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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
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)
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION)
OR ORGANIZATION)
2770 SAN TOMAS EXPRESSWAY, 95051
SANTA CLARA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 JULY 31, 1998
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Common Stock................... 33,959,465
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TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 2
Condensed Consolidated Balance Sheets as of July 31, 1998
and April 30, 1998........................................ 2
Condensed Consolidated Statements of Income for the
three-month periods ended July 31, 1998 and July 25,
1997...................................................... 3
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended July 31, 1998 and July 25,
1997...................................................... 4
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 2. Changes in Securities....................................... 12
Item 3. Defaults Upon Senior Securities............................. 12
Item 4. Submission of Matters to a Vote of Securityholders.......... 12
Item 5. Other Information........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
SIGNATURE............................................................ 13
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JULY 31, APRIL 30,
1998 1998
----------- ---------
(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 31,476 $ 37,315
Short-term investments.................................... 14,930 10,800
Accounts receivable, net.................................. 35,960 34,313
Inventories............................................... 9,732 8,707
Prepaid expenses and other................................ 1,928 2,524
Deferred taxes............................................ 5,497 5,280
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Total current assets.............................. 99,523 98,939
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PROPERTY AND EQUIPMENT, NET................................. 12,661 12,217
DEPOSITS.................................................... 9,500 --
OTHER ASSETS................................................ 4,389 4,580
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$126,073 $115,736
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 7,538 $ 10,041
Income taxes payable...................................... 3,485 1,782
Accrued compensation and related benefits................. 5,259 8,485
Other accrued liabilities................................. 4,327 4,201
Deferred revenue.......................................... 5,788 4,799
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Total current liabilities......................... 26,397 29,308
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LONG-TERM OBLIGATIONS....................................... 157 163
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SHAREHOLDERS' EQUITY:
Common stock.............................................. 72,064 65,924
Retained earnings......................................... 27,438 20,341
Cumulative translation adjustment......................... 17 --
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Total shareholders' equity........................ 99,519 86,265
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$126,073 $115,736
======== ========
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
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JULY 31, JULY 25,
1998 1997
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NET SALES................................................... $57,375 $33,420
COST OF SALES............................................... 23,239 13,570
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Gross margin.............................................. 34,136 19,850
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OPERATING EXPENSES:
Sales and marketing....................................... 14,935 8,493
Research and development.................................. 6,081 3,415
General and administrative................................ 1,885 1,356
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Total operating expenses.......................... 22,901 13,264
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INCOME FROM OPERATIONS...................................... 11,235 6,586
OTHER INCOME, NET........................................... 121 168
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INCOME BEFORE INCOME TAXES.................................. 11,356 6,754
PROVISION FOR INCOME TAXES.................................. 4,259 2,533
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NET INCOME.................................................. $ 7,097 $ 4,221
======= =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.21 $ 0.13
======= =======
Diluted................................................... $ 0.19 $ 0.12
======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic..................................................... 33,548 31,884
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Diluted................................................... 37,271 35,139
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See accompanying notes to condensed consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
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JULY 31, JULY 25,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 7,097 $ 4,221
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,122 1,105
Provision for doubtful accounts........................ 100 --
Deferred income taxes.................................. (217) --
Deferred rent.......................................... (6) (14)
Changes in assets and liabilities:
Accounts receivable.................................. (1,734) (2,941)
Inventories.......................................... (1,021) (2,799)
Prepaid expenses and other........................... 716 489
Accounts payable..................................... (2,500) 1,024
Income taxes payable................................. 3,937 2,080
Accrued compensation and related benefits............ (3,226) (1,458)
Other accrued liabilities............................ 126 401
Deferred revenue..................................... 989 142
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Net cash provided by operating activities......... 6,383 2,250
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (7,080) (2,350)
Redemptions of short-term investments..................... 2,950 4,416
Purchases of property and equipment....................... (2,340) (1,409)
Payment of deposits....................................... (9,500) --
-------- -------
Net cash provided by (used in) investing
activities...................................... (15,970) 657
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations....................... (3) (6)
Proceeds from sale of common stock, net................... 3,751 1,157
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Net cash provided by financing activities......... 3,748 1,151
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (5,839) 4,058
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 37,315 21,520
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End of period............................................. $ 31,476 $25,578
======== =======
See accompanying notes to condensed consolidated financial statements.
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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. (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-month period ended July 31, 1998 are not necessarily indicative of the
operating results to be expected for the full fiscal year or future operating
periods. The information included in this report should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
fiscal year ended April 30, 1998 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, 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, the effect of
certain anti-takeover provisions and the Year 2000 Issue. Any party interested
in reviewing these publicly available documents should contact the SEC or the
Chief Financial Officer of the Company.
2. FISCAL PERIODS
The Company operates on a 52-week or 53-week year ending on the last Friday
in April. Fiscal 1999 is a 53-week year. Fiscal 1998 was a 52-week year. The
quarter ended July 31, 1998 includes 14 weeks of operating activity, compared to
13 weeks of activity for the corresponding period of the prior fiscal year.
3. INVENTORIES
Inventories consist of the following:
JULY 31, APRIL 30,
1998 1998
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Purchased components....................................... $3,707 $4,494
Work in process............................................ 2,512 1,889
Finished goods............................................. 3,513 2,324
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$9,732 $8,707
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4. COMMITMENTS
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5,000 of the $33,750 purchase
price as a nonrefundable deposit. The agreement allows the Company to assign its
rights and obligations to a third-party entity should the Company decide to
enter into an operating lease. It is the Company's intent to assign its rights
and obligations to a third-party entity and enter into an operating lease,
provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land.
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NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
Under terms of the option agreement, the Company paid a $4,500 nonrefundable
deposit. The option allows the Company to purchase the land, within a 90-day
period, commencing in December 1999 at a purchase price of $23,745 and its
rights and obligations under this agreement may be assigned to third parties. It
is the Company's intent to assign its purchase option to a third-party entity
and to enter into an operating lease with the third-party entity, provided the
Company can obtain satisfactory leasing terms.
5. LINE OF CREDIT
In July 1998, the Company negotiated a $5,000 unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility
which expires in July 1999, the Company must maintain various financial
covenants. Any borrowings under this agreement bear interest at either LIBOR
plus 1% or at the Lender's "prime" lending rate, such rate determined at the
discretion of the Company. As of July 31, 1998, there were no borrowings under
the credit facility and the line was available for draw.
6. COMMON STOCK AND NET INCOME PER SHARE
On November 11, 1997, the Board of Directors approved a two-for-one stock
split of the Company's common stock which was effective December 18, 1997. The
net income per share and number of shares used in the per-share calculations for
all periods presented reflect the two-for-one stock split that was effective
December 18, 1997.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128), effective in the third
quarter of fiscal 1998. SFAS 128 requires the presentation of basic and diluted
net income per share. Basic net income per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for that period. Diluted net income per share is computed giving
effect to all dilutive potential shares that were outstanding during the period.
Dilutive potential common shares consist of incremental common shares subject to
repurchase and common shares issuable upon exercise of stock options. Net income
per share data for the three-month period ended July 25, 1997 has been restated
to conform with SFAS 128.
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NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:
THREE MONTHS ENDED
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JULY 31, JULY 25,
1998 1997
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NET INCOME (NUMERATOR):
Net income, basic and diluted............................. $ 7,097 $ 4,221
======= =======
SHARES (DENOMINATOR):
Weighted average common shares outstanding................ 33,791 32,932
Weighted average common shares outstanding subject
to repurchase.......................................... (243) (1,048)
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Shares used in basic computation.......................... 33,548 31,884
Weighted average common shares outstanding subject
to repurchase.......................................... 243 1,048
Common shares issuable upon exercise of stock options..... 3,480 2,207
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Shares used in diluted computation........................ 37,271 35,139
======= =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.21 $ 0.13
======= =======
Diluted................................................... $ 0.19 $ 0.12
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7. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal
1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income or shareholders' equity.
The components of comprehensive income, net of tax, are as follows:
THREE MONTHS ENDED
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JULY 31, JULY 25,
1998 1997
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Net income.................................................. $7,097 $4,221
Change in cumulative translation adjustment................. 17 --
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Comprehensive income........................................ $7,114 $4,221
====== ======
8. SUBSEQUENT EVENT
In August 1998, the Company entered into an agreement to acquire land in
Sunnyvale, California and the accompanying 79,000 square foot building. Under
terms of the agreement, the Company paid $1,000 of the $16,750 purchase price as
a deposit. Upon satisfaction of certain conditions under the agreement, the
Company will pay a supplemental deposit of $500. The deposits are nonrefundable,
with limited exceptions.
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The agreement allows the Company to assign its rights and obligations to a
third-party entity should the Company decide to enter into an operating lease.
It is the Company's intent to assign its rights and obligations to a third-party
entity and enter into an operating lease, provided the Company can obtain
satisfactory leasing terms.
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
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JULY 31, JULY 25,
1998 1997
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Net Sales.................................................. 100.0% 100.0%
Cost of Sales.............................................. 40.5 40.6
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Gross margin..................................... 59.5 59.4
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Operating Expenses:
Sales and marketing...................................... 26.0 25.4
Research and development................................. 10.6 10.2
General and administrative............................... 3.3 4.1
----- -----
Total operating expenses......................... 39.9 39.7
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Income from operations..................................... 19.6 19.7
Other income, net.......................................... 0.2 0.5
----- -----
Income before income taxes................................. 19.8 20.2
Provision for income taxes................................. 7.4 7.6
----- -----
Net Income....................................... 12.4% 12.6%
===== =====
Net Sales -- Net sales increased by 71.7% to $57.4 million for the three
months ended July 31, 1998, from $33.4 million for the three months ended July
25, 1997. This increase was primarily attributable to a higher volume of units
shipped compared to the corresponding period of the prior fiscal year. Factors
impacting unit growth include expansion of the Company's direct sales force;
increased unit shipments of the Company's current product line first introduced
in June and July 1997, particularly the NetApp(TM) F630 and the NetApp F520; the
shipment of NetCache appliances; increased sales of multiprotocol systems and
increases in software subscription and service revenues due to a growing
installed base. Net sales growth was also positively impacted by an increase in
the average selling price of the NetApp F630, primarily facilitated by the
incorporation of fibre-channel disk drives which increase system capacity.
Factors which partially offset overall net sales growth include declining unit
sales of the Company's older product family and decreases in base prices of the
Company's current product line due to competitive forces.
International net sales (including U.S. exports) were $12.7 million and
$7.4 million, for the three months ended July 31, 1998 and July 25, 1997,
respectively. The increase in international net sales was a result of European
sales growth primarily due to increased headcount in the direct sales force,
increased shipments of filers and the sale of NetCache appliances. In absolute
dollars, Asia Pacific sales remained flat for the quarter ended July 31, 1998,
compared against the corresponding period of the prior fiscal year.
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 increased slightly to 59.5% for the three
months ended July 31, 1998 from 59.4% for the three months ended July 25, 1997.
This increase in gross margin was primarily attributable to the increase in
product volume, lower costs of key components, increased manufacturing
efficiencies and by
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increased market acceptance of the Company's 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 the effect of base
system price reductions across the full range of filers.
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. The Company's gross margin may also vary
based upon the configuration of systems that are sold and whether they are sold
directly or through indirect channels. Highly configured systems have
historically generated lower overall gross margin percentages due to greater
disk drive content.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and certain promotional expenses and customer
service and support costs. Sales and marketing expenses increased 75.9% to $14.9
million for the three months ended July 31, 1998 from $8.5 million for the three
months ended July 25, 1997. These expenses were 26.0% and 25.4% of net sales for
such periods, respectively. The increase 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, establish and expand new distribution channels and increase
product and company awareness. The Company believes that its continued growth
and profitability is dependent in part on the successful expansion of its
international operations, and therefore, has committed significant resources to
international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses, and fees paid to outside
consultants. Research and development expenses rose by 78.1% to $6.1 million for
the three months ended July 31, 1998 from $3.4 million for the three months
ended July 25, 1997. These expenses represented 10.6% and 10.2% of net sales for
the three months ended July 31, 1998 and July 25, 1997, respectively, and
increased in absolute dollars primarily as a result of increased headcount,
ongoing support of current and future product development and enhancement
efforts and prototyping expenses associated with the development of new
products, including the NetApp F700 series filers. 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 quarters ended July 31, 1998 and July 25, 1997, no
software development costs were capitalized as amounts that qualified for
capitalization were immaterial.
General and Administrative -- General and administrative expenses were $1.9
million for the three months ended July 31, 1998, compared to $1.4 million for
the three months ended July 25, 1997. These expenses represented 3.3% and 4.1%,
respectively, of net sales for such periods and increased in absolute dollars
primarily as a result of increased headcount and an increase to the allowance
for bad debt. The Company believes that its general and administrative expenses
will increase in absolute dollars as the Company continues to build its
infrastructure.
Other Income, net -- Other income, net, was $0.1 million and $0.2 million
for the three months ended July 31, 1998 and July 25, 1997, respectively. Other
income, net, decreased over the corresponding period of the prior year due
primarily to foreign currency exchange losses.
Provision for Income Taxes -- The Company's effective tax rate was 37.5%
for both the quarters ended July 31, 1998 and July 25, 1997.
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
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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, particularly
Europe, there can be no assurance that the Company's future operating results
will not be adversely affected by seasonality.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network file server market is rapidly evolving and the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations in any
particular quarter; and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company's expense levels are based, in part, on its expectations as to
future sales. As a result, if sales levels are below expectations, net income
may be disproportionately affected. Although the Company has experienced
significant revenue growth in recent periods, such growth may not be indicative
of future operating results. Period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indicator of future performance. Due to all of the foregoing factors, it is
possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be materially adversely
affected.
This Form 10-Q contains forward-looking statements about future results
which are subject to risks and uncertainties. Network Appliance's actual results
may differ significantly from the results discussed in the forward-looking
statements. 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
As of July 31, 1998, compared to the April 30, 1998 balances, the Company's
cash, cash equivalents and short-term investments decreased by $1.7 million to
$46.4 million. Working capital increased by $3.5 million to $73.1 million,
impacted primarily by increases in short-term investments and accounts
receivable and decreases in accounts payable and accrued compensation and
related benefits, partially offset by a decrease in cash and cash equivalents
and increases in income taxes payable and deferred revenue. The Company
generated cash from operating activities totaling $6.4 million and $2.3 million
for the three months ended July 31, 1998 and July 25, 1997, respectively. Net
cash provided by operating activities for the three months ended July 31, 1998
principally related to net income of $7.1 million, depreciation and amortization
which are non-cash expenses and increases in income taxes payable, partially
offset by increases in accounts receivable and decreases in accounts payable and
accrued compensation and related benefits.
The Company used $2.3 million and $1.4 million of cash during the quarters
ended July 31, 1998 and July 25, 1997, respectively, to purchase property and
equipment. In addition, the Company used $4.1 million during the quarter ended
July 31, 1998, for net short-term investment purchases. For the quarter ended
July 25, 1997, net redemptions of short-term investments provided $2.1 million.
Financing activities provided $3.7 million and $1.2 million during the periods
ended July 31, 1998 and July 25, 1997, respectively. The
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increase in cash provided by financing activities for the quarter ended July 31,
1998, compared to the corresponding period of the prior fiscal year, was due to
an increased quantity of stock options exercised at a higher average exercise
price and a greater number of employees participating in the employee stock
purchase plan.
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5.0 million of the $33.8 million
purchase price as a nonrefundable deposit. The agreement allows the Company to
assign its rights and obligations to a third-party entity should the Company
decide to enter into an operating lease. It is the Company's intent to assign
its rights and obligations to a third-party entity and enter into an operating
lease, provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3.1 million, commencing in October 1999, for a 6.2 acre plot
in Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4.5 million
nonrefundable deposit. The option allows the Company to purchase the land,
within a 90-day period, commencing in December 1999 at a purchase price of $23.7
million and its rights and obligations under this agreement may be assigned to
third parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5.0 million unsecured revolving
credit facility with a domestic commercial bank. Under terms of the credit
facility which expires in July 1999, the Company must maintain various financial
covenants. Any borrowings under this agreement bear interest at either LIBOR
plus 1% or at the Lender's "prime" lending rate, such rate determined at the
discretion of the Company. As of July 31, 1998, there were no borrowings under
the credit facility and the line was available for draw.
In August 1998, the Company entered into an agreement to acquire land in
Sunnyvale, California and the accompanying 79,000 square foot building. Under
terms of the agreement, the Company paid $1.0 million of the $16.8 million
purchase price as a deposit. Upon satisfaction of certain conditions under the
agreement, the Company will pay a supplemental deposit of $0.5 million. The
deposits are nonrefundable, with limited exceptions.
The agreement allows the Company to assign its rights and obligations to a
third-party entity should the Company decide to enter into an operating lease.
It is the Company's intent to assign its rights and obligations to a third-party
entity and enter into an operating lease, provided the Company can obtain
satisfactory leasing terms.
Excluding the commitments related to the aforementioned properties which
the Company intends to assign to a third party and then establish operating
leases, the Company currently has no significant commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources, including the $5.0 million line of credit, are
sufficient to fund its operations for at least the next twelve months.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. The Company is currently
assessing the impact the Year 2000 Issue will have on its internal information
systems. The Company believes that the majority of its current products are Year
2000 compliant and that new products are being designed to be Year 2000
compliant. The Company is currently performing extended testing. The Company
does not anticipate that addressing the Year 2000 Issue for its internal
information systems and current and future products will have a material adverse
impact on its operations, financial results or cash flows. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000
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Issue could lower demand for the Company's products while increasing the
Company's costs. These combining factors, while not quantified, could have a
material adverse impact on the Company's business, operating results, financial
condition and cash flows.
The Company has key relationships with certain suppliers. If these
suppliers fail to adequately address the Year 2000 Issue for the products they
provide the Company, this could have a material adverse impact on the Company's
business, operating results, financial condition or cash flows. The Company is
still assessing the effect the Year 2000 Issue will have on its suppliers and,
at this time, cannot determine the impact it will have.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.19 Purchase and Sale Agreement, dated August 5, 1998, by and between
Martin/Crossman, LLC and the Registrant.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
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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
--------------------------------------
Jeffry R. Allen
Vice President Finance and
Operations, Chief Financial Officer
(Principal Financial Officer)
Date: September 11, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER
- ------- DESCRIPTION
10.19 Purchase and Sale Agreement, dated August 5, 1998, by and
between Martin/Crossman, LLC and the Registrant.
27.1 Financial Data Schedule