructuring
impact, lower commission expenses and other profit-dependent payroll related
expenses. Sales and marketing headcount increased to 1,217 at October 26, 2001
from 1,052 at October 27, 2000. We expect to continue to selectively add sales
capacity in an effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels and increase
product and company awareness. We do not expect to increase our sales and
marketing expenses materially in fiscal 2002.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses, non-recurring
engineering charges and fees paid to outside consultants. Research and
development expenses increased 0.5% to $28.4 million for the three-month period
ended October 26, 2001 from $28.2 million for the three-month period ended
October 27, 2000. These expenses represented 14.6% and 10.8% of net sales for
the three-month periods ended October 26, 2001 and October 27, 2000,
respectively. Research and development expenses increased 10.8% to $57.4 million
for the six-month period ended October 26, 2001 from $51.8 million for the
six-month period ended October 27, 2000. These expenses represented 14.5% and
10.5% of net sales for the six-month periods ended October 26, 2001 and October
27, 2000, respectively. Research and development expenses increased in absolute
dollars, primarily as a result of increased headcount, the operating impact of
the Orca and WebManage acquisitions, ongoing support of current and future
product development and enhancement efforts, prototyping expenses and
non-recurring engineering charges associated with the development of new
products and technologies, partially offset by cost control, reduction in
discretionary spending efforts, restructuring impact and lower profit-related
payroll and related costs. Research and development headcount increased to 541
at October 26, 2001 from 444 at October 27, 2000.
During the first quarter of fiscal 2002, we continued our enterprise
focus by introducing new Center-to-Edge solutions for global Information
Technology (IT) infrastructures, offering greater data availability and enhanced
disaster recovery:
- - NetApp(R) DataFabric(TM) Manager, a software package for global enterprise
and content delivery network deployments allowing IT staff to monitor and
configure multiple storage and content delivery appliances throughout a
network;
- - new Fibre Channel Fabric Tape Storage Area Network (SAN) Backup solutions,
along with leading data protection companies, underscoring our open storage
networking approach to data management;
- - DiskShelf14, a new 14-slot Fibre Channel disk drive shelf that holds up to
one terabyte of data. Customers will benefit from the increased data storage
and performance densities, which help to lower their overall cost of
storage;
- - SnapManager 1.1 for Microsoft(R) Exchange 5.5 environments, a new version of
the industry-leading online backup and rapid data recovery solution.
SnapManager 1.1 simplifies data management by providing near instantaneous
on-line backup and recovery, faster response times, and enhanced Windows(R)
2000 support;
- - SecureShare(R) Quota Manager 2.0, a graphical user interface tool to
centrally manage and control hard and soft quotas on thousands of Microsoft
Windows NT(R)/2000 versions working with many NetApp filers. The solution is
based on the Microsoft Management Console standard interface, and allows for
a single point of control across multiple filers.
14
During the second quarter of fiscal 2002, we outlined our global data
fabric strategy and launched new storage solutions for evolving data centers. We
began shipping the new F880 series filers, our first multiprocessor systems that
extend the high end of our Center-to-Edge solution. We also began shipping five
new software upgrades:
- SnapManager(R)for Microsoft(R)Exchange 2000, our first block access
product for Windows 2000 environments;
- New software releases designed to ease the deployment and management
of global data fabrics, including NetCache 5.2(R), which delivers
improved security and manageability in Windows 2000 environments and
Data Fabric(TM) Manager 1.1 software that allows customers to view
and centrally manage hundreds of terabytes of networked storage;
- ContentDirector(TM) 2.0 and ContentReporter(TM) 3.0, content
distribution management software that automates and simplifies the
movement and management of streaming media, Web pages, and rich
content files from centralized storage locations to access points
around the world.
We believe that our future performance will depend in large part on our
ability to maintain and enhance our current product line, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. We intend to continuously expand
our existing product offerings and introduce new products and expect that such
expenditures will continue to increase moderately in absolute dollars. For the
three and six-month periods ended October 26, 2001 and October 27, 2000, no
software development costs were capitalized.
General and Administrative -- General and administrative expenses
increased 4.0% to $10.6 million for the three-month period ended October 26,
2001, from $10.2 million for the three-month period ended October 27, 2000.
These expenses represented 5.4% and 3.9% of net sales for the three-month
periods ended October 26, 2001 and October 27, 2000, respectively. General and
administrative expenses increased 9.4% to $20.8 million for the six-month period
ended October 26, 2001, from $19.0 million for the six-month period ended
October 27, 2000. These expenses represented 5.3% and 3.9% of net sales for the
six-month periods ended October 26, 2001 and October 27, 2000, respectively.
Increases in absolute dollars were primarily due to increased headcount,
expenses associated with initiatives to enhance enterprise-wide management
information systems and an increase in the allowance for bad debts, partially
offset by cost control, reduction in discretionary spending efforts,
restructuring impact and lower profit-dependent personnel and other expenses.
General and administrative headcount increased to 269 at October 26, 2001 from
204 at October 27, 2000. We believe that our general and administrative expenses
will not increase significantly in absolute dollars in fiscal 2002.
Amortization of Intangible Assets -- Amortization of intangible assets
represents the amortization on acquired intangible assets and the excess of the
aggregate purchase price over the fair value of the tangible and identifiable
intangible assets acquired by us. Intangible assets as of October 26, 2001,
including goodwill, existing workforce and technology, are being amortized over
estimated useful lives of three to five years. We assess the recoverability of
intangible assets by determining whether the amortized asset over its useful
life may be recovered through estimated useful cash flows. Amortization of
intangible assets charged to operations increased due to a full quarter impact
of acquisitions occurring in fiscal 2002 and was $5.2 million and $1.3 million,
respectively, in the second quarter of fiscal 2002 and 2001. Amortization of
intangible assets charged to operations was $10.5 million and $1.9 million,
respectively, for the six-month periods ended October 26, 2001 and October 27,
2000.
In-process Research and Development -- We incurred in-process research
and development charges of approximately $26.7 million in the first quarter of
fiscal 2001 related to the acquisition of Orca. The purchase price of the
transaction was allocated to the acquired assets and liabilities based on their
estimated fair values as of the date of the acquisition. Approximately $26.7
million was allocated to in-process research and development and charged to
operations, because the acquired technology had not reached technological
feasibility and had no alternative uses. The value was determined by estimating
the costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present value.
15
The discount rate included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur. Excluding the charge that may result from the
remaining 132,249 contingently issuable common shares, research and development
costs to bring the products from Orca to technological feasibility are not
expected to have a material impact on our future results of operations or
financial condition. Costs incurred prior to establishment of technological
feasibility are charged to research and development expense and have not been
material through October 26, 2001.
The Orca acquisition has been successfully utilized for the design and
development of the Direct Access File System (DAFS) protocol. By eliminating
much of the traditional operating system overhead, DAFS allows for improved I/O
performance while using fewer CPU cycles. The protocol leverages next generation
networking technologies that provide remote memory transfer capabilities (RDMA)
found in VI and Infiniband. This protocol has good industry support and is now
under consideration as an industry standard. We expect to deliver DAFS capable
product in early calendar 2002. However, there is risk associated with the
completion of the in-process project and there can be no assurance that such
project will meet with either technological or commercial success. Failure to
successfully develop and commercialize this in-process project would result in
the loss of the expected economic return inherent in the fair value allocation.
Additionally, the value of other intangible assets acquired may become impaired.
The risks associated with the research and development are still considered high
and no assurance can be made that upcoming products will meet market
expectations or gain market acceptance.
Stock Compensation -- We account for stock-based employee compensation
arrangements in accordance with provisions of APB No. 25, "Accounting for Stock
Issued to Employees," and comply with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," for non-employee compensation awards.
Accordingly, we recognize the intrinsic value for employees and the fair value
for non-employees as stock compensation expense over the vesting terms of the
awards. Stock compensation expenses were $1.9 million and $0.4 million in the
second quarter of fiscal 2002 and 2001, respectively. This increase was
primarily attributable to the recognition of stock compensation on options
assumed in the WebManage acquisition and the issuance of 66,124 contingently
issuable milestones shares relating to Orca valued at $1.0 million. For the
six-month periods, stock compensation expenses increased to $4.6 million in
fiscal 2002 from $0.9 million in fiscal 2001, respectively for those periods.
This increase was primarily attributable to the recognition of stock
compensation on options assumed in the WebManage acquisition and the issuance of
132,248 contingently issuable milestones shares relating to Orca valued at $2.4
million.
Restructuring charges -- In August 2001, we implemented a restructuring
plan, which included a reduction in workforce of approximately 200 employees and
a consolidation of facilities. The action was required to properly align and
manage the business commensurate with our current revenue levels. All functional
areas of the Company were affected by the reduction. We completed our actions
during the second quarter of fiscal 2002. As a result of this restructuring, we
incurred a charge of approximately $8.0 million. The restructuring charge
included approximately $4.8 million of severance-related amounts, $2.7 million
of committed excess facilities and facility closure costs, and $0.5 million in
fixed assets write off. As of October 26, 2001, $3.2 million of accrued
committed excess facility costs and other severance-related amounts remained
outstanding. Of this amount, approximately $2.9 million was included in other
accrued liabilities and the remaining $0.3 million classified as long-term
obligations. We expect to utilize the restructuring reserve over the next four
years. We also expect annual cost savings of approximately $26.1 million as a
result of restructuring and reduction in force actions taken in the second
quarter of fiscal 2002.
Interest income and other, net -- Interest income and other, net, was
$4.7 million and $5.5 million for the three-month periods ended October 26, 2001
and October 27, 2000, respectively. The decrease is attributable to lower
interest income primarily due to lower average interest rates, lower net
proceeds from stock option exercises partially offset by higher average
investment balances from cash, short-term investments and restricted cash
generated from operations. During the six-month period ended October 26, 2001,
interest income and other, net was $10.2 million, as compared to $9.9 million in
the corresponding period of the prior year. The slight increase in interest
income was primarily due to
16
increased cash, short-term investments and restricted cash generated from
operations, partially offset by lower average interest rates and a reduction of
net proceeds from stock exercises. We expect interest income to moderately
decline in future quarters in fiscal 2002, as existing investments mature and
proceeds are reinvested in a lower interest-rate environment.
Impairment loss on investments -- We perform periodic reviews of our
investments for impairment. Our investments in publicly held companies are
generally considered impaired when a decline in the fair value of an investment
as measured by quoted market prices is less than its carrying value and such a
decline is not considered temporary. Our investments in privately held companies
are considered impaired when a review of the investees' operations and other
indicators of impairment indicate that the carrying value of the investment is
not likely to be recoverable. Such indicators include, but are not limited to,
limited capital resources, limited prospects of receiving additional financing,
and prospects for liquidity of the related securities. In the second quarter of
fiscal 2002, we recorded a non cash, other-than-temporary write down of $13.0
million related to impairments of our investments in publicly traded and private
companies. There were no realized gains or losses on equity investments in the
three or six-month periods of fiscal 2001.
Provision (Benefit), for Income Taxes -- For the six-month period ended
October 26, 2001, we applied an annual rate of 43% benefit to pretax loss and
have recorded an adjustment in the current quarter to reflect this rate. For the
three and six-month periods ended October 27, 2000, our effective tax rate was
34.5%, which excluded the effect of the write-off of acquired in-process
research and development. Our estimate is based on existing tax laws and our
current projections of income/(loss) and distributions of income/(loss) among
different entities and tax jurisdictions, and is subject to change, based
primarily on varying levels of profitability.
LIQUIDITY AND CAPITAL RESOURCES
As of October 26, 2001, as compared to the April 30, 2001 balances, our
cash, cash equivalents and short-term investments decreased by $30.8 million to
$333.3 million. Working capital decreased by $28.7 million to $388.1 million. We
generated cash from operating activities totaling $41.5 million and $147.7
million for the six-month periods ended October 26, 2001 and October 27, 2000,
respectively. Net cash provided by operating activities for the six-month period
ended October 26, 2001 was principally related to decreases in accounts
receivable, prepaid expenses and other assets, and deferred income taxes and
increases in other accrued liabilities, deferred revenue, coupled with
depreciation, impairment loss on investments, amortization of intangibles and
stock compensation, partially offset by net loss of $11.7 million, decreases in
accounts payable, income taxes payable, accrued compensation and related
benefits and increases in inventories.
In addition to lower net income in fiscal 2002, the primary factors that
impacted the period-to-period change in cash flows relating to operating
activities included the following:
- lower accounts receivable balances due to lower sales and more
collections in the first six-month period of fiscal 2002;
- non-cash acquisition-related charges, stock compensation, impairment
loss on investments, provision for doubtful accounts and
depreciation included in net income (loss);
- increased accrued liabilities relating to the restructuring; and
- an increase in deferred sales related to service and software
subscriptions.
The above factors were partially offset by the effects of:
- decreased balances for accounts payable and deferred revenue due to
lower levels of business activity in the six-month period of fiscal
2002;
- decreased accrued compensation and related benefits due to payouts
of profit dependent personnel expenses accrued in fiscal 2001 and
paid in fiscal 2002, vacation taken during a
17
July 2001 facility shutdown and lower commission accrual as a result
of lower levels of sales; and
- decreased income taxes payable, primarily reflecting lower
profitability in fiscal 2002.
As a result of the restructuring actions implemented in the second
quarter of fiscal 2002, we believe that cash operating expenses are likely to
decline in the remainder of fiscal 2002.
Since we have curtailed capital expenditures, purchases of property and
equipment were only $17.7 million in the six-month period of fiscal 2002,
compared to $39.4 million the same period a year ago. The decrease was primarily
attributed to the slowdown in hiring and various cost control and cutting
measures. We have used $64.4 million and $55.1 million during the six-month
periods ended October 26, 2001 and October 27, 2000, respectively, for net
purchases of short-term investments. In the first quarter of fiscal 2001, we
acquired Orca for a purchase price of approximately $50.0 million, including
common stock, contingently issuable common stock, assumed options, cash payments
of $2.0 million and related transaction costs. Investing activities in the
six-month period ended October 26, 2001 also included new equity investments of
$0.8 million.
We have used $52.8 million and $23.3 million during the six-month
periods ended October 26, 2001 and October 27, 2000, respectively, from
financing activities, primarily from the increase in restricted cash (see "
Commitments" Note 9 to Notes to Condensed Consolidated Financial Statements)
partially offset by proceeds from the sale of common stock. The decrease in cash
provided by sales of common stock for the six-month period ended October 26,
2001, compared to the corresponding period of the prior fiscal year, was
primarily due to lower stock option exercise proceeds as a result of the recent
decline in our stock price.
Excluding the commitments related to operating lease arrangements for
various properties in our Sunnyvale headquarters, which aggregate $309.0
million, we currently have no significant commitments other than commitments
under operating leases. We believe that our existing liquidity and capital
resources, including the available amounts under our $5.0 million line of
credit, are sufficient to fund our operations for at least the next twelve
months. We may also investigate other financing alternatives; however, we cannot
be certain that additional financing will be available on satisfactory terms.
NEW ACCOUNTING STANDARDS
Effective May 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. SFAS No. 133 requires
that all derivatives be recognized as either assets or liabilities at fair
value. Derivatives that are not designated as hedges are adjusted to fair value
through earnings. If the derivative is designated as a hedge, depending on the
nature of the exposure being hedged, changes in fair value will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of the hedge
is recognized in earnings immediately.
As a result of our significant international operations, we are subject
to risks associated with fluctuating exchange rates. We use foreign currency
forward contracts, to attempt to minimize the impact of exchange rate movements
on our balance sheet relating to certain foreign currency assets and
liabilities. Gains and losses on these undesignated derivatives offset gains and
losses on the assets and liabilities being hedged and the net amount is included
in earnings. For the first quarter of fiscal 2002, net losses generated by
hedged assets and liabilities totaled approximately $0.2 million, which were
offset by gains on the related derivative instruments of approximately $0.3
million. For the second quarter of fiscal 2002, net gains generated by hedged
assets and liabilities totaled approximately $1.1 million, which were offset by
losses on the related derivative instruments of approximately $1.6 million. We
do not enter into derivative financial instruments for speculative or trading
purposes.
18
Currently, we do not enter into any foreign exchange forward contracts
to hedge exposures related to forecasted transactions, firm commitments or
equity investments. The adoption of SFAS No. 133 did not have a significant
impact on our financial position, results of operations or cash flow.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 141, all business combinations initiated
after June 30, 2001 must be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually for impairment (or more frequently if
indicators of impairment arise). Separable intangible assets that are not deemed
to have indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, we are required
to adopt SFAS No. 142 effective April 27, 2002. Upon adoption of SFAS No. 142,
we will stop the amortization of goodwill with a net carrying value of
approximately $48.9 million at April 26, 2002 and the annual amortization of
$14.6 million that resulted from business combinations initiated prior to the
adoption. We will evaluate goodwill under the SFAS No. 142 transitional
impairment test. Any transitional impairment loss will be recognized as a change
in accounting principle on the date of adoption. If any impairment of goodwill
is recognized, under existing accounting rules, prior to the date of adoption,
the loss will be charged to operating expenses.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to Be Disposed Of." Adoption of SFAS No. 144 is
required for our fiscal year beginning April 27, 2002. We are currently
evaluating the potential impact of adoption of SFAS No. 144 on our financial
position and results of operations and have not yet determined the impact of
adopting this statement.
RISK FACTORS
The following risk factors and other information included in this Form
10-Q should be carefully considered. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we presently deem less significant may also impair our
business operations. If any of the following risks actually occur, our business,
operating results, and financial condition could be materially adversely
affected.
FACTORS BEYOND OUR CONTROL COULD CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE.
Although we did experience significant revenue growth in periods prior
to the third quarter of fiscal 2001, this growth may not be indicative of our
future operating results. As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance. Many of the
factors that could cause our quarterly operating results to fluctuate
significantly in the future are beyond our control and include the following:
- general economic trends;
- global trends related to Information Technology spending;
- demand for storage and content delivery products;
- the level of competition in our target product markets;
- the size, timing, and cancellation of significant orders;
- product configuration and mix;
- market acceptance of new products and product enhancements;
- new product announcements or introductions by us or our competitors;
- deferrals of customer orders in anticipation of new products or product
enhancements;
- changes in pricing by us or our competitors;
19
- our ability to develop, introduce, and market new products and
enhancements in a timely manner;
- supply constraints;
- technological changes in our target product markets;
- the levels of expenditure on research and development and expansion of
our sales and marketing programs; and
- seasonality.
Current global economic and political factors, including terrorism,
could harm our business. Weak economic conditions, terrorist actions, and the
effects of ongoing military actions against terrorists could lead to significant
business interruptions. If such disruptions result in cancellations of customer
orders, a general decrease in corporate spending on information technology, or
direct impacts on our marketing, manufacturing, financial functions or our
suppliers' logistics function, our results of operations and financial condition
could be adversely affected.
In addition, sales for any future quarter may vary and accordingly be
inconsistent with our plans. We generally operate with limited order backlog
because our products are typically 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 storage market is rapidly evolving and our sales cycle
varies substantially from customer to customer.
Due to all of the foregoing factors, it is possible that in one or more
future quarters our results may fall below the expectations of public market
analysts and investors, as has been the case through the last two quarters of
fiscal 2001 and first two quarters of fiscal 2002. In such event, the trading
price of our common stock would likely decrease.
OUR GROSS MARGINS MAY VARY BASED ON THE CONFIGURATION OF OUR PRODUCTS.
We derive a significant portion of our sales from the resale of disk
drives as components of our filers, and the resale market for hard disk drives
is highly competitive and subject to intense pricing pressures. Our sales of
disk drives generate lower gross margin percentages than those of our filer
products. As a result, as we sell more highly configured systems with greater
disk drive content, overall gross margin percentages will be negatively
affected. Conversely, we believe our increased licensing of add-on software
products may favorably impact gross margins.
Our gross margins have been and may continue to be affected by a variety
of other factors, including:
- demand for storage and content delivery products;
- discount levels and price competition;
- direct versus indirect sales;
- the mix of software as a percentage of revenue;
- the mix and average selling prices of products;
- new product introductions and enhancements; and
- the cost of components, manufacturing labor, and quality.
A SIGNIFICANT PERCENTAGE OF OUR EXPENSES ARE FIXED WHICH COULD AFFECT OUR NET
INCOME.
Our expense levels are based in part on our expectations as to future
sales and a significant percentage of our expenses are fixed. As a result, if
sales levels are below expectations, as has been the case through the second
half of fiscal 2001 and the first two quarters of fiscal 2002, net income will
be disproportionately affected.
OUR FUTURE FINANCIAL PERFORMANCE DEPENDS ON GROWTH IN THE NETWORK STORAGE AND
CONTENT DELIVERY MARKET AND ANY LACK OF GROWTH WILL HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
All of our products address the storage and content delivery market.
Accordingly, our future financial performance will depend in large part on
continued growth in the storage and content delivery market and on emerging
standards in these markets. We cannot assure you that the market for storage and
content delivery will continue to grow or that emerging standards in these
markets will not adversely affect
20
the growth of UNIX, Windows NT and the World Wide Web server markets. In
addition, our business also depends on general economic and business conditions.
A reduction in demand for network storage and content delivery caused by
weakening economic conditions and decreases in corporate spending has resulted
in decreased revenues or lower revenue growth rates. The network storage and
content delivery market growth declined significantly beginning in the third
quarter of fiscal 2001, causing both our revenues and operating results to
decline. If the network storage and content delivery markets grow more slowly
than anticipated or if network storage and content delivery based on emerging
standards other than those adopted by us become increasingly accepted by the
market, our operating results could be materially adversely affected.
THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE.
The market price for our common stock has been volatile in the past, and
several factors could cause the price to fluctuate substantially in the future.
These factors include:
- fluctuations in our operating results;
- fluctuations in the valuation of companies perceived by investors to be
comparable to us;
- a shortfall in revenues or earnings compared to securities analysts'
expectations;
- changes in analysts' recommendations or projections;
- announcements of new products, applications or product enhancements by
us or our competitors; and
- changes in our relationships with our suppliers, customers and strategic
partners.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies. Additionally, certain macro economic factors such as
changes in interest rates as well as market climate for the high technology
sector could also have an impact on the trading price of our stock. As a result,
the market price of our common stock may fluctuate significantly in the future
and any broad market decline, as well as our own operating results, may
materially adversely affect the market price of our common stock.
THE SUCCESS OF OUR NETCACHE APPLIANCE PRODUCTS DEPENDS UPON MARKET ACCEPTANCE OF
CACHING TECHNOLOGY AND CONTINUED GROWTH IN THE CONTENT DELIVERY MARKET.
In late 1997, we released our NetCache appliance products, a new
category of hardware-based Internet caching appliances designed to speed and
manage the delivery of information stored on the Web. However, hardware-based
caching technology is still developing.
Our future financial performance will depend in part on the acceptance
of caching technology and the acceptance of our NetCache appliance products. We
cannot assure you that the caching appliance market will continue to grow at
previous rates or at all.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND RESPOND TO
TECHNOLOGICAL CHANGE, OR IF OUR NEW PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE,
OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
Our future growth depends upon the successful development and
introduction of new hardware and software products. Due to the complexity of
storage sub-systems and Internet caching devices, and the difficulty in gauging
the engineering effort required to produce new products, such products are
subject to significant technical risks. However, we cannot assure you that any
of our new products will achieve market acceptance. Additional product
introductions in future periods may also impact the sales of existing products.
In addition, our new products must respond to technological changes and evolving
industry standards. If we are 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, or if such products do not achieve
market acceptance, our operating results could be materially adversely affected.
WE DEPEND ON ATTRACTING AND RETAINING QUALIFIED TECHNICAL AND SALES PERSONNEL.
21
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel. Because
our future success is dependent on our ability to continue to enhance and
introduce new products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with the requisite
education, backgrounds and industry experience. Competition for qualified
engineers, particularly in Silicon Valley, is intense. The loss of the services
of a significant number of our engineers or sales people could be disruptive to
our development efforts or business relationships and could materially adversely
affect our operating results.
RISKS INHERENT IN OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS.
We conduct business internationally. International customers (including
United States exports) were approximately 38.9% and 39.0% of our net sales for
the three and six-month periods ended October 26, 2001, respectively.
Accordingly, our future operating results could be materially adversely affected
by a variety of factors, some of which are beyond our control, including
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements and government
spending patterns.
Our international sales are denominated in U.S. dollars and in foreign
currencies. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in foreign markets. For international sales and expenditures
denominated in foreign currencies, we are subject to risks associated with
currency fluctuations. We hedge risks associated with foreign currency
transactions in order to minimize the impact of changes in foreign currency
exchange rates on earnings. We utilize forward contracts to hedge trade and
intercompany receivables and payables. All hedge contracts are marked to market
through earnings every period. There can be no assurance that such hedging
strategy will be successful and that currency exchange rate fluctuations will
not have a material adverse effect on our operating results.
Additional risks inherent in our international business activities
generally include, among others, longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. Such factors could materially adversely affect our future
international sales and, consequently, our operating results.
Although operating results have not been materially adversely affected
by seasonality in the past, because of the significant seasonal effects
experienced within the industry, particularly in Europe, our future operating
results could be materially adversely affected by seasonality.
We cannot assure you that we will be able to maintain or increase
international market demand for our products. We believe our net sales will not
increase in fiscal 2002 at the rate at which they grew in fiscal 2001.
AN INCREASE IN COMPETITION COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
The storage and content delivery markets are intensely competitive and
are characterized by rapidly changing technology.
In the storage market, our filer appliances and data management software
compete primarily against storage products and data management software from EMC
Corporation, Hitachi Data Systems, Compaq Computer Corporation, Sun
Microsystems, Inc., Hewlett-Packard Company, and IBM Corporation. We also
encounter less frequent competition from companies including MTI Corp., Procom
Technology, LSI Logic Corp., and Auspex Systems, Inc.
In the content delivery market, our NetCache appliances and content
delivery software compete against caching appliance and content delivery
software vendors including Cisco Systems, Inc., CacheFlow, Inc., Inktomi Corp.,
Akamai Technologies, Inc., and Volera.
This past year has seen an increasing number of new, privately held
companies attempting to enter our markets, some of which may become significant
competitors in the future.
We believe that the principal competitive factors affecting our market
include but are not limited to:
22
- Response time and performance
- Scalability
- Data availability
- Multiprotocol data sharing
- Acquisition price and low overall total cost of ownership
- Ease-of-use and deployment
- Customer service and support
Although we believe that our products currently compete favorably with
respect to these factors, we can not assure you that we can maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical,
and other resources.
Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our operating results. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements, or
devote greater resources to the development, promotion, sale and support of
their products. 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. We cannot
assure you that we will be able to compete successfully against current or
future competitors. Competitive pressures we face could materially adversely
affect our operating results.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS AND ANY DISRUPTION OR TERMINATION OF
THESE SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
We rely on a limited number of suppliers of several key components
utilized in the assembly of our products. We purchase most of our disk drives
through a single supplier. We purchase computer boards and microprocessors from
a limited number of suppliers. Our reliance on a limited number of suppliers
involves several risks, including:
- a potential inability to obtain an adequate supply of required
components because we do not have long-term supply commitments;
- supplier capacity constraints;
- price increases;
- timely delivery; and
- component quality.
In the future, we intend to increasingly rely on contract manufacturers
to assemble our products. If our contract manufacturers' operations were
interrupted for any reason, our ability to meet scheduled product deliveries to
customers would be materially adversely affected.
Component quality is particularly significant with respect to our
supplier of disk drives. In order to meet product performance requirements, we
must obtain disk drives of extremely high quality and capacity. In addition,
there are periodic supply and demand issues for disk drives, microprocessors and
for semiconductor memory components, which could result in component shortages,
selective supply allocations and increased prices of such components. We cannot
assure you that we will be able to obtain our full requirements of such
components in the future or that prices of such components will not increase. In
addition, problems with respect to yield and quality of such components and
timeliness of deliveries could occur. Disruption or termination of the supply of
these components could delay shipments of our products and could materially
adversely affect our operating results. Such delays could also damage
relationships with current and prospective customers.
WE CANNOT ASSURE YOU THAT WE WILL NOT INCUR PROBLEMS WITH CURRENT OR FUTURE
EQUITY INVESTMENTS AND ACQUISITIONS OR THAT WE WILL REALIZE VALUE FROM SUCH
STRATEGIC RELATIONSHIPS.
23
We are continuously evaluating alliances and external investment in
technologies related to our business. We have already made relatively small
strategic investments in a number of network storage related technology
companies and acquired two companies since the beginning of fiscal 2001. Equity
investments may result in the loss of investment capital. Acquisitions of
companies or products and alliances and strategic investments entail numerous
risks, and we cannot assure you that we will be able to successfully integrate
acquired operations and products or to realize anticipated synergies, economies
of scale, or other value. In addition, we may experience a diversion of
management's attention, the loss of key employees of acquired operations or the
inability to recover strategic investments in development stage entities. Any
such problems could have a material adverse effect on our business, financial
condition and results of operation.
WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS AND ACCORDINGLY
THERE IS A RISK THAT THOSE DISTRIBUTORS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF
OTHER SUPPLIERS, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our distribution customers generally offer products of several different
companies, including products of our competitors. Accordingly, there is risk
that these distributors may give higher priority to products of other suppliers,
which could materially adversely affect our operating results.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS.
Our products may contain undetected software errors or failures when
first introduced or as new versions are released. Despite testing by us and by
current and potential customers, errors may not be found in new products until
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could materially adversely affect our operating
results.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO
INCREASED COMPETITION THAT COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions and patents to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret, copyright and patent laws, which afford
only limited protection. Other United States trademarks and some of the other
United States--registered trademarks are registered internationally as well. We
will continue to evaluate the registration of additional trademarks as
appropriate. We generally enter into confidentiality agreements with our
employees and with our resellers and customers. We currently have multiple
United States and international patent applications pending and multiple United
States patents issued. The pending applications may not be approved and if
patents are issued, such patents may be challenged. If such challenges are
brought, the patents may be invalidated. We cannot assure you that we will
develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not materially
adversely affect our ability to do business.
Litigation may be necessary to protect our proprietary technology. Any
such litigation may be time-consuming and costly. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard 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. We cannot assure you
that our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology, duplicate our
products or design around patents issued to us or other intellectual property
rights of ours.
We are subject to intellectual property infringement claims. We may,
from time to time receive claims that we are infringing third parties'
intellectual property rights. Third parties may in the future claim infringement
by us with respect to current or future products, patents, trademarks or other
proprietary rights. We expect that companies in the appliance market will
increasingly be subject to infringement claims as the number of products and
competitors in our 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 us to
redesign our products or require us to enter
24
into royalty or licensing agreements, any of which could materially adversely
affect our operating results. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to us or at all.
PROTECTIVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MATERIALLY
ADVERSELY AFFECT STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the 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 materially 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 our outstanding voting stock.
WE RELY ON A CONTINUOUS POWER SUPPLY AND ANY POWER SHORTAGE COULD INTERRUPT OUR
MANUFACTURING OPERATIONS AND COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING
RESULTS.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below certain
critical levels, California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts. We currently have limited
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our
customers/suppliers may suffer as a result of any interruption in our power
supply. If blackouts interrupt our power supply or our suppliers' power supply,
we could be temporarily unable to continue operations at our California
facilities. Any such interruption in our ability to continue operations at our
facilities or our suppliers' facilities to manufacture products could damage our
reputation, harm our ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could materially
adversely affect our operating results.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in interest rates,
market prices and foreign currency exchange rates. We use certain derivative
financial instruments to manage these risks. We do not use derivative financial
instruments for speculative or trading purposes. All financial instruments are
used in accordance with Board-approved policies.
Market Interest and Interest Income Risk
Interest and Investment Income - As of October 26, 2001, we had
short-term investments of $155.5 million. Our investment portfolio primarily
consists of highly liquid investments with original maturities at the date of
purchase between three and twelve months and investment in marketable equity
securities in certain technology companies. These highly liquid investments,
consisting primarily of government and corporate debt securities, are subject to
interest rate and interest income risk and will decrease in value if market
interest rates increase. A hypothetical 10 percent increase in market interest
rates from levels at October 26, 2001, would cause the fair value of these
short-term investments to decline by an immaterial amount. Because we have the
ability to hold these investments until maturity we would not expect any
significant decline in value of our investments caused by market interest rate
changes. Declines in interest rates over time will, however, reduce our interest
income. We do not use derivative financial instruments in our investment
portfolio.
Operating Lease Commitments - As of October 26, 2001, we have
outstanding lease commitments to a third-party entity under operating lease
agreements, which vary based on a monthly LIBOR rate plus a spread. A
hypothetical 10 percent increase in interest rates would increase our annual
rent expense under operating lease commitments by approximately $0.8 million.
Increases in interest rates could, however, increase our rent expenses
associated with future lease payments. We do not currently hedge against
interest rate increases. Our investment portfolio offers a natural hedge against
interest rate risk from our operating lease commitments in the event of a
significant increase in the market interest rate. Moreover, a total of $250.7
million in operating leases are collateralized with investments that have
similar, and thus offsetting, interest rate characteristics.
Market Price Risk
Equity Securities - We are also exposed to market price risk on our
equity securities included in our short-term investments. These investments are
in publicly traded companies in the volatile high-technology industry sector. We
do not attempt to reduce or eliminate our market exposure on these securities
and as a result, the amount of income and cash flow that we ultimately realize
from these investments in future periods may vary materially from the current
unrealized amount. A 50% adverse change in the equity price would result in an
approximate $1.0 million decrease in the fair value of our equity securities as
of October 26, 2001.
The hypothetical changes and assumptions discussed above will be
different from what actually occurs in the future. Furthermore, such
computations do not anticipate actions that may be taken by management, should
the hypothetical market changes actually occur over time. As a result, the
effect on actual earnings in the future will differ from those described above.
Foreign Currency Exchange Rate Risk
We hedge risks associated with foreign currency transactions in order to
minimize the impact of changes in foreign currency exchange rates on earnings.
We utilize forward contracts to hedge against the short-term impact of foreign
currency fluctuations on certain assets and liabilities denominated in foreign
currencies. All hedge instruments are marked to market through earnings every
period. We believe that these forward contracts do not subject us to undue risk
due to foreign exchange movements because gains and losses on these contracts
are offset by losses and gains on the underlying assets and liabilities.
26
All contracts have a maturity of less than one year and we do not defer
any gains and losses, as they are all accounted for through earnings every
period.
The following table provides information about our foreign exchange
forward contracts outstanding on October 26, 2001, (in thousands):
BUY/ FOREIGN CONTRACT VALUE FAIR VALUE
CURRENCY SELL CURRENCY AMOUNT USD IN USD
- ------------------------------------------------------------------------------
AUD Sell 4,976 $ 2,483 $ 2,488
CHF Sell 2,224 $ 1,349 $ 1,349
EUR Sell 51,266 $45,499 $45,561
GBP Sell 9,649 $13,838 $13,860
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 18, 2001, we held our 2001 Annual Meeting of Stockholders. On the
record date, 330,366,171 shares of our Common Stock were outstanding and
entitled to be voted. Tabulated proxies at the meeting represented 297,473,504
shares, or 90.0% of the total eligible. Voting results are summarized below:
Proposal I - To elect the following individuals to serve as members of the
Board of the Directors for the ensuing year or until their respective successors
are duly elected and qualified:
NAME VOTES FOR WITHHELD
--------------------------------------------------------------------
Daniel J. Warmenhoven 282,192,775 15,278,629
Donald T. Valentine 294,926,187 2,545,217
Sanjiv Ahuja 294,932,648 2,538,756
Carol A. Bartz 294,941,998 2,529,406
Michael R. Hallman 294,951,914 2,519,490
Sachio Semmoto 294,939,934 2,531,470
Robert T. Wall 294,943,456 2,527,948
Proposal II - To approve a series of amendments to the Company's 1999
Stock Option Plan (the "1999 Plan") which will increase the share reserve under
the plan by an additional 13,400,000 shares of Common Stock and effect certain
changes to the automatic option grant program in effect for the non-employee
members of the Board of Directors.
VOTES FOR AGAINST WITHHELD
----------------------------------------------------
218,310,199 77,689,224 1,419,983
Proposal III - To approve an amendment to the Company's Employee Stock
Purchase Plan (the "the ESPP") which will increase the share reserve under the
plan by an additional 3,000,000 shares of Common Stock and extend the term of
the ESPP to the last business day of May 2011.
VOTES FOR AGAINST WITHHELD
----------------------------------------------------
285,940,309 10,149,868 1,327,129
28
Proposal IV - To approve the Company's reincorporation under the laws of
the state of Delaware.
VOTES FOR AGAINST WITHHELD
----------------------------------------------------
188,143,555 7,429,199 1,225,255
Proposal V - To ratify the appointment of Deloitte and Touche LLP as
independent accountants of the Company for the fiscal year ending April 26,
2002.
VOTES FOR AGAINST WITHHELD
----------------------------------------------------
295,730,023 655,667 1,085,714
Proposal VI - To transact such other business as may properly come
before the meeting or any adjournment thereof.
VOTES FOR AGAINST WITHHELD
-----------------------------------------------------
209,620,491 50,321,829 37,529,084
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
29
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NETWORK APPLIANCE INC.
(Registrant)
/s/ JEFFRY R. ALLEN
----------------------------------------
Jeffry R. Allen
Executive Vice President Finance and
Operations, and Chief Financial Officer
Date: December 7, 2001
30