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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 24, 1997
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
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NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION IRS EMPLOYER IDENTIFICATION
OR ORGANIZATION)
2770 SAN TOMAS EXPRESSWAY, SANTA CLARA, 95051
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 367-3000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of the issuer's class of common
stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OCTOBER 24, 1997
- --------------------------------------------------------------------------------------------
Common Stock 16,603,188
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TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of October 24, 1997 and April 30,
1997..................................................................... 3
Condensed Consolidated Statements of Income for the three and six-month
periods ended October 24, 1997 and October 25, 1996...................... 4-5
Condensed Consolidated Statements of Cash Flows for the six-month periods
ended October 24, 1997 and October 25, 1996.............................. 6
Notes to Condensed Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 12
Item 2. Changes in Securities...................................................... 12
Item 3. Defaults Upon Senior Securities............................................ 13
Item 4. Submission of Matters to a Vote of Securityholders......................... 13
Item 5. Other Information.......................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................... 13
SIGNATURE............................................................................. 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 24, 1997 APRIL 30, 1997
---------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 28,520 $ 21,520
Short-term investments........................................ 5,250 6,916
Accounts receivable, net...................................... 23,113 13,911
Inventories................................................... 11,718 9,920
Prepaid expenses and other.................................... 1,621 1,253
Deferred taxes................................................ 3,139 3,100
------- -------
Total current assets.................................. 73,361 56,620
------- -------
PROPERTY AND EQUIPMENT, NET..................................... 10,231 9,238
OTHER ASSETS.................................................... 3,006 3,083
------- -------
$ 86,598 $ 68,941
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 5,424 $ 4,415
Income taxes payable.......................................... 3,491 1,023
Accrued compensation and related benefits..................... 5,164 4,666
Other accrued liabilities..................................... 2,924 2,280
Deferred revenue.............................................. 3,476 2,317
------- -------
Total current liabilities............................. 20,479 14,701
------- -------
LONG-TERM OBLIGATIONS........................................... 180 211
SHAREHOLDERS' EQUITY:
Common stock.................................................. 57,457 54,653
Retained earnings (Accumulated deficit)....................... 8,482 (624)
------- -------
Total shareholders' equity............................ 65,939 54,029
------- -------
$ 86,598 $ 68,941
======= =======
See accompanying notes to condensed consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------------
OCTOBER 24, 1997 OCTOBER 25, 1996
---------------- ----------------
NET SALES..................................................... $ 38,401 $ 21,048
COST OF SALES................................................. 15,746 8,582
------- -------
Gross margin................................................ 22,655 12,466
------- -------
OPERATING EXPENSES:
Sales and marketing......................................... 9,672 5,538
Research and development.................................... 3,903 1,980
General and administrative.................................. 1,493 932
------- -------
Total operating expenses............................ 15,068 8,450
------- -------
INCOME FROM OPERATIONS........................................ 7,587 4,016
OTHER INCOME, NET............................................. 229 261
------- -------
INCOME BEFORE INCOME TAXES.................................... 7,816 4,277
PROVISION FOR INCOME TAXES.................................... 2,931 1,497
------- -------
NET INCOME.................................................... $ 4,885 $ 2,780
======= =======
NET INCOME PER SHARE.......................................... $ 0.27 $ 0.16
======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES.......... 18,038 17,403
======= =======
PRO FORMA NET INCOME PER SHARE (NOTE 7)....................... $ 0.14 $ 0.08
======= =======
PRO FORMA WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
(NOTE 7).................................................... 36,076 34,806
======= =======
See accompanying notes to condensed consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------------
OCTOBER 24, 1997 OCTOBER 25, 1996
---------------- ----------------
NET SALES..................................................... $ 71,821 $ 39,508
COST OF SALES................................................. 29,316 16,176
------- -------
Gross margin................................................ 42,505 23,332
------- -------
OPERATING EXPENSES:
Sales and marketing......................................... 18,165 10,206
Research and development.................................... 7,318 3,703
General and administrative.................................. 2,849 2,152
Litigation settlement....................................... -- 4,300
------- -------
Total operating expenses............................ 28,332 20,361
------- -------
INCOME FROM OPERATIONS........................................ 14,173 2,971
OTHER INCOME, NET............................................. 397 552
------- -------
INCOME BEFORE INCOME TAXES.................................... 14,570 3,523
PROVISION FOR INCOME TAXES.................................... 5,464 1,233
======= =======
NET INCOME.................................................... $ 9,106 $ 2,290
======= =======
NET INCOME PER SHARE.......................................... $ 0.51 $ 0.13
======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES.......... 17,837 17,353
======= =======
PRO FORMA NET INCOME PER SHARE (NOTE 7)....................... $ 0.26 $ 0.07
======= =======
PRO FORMA WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
(NOTE 7).................................................... 35,674 34,706
======= =======
See accompanying notes to condensed consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------------
OCTOBER 24, 1997 OCTOBER 25, 1996
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 9,106 $ 2,290
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 2,426 1,274
Provision for doubtful accounts.......................... 91 --
Deferred income taxes.................................... (39) --
Deferred rent............................................ (21) (36)
Changes in assets and liabilities:
Accounts receivable.................................... (9,293) (5,536)
Inventories............................................ (1,798) (3,493)
Prepaid expenses and other............................. (433) (398)
Accounts payable....................................... 1,009 2,303
Income taxes payable................................... 2,468 --
Accrued compensation and related benefits.............. 498 328
Other accrued liabilities.............................. 644 356
Deferred revenue....................................... 1,159 1,115
------- --------
Net cash provided by (used in) operating
activities........................................ 5,817 (1,797)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments......................... (5,250) (10,851)
Redemptions of short-term investments....................... 6,916 4,983
Purchases of property and equipment......................... (3,262) (2,214)
------- --------
Net cash used in investing activities............... (1,596) (8,082)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations......................... (10) (7)
Proceeds from sale of common stock, net..................... 2,789 493
------- --------
Net cash provided by financing activities........... 2,779 486
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 7,000 (9,393)
CASH AND CASH EQUIVALENTS:
Beginning of period......................................... 21,520 24,637
------- --------
End of period............................................... $ 28,520 $ 15,244
======= ========
See accompanying notes to condensed consolidated financial statements.
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NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Network Appliance, Inc. (the Company) without audit and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position and the results of operations of the
Company for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles. The results of operations for the
three and six-month periods ended October 24, 1997 are not necessarily
indicative of the operating results to be expected for the full fiscal year or
future operating periods. The information included in this report should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended April 30, 1997 and the risk factors as set
forth in the Company's Annual Report on Form 10-K, including, without
limitation, risks relating to history of operating losses, fluctuating operating
results, dependence on new products, rapid technological change, dependence on
growth in the network file server market, expansion of international operations,
product concentration, changing product mix, competition, recent management
additions, management of expanding operations, dependence on high-quality
components, dependence on proprietary technology, intellectual property rights,
dependence on key personnel, volatility of stock price, shares eligible for
future sale and the effect of certain anti-takeover provisions. Any party
interested in reviewing these publicly available documents should contact the
SEC or the Chief Financial Officer of the Company.
2. INVENTORIES
Inventories consist of the following (in thousands):
OCTOBER 24, 1997 APRIL 30, 1997
---------------- --------------
Purchased components......................... $ 5,785 $6,775
Work in process.............................. 1,747 1,524
Finished goods............................... 4,186 1,621
------- ------
$ 11,718 $9,920
======= ======
3. COMMON STOCK
On September 25, 1997, the Company's shareholders approved a 1,600,000
share increase in the number of shares of common stock authorized for issuance
under the Network Appliance 1995 Stock Incentive Plan.
4. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include stock options (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
anti-dilutive.
5. LITIGATION SETTLEMENT
The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995, a lawsuit of this nature was
filed against the Company and two of its shareholders (the Whipsaw Litigation).
During the first quarter of fiscal 1997, the Company settled the Whipsaw
litigation and
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NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
recorded a pre-tax expense of $4.3 million ($3.5 million in payments to the
plaintiffs and $0.8 million in legal fees). In connection with the settlement,
the Whipsaw group released the Company from all liabilities.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the third quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces
current EPS reporting requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.
If SFAS 128 had been in effect during the current and prior-year fiscal
periods, net income per share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 24, OCTOBER 25, OCTOBER 24, OCTOBER 25,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Basic......................... $0.30 $0.17 $0.55 $0.14
Diluted....................... $0.27 $0.16 $0.51 $0.13
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. The adoption is
not expected to have a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). This statement requires that
financial information be reported on the basis used internally for evaluating
segment performance and deciding how to allocate resources to segments. SFAS 131
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of all previously reported information for comparative purposes.
7. SUBSEQUENT EVENT
On November 11, 1997, the Board of Directors approved a two-for-one stock
split of the Company's common stock to be distributed on or about December 18,
1997 to holders of record on December 8, 1997. Pro forma share and per-share
amounts have been presented within the Condensed Consolidated Statements of
Income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 24, OCTOBER 25, OCTOBER 24, OCTOBER 25,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net Sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of Sales......................... 41.0 40.8 40.8 40.9
----- ----- ----- -----
Gross margin........................ 59.0 59.2 59.2 59.1
----- ----- ----- -----
Operating Expenses:
Sales and marketing................. 25.2 26.3 25.3 25.8
Research and development............ 10.2 9.4 10.2 9.4
General and administrative.......... 3.9 4.4 4.0 5.5
Litigation settlement............... -- -- -- 10.9
----- ----- ----- -----
Total operating expenses.... 39.3 40.1 39.5 51.6
----- ----- ----- -----
Income from operations................ 19.7 19.1 19.7 7.5
Other income, net..................... .6 1.2 .6 1.4
----- ----- ----- -----
Income before income taxes............ 20.3 20.3 20.3 8.9
Provision for income taxes............ 7.6 7.1 7.6 3.1
----- ----- ----- -----
Net Income.................. 12.7% 13.2% 12.7% 5.8%
===== ===== ===== =====
Net Sales -- Net sales were $38.4 million for the three months ended
October 24, 1997 and $71.8 million for the six months ended October 24, 1997,
representing increases of 82.4% and 81.8%, respectively, over the comparable
periods of the prior fiscal year. The increase in net sales for these periods
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from the Company's expansion of its direct
sales force and the introduction of new products during June and July 1997,
particularly the enterprise-class NetApp(TM) F630, the NetApp F520 and the
NetApp F230. Net sales also grew for the three and six-month periods as a result
of increased multiprotocol system shipments, the licensing of multiprotocol
software to pre-existing customers and increased service and software
subscription revenues due to a growing installed base. For the three and six
months ended October 24, 1997 compared to the corresponding periods of the prior
year, average selling prices were impacted by price reductions on 4 gigabyte
drives.
International net sales (including United States exports) grew by 134.5%
and 149.3% for the three and six-month periods ended October 24, 1997,
respectively, compared to comparable periods of the prior fiscal year.
International net sales were $8.6 million, or 22.5% of total net sales, and
$16.1 million, or 22.4% of total net sales, for the three and six months ended
October 24, 1997, respectively.
There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal periods.
Gross Margin -- Gross margin decreased from 59.2% for the three months
ended October 25, 1996 to 59.0% for the three months ended October 24, 1997.
This decrease in gross margin was primarily attributable to price reductions on
4 gigabyte drives, partially offset by the increase in product volume, lower
costs of key components, increased manufacturing efficiencies and by the sale of
the Company's new product line with cost-reduced designs introduced in June and
July 1997. Gross margin was also favorably impacted by the licensing of
multiprotocol software and by growth in software subscription and service
revenues due to a larger installed base.
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Gross margin for the six months ended October 24, 1997 was 59.2%, compared
to 59.1% for the comparable period of the prior fiscal year. This increase in
gross margin was primarily attributable to the increase in product volume, lower
costs of key components, increased manufacturing efficiencies and by the sale of
the Company's new product line with cost-reduced designs introduced in June and
July 1997. Gross margin was also favorably impacted by the licensing of
multiprotocol software and by growth in software subscription and service
revenues due to a larger installed base. Factors contributing to gross margin
growth were partially offset by price reductions on 4 gigabyte drives.
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, including
software licensing, new product introductions and enhancements and the cost of
components and manufacturing labor. In particular, the Company's gross margin
varies based upon the configuration of systems that are sold and whether they
are sold directly or through indirect channels. Highly configured systems
typically generate lower overall gross margin percentages due to greater disk
drive and memory content.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 74.6% from $5.5
million for the three months ended October 25, 1996 to $9.7 million for the
three months ended October 24, 1997. For the six months ended October 24, 1997,
sales and marketing expenses of $18.2 million reflect an increase of 78.0% over
the comparable period of fiscal 1997. These expenses were 25.2% and 26.3% of net
sales for the three months ended October 24, 1997 and October 25, 1996,
respectively, and were 25.3% and 25.8%, respectively, of net sales for the six
months then ended. The increase in absolute dollars was primarily related to the
expansion of the Company's sales and marketing organization, including growth in
the domestic and international direct sales forces and increased commission
expenses. The Company expects to continue to increase its sales and marketing
expenses in an effort to expand domestic and international markets, introduce
new products and establish and expand new distribution channels. The Company
believes that its continued growth and profitability is dependent in part on the
successful expansion of its international operations, and therefore, has
committed significant resources to international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 97.1% from $2.0 million for the three months
ended October 25, 1996 to $3.9 million for the three months ended October 24,
1997. These expenses represented 10.2% and 9.4% of net sales for the quarters
ended October 24, 1997 and October 25, 1996, respectively. For the six-month
periods, research and development expenses increased 97.6% from $3.7 million in
fiscal 1997 to $7.3 million in fiscal 1998 and represented 9.4% and 10.2% of net
sales, respectively, for those periods. Expenses for the three and six-month
periods increased as a result of increased headcount, prototyping expenses
associated with the development of new products and ongoing support of current
and future product development and enhancement efforts. The Company believes
that significant investments in research and development will be required to
remain competitive and expects that such expenditures will continue to increase
in absolute dollars. For the three and six months ended October 24, 1997 and
October 25, 1996, no software development costs were capitalized as amounts that
qualified for capitalization were immaterial.
General and Administrative -- General and administrative expenses were $1.5
million in the three months ended October 24, 1997, compared to $0.9 million in
the three months ended October 25, 1996. These expenses represented 3.9% and
4.4%, respectively, of net sales for such periods. For the six-month periods,
general and administrative expenses increased 32.4% from $2.2 million in fiscal
1997 to $2.8 million in fiscal 1998 and represented 5.5% and 4.0% of net sales,
respectively, for those periods. Increases in absolute dollars related primarily
to increased headcount and growth in other expenses, partially offset by reduced
legal fees over the corresponding periods of the prior year. The Company
believes that its general and administrative expenses will increase as the
Company continues to build its infrastructure.
Litigation Settlement -- The computer industry is characterized by frequent
litigation regarding intellectual property rights. During fiscal 1995 a lawsuit
of this nature was filed against the Company and two of its
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shareholders (the Whipsaw Litigation). During the first quarter of fiscal 1997,
the Company settled the Whipsaw litigation and recorded a pre-tax expense of
$4.3 million ($3.5 million in payments to the plaintiffs and $0.8 million in
legal fees). In connection with the settlement, the Whipsaw group released the
Company from all liabilities.
Other Income, net -- Other income, net, was $0.2 million and $0.3 million
for the three months ended October 24, 1997 and October 25, 1996, respectively.
During the six months ended October 24, 1997, other income, net was $0.4
million, compared to $0.6 million in the corresponding period of the prior year.
For the six months ended October 24, 1997, other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in the first quarter of fiscal 1998.
Provision for Income Taxes -- The Company's effective tax rate during the
three and six months ended October 24, 1997 was 37.5% compared with 35.0% for
the corresponding periods of the prior year. The higher tax rate in fiscal 1998
relates to increased earnings, which reduce the impact of research and
development and other tax credits on the effective tax rate. Additionally,
fiscal 1997 included a benefit for the reversal of a valuation allowance
previously provided against deferred tax assets which will not occur in fiscal
1998.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition; the size and timing of significant orders; product
configuration and mix; market acceptance of new products and product
enhancements; new product announcements or introductions by the Company or its
competitors; deferrals of customer orders in anticipation of new products or
product enhancements; changes in pricing by the Company or its competitors; the
ability of the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs; supply constraints;
the Company's success in expanding its sales and marketing programs;
technological changes in the network file server market; the mix of sales among
the Company's sales channels; levels of expenditure on research and development;
changes in Company strategy; personnel changes; the Company's ability to
successfully expand international operations; general economic trends and other
factors.
The Company conducts business internationally. Accordingly, the Company's
future operating results could be materially adversely affected by a variety of
uncontrollable and changing factors including foreign currency exchange rates,
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements, and government
spending patterns, among other factors. Although operating results have not been
materially adversely affected by seasonality in the past, because of the
significant seasonal effects experienced within the industry and the Company's
international sales growth and goal to continue international expansion, there
can be no assurance that the Company's future operating results will not be
adversely affected by seasonality.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network file server market is rapidly evolving and the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations in any
particular quarter; and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company's expense levels are based, in part, on its expectations as to
future sales. As a result, if sales levels are below expectations, net income
may be disproportionately affected. Although the Company has experienced
significant revenue growth in recent periods, the Company does not believe such
growth is indicative of future operating results. The Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indicator of future performance.
Due to all of the foregoing factors, it is possible that in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's common stock
would likely be materially adversely affected.
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This Form 10-Q may contain forward-looking statements about future results
which are subject to risks and uncertainties. Network Appliance's actual results
may differ significantly from the results discussed in the forward-looking
statements. The Company is subject to a variety of other additional risk
factors, more fully described in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 24, 1997, the Company's cash, cash
equivalents and short-term investments increased by $5.3 million to $33.8
million. The Company's working capital increased during the six months ended
October 24, 1997 by $11.0 million to $52.9 million. For the six months ended
October 24, 1997, the Company generated cash from operating activities totaling
$5.8 million, principally related to net income of $9.1 million and to an
increase in income taxes payable, partially offset by increases in accounts
receivable and inventories. Net cash used in operating activities during the six
months ended October 25, 1996 principally related to increases in accounts
receivable and inventories, partially offset by net income and increases in
accounts payable.
The Company used $3.3 million and $2.2 million to purchase property and
equipment during the six-month periods ended October 24, 1997 and October 25,
1996, respectively. Net maturities of short-term investments provided $1.7
million for the six months ended October 24, 1997. The Company used $5.9 million
during the six months ended October 25, 1996 for net investment purchases.
Financing activities provided $2.8 million and $0.5 million for the six months
ended October 24, 1997 and October 25, 1996, respectively, due primarily to
proceeds from the exercise of stock options in such periods.
The Company currently has no significant capital commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources are sufficient to fund its operations for at
least the next twelve months.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the third quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces
current EPS reporting requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.
If SFAS 128 had been in effect during the current and prior-year fiscal
periods, net income per share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 24, OCTOBER 25, OCTOBER 24, OCTOBER 25,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Basic....................... $0.30 $0.17 $0.55 $0.14
Diluted..................... $0.27 $0.16 $0.51 $0.13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The following proposals were voted upon by the Company's shareholders at
the Annual Meeting of Shareholders held on September 25, 1997 (Annual
Shareholders Meeting):
1. The following persons were elected as directors of the Company to serve
for a term ending upon the next Annual Shareholders Meeting and until
their successors are elected and qualified:
VOTES FOR VOTES WITHHELD
---------- --------------
Daniel J. Warmenhoven............................. 14,918,757 160,082
Donald T. Valentine............................... 14,968,888 109,951
Carol A. Bartz.................................... 14,971,457 107,382
Larry R. Carter................................... 14,973,037 105,802
Michael R. Hallman................................ 14,972,351 106,488
Robert T. Wall.................................... 14,973,537 105,302
2. A proposal to ratify the election of Deloitte & Touche LLP, as the
Company's independent auditors for the fiscal year ending April 30, 1998
was approved as follows:
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
- ---------- ------- ------- ----------------
15,030,083 22,464 26,292 --
3. To approve a series of amendments to the Company's 1995 Stock Incentive
Plan, including a 1,600,000 share increase in the maximum number of
shares of common stock authorized for issuance under the plan:
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
- --------- --------- ------- ----------------
8,978,284 4,643,943 142,881 1,002,834
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.12 Facility lease, dated August 18, 1997, by and between McCandless-San
Tomas No. 2 and the Registrant.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On November 26, 1997, the Company filed a current report on Form 8-K
announcing a two-for-one stock split, to be distributed on or about December 18,
1997 to shareholders of record on December 8, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NETWORK APPLIANCE, INC.
(Registrant)
/s/ JEFFRY R. ALLEN
--------------------------------------
By: Jeffry R. Allen
Vice President Finance and
Operations, Chief Financial Officer
(Principal Financial Officer)
Date: December 5, 1997
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INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
10.12 Facility lease, dated August 18, 1997, by and between
McCandless-San Tomas No. 2 and the Registrant.
27.1 Financial Data Schedule