e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
January 27, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number 0-27130
Network Appliance,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0307520
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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495 East Java Drive,
Sunnyvale, California 94089
(Address of principal executive
offices, including zip code)
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one:).
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes o No þ
Number of shares outstanding of the registrants common
stock, $0.001 par value, as of the latest practicable date.
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Class
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Outstanding at February 24,
2006
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Common Stock
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374,164,288
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PART I.
FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements (Unaudited)
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NETWORK
APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands unaudited)
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|
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January 27,
|
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April 30,
|
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|
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2006
|
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|
2005
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|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
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|
|
Cash and cash equivalents
|
|
$
|
188,125
|
|
|
$
|
193,542
|
|
Short-term investments
|
|
|
952,819
|
|
|
|
976,423
|
|
Accounts receivable, net of
allowances of $6,201 at January 27, 2006 and $5,445 at
April 30, 2005
|
|
|
367,490
|
|
|
|
296,885
|
|
Inventories
|
|
|
64,072
|
|
|
|
38,983
|
|
Prepaid expenses and other
|
|
|
35,768
|
|
|
|
32,472
|
|
Deferred income taxes
|
|
|
35,544
|
|
|
|
37,584
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,643,818
|
|
|
|
1,575,889
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Property and Equipment,
net
|
|
|
492,793
|
|
|
|
418,749
|
|
Goodwill
|
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|
491,089
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|
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|
291,816
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Intangible Assets, net
|
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|
82,433
|
|
|
|
21,448
|
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Other Assets
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|
59,817
|
|
|
|
64,745
|
|
|
|
|
|
|
|
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|
$
|
2,769,950
|
|
|
$
|
2,372,647
|
|
|
|
|
|
|
|
|
|
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LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
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|
|
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Accounts payable
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|
$
|
99,720
|
|
|
$
|
83,572
|
|
Income taxes payable
|
|
|
38,226
|
|
|
|
20,823
|
|
Accrued compensation and related
benefits
|
|
|
113,067
|
|
|
|
100,534
|
|
Other accrued liabilities
|
|
|
66,790
|
|
|
|
53,262
|
|
Deferred revenue
|
|
|
336,944
|
|
|
|
261,998
|
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|
|
|
|
|
|
|
|
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Total current liabilities
|
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|
654,747
|
|
|
|
520,189
|
|
Long-Term Deferred
Revenue
|
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|
256,528
|
|
|
|
187,180
|
|
Long-Term Obligations
|
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3,427
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|
|
|
4,474
|
|
|
|
|
|
|
|
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|
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Total liabilities
|
|
|
914,702
|
|
|
|
711,843
|
|
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|
|
|
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Stockholders
Equity:
|
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|
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Common stock (401,654 shares
at January 27, 2006 and 381,509 shares at
April 30, 2005)
|
|
|
402
|
|
|
|
381
|
|
Additional paid-in capital
|
|
|
1,743,879
|
|
|
|
1,347,352
|
|
Deferred stock compensation
|
|
|
(29,041
|
)
|
|
|
(15,782
|
)
|
Treasury stock (29,178 shares
at January 27, 2006 and 14,566 shares at
April 30, 2005)
|
|
|
(719,222
|
)
|
|
|
(329,075
|
)
|
Retained earnings
|
|
|
869,209
|
|
|
|
661,978
|
|
Accumulated other comprehensive loss
|
|
|
(9,979
|
)
|
|
|
(4,050
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,855,248
|
|
|
|
1,660,804
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,769,950
|
|
|
$
|
2,372,647
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
3
NETWORK
APPLIANCE, INC.
(In thousands, except per share
amounts unaudited)
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Three Months Ended
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Nine Months Ended
|
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|
January 27,
|
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|
January 28,
|
|
|
January 27,
|
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|
January 28,
|
|
|
|
2006
|
|
|
2005
|
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|
2006
|
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|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Product revenue
|
|
$
|
474,236
|
|
|
$
|
367,903
|
|
|
$
|
1,293,642
|
|
|
$
|
1,029,334
|
|
Service revenue
|
|
|
62,795
|
|
|
|
44,803
|
|
|
|
174,853
|
|
|
|
116,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
537,031
|
|
|
|
412,706
|
|
|
|
1,468,495
|
|
|
|
1,146,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
163,505
|
|
|
|
127,118
|
|
|
|
438,363
|
|
|
|
353,060
|
|
Cost of service revenue
|
|
|
46,502
|
|
|
|
33,454
|
|
|
|
130,530
|
|
|
|
94,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
210,007
|
|
|
|
160,572
|
|
|
|
568,893
|
|
|
|
448,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
327,024
|
|
|
|
252,134
|
|
|
|
899,602
|
|
|
|
698,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
152,008
|
|
|
|
118,668
|
|
|
|
427,526
|
|
|
|
331,087
|
|
Research and development
|
|
|
62,622
|
|
|
|
43,603
|
|
|
|
169,462
|
|
|
|
122,957
|
|
General and administrative
|
|
|
24,742
|
|
|
|
20,136
|
|
|
|
67,349
|
|
|
|
54,888
|
|
In process research and development
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
Stock compensation (1)
|
|
|
4,070
|
|
|
|
2,189
|
|
|
|
9,442
|
|
|
|
6,432
|
|
Restructuring charges (recoveries)
|
|
|
117
|
|
|
|
(270
|
)
|
|
|
(495
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
243,559
|
|
|
|
184,326
|
|
|
|
678,284
|
|
|
|
515,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
Operations
|
|
|
83,465
|
|
|
|
67,808
|
|
|
|
221,318
|
|
|
|
183,159
|
|
Other Income (Expense),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,891
|
|
|
|
6,031
|
|
|
|
28,590
|
|
|
|
16,216
|
|
Other income (expenses), net
|
|
|
1,001
|
|
|
|
(500
|
)
|
|
|
453
|
|
|
|
(1,322
|
)
|
Net gain on investments
|
|
|
|
|
|
|
41
|
|
|
|
101
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
10,892
|
|
|
|
5,572
|
|
|
|
29,144
|
|
|
|
14,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income
Taxes
|
|
|
94,357
|
|
|
|
73,380
|
|
|
|
250,462
|
|
|
|
198,094
|
|
Provision for Income
Taxes
|
|
|
17,964
|
|
|
|
13,253
|
|
|
|
43,231
|
|
|
|
35,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
76,393
|
|
|
$
|
60,127
|
|
|
$
|
207,231
|
|
|
$
|
162,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.56
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.54
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in per Share
Calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
371,768
|
|
|
|
362,563
|
|
|
|
370,069
|
|
|
|
359,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
389,149
|
|
|
|
385,869
|
|
|
|
386,991
|
|
|
|
377,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Stock compensation includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
1,325
|
|
|
$
|
733
|
|
|
$
|
2,851
|
|
|
$
|
1,813
|
|
Research and development
|
|
|
2,465
|
|
|
|
1,281
|
|
|
|
5,929
|
|
|
|
4,020
|
|
General and administrative
|
|
|
280
|
|
|
|
175
|
|
|
|
662
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,070
|
|
|
$
|
2,189
|
|
|
$
|
9,442
|
|
|
$
|
6,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
4
NETWORK
APPLIANCE, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
207,231
|
|
|
$
|
162,318
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
46,175
|
|
|
|
39,869
|
|
In process research and development
|
|
|
5,000
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
11,329
|
|
|
|
6,999
|
|
Amortization of patents
|
|
|
1,487
|
|
|
|
1,352
|
|
Stock compensation
|
|
|
9,442
|
|
|
|
6,432
|
|
Net gain on investments
|
|
|
(101
|
)
|
|
|
(70
|
)
|
Net loss on disposal of equipment
|
|
|
1,318
|
|
|
|
907
|
|
Allowance for doubtful accounts
|
|
|
921
|
|
|
|
325
|
|
Deferred income taxes
|
|
|
14
|
|
|
|
730
|
|
Deferred rent
|
|
|
301
|
|
|
|
228
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(70,153
|
)
|
|
|
(40,065
|
)
|
Inventories
|
|
|
(38,397
|
)
|
|
|
(12,383
|
)
|
Prepaid expenses and other assets
|
|
|
(6,590
|
)
|
|
|
3,011
|
|
Accounts payable
|
|
|
16,072
|
|
|
|
15,355
|
|
Income taxes payable
|
|
|
39,606
|
|
|
|
24,577
|
|
Accrued compensation and related
benefits
|
|
|
12,992
|
|
|
|
16,508
|
|
Other accrued liabilities
|
|
|
970
|
|
|
|
8,008
|
|
Deferred revenue
|
|
|
144,737
|
|
|
|
110,534
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
382,354
|
|
|
|
344,635
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(450,555
|
)
|
|
|
(669,562
|
)
|
Redemptions of investments
|
|
|
471,755
|
|
|
|
456,387
|
|
Increase in restricted cash
|
|
|
(1,997
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(96,476
|
)
|
|
|
(64,756
|
)
|
Proceeds from sales of investments
|
|
|
130
|
|
|
|
347
|
|
Purchases of equity securities
|
|
|
(7,100
|
)
|
|
|
(125
|
)
|
Purchase of business, net of cash
acquired
|
|
|
(53,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(137,990
|
)
|
|
|
(277,709
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
related to employee stock transactions
|
|
|
141,725
|
|
|
|
153,460
|
|
Tax withholding payments reimbursed
by restricted stock
|
|
|
(794
|
)
|
|
|
(43
|
)
|
Repurchases of common stock
|
|
|
(390,147
|
)
|
|
|
(132,993
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(249,216
|
)
|
|
|
20,424
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes
on Cash and Cash Equivalents
|
|
|
(565
|
)
|
|
|
1,695
|
|
Net Increase (Decrease) in Cash
and Cash Equivalents
|
|
|
(5,417
|
)
|
|
|
89,045
|
|
Cash and Cash
Equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
193,542
|
|
|
|
92,328
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
188,125
|
|
|
$
|
181,373
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
Conversion of evaluation inventory
to fixed assets
|
|
$
|
14,393
|
|
|
$
|
8,468
|
|
Deferred stock compensation, net of
reversals
|
|
$
|
2,897
|
|
|
$
|
512
|
|
Income tax benefit from employee
stock transactions
|
|
$
|
22,334
|
|
|
$
|
27,829
|
|
Acquisition of property and
equipment on account
|
|
$
|
11,158
|
|
|
$
|
|
|
Stock issued for acquisition
|
|
$
|
191,874
|
|
|
$
|
|
|
Options assumed for acquired
business
|
|
$
|
38,456
|
|
|
$
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
5,625
|
|
|
$
|
11,975
|
|
Income taxes refund
|
|
$
|
2,345
|
|
|
$
|
10,588
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
5
NETWORK
APPLIANCE, INC.
(Dollar and share amounts in thousands, except per-share
data)
(Unaudited)
Based in Sunnyvale, California, Network Appliance was
incorporated in California in April 1992 and reincorporated in
Delaware in November 2001. Network Appliance, Inc. is a leading
supplier of enterprise storage and data management software and
hardware products and services. Its solutions help global
enterprises meet major information technology challenges such as
managing storage growth, assuring secure and timely information
access, protecting data and controlling costs by providing
innovative solutions that simplify the complexity associated
with managing corporate data.
|
|
2.
|
Condensed
Consolidated Financial Statements
|
The accompanying interim unaudited condensed consolidated
financial statements have been prepared by Network Appliance,
Inc. without audit and reflect all adjustments, consisting only
of normal recurring 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 accounting principles generally accepted in the
United States of America (generally accepted accounting
principles) for interim financial information and in
accordance with the instructions to
Form 10-Q
and
Article 10-01
of
Regulation S-X.
Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for annual
consolidated financial statements. Certain prior period balances
have been reclassified to conform with the current period
presentation.
We operate on a
52-week or
53-week year
ending on the last Friday in April. For presentation purposes we
have indicated in the accompanying interim unaudited condensed
consolidated financial statements that our fiscal year end is
April 30. The first nine months of fiscal 2006 and 2005
were both
39-week
fiscal periods.
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 30, 2005. The results of
operations for the three and nine-month periods ended
January 27, 2006 are not necessarily indicative of the
operating results to be expected for the full fiscal year or
future operating periods. In the following notes to our interim
condensed consolidated financial statements, Network Appliance
Inc. is also referred to as we, our and
us.
The preparation of the interim condensed consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Such estimates include, but are not limited to, revenue
recognition and allowances; valuation of goodwill and
intangibles; accounting for income taxes; inventory reserves and
write-down; restructuring accruals; impairment losses on
investments; accounting for stock-based compensation; and loss
contingencies. Actual results could differ from those estimates.
We account for stock-based compensation in accordance with the
provisions of Accounting Principle Board Opinion
(APB) No. 25, Accounting for Stock
Issued to Employees, (APB No. 25) and comply
with the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123). Deferred compensation recognized
under APB No. 25 is amortized ratably
6
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to expense over the vesting periods. We account for stock
options issued to non-employees in accordance with the
provisions of SFAS No. 123 under the fair value based
method.
We amortize deferred stock-based compensation ratably over the
vesting periods of the applicable stock purchase rights,
restricted stocks and stock options, generally four years.
Deferred stock compensation under APB No. 25 and pro forma
net income under the provisions of SFAS No. 123 are
adjusted to reflect cancellations and forfeitures due to
employee terminations as they occur.
We recorded $4,070 and $9,442 of deferred compensation expense
for the three and nine-month periods ended January 27,
2006, respectively, and $1,968 and $5,963 for the three and
nine-month periods ended January 28, 2005, respectively,
primarily related to the amortization of deferred stock
compensation from unvested options assumed in the Decru,
Alacritus and Spinnaker acquisitions, the retention escrow
shares relative to Spinnaker, the grant of stock options to
certain highly compensated employees below fair value at the
date of grant (discontinued as of December 31,
2004) and the award of restricted stock to certain
employees. The net increase in stock compensation expenses
reflected primarily higher stock compensation relating to the
Decru acquisition and restricted stock awards.
Based on deferred stock compensation recorded at
January 27, 2006, estimated future deferred stock
compensation amortization for the remainder of fiscal year 2006,
fiscal years 2007, 2008, 2009 and 2010 are expected to be
$3,925, $14,669, $8,449 and $1,731 and $268, respectively, and
none thereafter.
We recorded charges of $45 and $56, in compensation expense, in
the three and nine-month periods ending January 27, 2006,
respectively, and $221 and $469 in the three and nine-month
periods ending January 28, 2005, respectively, for the fair
value of options granted to a member of the Board of Directors
in recognition for services performed outside of the normal
capacity of a board member.
Had compensation expense been determined based on the fair value
at the grant date for awards, consistent with the provisions of
SFAS No. 123, the impact on net income and net income
per share would be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income as reported
|
|
$
|
76,393
|
|
|
$
|
60,127
|
|
|
$
|
207,231
|
|
|
$
|
162,318
|
|
Add: stock based employee
compensation expense included in reported net income under APB
No. 25, net of related tax effects
|
|
|
2,442
|
|
|
|
1,181
|
|
|
|
5,665
|
|
|
|
3,578
|
|
Deduct: total stock based
compensation determined under fair value based method for all
awards, net of related tax effects
|
|
|
(24,860
|
)
|
|
|
(21,172
|
)
|
|
|
(74,224
|
)
|
|
|
(61,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
53,975
|
|
|
$
|
40,136
|
|
|
$
|
138,672
|
|
|
$
|
104,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, as
reported
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.56
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, as
reported
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.54
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, pro
forma
|
|
$
|
0.15
|
|
|
$
|
0.11
|
|
|
$
|
0.37
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, pro
forma
|
|
$
|
0.14
|
|
|
$
|
0.10
|
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories are stated at the lower of cost
(first-in,
first-out basis) or market. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
January 27,
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Purchased components
|
|
$
|
30,029
|
|
|
$
|
15,784
|
|
Work in process
|
|
|
|
|
|
|
686
|
|
Finished goods
|
|
|
34,043
|
|
|
|
22,513
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,072
|
|
|
$
|
38,983
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Goodwill
and Intangible Assets
|
Goodwill is reviewed annually for impairment (or more frequently
if indicators of impairment arise). We completed our annual
impairment assessment in fiscal 2005 and concluded that goodwill
was not impaired. In the nine month period ended
January 27, 2006, there were no indicators that would
suggest the impairment of goodwill and intangible assets.
During May 2005, we acquired Alacritus Inc.
(Alacritus) and recorded goodwill of $5,844 and
intangible assets of $5,700 resulting from the allocation of the
purchase price. See Note 14, Business
Combinations. In the second quarter of fiscal 2006, the
Alacritus goodwill was increased by $479 to reflect an
adjustment for the deferred tax impact on deferred stock
compensation.
During August 2005, we acquired Decru, Inc. (Decru)
and recorded goodwill of $192,949 and intangible assets of
$68,100 resulting from the allocation of the purchase price. See
Note 14, Business Combinations.
Identified intangible asset balances as of January 27, 2006
and April 30, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
January 27, 2006
|
|
|
April 30, 2005
|
|
|
|
Period
|
|
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(Years)
|
|
Gross Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Gross Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5
|
|
$
|
10,040
|
|
|
$
|
(4,952
|
)
|
|
$
|
5,088
|
|
|
$
|
10,040
|
|
|
$
|
(3,467
|
)
|
|
$
|
6,573
|
|
Existing technology
|
|
4 5
|
|
|
91,025
|
|
|
|
(28,432
|
)
|
|
|
62,593
|
|
|
|
33,525
|
|
|
|
(20,512
|
)
|
|
|
13,013
|
|
Trademarks/tradenames
|
|
3 6
|
|
|
5,080
|
|
|
|
(515
|
)
|
|
|
4,565
|
|
|
|
280
|
|
|
|
(111
|
)
|
|
|
169
|
|
Customer contracts/relationships
|
|
1.5 5
|
|
|
10,700
|
|
|
|
(1,900
|
)
|
|
|
8,800
|
|
|
|
1,100
|
|
|
|
(885
|
)
|
|
|
215
|
|
Covenants not to compete
|
|
1.5 2
|
|
|
9,510
|
|
|
|
(8,123
|
)
|
|
|
1,387
|
|
|
|
7,610
|
|
|
|
(6,132
|
)
|
|
|
1,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets, Net
|
|
|
|
$
|
126,355
|
|
|
$
|
(43,922
|
)
|
|
$
|
82,433
|
|
|
$
|
52,555
|
|
|
$
|
(31,107
|
)
|
|
$
|
21,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for identified intangible assets is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Patents
|
|
$
|
495
|
|
|
$
|
451
|
|
|
$
|
1,487
|
|
|
$
|
1,352
|
|
Existing technology
|
|
|
3,866
|
|
|
|
858
|
|
|
|
7,920
|
|
|
|
2,574
|
|
Other identified intangibles
|
|
|
940
|
|
|
|
1,475
|
|
|
|
3,409
|
|
|
|
4,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,301
|
|
|
$
|
2,784
|
|
|
$
|
12,816
|
|
|
$
|
8,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based on the identified intangible assets recorded at
January 27, 2006, the future amortization expense of
identified intangibles for the remainder of fiscal 2006, the
next four fiscal years and thereafter is as follows:
|
|
|
|
|
Year Ending April,
|
|
Amount
|
|
|
Remainder of Fiscal 2006
|
|
$
|
5,301
|
|
2007
|
|
|
21,188
|
|
2008
|
|
|
20,364
|
|
2009
|
|
|
17,946
|
|
2010
|
|
|
13,133
|
|
Thereafter
|
|
|
4,501
|
|
|
|
|
|
|
Total
|
|
$
|
82,433
|
|
|
|
|
|
|
|
|
7.
|
Derivative
Instruments
|
As a result of our significant international operations, we are
subject to risks associated with fluctuating exchange rates. We
use derivative financial instruments, principally currency
forward contracts and currency options, to attempt to minimize
the impact of exchange rate movements on our balance sheet and
operating results. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. These
programs reduce, but do not always entirely eliminate, the
impact of currency exchange movements. The maturities of these
instruments are generally less than one year.
Currently, we do not enter into any foreign exchange forward
contracts to hedge exposures related to firm commitments or
equity investments. Our major foreign currency exchange
exposures and related hedging programs are described below:
Balance Sheet Exposures. We utilize foreign
currency forward and options contracts to hedge exchange rate
fluctuations related to certain foreign assets and liabilities.
Gains and losses on these derivatives offset gains and losses on
the assets and liabilities being hedged and the net amount is
included in earnings. For the three-month period ended
January 27, 2006, net gains generated by hedged assets and
liabilities totaled $1,169 and were offset by losses on the
related derivative instruments of $113. For the nine-month
period ended January 27, 2006, net losses generated by
hedged assets and liabilities totaled $2,407 and were offset by
gains on the related derivative instruments of $3,035. For the
three and nine-month periods ended January 28, 2005, net
gains generated by hedged assets and liabilities totaled $748
and $5,021, respectively, and were offset by losses on the
related derivative instruments of $1,388 and $6,596,
respectively.
The premiums paid on the foreign currency option contracts are
recognized as a reduction to other income when the contract is
entered into. Other than the risk associated with the financial
condition of the counterparties, our maximum exposure related to
foreign currency options is limited to the premiums paid.
Forecasted Transactions. We use currency
forward contracts to hedge exposures related to forecasted sales
and operating expenses denominated in certain foreign
currencies. These contracts are designated as cash flow hedges
and in general closely match the underlying forecasted
transactions in duration. The contracts are carried on the
balance sheet at fair value and the effective portion of the
contracts gains and losses is recorded as other
comprehensive income until the forecasted transaction occurs.
If the underlying forecasted transactions do not occur, or it
becomes probable that they will not occur, the gain or loss on
the related cash flow hedge is recognized immediately in
earnings. For the three and nine-month periods ended
January 27, 2006 and January 28, 2005, we did not
record any gains or losses related to forecasted transactions
that did not occur or became improbable.
As of January 27, 2006, our notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$305,585. We do not believe that these derivatives present
significant credit risks, because the
9
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
counterparties to the derivatives consist of major financial
institutions, and we manage the notional amount of contracts
entered into with several counterparties. We do not enter into
derivative financial instruments for speculative or trading
purposes. Other than the risk associated with the financial
condition of the counterparties, our maximum exposure related to
foreign currency forward and option contracts is limited to the
forward points and premiums paid.
Basic net income per share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding excluding unvested restricted stock
for that period. Diluted net income per share is computed giving
effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares
consist of incremental common shares subject to repurchase,
common shares issuable upon exercise of stock options and
restricted stock awards.
During all periods presented, we had certain 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. These options were antidilutive in
the three and nine-month periods ended January 27, 2006 and
January 28, 2005 as their exercise prices were above the
average market prices in such periods. For the three-month
periods ended January 27, 2006 and January 28, 2005,
18,450 and 13,121 shares of common stock options with a
weighted average exercise price of $47.83 and $57.67,
respectively, were excluded from the diluted net income per
share computation. For the nine-month periods ended
January 27, 2006 and January 28, 2005, 18,881 and
14,873 shares of common stock options with a weighted
average exercise price of $48.04 and $54.05, respectively, were
excluded from the diluted net income per share computation.
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
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
Net Income
(Numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic and diluted
|
|
$
|
76,393
|
|
|
$
|
60,127
|
|
|
$
|
207,231
|
|
|
$
|
162,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Per Share
Calculations (Denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
372,289
|
|
|
|
363,071
|
|
|
|
370,543
|
|
|
|
359,561
|
|
Weighted average common shares
outstanding subject to repurchase
|
|
|
(521
|
)
|
|
|
(508
|
)
|
|
|
(474
|
)
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic computation
|
|
|
371,768
|
|
|
|
362,563
|
|
|
|
370,069
|
|
|
|
359,031
|
|
Weighted average common shares
outstanding subject to repurchase
|
|
|
521
|
|
|
|
508
|
|
|
|
474
|
|
|
|
530
|
|
Common shares issuable upon
exercise of stock options
|
|
|
16,860
|
|
|
|
22,798
|
|
|
|
16,448
|
|
|
|
18,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted computation
|
|
|
389,149
|
|
|
|
385,869
|
|
|
|
386,991
|
|
|
|
377,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.56
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.54
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Repurchase Program
As of April 30, 2005, $20,925 was available for the
repurchase of common shares under the Stock Repurchase Program.
On May 24, 2005, our Board approved an incremental stock
repurchase program in which up to $300,000 of additional shares
may be repurchased. In November 2005, our Board of Directors
approved a new $650,000 stock repurchase program which amount
includes the $76,361 remaining from all prior authorizations
(i.e., the net additional approval amount, without taking into
account remaining amounts approved in prior periods, is
$573,639).
Share repurchase activities for the three and nine-months ended
January 27, 2006 and January 28, 2005, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Shares repurchased
|
|
|
5,025
|
|
|
|
1,532
|
|
|
|
14,612
|
|
|
|
5,580
|
|
Cost of shares repurchased
|
|
$
|
145,583
|
|
|
$
|
49,980
|
|
|
$
|
390,147
|
|
|
$
|
132,993
|
|
Average price per share
|
|
$
|
28.97
|
|
|
$
|
32.62
|
|
|
$
|
26.70
|
|
|
$
|
23.83
|
|
At January 27, 2006, $504,417 remained available for
repurchases under the plan.
Since the inception of the stock repurchase program through
January 27, 2006, we have purchased a total of
29,178 shares of our common stock at an average price of
$24.65 per share for an aggregate purchase price of
$719,222.
Comprehensive
Income
The components of comprehensive income, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
76,393
|
|
|
$
|
60,127
|
|
|
$
|
207,231
|
|
|
$
|
162,318
|
|
Currency translation adjustment
|
|
|
(12
|
)
|
|
|
448
|
|
|
|
(1,996
|
)
|
|
|
30
|
|
Change in unrealized gain (loss)
on investments
|
|
|
1,327
|
|
|
|
143
|
|
|
|
(4,492
|
)
|
|
|
(1,562
|
)
|
Change in unrealized gain (loss)
on derivatives
|
|
|
352
|
|
|
|
(2,691
|
)
|
|
|
559
|
|
|
|
(2,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
78,060
|
|
|
$
|
58,027
|
|
|
$
|
201,302
|
|
|
$
|
157,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss were as
follows:
|
|
|
|
|
|
|
|
|
|
|
January 27,
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accumulated translation adjustments
|
|
$
|
(714
|
)
|
|
$
|
1,283
|
|
Accumulated unrealized loss on
available-for-sale
investments
|
|
|
(9,935
|
)
|
|
|
(5,444
|
)
|
Accumulated unrealized gain on
derivatives
|
|
|
670
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive loss
|
|
$
|
(9,979
|
)
|
|
$
|
(4,050
|
)
|
|
|
|
|
|
|
|
|
|
11
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Restructuring
Charges
|
In fiscal 2002, as a result of continuing unfavorable economic
conditions and a reduction in IT spending rates, we implemented
two restructuring plans, which included reductions in workforce
and consolidations of facilities. As of January 27, 2006,
we have no outstanding balance in our restructuring liability
for the first restructuring. The second restructuring related to
the closure of an engineering facility and consolidation of
resources to the Sunnyvale headquarters. In the second quarter
of fiscal 2006, we implemented a third restructuring plan
related to the move of our global services center operations
from Sunnyvale to our new flagship support center at our
Research Triangle Park facility in North Carolina.
During the first quarter of fiscal 2006, we recorded a reduction
in restructuring reserve of $1,256 resulting from the execution
of new sublease agreement for our Tewksbury facility. Our
restructuring estimates are reviewed and revised periodically
and may result in a substantial charge or reduction to
restructuring expense should different conditions prevail than
were anticipated in previous management estimates. Such
estimates included various assumptions such as the time period
over which the facilities will be vacant, expected sublease
terms, and expected sublease rates.
During the second and third quarter of fiscal 2006, we recorded
a restructuring charge of $645 and $117, primarily attributed to
severance-related amounts and relocation expenses related to the
move of our global services center operations.
The following analysis sets forth the changes in the
restructuring reserve for the three months ended
January 27, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Accrual
|
|
|
Severance-Related
|
|
|
Total
|
|
|
Reserve balance at April 30,
2004
|
|
$
|
5,208
|
|
|
$
|
|
|
|
$
|
5,208
|
|
Cash payments
|
|
|
(705
|
)
|
|
|
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 30,
2005
|
|
|
4,503
|
|
|
|
|
|
|
|
4,503
|
|
Cash payments
|
|
|
(90
|
)
|
|
|
|
|
|
|
(90
|
)
|
Adjustments
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at July 29,
2005
|
|
|
3,157
|
|
|
|
|
|
|
|
3,157
|
|
Restructuring charges
|
|
|
281
|
|
|
|
364
|
|
|
|
645
|
|
Cash payments
|
|
|
(451
|
)
|
|
|
(341
|
)
|
|
|
(792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at
October 28, 2005
|
|
|
2,987
|
|
|
|
23
|
|
|
|
3,010
|
|
Restructuring charges
|
|
|
|
|
|
|
117
|
|
|
|
117
|
|
Cash payments
|
|
|
(175
|
)
|
|
|
(17
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at
January 27, 2006
|
|
$
|
2,812
|
|
|
$
|
123
|
|
|
$
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the restructuring reserve balance at January 27, 2006,
$681 was included in other accrued liabilities and the remaining
$2,254 was classified as long-term obligations, relating to the
facility charges for the second restructuring and the global
services center restructuring charges.
|
|
11.
|
Short-Term
Investments
|
All our investments are classified as available for sale at
January 27, 2006 and April 30, 2005.
Available-for-sale
investments with original maturities of greater than three
months are classified as short-term investments, as these
investments generally consist of highly marketable securities
that are intended to be available to meet current cash
requirements. Investment securities classified as
available-for-sale
are reported at fair market value, and net unrealized gains or
losses are recorded in accumulated other comprehensive loss, a
separate component of stockholders equity. Realized gains
or losses on sales of investments are computed based upon
12
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
specific identification and are included in interest income and
other, net. For all periods presented, realized gains and losses
on
available-for-sale
investments were not material. Management evaluates investments
on a regular basis to determine if an
other-than-temporary
impairment has occurred and there were none as of
January 27, 2006. The unrealized losses on these
investments at January 27, 2006 were primarily due to
interest rate fluctuations. We have the ability and intent to
hold these investments until recovery of their carrying values.
We also believe that we will be able to collect all principal
and interest amounts due to us at maturity given the high credit
quality of these investments. Accordingly, we do not consider
these investments to be
other-than-temporarily
impaired at January 27, 2006.
|
|
12.
|
New
Accounting Pronouncements
|
In June 2004, the FASB ratified Emerging Issues Task Force Issue
(EITF)
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments.
EITF 03-1
includes new guidance for evaluating and recording impairment
losses on debt and equity investments, as well as new disclosure
requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards
Board (FASB) approved the issuance of a FASB Staff
Position to delay the recognition and measurement provisions of
EITF 03-1.
In June 2005, the FASB decided not to provide additional
guidance on the meaning of
other-than-temporary
impairment under
EITF 03-1.
The FASB directed the staff to issue FASB Staff Position Paper
(FSP) 115-1, The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments
( FSP 115-1), superseding
EITF 03-1.
FSP 115-1 will replace the accounting guidance on the
determination of whether an investment is
other-than-temporarily
impaired as set forth in
EITF 03-1
with references to existing
other-than-temporary
impairment guidance. In November 2005, the FASB issued FASB
Staff Position FSP 115-1 which addresses the determination as to
when an investment is considered impaired, whether that
impairment is
other-than-temporary,
and the measurement of an impairment loss. This FSP also
includes accounting considerations subsequent to the recognition
of an
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as
other-than-temporary
impairments. The guidance in this FSP amends FASB Statement
No. 115, Accounting for Certain Investments in Debt
and Equity Securities and APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common
Stock. The guidance in FSP 115-1 shall be applied to
reporting periods beginning after December 15, 2005. We are
required to adopt FSP 115-1 beginning January 28, 2006. We
are currently evaluating the effect that the adoption of FSP
115-1 will have on our consolidated results of operations and
financial condition but do not expect it to have a material
impact.
In October 2005, the FASB issued FASB Staff Position
(FSP) FSP Nos.
FAS 13-1,
Accounting for Rental Costs Incurred during a Construction
Period, (FSP
13-1)
addresses the accounting for rental costs associated with
operating leases that are incurred during a construction period.
The adoption of the provisions of FSP
13-1 is not
expected to have a material impact on our financial position or
results of operations.
In June 2005, the FASB issued SFAS No. 154
Accounting Changes and Error Corrections: a Replacement of
Accounting Principles Board Opinion No. 20
(APB 20) and FASB Statement No 3
(SFAS No. 154). SFAS No. 154
requires retrospective application for voluntary changes in
accounting principle unless it is impracticable to do so.
Retrospective application refers to the application of a
different accounting principle to previously issued financial
statements as if that principle had always been used.
SFAS No. 154s retrospective-application
requirement replaces APB 20s requirement to recognize
most voluntary changes in accounting principle by including in
net income of the period of the change the cumulative effect of
changing to the new accounting principle. This Statement defines
retrospective application as the application of a different
accounting principle to prior accounting periods as if that
principle had always been used or as the adjustment of
previously issued financial statements to reflect a change in
the reporting entity. This Statement also redefines restatement
as the revising of previously issued financial statements to
reflect the correction of an error. The requirements are
effective for accounting changes made in fiscal years beginning
after December 15, 2005 and will only impact the
consolidated financial statements in periods in which a change
in accounting principle is made.
13
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligation. (Interpretation No. 47).
Interpretation No. 47 clarifies that an entity must record
a liability for a conditional asset retirement
obligation if the fair value of the obligation can be reasonably
estimated. Interpretation No. 47 also clarifies when an
entity would have sufficient information to reasonably estimate
the fair value of an asset retirement obligation. Interpretation
No. 47 is effective no later than the end of the fiscal
year ending after December 15, 2005. We are currently
evaluating the provision and do not expect that our adoption in
the fourth quarter of fiscal 2006 will have a material impact on
our results of operations or financial condition.
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 107, which provides guidance on the
implementation of Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based
Payments (SFAS No. 123R) (see discussion
below). In particular, SAB No. 107 provides key
guidance related to valuation methods (including assumptions
such as expected volatility and expected term), the accounting
for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123R, the modification of
employee share options prior to the adoption of
SFAS No. 123R, the classification of compensation
expense, capitalization of compensation cost related to
share-based payment arrangements, first-time adoption of
SFAS No. 123R in an interim period, and disclosures in
Managements Discussion and Analysis subsequent to the
adoption of SFAS No. 123R. SAB No. 107
became effective on March 29, 2005. It did not have a
material impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R.
Generally, the requirements of SFAS No. 123R are
similar to those of SFAS No. 123. However,
SFAS No. 123R requires companies to now recognize all
share-based payments to employees, including grants of employee
stock options, in their statements of operations based on the
fair value of the payments. Pro forma disclosure will no longer
be an alternative. The effective date of the new standard for
our consolidated financial statements is the first quarter of
fiscal 2007, which begins on May 1, 2006.
SFAS No. 123R permits public companies to adopt its
requirements using one of two methods: (1) a modified
prospective method under which compensation cost is
recognized beginning with the effective date based on the
requirements of SFAS No. 123R for all share-based
payments granted after the effective date and based on the
requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R
that are unvested on the effective date; or (2) a
modified retrospective method which includes the
requirements of the modified prospective method and also permits
companies to restate either all prior periods presented or prior
interim periods of the year of adoption using the amounts
previously calculated for pro forma disclosure under
SFAS No. 123. We have not yet determined which method
we will select for our adoption of SFAS No. 123R.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB No. 25s
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options through our
consolidated statements of operations but rather, discloses the
effect in its consolidated financial statement footnotes.
Accordingly, the adoption of SFAS No. 123Rs fair
value method will have a significant impact on our reported
results of operations. However, the impact of the adoption of
SFAS No. 123R cannot be quantified at this time
because it will depend on levels of share-based payments granted
in the future as well as other variables that effect the fair
market value estimates, which cannot be forecasted at this time.
In January 2005, the FASB issued FASB Staff Position
(FSP)
No. FAS 109-1,
Application of SFAS No. 109 to the Tax
Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004. (FSP
No. 109-1)
This FSP provides guidance for the accounting of a deduction
provided to U.S. manufacturing companies and is effective
immediately. We believe the adoption of this position currently
will not have a material effect on our financial position or
results of operations. However, there is no assurance that there
will not be a material impact in the future.
In December 2004, the FASB issued FSP
No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 (FSP
No. 109-2).
The American Jobs Creation Act introduces a special one-time
dividends received deduction on the repatriation of
14
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain foreign earnings to U.S. companies, provided
certain criteria are met. FSP
No. 109-2
provides accounting and disclosure guidance on the impact of the
repatriation provision on a companys income tax expense
and deferred tax liability. We are currently studying the impact
of the one-time favorable foreign dividend provision and intend
to complete the analysis by the end of our fourth quarter of
fiscal 2006. Accordingly, we have not adjusted income tax
expense or deferred tax liability to reflect the tax impact of
any repatriation of
non-U.S. earnings.
In November 2004, the FASB issued SFAS No. 151
Inventory Costs (SFAS No. 151).
This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage).
SFAS No. 151 requires that those items be recognized
as current-period charges. In addition, this Statement requires
that allocation of fixed production overhead to costs of
conversion be based upon the normal capacity of the production
facilities. The provisions of SFAS No. 151 are
effective for inventory cost incurred in fiscal years beginning
after June 15, 2005. As such, we are required to adopt
these provisions at the beginning of fiscal 2007, which begins
on May 1, 2006. We do not expect the adoption of
SFAS No. 151 to have a material impact on our
consolidated financial statements.
|
|
13.
|
Commitments
and Contingencies
|
The following summarizes our commitments and contingencies at
January 27, 2006, and the effect such obligations may have
on our future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations:
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Rent operating lease payments(1)
|
|
$
|
3,981
|
|
|
$
|
13,979
|
|
|
$
|
13,627
|
|
|
$
|
13,358
|
|
|
$
|
10,133
|
|
|
$
|
28,779
|
|
|
$
|
83,857
|
|
Equipment operating lease
payments(1)
|
|
|
1,516
|
|
|
|
5,849
|
|
|
|
5,167
|
|
|
|
2,873
|
|
|
|
16
|
|
|
|
|
|
|
|
15,421
|
|
Lease payments(2)
|
|
|
|
|
|
|
|
|
|
|
1,651
|
|
|
|
1,981
|
|
|
|
1,981
|
|
|
|
37,017
|
|
|
|
42,630
|
|
Venture capital funding
commitments(3)
|
|
|
100
|
|
|
|
402
|
|
|
|
389
|
|
|
|
377
|
|
|
|
364
|
|
|
|
381
|
|
|
|
2,013
|
|
Purchase commitments and other(4)
|
|
|
1,348
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,948
|
|
Capital Expenditures(5)
|
|
|
10,858
|
|
|
|
7,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,569
|
|
Communications &
Maintenance(6)
|
|
|
3,169
|
|
|
|
7,439
|
|
|
|
5,267
|
|
|
|
1,521
|
|
|
|
169
|
|
|
|
|
|
|
|
17,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations
|
|
$
|
20,972
|
|
|
$
|
35,980
|
|
|
$
|
26,101
|
|
|
$
|
20,110
|
|
|
$
|
12,663
|
|
|
$
|
66,177
|
|
|
$
|
182,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
Commitments:
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Letters of Credit(7)
|
|
$
|
450
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
337
|
|
|
$
|
787
|
|
Restricted Cash(8)
|
|
|
1,828
|
|
|
|
302
|
|
|
|
748
|
|
|
|
676
|
|
|
|
53
|
|
|
|
2,224
|
|
|
|
5,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
Commitments
|
|
$
|
2,278
|
|
|
$
|
302
|
|
|
$
|
748
|
|
|
$
|
676
|
|
|
$
|
53
|
|
|
$
|
2,561
|
|
|
$
|
6,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We lease sales offices and research and development facilities
throughout the U.S. and internationally. These sales offices are
leased under operating leases which expire through fiscal 2015.
We are responsible for certain maintenance costs, taxes, and
insurance under these leases. Substantially all lease agreements
have fixed payment terms based on the passage of time. Some
lease agreements provide us with the option to renew or
terminate the lease. Our future operating lease obligations
would change if we were to exercise these options and if we were
to enter into additional operating lease agreements. Sublease
income of $58 has been included as a reduction of the payment
amounts shown in the table. Rent operating lease payments in the
table exclude lease |
15
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
payments which are accrued as part of our 2002 restructurings
and include only rent lease commitments that are over one year. |
|
(2) |
|
On December 16, 2005, we (the Lessee) entered
into financing, construction and leasing arrangements with BNP
Paribas LLC (BNP) (the Lessor), for
office space to be located on land currently owned by us in
Sunnyvale, California. This arrangement requires us to ground
lease our land to BNP for a period of 50 years to construct
approximately 190,000 square feet of office space with
$38,500 construction allowance provided by BNP, and, after
completion of construction to pay minimum lease payments which
vary based on London Interbank Offered Rate (LIBOR)
plus a spread (5.15% at January 27, 2006). We expect to pay
lease payments on the completed buildings from BNP on June 2007
for a term of five years. We have the option to renew the lease
for two consecutive five-year periods upon approval by BNP. |
|
|
|
Upon expiration (or upon any earlier termination) of the lease
term, we must elect one of the following options: we may
(i) purchase the building from BNP for $38,500 (ii) if
certain conditions are met, arrange for the sale of the building
by BNP to a third party for an amount equal to at least 32,725,
and be liable for the deficiency between the net proceeds
received from the third party and $32,725, or (iii) pay BNP
a supplemental payment of $32,725, in which event, we may recoup
some or all of such payment by arranging for a sale of the
building by BNP during the ensuing 2 year period. |
|
|
|
Included in the above contractual cash obligations are
(a) lease commitments of $1,651 in fiscal 2008, $1,981 in
each of the fiscal years 2009, 2010, 2011, 2012 and $330 in
fiscal 2013, which are based on the LIBOR rate at
January 27, 2006, for a term of 5 years, and
(b) at the expiration or termination of the lease, a
supplemental payment obligation equal to $32,725 in the event
that we elect not to purchase or arrange for a sale of the
building. |
|
|
|
The lease also requires us to maintain specified financial
covenants with which we were in compliance as of
January 27, 2006. Such specified financial covenants
include a maximum ratio of Total Debt to Earnings Before
Interest, Taxes, Depreciation and Amortization
(EBITDA) and a Minimum Unencumbered Cash and Short
Term Investments. |
|
(3) |
|
Venture capital funding commitments include a quarterly
committed management fee based on a percentage of our committed
funding to be payable through June 2011. |
|
(4) |
|
Amounts included in purchase commitments and other are
(a) agreements to purchase component inventory from our
suppliers
and/or
contract manufacturers that are non-cancelable and legally
binding against us and (b) commitment related to utilities
contracts. Purchase commitments and other exclude
(a) purchases of goods and services we expect to consume in
the ordinary course of business in the next 12 months;
(b) open purchase orders that represent an authorization to
purchase rather than a binding agreement; (c) agreements
that are cancelable without penalty and costs that are not
reasonably estimable at this time. |
|
(5) |
|
Capital expenditures include worldwide contractual commitments
to purchase equipment and to construct building and leasehold
improvements, which will be recorded as Property and Equipment. |
|
(6) |
|
We are required to pay based on a minimum volume under certain
communication contracts with major telecommunication companies
as well as maintenance contracts with multiple vendors. Such
obligations expire in April 2010. |
|
(7) |
|
The amounts outstanding under these letters of credit relate to
workers compensation, a customs guarantee and a corporate
credit card program. |
|
(8) |
|
Restricted cash arrangements relate to facility lease
requirements, service performance guarantees, customs and duties
guarantees, and VAT requirements are included under Prepaid
Expenses and Other and Other Assets on our Consolidated Balance
Sheets. |
From time to time, we have committed to purchase various key
components used in the manufacture of our products. We establish
accruals for estimated losses on purchased components for which
we believe it is probable
16
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that they will not be utilized in future operations. To the
extent that such forecasts are not achieved, our commitments and
associated accruals may change.
We are subject to various legal proceedings and claims which may
arise in the normal course of business. While the outcome of
these legal matters is currently not determinable, we do not
believe that any current litigation or claims will have a
material adverse effect on our business, cash flow, operating
results, or financial condition.
|
|
14.
|
Business
Combinations
|
Acquisition
of Decru
On August 26, 2005, we completed our acquisition of Decru,
Inc. (Decru), a Delaware corporation that develops
and sells encryption software and appliances which encrypt
network data. The acquisition resulted in the issuance of
approximately 8,270 shares of our common stock with a fair
value of approximately $191,874, approximately 1,907 stock
options and restricted stock with a fair value of approximately
$36,142 and the payment of approximately $54,482 in cash (of
which approximately $34,049 has been placed in escrow to secure
the Decru stockholders indemnification obligations to us
pursuant to the Merger Agreement), and $711 acquisition-related
transaction costs, for a total purchase price of approximately
$283,209. The common stock issued in the acquisition was valued
at $23.20 per share using a measurement date of
August 11, 2005 in accordance with EITF 99-12,
Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business
Combination. The options were valued using the Black-Scholes
option pricing model with the following inputs: volatility
factor of 69%, expected life of 3.8 years, risk-free
interest rate of 2.9%, and a market value for Network
Appliances stock of $23.20 per share, which was
determined as described above. A summary of the total purchase
price is as follows:
|
|
|
|
|
|
|
Decru
|
|
|
Common stock issued
|
|
$
|
191,874
|
|
Cash consideration
|
|
|
54,482
|
|
Stock options assumed
|
|
|
36,142
|
|
Acquisition-related transaction
costs
|
|
|
711
|
|
|
|
|
|
|
|
|
$
|
283,209
|
|
|
|
|
|
|
In accordance with SFAS 141, we have preliminarily
allocated the purchase price to the estimated tangible and
intangible assets acquired and liabilities assumed, including
in-process research and development, based on their estimated
fair values. The excess purchase price over those fair values is
recorded as goodwill. Decrus technology will augment our
data protection and security solutions and provide for a wide
variety of deployments with vendors storage systems in
NAS, DAS, SAN, iSCSI, and even tape backup environments, which
will allow us to pursue expanded market opportunities. These
opportunities, along with the ability to leverage the Decru
workforce, were significant contributing factors to the
establishment of the purchase price, resulting in the
recognition of a significant amount of goodwill. The fair values
assigned to tangible and intangible assets acquired and
liabilities assumed are based on management estimates and
assumptions, and other information compiled by management,
including third-party valuations that utilized established
valuation techniques appropriate for the high-technology
industry. Goodwill recorded as a result of this acquisition is
not expected to be deductible for tax purposes. In accordance
with SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142), goodwill is not amortized but
will be reviewed at least annually for impairment. Purchased
intangibles with finite lives will be amortized over their
17
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respective estimated useful lives on a straight line basis. The
purchase price has been preliminarily allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Period
|
|
Purchase Price
Allocation:
|
|
Decru
|
|
|
(Years)
|
|
|
Fair value of tangible assets
acquired
|
|
$
|
16,516
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Existing
Technology Hardware
|
|
|
30,100
|
|
|
|
5
|
|
Existing
Technology Software
|
|
|
10,600
|
|
|
|
4
|
|
Patents and Core Technology
|
|
|
11,800
|
|
|
|
5
|
|
Reseller Agreement and Related
Relationship
|
|
|
2,400
|
|
|
|
5
|
|
Customer/Distributor Relationships
|
|
|
7,200
|
|
|
|
5
|
|
Non compete agreements
|
|
|
1,200
|
|
|
|
2
|
|
Trademarks and tradenames
|
|
|
4,800
|
|
|
|
6
|
|
Goodwill
|
|
|
192,949
|
|
|
|
|
|
In process research and development
|
|
|
5,000
|
|
|
|
Expensed
|
|
Fair value of liabilities assumed
|
|
|
(3,087
|
)
|
|
|
|
|
Deferred stock compensation
|
|
|
18,549
|
|
|
|
|
|
Deferred income taxes
|
|
|
(14,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
283,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives are primarily based on the underlying assumptions
used in the discounted cash flow models. The allocation is
preliminary and subject to change if we obtain additional
information concerning the fair values of certain acquired
assets and liabilities of Decru.
Net
Tangible Assets
Decrus assets and liabilities as of August 26, 2005
were reviewed and adjusted, if required, to their estimated fair
value. Included in net tangible assets acquired above is $13,277
of cash assumed in connection with the Decru acquisition.
Amortizable
Intangible Assets
Our valuation specialists valued the identified intangible
assets utilizing a discounted cash flow (DCF) model,
which uses forecasts of future revenues and expenses related to
the intangible assets. We are amortizing these intangible assets
over 2-6 years on a straight-line basis.
In-process
Research and Development (IPR&D)
Of the total purchase price, $5,000 has been allocated to
in-process research and development (IPR&D) and
was expensed in the quarter ended October 28, 2005.
Projects that qualify as IPR&D represent those that have not
yet reached technological feasibility and which have no
alternative future use. Technological feasibility is established
when an enterprise has completed all planning, designing,
coding, and testing activities that are necessary to establish
that a product can be produced to meet its design specifications
including functions, features, and technical performance
requirement. The value of IPR&D was determined by estimating
the stage of completion and risk associated with IPR&D to
determine the level of discount rate to be applied, estimating
costs to develop the purchased IPR&D into commercially
viable products, estimating the resulting net cash flows from
the projects when completed and discounting the net cash flows
to their present value based on the percentage of completion of
the IPR&D projects.
18
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisition
of Alacritus
On May 2, 2005, we acquired Alacritus, Inc., a privately
held company based in Pleasanton, California, that develops and
sells disk-based virtual tape library software for data
protection solutions. Under terms of the agreement, we paid
Alacritus $11,000 in cash and assumed options to acquire
79 shares of common stock at an average price of
$26.37 per share and 43 shares of restricted stock
units at $0 per share. We also incurred certain transaction
costs and assumed certain operating assets and liabilities. The
historical operations of Alacritus were not significant.
The acquisition was accounted for under the purchase method of
accounting. The total purchase price for Alacritus is summarized
below:
|
|
|
|
|
|
|
Alacritus
|
|
|
Cash consideration
|
|
$
|
11,000
|
|
Common stock issued
|
|
|
|
|
Stock options assumed
|
|
|
2,314
|
|
Acquisition-related transaction
costs
|
|
|
337
|
|
|
|
|
|
|
|
|
$
|
13,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Period
|
|
Purchase Price
Allocation:
|
|
Alacritus
|
|
|
(Years)
|
|
|
Fair value of tangible assets
acquired
|
|
$
|
67
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Existing/Core Technology
|
|
|
5,000
|
|
|
|
5
|
|
Non compete agreements
|
|
|
700
|
|
|
|
2
|
|
Goodwill
|
|
|
5,844
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
(810
|
)
|
|
|
|
|
Deferred stock compensation
|
|
|
1,199
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock
Compensation, we recorded the intrinsic value, measured as
the difference between the grant price and fair market value on
the acquisition consummation date, of unvested options and
restricted stock units assumed in the Alacritus and Decru
acquisitions as deferred stock compensation. Such deferred stock
compensation which aggregated $1,199 for Alacritus and $18,549
for Decru, are recorded as a separate component of
stockholders equity in the accompanying condensed
consolidated balance sheet and will be amortized over the
vesting term of the related options. In connection with the
Decru merger, we assumed all options to purchase Decru common
stock granted under the Decru, Inc. 2001 Equity Incentive Plan
that were outstanding at the closing of the Merger, which
options shall be exercisable for an aggregate of
1,907 shares of our Common Stock at an average price of
$11.86 per share.
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Quarterly Report on
Form 10-Q
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and are subject to the
safe harbor provisions set forth in the Exchange Act.
Forward-looking statements usually contain the words
estimate, intend, plan,
predict, seek, may,
will, should, would,
anticipate, expect, believe,
or similar expressions and variations or negatives of these
words. In addition, any statements that refer to expectations,
projections or other characterizations of future events or
19
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
circumstances, including any underlying assumptions, are
forward-looking statements. All forward-looking statements,
including, but not limited to, (1) our expectation that
units shipped of the FAS 960, FAS 940 and FAS 920
will continue to decline and gradually be replaced by
FAS 3000 units; (2) our expectation that the
decline in our high-end products will be mitigated by the
introduction of our next-generation high-end products;
(3) our belief that our new
NearStore®
Virtual Tape Library solution will further expand our market
opportunity; (4) our expectation that the introduction of
our new high-end products, targeted for shipping before the end
of our fiscal 2006, will increase both performance and capacity
and restore the balance between the sales of our mid-range and
high-end products; (5) our plan to invest in the people,
processes and systems necessary to best optimize our revenue
growth and long-term profitability; (6) our expectation
that higher disk content associated with high-end storage
systems may negatively affect our gross margin; (7) our
estimates regarding future amortization of exiting technology to
cost of products revenues relating to our acquisitions;
(8) our expectation that service margins will be in the mid
20% range for fiscal 2006; (9) our estimates regarding
future amortization of trademarks, tradenames, customer
contracts and relationships relating to our acquisitions and
included in sales and marketing expenses; (10) our
expectation that we will continue to add sales and professional
services capacity; (11) our expectation that we will
increase sales and marketing expenses commensurate with future
revenue growth; (12) our estimates regarding future
capitalized patents amortization expenses; (13) our belief
that our future performance will depend in on our ability to
maintain and enhance our current product line, develop new
products, maintain technological competitiveness, and meet an
expanding range of customer requirements; (14) our
intention to continuously broaden our existing product offerings
and introduce new products; (15) our expectation that we
will continuously support current and future product development
and enhancement efforts and incur corresponding charges;
(16) our belief that our research and development expenses
will increase in absolute dollars for the remainder of fiscal
2006; (17) our belief that our general and administrative
expenses will increase in absolute terms in the remainder of
fiscal 2006; (18) our estimates regarding future
amortization of covenants not to compete relating to our
acquisitions; (19) our expectation that the research and
development costs to bring Decru products to technological
feasibility will not have a material impact on our future
results of operations of our financial condition; (20) our
expectation regarding estimated future deferred stock
compensation amortization expenses and future amortization of
intangible assets; (21) our expectation that interest
income will increase in fiscal 2006; (22) our belief that
period-to-period
changes in foreign exchange gain or losses will continue to be
impacted by hedging costs associated with our forward and option
activities; (23) our expectation that cash provided by
operating activities may fluctuate in future periods as a result
of a number of factors; (24) our expectation that we may
repatriate foreign earnings and pay taxes under the Jobs Act and
our expectation of the amount to be repatriated and the
consequent tax liability; (25) our expectations regarding
our contractual cash obligations and other commercial
commitments at January 27, 2006 for the remainder of fiscal
2006 and fiscal years 2007 through 2010 and thereafter;
(26) our expectation that we will complete construction on
our Sunnyvale facility by approximately June 2007 and that our
estimates regarding future minimum lease payments for the lease
term; (27) our expectation that capital expenditures will
increase consistent with our business growth; (28) our
expectation that our existing facilities and those currently
being developed, will be sufficient for our needs for at least
the next two years and that our contractual commitments,
including operating leases, and any required capital
expenditures over the next few years will be funded through cash
from operations and existing cash and investments; (29) our
belief that foreign currency hedging contracts will not subject
us to significant credit risk; (30) our belief that our
existing liquidity and capital resources are sufficient to fund
our operations for at least the next twelve months;
(31) our belief that the accounting policies included
herein are the policies that most frequently require us to make
estimates and judgments, and are therefore critical;
(32) our belief that the principal competitive factors
affecting our markets include certain product benefits and
global service and support; (33) our intent to regularly
introduce new products and product enhancements; (34) the
possibility that we may need to increase our materials
purchases, contract manufacturing capacity and internal test and
quality functions to meet anticipated demand; (35) our
intention to continue to establish and maintain business
relationships with technology companies; (36) the
possibility that we may continue to engage in future
acquisitions; (37) our expectation that we will
increasingly rely on our indirect sales channel for a
significant portion of our revenue; (38) our expectation
that the ultimate costs to resolve any outstanding legal
20
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims or proceedings will not be material to our business;
(39) our expectation that companies in the appliance market
will increasingly be subject to infringement claims as the
industry grows; (40) our expectation that the value of our
investments will not decline significantly because of changes in
market interest rates, (41) our expectation that our
investments in emerging technologies will contribute to our long
term growth; and (42) our expectation that we will acquire
products and businesses complementary to our business, are
inherently uncertain as they are based on managements
current expectations and assumptions concerning future events,
and they are subject to numerous known and unknown risks and
uncertainties. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the
date hereof and are based upon information available to us at
this time. These statements are not guarantees of future
performance. We disclaim any obligation to update information in
any forward-looking statement. Actual results could vary from
our forward looking statements and as a result of important
factors, including those described in the Risk Factors included
on page 35.
Third
Quarter Fiscal 2006 Overview
We achieved growth in revenue and profitability during the
three-month period ended January 27, 2006, driven primarily
by our FAS 3000 midrange product line. Product revenues
growth was across all geographies. The increase in product
revenues year over year was specifically attributable to
increased software licenses and software subscriptions, an
increase in units shipped of the new FAS 3000 series, and
sales of add-on storage shelves, partially offset by declines in
units shipped of our FAS 960, FAS 940, FAS 920
and R200 products.
We expect unit shipments of the FAS 960, FAS 940, and
FAS 920 to continue to decline in the remainder of fiscal
2006 and be gradually replaced by the FAS 3000 series
products. However, this shift to the FAS 3000 may
negatively impact our revenue in the near term as the dollar
value of our FAS 3000 sales may be lower compared to sales
of our FAS 960 and R200 products. In the longer term, we
expect this decline in the high-end products to be mitigated by
the introduction of our next-generation high-end products, which
is targeted for shipping in the fourth quarter of fiscal 2006.
We also expect this introduction will increase both performance
and capacity compared to the FAS 980, and will restore the
balance between the sales of our high-end and mid-range
products. Additionally, we believe that our new NearStore
Virtual Tape Library solution will further expand our market
opportunity as we can now provide
Disk-to-Disk
backup solutions for all open systems enterprise primary storage.
We continue to make progress in penetrating and expanding our
business in enterprise data centers with mission critical
partners, expanding our product line innovations to broaden our
addressable market, such as flexible volumes, data encryption
and virtual tape library. In the remainder of fiscal 2006 we
expect to introduce our new high-end products and deliver our
next-generation operating system with enhanced storage grid
architecture.
Continued revenue growth is dependent on the introduction and
market acceptance of our new products. If we fail to timely
introduce new products or successfully integrate acquired
technology into our existing architecture, or if there is no or
reduced demand for these or our current products, we may
experience a decline in revenue. We plan to continue to invest
in the people, processes, and systems necessary to best optimize
our revenue growth and long-term profitability. However, we
cannot assure you that such investments will achieve our
financial objectives.
Third
Quarter Fiscal 2006 Financial Performance
|
|
|
|
|
Our revenues for the three-month period ended January 27,
2006, were $537.0 million, a 30.1% increase over the
three-month period ended January 28, 2005. Our revenues for
the nine-month period ended January 27, 2006, were
$1,468.5 million, a 28.1% increase over the nine-month
period ended January 28, 2005. This
year-over-year
increase in revenue primarily from our new mid-range
FAS 3020 and FAS 3050 was partially offset by a
decline in revenue of our FAS 960, FAS 940,
FAS 920 and NearStore R200 products compared to the same
periods a year ago.
|
|
|
|
Our overall gross margins were 60.9% and 61.3% respectively, in
the three and nine-month periods ended January 27, 2006
compared to 61.1% and 60.9%, respectively, in the same periods
ended January 28, 2005.
|
21
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Overall gross margin for the three and nine-month periods ended
January 27, 2006 reflected higher amortization of existing
technology from our acquisitions which was partially offset by a
favorable change in product and add-on software mix.
|
|
|
|
|
|
Net income for the three-month period ended January 27,
2006 increased 27.1% to $76.4 million compared to net
income of $60.1 million for the same period a year ago. Net
income for the nine-month period ended January 27, 2006
increased 27.7% to $207.2 million compared to net income of
$162.3 million for the same period a year ago.
|
|
|
|
With the exception of long-term restructuring and deferred rent
liabilities totaling $3.4 million, our balance sheet as of
January 27, 2006 remains debt-free. Cash, cash equivalents
and investments declined to $1,140.9 million, compared to
$1,170.0 million as of April 30, 2005, due primarily
to cash repurchases of our common stock of $390.1 million
and net cash paid of $41.2 million in connection with the
Decru acquisition partially offset by cash generated from
operations. Days Sales Outstanding increased to 62 days as
of January 27, 2006 compared to 60 days as of
April 30, 2005. Inventory turns were 12.9 times and 17.9
times as of January 27, 2006 and April 30, 2005,
respectively. Deferred revenue increased to $593.5 million
as of January 27, 2006 from $449.2 million reported as
of April 30, 2005 due to higher software subscription and
service billings attributable to our continuing shift toward
larger enterprise customers. Capital purchases of plant,
property and equipment for the nine-month period ended
January 27, 2006 were $96.5 million.
|
Results
of Operations
The following table sets forth certain condensed consolidated
statements of income data as a percentage of total revenues for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Product revenue
|
|
|
88.3
|
|
|
|
89.1
|
|
|
|
88.1
|
|
|
|
89.8
|
|
Service revenue
|
|
|
11.7
|
|
|
|
10.9
|
|
|
|
11.9
|
|
|
|
10.2
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
30.4
|
|
|
|
30.8
|
|
|
|
29.8
|
|
|
|
30.8
|
|
Cost of service revenue
|
|
|
8.7
|
|
|
|
8.1
|
|
|
|
8.9
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
60.9
|
|
|
|
61.1
|
|
|
|
61.3
|
|
|
|
60.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
28.3
|
|
|
|
28.8
|
|
|
|
29.2
|
|
|
|
28.8
|
|
Research and development
|
|
|
11.7
|
|
|
|
10.6
|
|
|
|
11.5
|
|
|
|
10.7
|
|
General and administrative
|
|
|
4.6
|
|
|
|
4.9
|
|
|
|
4.6
|
|
|
|
4.8
|
|
In process research and development
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
Stock compensation
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Restructuring recoveries
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
45.4
|
|
|
|
44.7
|
|
|
|
46.2
|
|
|
|
44.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
15.5
|
|
|
|
16.4
|
|
|
|
15.1
|
|
|
|
16.0
|
|
22
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
January 27,
|
|
|
January 28,
|
|
|
January 27,
|
|
|
January 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1.8
|
|
|
|
1.5
|
|
|
|
1.9
|
|
|
|
1.4
|
|
Other income (expenses), net
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Net gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
17.5
|
|
|
|
17.8
|
|
|
|
17.0
|
|
|
|
17.3
|
|
Provision for Income Taxes
|
|
|
3.3
|
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
14.2
|
%
|
|
|
14.6
|
%
|
|
|
14.1
|
%
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
and Analysis of Results of Operations
Product Revenues Product revenues
increased by 28.9% to $474.2 million for the three-month
period ended January 27, 2006, from $367.9 million for
the same period in fiscal 2005. Product revenues increased by
25.7% to $1,293.6 million for the nine-month period ended
January 27, 2006, from $1,029.3 million for the same
period in fiscal 2005.
Product revenues were favorably impacted by the following
factors:
|
|
|
|
|
increased revenues from our new and current product portfolio,
and in particular, FAS 3020, FAS 3050, and
FAS 270 filer products and add-on software;
|
|
|
|
increased sales of software subscriptions, which represented
11.3% and 11.7% of total revenues for the three and nine-month
periods ended January 27, 2006, respectively, and 10.6% and
10.5% of total revenues for the three and nine-month periods
ended January 28, 2005, respectively;
|
|
|
|
increased sales through indirect channels, which includes sales
through our resellers, distributors and OEM partners,
representing 56.9% and 56.0% of total revenues for the three and
nine-month periods ended January 27, 2006, respectively,
and 50.4% of total revenues for both the three and nine-month
periods ended January 28, 2005; and
|
|
|
|
increased sales of add-on storage shelves due to data volume
growth and year end buying surge.
|
Product revenues were negatively impacted by the following
factors:
|
|
|
|
|
a mix shift to our new midrange FAS 3000 series, causing a
decline in unit shipments and revenues from our FAS 960,
FAS 940 and NearStore R200 products;
|
|
|
|
lower average selling prices associated with the new
FAS 3000 series using a mix of ATA and fibre channel drives;
|
|
|
|
lower-cost-per-megabyte disks; and
|
|
|
|
declining average selling prices and unit sales of our older
products.
|
The overall increase in product revenues for the nine-month
period ended January 27, 2006 as compared to the same
period ended January 28, 2005 was generally attributed to
the same offsetting factors as cited above for the three-month
periods ended January 27, 2006 and January 28, 2005.
In addition, for the nine-month period ended January 27,
2006, product revenues were also positively impacted by
increased revenues from our high-end FAS 980 product.
23
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Decru acquisition and the IBM OEM relationship did not have
a significant impact on the revenue for the three and nine-month
periods ended January 27, 2006. There can be no assurance
that IBM and Decru will contribute meaningful revenue in future
quarters. We also cannot assure you that we will be able to
maintain or increase market demand for our products.
Service Revenues Service revenues, which
include hardware support, professional services, and educational
services, increased by 40.2% to $62.8 million in the
three-month period ended January 27, 2006, from
$44.8 million in the same period in fiscal 2005. Service
revenues increased by 49.5% to $174.9 million in the
nine-month period ended January 27, 2006, from
$117.0 million in the same period in fiscal 2005.
The increase in absolute dollars was due to the following
factors:
|
|
|
|
|
an increasing number of enterprise customers which typically
purchase more complete and generally longer-term service
packages than our non-enterprise customers;
|
|
|
|
a growing installed base resulting in new customer support
contracts in addition to support contract renewals by existing
customers; and
|
|
|
|
growth in professional services revenue.
|
While it is an element of our strategy to expand and offer a
more comprehensive, global enterprise support and service
solution, we cannot assure you that service revenue will grow at
the current rate in the remainder of fiscal 2006.
Service revenues are generally deferred and, in most cases,
recognized ratably over the service obligation periods, which
are typically one to three years. Service revenues represented
11.7% and 11.9% of total revenues for the three and nine-month
periods ended January 27, 2006, respectively, and 10.9% and
10.2% of total revenues for the three and nine-month periods
ended January 28, 2005, respectively.
International total
revenues International total revenues
(including United States exports) increased by 27.8% and 25.0%
for the three and nine-month periods ended January 27,
2006, respectively, as compared to the same periods in fiscal
2005. International total revenues were $239.1 million and
$615.1 million, respectively, or 44.5% and 41.9% of total
revenues, respectively, for the three and nine-month periods
ended January 27, 2006. International total revenues were
$187.1 million and $492.0 million, respectively, or
45.3% and 42.9% of total revenues, respectively, for the three
and nine-month periods ended January 28, 2005. The increase
in international sales in absolute dollars was primarily a
result of European and Asia Pacific net revenue growth, driven
by increased demand for our solutions, new customers and higher
storage spending in certain geographic regions as compared to
the same periods in the prior fiscal year. We cannot assure you
that we will be able to maintain or increase international
revenues in the remainder of fiscal 2006.
Product Gross Margin Product gross
margins were 65.5% and 65.4% for the three-month periods ended
January 27, 2006, and January 28, 2005, respectively.
Product gross margin increased to 66.1% for the nine-month
period ended January 27, 2006, from 65.7% for the
nine-month period ended January 28, 2005.
Product gross margin was favorably impacted by:
|
|
|
|
|
favorable product and add-on software mix;
|
|
|
|
better disk utilization rates associated with sales of
higher-margin management software products like
FlexClonetm
and
FlexVoltm
that run on the Data
ONTAP®
7G operating system allowing customers to buy less disk storage
but buy more of the high-value, high-margin systems and
associated software to manage their data;
|
|
|
|
growth in software subscription upgrades and software licenses
due primarily to a larger installed base and an increasing
number of new enterprise customers.
|
24
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Product gross margin was negatively impacted by:
|
|
|
|
|
sales price reductions due to competitive pricing pressure and
selective pricing discounts;
|
|
|
|
increased sales through indirect channels, which may have a
lower gross margin than our direct sales in certain geographic
regions;
|
|
|
|
increase in the amount of relatively lower margin add-on storage
shelves sold; and
|
|
|
|
lower average selling price of certain add-on software options.
|
Higher disk content associated with high-end storage systems may
negatively affect our gross margin in the future if not offset
by increases in software revenue or new higher-margin products.
Amortization of existing technology included in cost of product
revenues was $3.9 million and $7.9 million for the
three and nine-month periods ended January 27, 2006,
respectively, and $0.9 million and $2.6 million for
the three and nine-month periods ended January 28, 2005,
respectively. Based on existing technology recorded at
January 27, 2006, estimated future amortization of existing
technology to cost of product revenues relating to our
acquisitions will be $3.9 million for the remainder of
fiscal 2006, $15.5 million for fiscal years 2007 and 2008,
$14.7 million for fiscal year 2009; $10.3 million for
fiscal year 2010; and $2.8 million thereafter.
Service Gross Margin Service gross
margin increased to 25.9% in the three-month period ended
January 27, 2006, as compared to 25.3% in the three-month
period ended January 28, 2005. Service gross margin
increased to 25.3% in the nine-month period ended
January 27, 2006 as compared to 18.8% in the nine-month
period ended January 28, 2005. Cost of service revenue
increased by 39.0% to $46.5 million in the three-month
period ended January 27, 2006, from $33.5 million in
the same period in fiscal 2005. Cost of service revenue
increased by 37.4% to $130.5 million in the nine-month
period ended January 27, 2006, from $95.0 million in
the same period in fiscal 2005.
The improvement in service gross margin for the three and
nine-month periods ended January 27, 2006 compared to the
same periods in fiscal 2005 was primarily due to an increase in
services revenue and improved headcount utilization. The
increase in the service gross margin was partially offset by the
continued spending in our service infrastructure to support our
increasing enterprise customer base. This spending included
additional professional support engineers, increased support
center activities, and global service partnership programs.
Service gross margin will typically experience some variability
over time due to the timing of technical support service
initiations and renewals and additional investments in our
customer support infrastructure. In fiscal 2006, we expect
service margin to be in the mid 20% range, as we continue to
scale our service programs and offerings, particularly
professional services.
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 increased 28.1% to
$152.0 million for the three-month period ended
January 27, 2006, from $118.7 million for the same
period in fiscal 2005. These expenses were 28.3% and 28.8% of
total revenues for the three-month periods ended
January 27, 2006 and January 28, 2005, respectively.
Sales and marketing expenses increased 29.1% to
$427.5 million for the nine-month period ended
January 27, 2006, from $331.1 million for the same
period in fiscal 2005. These expenses were 29.2% and 28.8% of
total revenues for the nine-month periods ended January 27,
2006 and January 28, 2005, respectively. The increase in
absolute dollars was attributed to increased commission expenses
resulting from increased revenues, higher performance-based
payroll expenses due to higher profitability, higher partner
program expenses, and the continued worldwide investment in our
sales and global service organizations associated with selling
complete enterprise solutions.
Amortization of trademarks/tradenames and customer
contracts/relationships relating to our acquisitions included in
sales and marketing expenses was $0.7 million and
$0.2 million for the three-month periods ended
January 27, 2006 and January 28, 2005, respectively,
and was $1.4 million and $0.6 million for the
nine-month
25
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
periods ended January 27, 2006 and January 28, 2005,
respectively. Based on the intangibles recorded at
January 27, 2006, estimated future amortization of
trademarks, tradenames, customer contracts and relationships
relating to our acquisitions and included in sales and marketing
expenses will be $0.7 million for the remainder of fiscal
2006, $2.8 million for fiscal 2007, $2.7 million for
fiscal 2008, 2009 and 2010 and $1.7 million thereafter.
Sales and marketing headcount increased to 2,160 at
January 27, 2006 from 1,748 at January 28, 2005. 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 expect to
increase our sales and marketing expenses commensurate with
future revenue growth.
Research and Development Research and
development expenses consist primarily of salaries and benefits,
prototype expenses, non-recurring engineering charges, fees paid
to outside consultants and amortization of capitalized patents.
Research and development expenses increased 43.6% to
$62.6 million for the three-month period ended
January 27, 2006, from $43.6 million for the same
period ended January 28, 2005. These expenses represented
11.7% and 10.6% of total revenues for the three-month periods
ended January 27, 2006 and January 28, 2005,
respectively. Research and development expenses increased 37.8%
to $169.5 million for the nine-month period ended
January 27, 2006 from $123.0 million for the same
period ended January 28, 2005. These expenses represented
11.5% and 10.7% of total revenues for the nine-month periods
ended January 27, 2006 and January 28, 2005,
respectively. The increase in research and development expenses
was primarily a result of increased headcount, ongoing operating
impact of the acquisitions, ongoing support of current and
future product development and enhancement efforts, and higher
performance-based payroll expenses due to higher profitability.
Research and development headcount increased to 1,095 as of
January 27, 2006 compared to 811 as of January 28,
2005 primarily due to new hires and employees from the Decru
acquisition. For both the three and nine-month periods ended
January 27, 2006 and January 28, 2005, no software
development costs were capitalized.
Included in research and development expenses is capitalized
patents amortization of $0.5 million and $1.5 million
for the three and nine-month periods ended January 27,
2006, respectively, as compared to $0.5 million and
$1.4 million, respectively, for the three and nine-month
periods ended January 28, 2005. Based on capitalized
patents recorded at January 27, 2006, estimated future
capitalized patents amortization expenses for the remainder of
fiscal 2006 will be $0.5 million, $2.0 million for
fiscal years 2007 and 2008, $0.5 million in fiscal 2009,
$0.2 million in fiscal 2010, and none thereafter.
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 expect to continuously support current
and future product development and enhancement efforts, and
incur prototyping expenses and nonrecurring engineering charges
associated with the development of new products and
technologies. We intend to continuously broaden our existing
product offerings and introduce new products that expand our
solutions portfolio.
We believe that our research and development expenses will
increase in absolute dollars for fiscal 2006, primarily due to
ongoing costs associated with the development of new products
and technologies, projected headcount growth and the operating
impact of potential future acquisitions as compared to fiscal
2005.
General and Administrative General and
administrative expenses increased 22.9% to $24.7 million
for the three-month period ended January 27, 2006, from
$20.1 million for the same period in fiscal 2005. These
expenses represented 4.6% and 4.9% of total revenues for the
three-month periods ended January 27, 2006 and
January 28, 2005, respectively. General and administrative
expenses increased 22.7% to $67.3 million for the
nine-month period ended January 27, 2006, from
$54.9 million for the same period in fiscal 2005. These
expenses represented 4.6% and 4.8% of total revenues for the
nine-month periods ended January 27, 2006 and
January 28, 2005, respectively. This increase in absolute
dollars was primarily due to higher legal expenses and
professional fees for
26
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
general corporate matters including patents, higher
performance-based payroll expenses due to higher profitability
and higher headcount growth.
General and administrative headcount increased to 514 at
January 27, 2006 from 405 at January 28, 2005. We
believe that our general and administrative expenses will
increase in absolute dollars for fiscal 2006 due to projected
general and administrative headcount growth. Amortization of
covenants not to compete included in general and administrative
expenses was $0.2 million and $2.0 million for the
three and nine-month periods ended January 27, 2006,
respectively, as compared to $1.3 million and
$3.8 million for the three and nine-month periods ended
January 28, 2005, respectively. Based on the intangibles
recorded at January 27, 2006, estimated future amortization
of covenants not to compete relating to our acquisitions will be
$0.2 million in the remainder of fiscal 2006,
$1.0 million for fiscal year 2007, $0.2 million for
fiscal 2008 and none thereafter.
In-process Research and Development We
recorded in-process research and development charges of
$5.0 million in the second quarter of fiscal 2006 related
to the acquisition of Decru. 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 $5.0 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 future net cash flows from such
projects, and discounting the net cash flows back to their
present value. 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. Research and
development costs to bring the products from Decru to
technological feasibility are not expected to have a material
impact on our future results of operations or financial
condition.
Stock Compensation Stock compensation
expenses were $4.1 million and $9.4 million in the
three and nine-month periods ended January 27, 2006,
respectively, as compared to $2.2 million and
$6.4 million in the three and nine-month periods ended
January 28, 2005, respectively. The net increase in
deferred compensation expense year over year reflected higher
deferred compensation expense amortization from newly issued
restricted stock awards and assumed options from the Alacritus
and Decru acquisitions partially offset by the terminated
deferred salary compensation program and fully amortized
WebManage assumed options. Based on deferred stock compensation
recorded at January 27, 2006, estimated future deferred
stock compensation amortization expenses are $3.9 million
in the remainder of fiscal 2006, $14.7 million in fiscal
2007, $8.4 million in fiscal 2008, $1.7 million in
fiscal 2009 and $0.3 million in fiscal 2010 and none
thereafter.
Beginning May 1, 2006, we are required to adopt
SFAS No. 123R and expense employee stock options in
our financial statements. Adoption of SFAS No. 123R
will have a significant impact on our reported results of
operations. However, the impact of the adoption of
SFAS No. 123R cannot be quantified at this time
because it will depend on levels of share-based payments granted
in the future as well as other variables that will affect the
fair market value estimates, which cannot be forecasted at this
time.
Restructuring Charges In fiscal 2002, as
a result of continuing unfavorable economic conditions and a
reduction in IT spending rates, we implemented two restructuring
plans, which included reductions in workforce and consolidations
of facilities. As of January 27, 2006, we have no
outstanding balance in our restructuring liability for the first
restructuring. The second restructuring related to the closure
of an engineering facility and consolidation of resources to the
Sunnyvale headquarters. In the second quarter of fiscal 2006, we
implemented a third restructuring plan related to the move of
our global services center operations from Sunnyvale to our new
flagship support center at our Research Triangle Park facility
in North Carolina.
During the first quarter of fiscal 2006, we recorded a reduction
in restructuring reserve of $1.3 million resulting from the
execution of new sublease agreement for our Tewksbury facility.
Our restructuring estimates are reviewed and revised
periodically and may result in a substantial charge or reduction
to restructuring expense should different
27
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conditions prevail than were anticipated in previous management
estimates. Such estimates included various assumptions such as
the time period over which the facilities will be vacant,
expected sublease terms, and expected sublease rates.
During the second and third quarter of fiscal 2006, we recorded
a restructuring charge of $0.6 and $0.1 million, primarily
attributed to severance-related amounts and relocation expenses
related to the move of our global services center operations.
The following analysis sets forth the changes in the
restructuring reserve for the three months ended
January 27, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Accrual
|
|
|
Severance-Related
|
|
|
Total
|
|
|
Reserve balance at April 30,
2004
|
|
$
|
5,208
|
|
|
$
|
|
|
|
$
|
5,208
|
|
Cash payments
|
|
|
(705
|
)
|
|
|
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 30,
2005
|
|
|
4,503
|
|
|
|
|
|
|
|
4,503
|
|
Cash payments
|
|
|
(90
|
)
|
|
|
|
|
|
|
(90
|
)
|
Adjustments
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at July 29,
2005
|
|
|
3,157
|
|
|
|
|
|
|
|
3,157
|
|
Restructuring charges
|
|
|
281
|
|
|
|
364
|
|
|
|
645
|
|
Cash payments
|
|
|
(451
|
)
|
|
|
(341
|
)
|
|
|
(792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at
October 28, 2005
|
|
|
2,987
|
|
|
|
23
|
|
|
|
3,010
|
|
Restructuring charges
|
|
|
|
|
|
|
117
|
|
|
|
117
|
|
Cash payments
|
|
|
(175
|
)
|
|
|
(17
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at
January 27, 2006
|
|
$
|
2,812
|
|
|
$
|
123
|
|
|
$
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the reserve balance at January 27, 2006,
$0.7 million was included in other accrued liabilities and
the remaining $2.3 million was classified as long-term
obligations, relating to the facility charges for the second
restructuring and the global services center restructuring
charges.
Interest Income Interest income was
$9.9 million and $28.6 million for the three and
nine-month periods ended January 27, 2006, respectively, as
compared to $6.0 million and $16.2 million for the
three and nine-month periods ended January 28, 2005,
respectively. The increase in interest income was primarily
driven by higher average interest rates on our investment
portfolio. We expect overall interest income to increase for
fiscal 2006 as a result of rising average interest rates,
partially offset by lower cash and invested balances due
primarily to cash repurchases of our common stock.
Other Income (Expense), Net Other Income
(Expense), Net, included net exchange gains from foreign
currency transactions of $1.0 million and $0.4 million
for the three and nine-month periods ended January 27,
2006, respectively. Net exchange losses were $0.6 million
and $1.6 million in the three and nine-month periods ended
January 28, 2005. We believe that
period-to-period
changes in foreign exchange gain or losses will continue to be
impacted by hedging costs associated with our forward and option
activities and forecast variance.
Provision for Income Taxes For the three
and nine-month periods ended January 27, 2006, we applied
annual tax rates of 19.0% and 17.3%, respectively, to pretax
income as compared to 18.1% for the same periods in the prior
year. The tax rates for the three and nine-month periods ended
January 27, 2006 benefited from discrete provision for
income tax items totaling $0.6 million and
$5.2 million, respectively. The benefit from the discrete
items is attributable primarily to a R&D tax credit study
commissioned by us that generated a one time incremental benefit
related to prior fiscal years. These rates also reflect a
favorable foreign tax ruling for our principal European
subsidiary. Our estimate is based on existing tax laws and our
current projections of income (loss) and distributions
28
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
The following sections discuss the effects of changes in our
balance sheet and cash flow, contractual obligations and other
commercial commitments, stock repurchase program, capital
commitments, other sources and uses of cash flow and potential
tax opportunities on our liquidity and capital resources.
Balance
Sheet and Other Cash Flows
As of January 27, 2006, as compared to April 30, 2005,
our cash, cash equivalents, and short-term investments decreased
by $29.0 million to $1,140.9 million due primarily to
cash repurchases of our common stock of $390.1 million and
net cash paid of $41.2 million in connection with the Decru
acquisition, partially offset by cash generated from operations.
We derive our liquidity and capital resources primarily from our
cash flow from operations and from working capital. Working
capital decreased by $66.6 million to $989.1 million
as of January 27, 2006, compared to $1,055.7 million
as of April 30, 2005 due primarily to a decrease in cash
and short-term investments as well as an increase in current
liabilities due primarily to a higher deferred revenue balance,
partially offset by higher accounts receivable and inventory
balances.
During the nine-month period ended January 27, 2006, we
generated cash flows from operating activities of
$382.4 million as compared with $344.6 million in the
same period in fiscal 2005. The largest driver of this increase
was the net income of $207.2 million for the nine-month
period ended January 27, 2006, as compared to
$162.3 million in the same period in fiscal 2005. In
addition to higher net income and noncash adjustments in the
nine months ended January 27, 2006, the primary factors
that impacted the
period-to-period
change in cash flows relating to operating activities were the
following:
|
|
|
|
|
An increase in deferred revenues from higher software
subscription and service billings attributable to our continuing
shift toward larger enterprise customers, as well as renewals of
existing maintenance agreements; and
|
|
|
|
Increased income taxes payable, primarily reflecting higher
profitability in the nine-month period ended January 27,
2006 as compared to the same period in the prior year and lower
tax payments offset by lower tax refunds as compared to the same
period in the prior year.
|
The above factors were partially offset by the effects of:
|
|
|
|
|
Increased accounts receivable balances due primarily to a
shipping profile weighted towards the second half of the third
quarter of fiscal 2006;
|
|
|
|
An increase in inventories due primarily to higher consigned
inventory for the IBM sales and increased configured units to
meet revenue growth; and
|
|
|
|
Increased prepaid expenses in the nine-month period ended
January 27, 2006, as compared to a decrease in the same
period a year ago due to a tax refund of $9.0 million in
connection with a carryback of net operating losses generated in
fiscal 2000.
|
We expect that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors,
including fluctuations in our operating results, shipment
linearity, accounts receivable collections, inventory
management, and the timing of tax and other payments.
Capital expenditures for the nine-month period ended
January 27, 2006 were $96.5 million as compared to
$64.8 million in the same period a year ago. We received
net proceeds of $21.2 million and used net proceeds of
$213.2 million in the nine-month periods ended
January 27, 2006 and January 28, 2005, respectively,
for net purchases/redemptions of short-term investments.
Investing activities in the nine-month period ended
January 27,
29
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006 also included new investments in privately held companies
of $7.1 million. In the first quarter of fiscal 2006, we
acquired Alacritus for a purchase price of approximately
$13.7 million, including assumed options, cash payments of
$11.0 million and related transaction costs. In the second
quarter of fiscal 2006, we acquired Decru for a purchase price
of approximately $283.2 million, including assumed options,
net cash payments of $41.2 million and related transaction
costs.
We used $249.2 million and received $20.4 million in
the nine-month periods ended January 27, 2006 and
January 28, 2005, respectively, from net financing
activities, which included sales of common stock related to
employee stock transactions net of common stock repurchases. We
repurchased 14.6 million and 5.6 million shares of
common stock for a total cost of $390.1 million and
$133.0 million during the nine-month periods ended
January 27, 2006 and January 28, 2005, respectively.
Other financing activities provided $141.7 million and
$153.5 million in the nine-month periods ended
January 27, 2006 and January 28, 2005, respectively,
which related to sales of common stock related to employee stock
transactions. During the nine-month period ended
January 27, 2006, we withheld $0.8 million from
certain employees exercised shares of their restricted
stock to reimburse for federal, state, and local withholding
taxes obligations.
The change in cash flow from financing activities was primarily
due to the effects of higher common stock repurchases partially
offset by proceeds from issuance of common stock under employee
programs compared to the same period in the prior year. Net
proceeds from the issuance of common stock related to employee
participation in employee stock programs have historically been
a significant component of our liquidity. The extent to which
our employees participate in these programs generally increases
or decreases based upon changes in the market price of our
common stock. As a result, our cash flow resulting from the
issuance of common stock related to employee participation in
employee stock programs will vary.
Other
Sources and Uses of Cash and Tax Opportunities
The American Jobs Creation Act of 2004 (the Jobs
Act) created a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85% dividend-received deduction for
certain dividends from certain
non-U.S. subsidiaries.
The deduction is subject to a number of limitations, and we are
currently considering recently issued Treasury and IRS guidance
on the application of the deduction. We are not yet in a
position to decide whether, and to what extent, foreign earnings
that have not yet been remitted to the U.S. may be
repatriated. Based on the analysis to date, however, it is
reasonably possible that as much as a $355.0 million
dividend might be repatriated, with a respective tax liability
of up to $15.0 million. We expect to be in a position to
finalize our analysis by the end of our fourth quarter of fiscal
2006.
In November 2005, our Board of Directors approved a new stock
repurchase program in which up to an additional
$650.0 million of shares of our outstanding common stock
may be purchased, which amount includes approximately
$76.4 million remaining from all prior authorizations
(i.e., the net additional approval amount, without taking into
account remaining amounts approved in prior periods, is
$573.6 million). At January 27, 2006,
$504.4 million of shares remained available for repurchases
under the plan.
For the nine-month periods ended January 27, 2006 and
January 28, 2005, we recorded tax benefits, in the form of
reduced payments, of $22.3 million and $27.8 million,
respectively, associated with disqualifying dispositions of
employee stock options. If stock option exercise patterns
change, we may receive less cash from stock option exercises and
may not receive the same level of tax benefits in the future,
which could cause our cash payments for income taxes to increase.
30
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contractual
Cash Obligations and Other Commercial Commitments
The following summarizes our contractual cash obligations and
commercial commitments at January 27, 2006, and the effect
such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations:
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Rent operating lease payments(1)
|
|
$
|
3,981
|
|
|
$
|
13,979
|
|
|
$
|
13,627
|
|
|
$
|
13,358
|
|
|
$
|
10,133
|
|
|
$
|
28,779
|
|
|
$
|
83,857
|
|
Equipment operating lease
payments(1)
|
|
|
1,516
|
|
|
|
5,849
|
|
|
|
5,167
|
|
|
|
2,873
|
|
|
|
16
|
|
|
|
|
|
|
|
15,421
|
|
Lease payments(2)
|
|
|
|
|
|
|
|
|
|
|
1,651
|
|
|
|
1,981
|
|
|
|
1,981
|
|
|
|
37,017
|
|
|
|
42,630
|
|
Venture capital funding
commitments(3)
|
|
|
100
|
|
|
|
402
|
|
|
|
389
|
|
|
|
377
|
|
|
|
364
|
|
|
|
381
|
|
|
|
2,013
|
|
Purchase commitments and other(4)
|
|
|
1,348
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,948
|
|
Capital Expenditures(5)
|
|
|
10,858
|
|
|
|
7,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,569
|
|
Communications &
Maintenance(6)
|
|
|
3,169
|
|
|
|
7,439
|
|
|
|
5,267
|
|
|
|
1,521
|
|
|
|
169
|
|
|
|
|
|
|
|
17,565
|
|
Restructuring Charges(7)
|
|
|
173
|
|
|
|
565
|
|
|
|
579
|
|
|
|
603
|
|
|
|
637
|
|
|
|
378
|
|
|
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations
|
|
$
|
21,145
|
|
|
$
|
36,545
|
|
|
$
|
26,680
|
|
|
$
|
20,713
|
|
|
$
|
13,300
|
|
|
$
|
66,555
|
|
|
$
|
184,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of the above table, contractual obligations for the
purchase of goods and services are defined as agreements that
are enforceable, legally binding on us, and subject us to
penalties if we cancel the agreement. Some of the figures we
include in this table are based on managements estimates
and assumptions about these obligations, including their
duration, the possibility of renewal or termination, anticipated
actions by management, third parties, and other factors. Because
these estimates and assumptions are necessarily subjective, the
enforceable and legally binding obligations we will actually pay
in future periods may vary from those reflected in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
Commitments:
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Letters of Credit(8)
|
|
$
|
450
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
337
|
|
|
$
|
787
|
|
Restricted Cash(9)
|
|
|
1,828
|
|
|
|
302
|
|
|
|
748
|
|
|
|
676
|
|
|
|
53
|
|
|
|
2,224
|
|
|
|
5,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
Commitments
|
|
$
|
2,278
|
|
|
$
|
302
|
|
|
$
|
748
|
|
|
$
|
676
|
|
|
$
|
53
|
|
|
$
|
2,561
|
|
|
$
|
6,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
(1) |
|
We enter into operating leases in the normal course of business.
We lease sales offices, research and development facilities, and
other property and equipment under operating leases throughout
the U.S. and internationally, which expire through fiscal 2015.
Substantially all lease agreements have fixed payment terms
based on the passage of time and contain escalation clauses.
Some lease agreements provide us with the option to renew the
lease or to terminate the lease. Our future operating lease
obligations would change if we were to exercise these options
and if we were to enter into additional operating lease
agreements. Sublease income of $0.1 million has been
included as a reduction of the payment amounts shown in the
table. Facilities operating lease payments exclude the leases
impacted by the restructurings. The amounts for the leases
impacted by the restructurings are included in
subparagraph (7) below. |
|
(2) |
|
On December 16, 2005, we (the Lessee) entered
into financing, construction and leasing arrangements with BNP
(the Lessor), for office space to be located on land
currently owned by us in Sunnyvale, California. This arrangement
requires us to ground lease our land to BNP for a period of
50 years to construct approximately 190,000 square
feet of office space with $38.5 million construction
allowance provided by BNP, and, after |
31
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
completion of construction to pay minimum lease payments which
vary based on London Interbank Offered Rate (LIBOR)
plus a spread (5.15% at January 27, 2006). We expect to pay
lease payments on the completed buildings from BNP on June 2007
for a term of five years. We have the option to renew the lease
for two consecutive five-year periods upon approval by BNP. |
|
|
|
Upon expiration (or upon any earlier termination) of the lease
term, we must elect one of the following options: we may
(i) purchase the building from BNP for $38.5 million,
(ii) if certain conditions are met, arrange for the sale of
the building by BNP to a third party for an amount equal to at
least $32.7 million, and be liable for the deficiency
between the net proceeds received from the third party and
$32.7 million, or (iii) pay BNP a supplemental payment
of $32.7 million, in which event, we may recoup some or all
of such payment by arranging for a sale of the building by BNP
during the ensuing 2 year period. |
|
|
|
Included in the above contractual cash obligations are
(a) lease commitments of $1.7 million in fiscal 2008,
$2.0 million in each of the fiscal years 2009, 2010, 2011,
2012 and $0.3 million in fiscal 2013, which are based on
the LIBOR rate at January 27, 2006 for a term of
5 years, and (b) at the expiration or termination of
the lease, a supplemental payment obligation equal to
$32.7 million in the event that we elect not to purchase or
arrange for a sale of the building. |
|
|
|
The lease also requires us to maintain specified financial
covenants with which we were in compliance as of
January 27, 2006. Such specified financial covenants
include a maximum ratio of Total Debt to Earnings Before
Interest, Taxes, Depreciation and Amortization
(EBITDA) and a Minimum Unencumbered Cash and Short
Term Investments. |
|
(3) |
|
Venture capital funding commitments include a quarterly
committed management fee based on a percentage of our committed
funding to be payable through June 2011. |
|
(4) |
|
Amounts included in purchase commitments and other are
(a) agreements to purchase component inventory from our
suppliers
and/or
contract manufacturers that are non-cancelable and legally
binding against us and (b) commitment related to utilities
contracts. Purchase commitments and other exclude
(a) purchases of goods and services we expect to consume in
the ordinary course of business in the next 12 months;
(b) open purchase orders that represent an authorization to
purchase rather than a binding agreement; (c) agreements
that are cancelable without penalty and costs that are not
reasonably estimable at this time. |
|
(5) |
|
Capital expenditures include worldwide contractual commitments
to purchase equipment and to construct building and leasehold
improvements, which will be recorded as Property and Equipment. |
|
(6) |
|
We are required to pay based on a minimum volume under certain
communication contracts with major telecommunication companies
as well as maintenance contracts with multiple vendors. Such
obligations expire in April 2010. |
|
(7) |
|
These amounts are included on our Consolidated Balance Sheets
under Long-term Obligations and Other Accrued Liabilities, which
is comprised of committed lease payments and operating expenses
net of committed and estimated sublease income. The
restructuring estimated sublease income included various
assumptions such as the time period over which the facilities
will be vacant, expected sublease terms, and expected sublease
rates. |
|
(8) |
|
The amounts outstanding under these letters of credit relate to
workers compensation, a customs guarantee and a corporate
credit card program. |
|
(9) |
|
Restricted cash arrangements relate to facility lease
requirements, service performance guarantees, customs and duties
guarantees, and VAT requirements, and are included under Prepaid
Expenses and Other and Other Assets on our Consolidated Balance
Sheets. |
Capital
Expenditure Requirements
We expect capital expenditures to increase in the future
consistent with the growth in our business, as we continue to
invest in people, land, buildings, capital equipment and
enhancements to our worldwide infrastructure. We expect that our
existing facilities and those being developed in Sunnyvale,
California, Research Triangle Park (RTP), and
worldwide are adequate for our requirements over at least the
next two years and that additional space
32
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
will be available as needed. We expect to finance all our
construction projects, including our contractual commitments,
operating leases, and any required capital expenditures over the
next few years through cash from operations and existing cash
and investments.
Off-Balance
Sheet Arrangements
As of January 27, 2006, we have $0.8 million letters
of credit that are related to workers compensation, a
customs guarantee, and a corporate credit card program and were
not recorded on our balance sheet.
As of January 27, 2006, the notional fair values of our
foreign exchange forward and foreign currency option contracts
totaled $305.6 million. We do not believe that these
derivatives present significant credit risks, because the
counterparties to the derivatives consist of major financial
institutions, and we manage the notional amount of contracts
entered into with any one counterparty. We do not enter into
derivative financial instruments for speculative or trading
purposes. Other than the risk associated with the financial
condition of the counterparties, our maximum exposure related to
foreign currency forward and option contracts is limited to the
forward points and premiums paid.
We offer both recourse and nonrecourse lease financing
arrangements to our customers. Under the terms of recourse
leases, which are generally three years or less, we remain
liable for the aggregate unpaid remaining lease payments to the
third-party leasing company in the event that any customers were
to default. We initially defer 100% of the recourse lease
receivable and recognize revenue over the term of the lease as
the lease payments become due. As of January 27, 2006, and
April 30, 2005, the maximum recourse exposure under such
leases totaled approximately $9.4 million and
$7.0 million, respectively. Under the terms of the
nonrecourse leases we do not have any continuing obligations or
liabilities. To date, we have not experienced significant losses
under this lease financing program.
We have entered into indemnification agreements with third
parties in the ordinary course of business. Generally, these
indemnification agreements require us to reimburse losses
suffered by the third party due to various events, such as
lawsuits arising from patent or copyright infringement. These
indemnification obligations are considered off-balance sheet
arrangements in accordance with FASB, Interpretation 45, of
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.
We have commitments related to a lease arrangement with BNP for
approximately 190,000 square feet of office space to be
located on land currently owned by us in Sunnyvale, California
(as further described above under Contractual Cash
Obligations and Other Commercial Commitments). We have
evaluated our accounting for this lease under the provisions of
FIN 46R, and have determined the following:
|
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|
|
BNP is a leasing company for BNP Paribas in the U.S. BNP is
not a special purpose entity organized for the sole
purpose of facilitating the lease to us. The obligation to
absorb expected losses and receive expected residual returns
rests with the parent BNP Paribas. Therefore, we are not the
primary beneficiary of BNP as we do not absorb the majority of
BNPs expected losses or expected residual returns; and
|
|
|
|
BNP has represented in the Closing Agreement (filed as
Exhibit 10.3) that the fair value of the property leased to
us by BNP is less than half of the total of the fair values of
all assets of BNP, excluding any assets of BNP held within a
silo. Further, the property leased to Network Appliance is not
held within a silo. The definition of held within a
silo means that BNP has obtained funds equal to or in
excess of 95% of the fair value of the leased asset to acquire
or maintain its investment in such asset through non-recourse
financing or other contractual arrangements, the effect of which
is to leave such asset (or proceeds thereof) as the only
significant asset of BNP at risk for the repayment of such funds.
|
33
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accordingly, we are not required to consolidate either the
leasing entity or the specific assets that we lease under the
BNP lease. See above in Contractual Obligations and
Note 13, for our future minimum lease payments under all
leases at January 27, 2006.
As of January 27, 2006, except for operating leases and
other contractual obligations outlined under the
Contractual Cash Obligations table, we do not have
any off-balance sheet financing arrangements or liabilities,
retained or contingent interests in transferred assets, or any
obligation arising out of a material variable interest in an
unconsolidated entity. We also do not have any majority-owned
subsidiaries that are not included in the consolidated financial
statements. Additionally, we do not have any interest in or
relationship with, any special purpose entities.
Liquidity
and Capital Resource Requirements
Key factors affecting our cash flows include our ability to
effectively manage our working capital, in particular, accounts
receivable and inventories and future demand for our products
and related pricing. We expect to incur higher capital
expenditures in the near future to expand our operations. We
will from time to time acquire products and businesses
complementary to our business. In the future, we may continue to
repurchase our common stock, which would reduce cash, cash
equivalents,
and/or
short-term investments available to fund future operations and
meet other liquidity requirements. Based on past performance and
current expectations, we believe that our cash and cash
equivalents, short-term investments, and cash generated from
operations will satisfy our working capital needs, capital
expenditures, stock repurchases, contractual obligations, and
other liquidity requirements associated with our operations
through at least the next 12 months.
Critical
Accounting Estimates and Policies
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of such statements
requires us to make estimates and assumptions that affect the
reported amounts of revenues and expenses during the reporting
period and the reported amounts of assets and liabilities as of
the date of the financial statements. Our estimates are based on
historical experience and other assumptions that we consider to
be appropriate in the circumstances. However, actual future
results may vary from our estimates.
We believe that the following accounting policies are
critical as defined by the Securities and Exchange
Commission, in that they are both highly important to the
portrayal of our financial condition and results, and require
difficult management judgments and assumptions about matters
that are inherently uncertain. We also have other important
policies, including those related to derivative instruments and
concentration of credit risk. However, these policies do not
meet the definition of critical accounting policies because they
do not generally require us to make estimates or judgments that
are difficult or subjective. These policies are discussed in the
Notes to the Consolidated Financial Statements, which are
included in our Annual Report on
Form 10-K
for the fiscal year ended April 30, 2005.
We believe the accounting policies described below are the ones
that most frequently require us to make estimates and judgments,
and therefore are critical to the understanding of our results
of operations:
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revenue recognition and allowances;
|
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|
valuation of goodwill and intangibles;
|
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|
accounting for income taxes;
|
|
|
|
inventory write-down and reserves;
|
|
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|
restructuring accruals;
|
|
|
|
impairment losses on investments;
|
34
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
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|
|
accounting for stock-based compensation; and
|
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|
loss contingencies.
|
These accounting estimates and policies 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 30, 2005.
New
Accounting Standards
See Note 12 of the Consolidated Condensed Financial
Statements for a full description of recent accounting
pronouncements including the respective expected dates of
adoption and effects on results of operations and financial
condition.
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
and adversely affected.
Factors
beyond our control could cause our quarterly results to
fluctuate, which could adversely impact our common stock
price.
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, but are not limited to, the
following:
|
|
|
|
|
Changes in general economic conditions and specific economic
conditions in the computer, storage, and networking industries
|
|
|
|
General decrease in global corporate spending on information
technology leading to a decline in demand for our products
|
|
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|
A shift in federal government spending patterns
|
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|
The possible effects of terrorist activity and international
conflicts, which could lead to business interruptions and
difficulty in forecasting
|
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|
The level of competition in our target product markets
|
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|
Our reliance on a limited number of suppliers due to industry
consolidation, which could subject us to periodic
supply-and-demand,
price rigidity and quality issues with our components
|
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|
The size, timing, and cancellation of significant orders
|
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|
Product configuration and mix
|
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|
The extent to which our customers renew their service and
maintenance contracts with us
|
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|
Market acceptance of new products and product enhancements
|
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|
Announcements, introductions, and transitions of new products by
us or our competitors
|
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|
Deferrals of customer orders in anticipation of new products or
product enhancements introduced by us or our competitors
|
35
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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|
Changes in pricing by us in response to competitive pricing
actions
|
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|
Our ability to develop, introduce, and market new products and
enhancements in a timely manner
|
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|
Supply constraints
|
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|
Technological changes in our target product markets
|
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|
The levels of expenditure on research and development and sales
and marketing programs
|
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Our ability to achieve targeted cost reductions
|
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Excess or inadequate facilities
|
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|
Disruptions resulting from new systems and processes as we
continue to enhance and adapt our system infrastructure to
accommodate future growth
|
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Future accounting pronouncements and changes in accounting
policies
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Seasonality
|
In addition, sales for any future quarter may vary and
accordingly be different from what we forecast. We manufacture
products based on a combination of specific order requirements
and forecasts of our customer demands. Products are typically
shipped within one to four weeks following receipt of an order.
In certain circumstances, customers may cancel or reschedule
orders without penalty. Product sales are also difficult to
forecast because the storage and data management market is
rapidly evolving and our sales cycle varies substantially from
customer to customer.
We derive a majority of our revenue in any given quarter from
orders booked in the same quarter. Bookings typically follow
intra-quarter seasonality patterns weighted towards the back-end
of the quarter. If we do not achieve bookings in the latter part
of a quarter consistent with our quarterly financial targets,
our financial results will be adversely impacted.
Due to all of the foregoing factors, it is possible that in one
or more future quarters our results may fall below our forecasts
and the expectations of public market analysts and investors. In
such event, the trading price of our common stock would likely
decrease.
If we
are unable to develop and introduce new products and respond to
technological change, if our new products do not achieve market
acceptance, or if we fail to manage the transition between our
new and old products, our operating results could be materially
and adversely affected.
Our future growth depends upon the successful development and
introduction of new hardware and software products. Due to the
complexity of storage subsystems 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 our 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 and adversely affected.
As new or enhanced products are introduced, we must successfully
manage the transition from older products in order to minimize
disruption in customers ordering patterns, avoid excessive
levels of older product inventories, and ensure that enough
supplies of new products can be delivered to meet
customers demands.
36
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
An
increase in competition could materially and 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 storage system products and
associated data management software portfolio compete primarily
with storage systems and data management software offered by EMC
Corporation, Hitachi Data Systems, Hewlett-Packard Company, IBM
Corporation, and Sun Microsystems, Inc. We also view Dell, Inc.
as an emerging competitor in the storage marketplace, primarily
due to a business partnership that has been established between
Dell and EMC, allowing Dell to resell EMC storage hardware and
software products. In addition, we have historically encountered
less-frequent competition from companies including Engenio
Information Technologies, Inc. (the storage systems group of LSI
Logic Corp.), StorageTek Technology Corporation (now operating
as a subsidiary of Sun Microsystems), Dot Hill Systems
Corporation, and Xiotech Corporation. In the nearline/secondary
storage market, which includes the
disk-to-disk
backup and regulated data storage segments, our NearStore
appliances compete primarily against products from EMC and
StorageTek and other traditional tape backup solutions in the
broader data backup and recovery space.
In the content delivery market, our
NetCache®
appliances and content delivery software compete against caching
appliance and content delivery software vendors including
BlueCoat Systems (formerly CacheFlow, Inc.) and Cisco Systems,
Inc. Our NetCache business is also subject to indirect
competition from content delivery service products such as those
offered by Akamai Technologies.
Additionally, a number of new, privately held companies are
currently attempting to enter the storage systems and data
management software markets, the nearline storage market, and
the caching and content delivery markets, some of which may
become significant competitors in the future.
We believe that the principal competitive factors affecting the
storage and content delivery markets include product benefits
such as response time, reliability, data availability,
scalability, ease of use, price, multiprotocol capabilities, and
global service and support. We must continue to maintain and
enhance this technological advantage over our competitors. If
those competitors with greater financial, marketing, service,
support, technical, and other resources were able to offer
products that matched or surpassed the technological
capabilities of our products, these competitors would, by virtue
of their greater resources, gain a competitive advantage over us
that could lead to greater sales for these competitors at the
expense of our own market share, which would have a material
adverse affect on our business, financial condition, and results
of operations.
Increased competition could also result in price reductions,
reduced gross margins, and loss of market share, any of which
could materially and 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 and
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 and 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
our disk drives through several suppliers. We purchase computer
boards and microprocessors from a limited number of suppliers.
Our reliance on a limited number of suppliers involves several
risks, including:
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A potential inability to obtain an adequate supply of required
components because we do not have long-term supply commitments
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37
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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Supplier capacity constraints
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Price increases
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Timely delivery
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Component quality
|
Component quality is particularly significant with respect to
our suppliers 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 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 and adversely
affect our operating results. Such delays could also damage
relationships with current and prospective customers.
In addition, we license certain technology and software from
third parties that is incorporated into our products. If we are
unable to obtain or license the technology and software on a
timely basis, we will not be able to deliver products to our
customers in a timely manner.
The
loss of any contract manufacturers or the failure to accurately
forecast demand for our products or successfully manage our
relationships with our contract manufacturers could negatively
impact our ability to manufacture and sell our
products.
We currently rely on several contract manufacturers to
manufacture most of our products. Our reliance on our
third-party contract manufacturers reduces our control over the
manufacturing process, exposing us to risks, including reduced
control over quality assurance, production costs, and product
supply. If we should fail to effectively manage our
relationships with our contract manufacturers, or if our
contract manufacturers experience delays, disruptions, capacity
constraints, or quality control problems in their manufacturing
operations, our ability to ship products to our customers could
be impaired and our competitive position and reputation could be
harmed. Qualifying a new contract manufacturer and commencing
volume production are expensive and time-consuming. If we are
required to change contract manufacturers or assume internal
manufacturing operations, we may lose revenue and damage our
customer relationships. If we inaccurately forecast demand for
our products, we may have excess or inadequate inventory or
incur cancellation charges or penalties, which could adversely
impact our operating results. As of January 27, 2006, we
have no purchase commitment under these agreements.
We intend to regularly introduce new products and product
enhancements, which will require us to rapidly achieve volume
production by coordinating with our contract manufacturers and
suppliers. We may need to increase our material purchases,
contract manufacturing capacity, and internal test and quality
functions to meet anticipated demand. The inability of our
contract manufacturers to provide us with adequate supplies of
high-quality products, or the inability to obtain raw materials,
could cause a delay in our ability to fulfill orders.
Our
future financial performance depends on growth in the storage,
data management and content delivery markets. If these markets
do not continue to grow at the rates at which we forecast
growth, our operating results will be materially and adversely
impacted.
All of our products address the storage, data management and
content delivery markets. Accordingly, our future financial
performance will depend in large part on continued growth in the
storage, data management and content delivery markets and on our
ability to adapt to emerging standards in these markets. We
cannot assure you that the markets for storage, data management
and content delivery will continue to grow or that emerging
standards
38
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in these markets will not adversely affect the growth of UNIX,
Windows, and the World Wide Web server markets upon which we
depend.
For example, we provide our open access data retention solutions
to customers within the financial services, healthcare,
pharmaceuticals, and government market segments, industries that
are subject to various evolving governmental regulations with
respect to data access, reliability, and permanence (such as
Rule 17(a)(4) of the Securities Exchange Act of 1934, as
amended) in the United States and in the other countries in
which we operate. If our products do not meet, and continue to
comply with, these evolving governmental regulations in this
regard, customers in these market and geographical segments will
not purchase our products, and, therefore, we will not be able
to expand our product offerings in these market and geographical
segments at the rates for which we have forecast.
In addition, our business also depends on general economic and
business conditions. A reduction in demand for storage, data
management and content delivery caused by weakening economic
conditions and decreases in corporate spending will result in
decreased revenues and lower revenue growth rates. The network
storage and content delivery market growth declined
significantly beginning in the third quarter of fiscal 2001
through fiscal 2003, causing both our revenues and operating
results to decline. If the storage, data management and content
delivery markets grow more slowly than anticipated or if
emerging standards other than those adopted by us become
increasingly accepted by these markets, our operating results
could be materially and adversely affected.
Our
gross margins may vary based on the configuration of our product
and service solutions, and such variation may make it more
difficult to forecast our earnings.
We derive a significant portion of our sales from the resale of
disk drives as components of our storage systems, 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 storage
systems. As a result, as we sell more highly configured systems
with greater disk drive content, overall gross margin
percentages may be negatively affected.
Our gross margins have been and may continue to be affected by a
variety of other factors, including:
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Demand for storage, data management and content delivery products
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Discount levels and price competition
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Direct versus indirect sales
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Product and add-on software mix
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The mix of services as a percentage of revenue
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The mix and average selling prices of products
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The mix of disk content
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New product introductions and enhancements
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Excess inventory purchase commitments as a result of changes in
demand forecasts and possible product and software defects as we
transition our products
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|
|
The cost of components, manufacturing labor, and quality
|
Changes in service gross margin may result from various factors
such as continued investments in our customer support
infrastructure, changes in the mix between technical support
services and professional services, as well as the timing of
technical support service contract initiations and renewals.
39
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We may
incur problems with current or future acquisitions and equity
investments, and these investments may not achieve our
objectives.
As part of our strategy, we are continuously evaluating
opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our
markets, or enhance our technical capabilities. We may engage in
future acquisitions that dilute our stockholders
investments and cause us to use cash, to incur debt, or to
assume contingent liabilities.
Acquisitions of companies entail numerous risks, and we may not
be able to successfully integrate acquired operations and
products or realize anticipated synergies, economies of scale,
or other value. Integration risks and issues may include, but
not limited to, key personnel retention and assimilation,
management distraction, technical development, and unexpected
costs and liabilities, including goodwill impairment charges. In
addition, we may be unable 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.
From time to time, we also make equity investments for the
promotion of business and strategic objectives. We have already
made strategic investments in a number of storage and data
management-related technology companies. Equity investments may
result in the loss of investment capital. The market price and
valuation of our equity investments in these companies may
fluctuate due to market conditions and other circumstances over
which we have little or no control. To the extent that the fair
value of these securities is less than our cost over an extended
period of time, our results of operations and financial position
could be negatively impacted.
Our
ability to increase our revenues depends on expanding our direct
sales operations and reseller distribution channels and
continuing to provide excellent global service and support. If
we are unable to effectively develop, retain, and expand our
global sales and service workforce or to establish and cultivate
relationships with our indirect reseller and distribution
channels, our ability to grow and increase revenue could be
harmed.
In an effort to gain market share and support our global
customers, we will need to expand our worldwide direct sales
operations and global service and support infrastructure to
support new and existing enterprise customers. Expansion of our
direct sales operations, reseller/distribution channels, and
global service and support operations may not be successfully
implemented, and the cost of any expansion may exceed the
revenues generated.
We market and sell our storage solutions directly through our
worldwide sales force and indirectly through channels such as
value-added resellers, or VARs, systems integrators,
distributors, OEMs and strategic business partners and derive a
significant portion of our revenue from these indirect channel
partners. However, in order for us to maintain our current
revenue sources and grow our revenue as we have forecasted, we
must effectively manage our relationships with these indirect
channel partners. To do so, we must attract and retain a
sufficient number of qualified channel partners to successfully
market our products. However, because we also sell our products
directly to customers through our sales force, on occasion we
compete with our indirect channels for sales of our products to
our end customers, competition that could result in conflicts
with these indirect channel partners and make it harder for us
to attract and retain these indirect channel partners. At the
same time, our indirect channel partners may develop and offer
products of their own that are competitive to ours. Or, because
our reseller partners generally offer products from several
different companies, including products of our competitors,
these resellers may give higher priority to the marketing,
sales, and support of our competitors products than ours.
If we fail to manage effectively our relationships with these
indirect channel partners to minimize channel conflict and
continue to evaluate and meet our indirect sales partners
needs with respect to our products, we will not be able to
maintain or increase our revenue as we have forecasted, which
would have a materially adverse affect on our business,
financial condition, and results of operations. Additionally, if
we do not manage distribution of our products and services and
support effectively, or if our resellers financial
conditions or operations weaken, our revenues and gross margins
could be adversely affected.
40
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Risks
inherent in our international operations could have a material
adverse effect on our operating results.
We conduct business internationally. For the three and
nine-month periods ended January 27, 2006, 44.5% and 41.9%,
respectively, of our total revenues was from international
customers (including U.S. exports). Accordingly, our future
operating results could be materially and 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, government spending patterns, and acts
of terrorism and international conflicts.
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 utilize
forward and option contracts to hedge our foreign currency
exposure associated with certain assets and liabilities as well
as anticipated foreign currency cash flow. All balance sheet
hedges are marked to market through earnings every quarter,
while gains and losses on cash flow hedges are recorded in other
comprehensive income. These hedges attempt to reduce, but do not
always entirely eliminate, the impact of currency exchange
movements. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. There
can be no assurance that such hedging strategies 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 and difficulties in managing
international operations. Such factors could materially and
adversely affect our future international sales and,
consequently, our operating results.
Potentially adverse tax consequences could also negatively
impact the operating and financial results from international
operations. International operations currently benefit from a
tax ruling concluded in the Netherlands.
Although operating results have not been materially and
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 and adversely affected by seasonality.
We cannot assure you that we will be able to maintain or
increase international market demand for our products.
If we
are unable to maintain our existing relationships and develop
new relationships with major strategic partners, our revenue may
be impacted negatively.
An element of our strategy to increase revenue is to
strategically partner with major third-party software and
hardware vendors that integrate our products into their products
and also comarket our products with these vendors. A number of
these strategic partners are industry leaders that offer us
expanded access to segments of the storage market. There is
intense competition for attractive strategic partners, and even
if we can establish strategic relationships with these partners,
we cannot assure you that these partnerships will generate
significant revenue or that the partnerships will continue to be
in effect for any specific period of time.
We intend to continue to establish and maintain business
relationships with technology companies to accelerate the
development and marketing of our storage solutions. To the
extent we are unsuccessful in developing new relationships and
maintaining our existing relationships, our future revenue and
operating results could be impacted negatively. In addition, the
loss of a strategic partner could have a material adverse effect
on the progress of our new products under development with that
partner.
41
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A
significant percentage of our expenses are fixed, which could
materially and adversely 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 or
previously higher levels, net income will be disproportionately
affected in a material and adverse manner.
If we
fail to manage our expanding business effectively, our operating
results could be materially and adversely
affected.
We experienced growth in the first nine months of fiscal 2006,
fiscal 2005 and 2004. Our future operating results depend to a
large extent on managements ability to successfully manage
expansion and growth, including but not limited to, expanding
international operations, forecasting revenues, addressing new
markets, controlling expenses, implementing and enhancing
infrastructure, systems and processes, and managing our assets.
In addition, an unexpected decline in the growth rate of
revenues without a corresponding and timely reduction in expense
growth or a failure to manage other aspects of growth could
materially and adversely affect our operating results.
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 experienced
substantial volatility in the past, and several factors could
cause the price to fluctuate substantially in the future. These
factors include but are not limited to:
|
|
|
|
|
Fluctuations in our operating results
|
|
|
|
Fluctuations in the valuation of companies perceived by
investors to be comparable to us
|
|
|
|
Economic developments in the storage and data management market
as a whole
|
|
|
|
International conflicts and acts of terrorism
|
|
|
|
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
|
|
|
|
Changes in our relationships with our suppliers, customers, and
channel and strategic partners
|
|
|
|
General market conditions
|
In addition, the stock market has experienced volatility that
has particularly affected the market prices of equity securities
of many technology companies. Additionally, certain
macroeconomic factors such as changes in interest rates, the
market climate for the technology sector, and levels of
corporate spending on information technology 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 and adversely affect the
market price of our common stock.
Our
business could be materially and adversely affected as a result
of a natural disaster, terrorist acts, or other catastrophic
events.
Our operations, including our suppliers and contract
manufacturers operations, are susceptible to outages due
to fire, floods, power loss, power shortages, telecommunications
failures, break-ins, and similar events. In addition, our
headquarters are located in Northern California, an area
susceptible to earthquakes. If any significant disaster were to
occur, our ability to operate our business could be impaired.
42
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Weak economic conditions or terrorist actions 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.
We
depend on attracting and retaining qualified technical and sales
personnel. If we are unable to attract and retain such
personnel, our operating results could be materially and
adversely impacted.
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, can be
intense. The loss of the services of a significant number of our
engineers or salespeople could be disruptive to our development
efforts or business relationships and could materially and
adversely affect our operating results.
Undetected
software, hardware errors, or failures found in new products may
result in loss of or delay in market acceptance of our products,
which could increase our costs and reduce our
revenues.
Our products may contain undetected software, hardware 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 and adversely
affect our operating results.
If we
are unable to protect our intellectual property, we may be
subject to increased competition that could materially and
adversely affect our operating results.
Our success depends significantly upon our proprietary
technology. We 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. Some U.S. trademarks and
some
U.S.-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, strategic
partners, and customers. We currently have multiple U.S. and
international patent applications pending and multiple
U.S. 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 and 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
43
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 into royalty or licensing
agreements, any of which could materially and adversely affect
our operating results. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at
all.
Our
business is subject to changing laws and regulations,
environmental legislation and public disclosure that have
increased both our costs and the risk of noncompliance. Failure
to comply with these new regulations could have an adverse
effect on our business and stock price.
Because our common stock is publicly traded, we are subject to
certain rules and regulations of federal, state, and financial
market exchange entities charged with the protection of
investors and the oversight of companies whose securities are
publicly traded. These entities, including the Public Company
Accounting Oversight Board, the SEC, and NASDAQ, have
implemented new requirements and regulations and continue
developing additional regulations and requirements in response
to recent corporate scandals and laws enacted by Congress, most
notably the Sarbanes-Oxley Act of 2002. Our efforts to comply
with these new regulations have resulted in, and are likely to
continue resulting in, increased general and administrative
expenses and diversion of management time and attention from
revenue-generating activities to compliance activities.
We have recently completed our evaluation of our internal
controls over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002. Although our
assessment, testing, and evaluation resulted in our conclusion
that as of January 27, 2006, our internal controls over
financial reporting were effective, we cannot predict the
outcome of our testing in future periods. If our internal
controls are ineffective in future periods, our business and
reputation could be harmed. We may incur additional expenses and
commitment of managements time in connection with further
evaluations, either of which could materially increase our
operating expenses and accordingly reduce our net income.
We also face increasing complexity in our product design and
procurement operations as we adjust to new and upcoming
requirements relating to the materials composition of many of
our products. The European Union (EU) has adopted
two directives to facilitate the recycling of electrical and
electronic equipment sold in the EU. The first of these is the
Waste Electrical and Electronic Equipment (WEEE) directive,
which directs EU member states to enact laws, regulations, and
administrative provisions to ensure that producers of electrical
and electronic equipment are financially responsible for
specified collection, recycling, treatment, and environmentally
sound disposal of products placed on the market after
August 13, 2005, and from products in use prior to that
date that are being replaced. The EU has also adopted the
Restriction on the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (RoHS)
directive. The RoHS directive restricts the use of lead,
mercury, and certain other substances in electrical and
electronic products placed on the market in the European Union
after July 1, 2006.
In connection with our compliance with such environmental laws
and regulations, we could incur substantial costs (including
excess component inventory) and be subject to disruptions to our
operations and logistics. In addition, we will need to ensure
that we can manufacture compliant products, and that we can be
assured a supply of compliant components from suppliers. Similar
laws and regulations have been or may be enacted in other
regions, including in the United States, China, and Japan. Other
environmental regulations may require us to reengineer our
products to utilize components that are more environmentally
compatible, and such reengineering and component substitution
may result in additional costs to us. Although we do not
anticipate any material adverse effects based on the nature of
our operations and the effect of such laws, there is no
assurance that such existing laws or future laws will not have a
material adverse effect on our business.
44
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes
in financial accounting standards or practices may cause adverse
unexpected fluctuations and affect our reported business and
financial results.
In December 2004 the FASB issued SFAS No. 123R
(revised 2004), which will require us, beginning in the first
quarter of fiscal 2007, to expense employee stock options for
financial reporting purposes. Adoption of
SFAS No. 123R will result in lower reported earnings
per share, which could negatively impact our future stock price.
In addition, this could also impact our ability or future
practice of utilizing broad-based employee stock plans to
attract, reward, and retain employees, which could also
adversely impact our operations.
In addition, the FASB requires certain valuation models to
estimate the fair value of employee stock options. These models,
including the Black-Scholes option-pricing model, use varying
methods, inputs, and assumptions selected across companies. If
another party asserts that the fair value of our employee stock
options is misstated, securities class action litigation could
be brought against us, or the market price of our common stock
could decline, or both could occur. As a result of these
changes, we could incur losses, and our operating results and
gross margins may be below our expectations and those of
investors and stock market analysts.
The
U.S. government has contributed to our revenue growth and
become an important customer for us. However, government demand
is unpredictable, and there is no guarantee of future revenue
growth from the U.S. government.
The U.S. government has become an important customer for
the storage market and for us. Government agencies are subject
to budgetary processes and expenditure constraints that could
lead to delays or decreased capital expenditures in IT spending
on infrastructures. If the government or individual agencies
within the government reduce or shift their capital spending
pattern, our financial results may be harmed. We cannot assure
you that revenue from the U.S. government will continue to
grow in the future.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk related to fluctuations in
interest rates 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 management-approved policies.
Market
Interest and Interest Income Risk
Interest and Investment Income As of
January 27, 2006, we had short-term investments of
$952.8 million. Our investment portfolio primarily consists
of highly liquid investments with original maturities at the
date of purchase of greater than three months, which are
classified as
available-for-sale
and investment in marketable equity securities in primarily
technology companies. These highly liquid investments,
consisting primarily of government and corporate debt
securities, and auction-rate 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
January 27, 2006 would cause the fair value of these
short-term investments to decline by approximately
$3.3 million. 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.
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 and option
contracts to hedge against the short-term impact of foreign
currency fluctuations on certain assets and liabilities
denominated in foreign currencies. All
45
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
balance sheet hedges are marked to market through earnings every
period. We also use foreign exchange forward contracts to hedge
foreign currency forecasted transactions related to certain
sales and operating expenses. These derivatives are designated
as cash flow hedges under SFAS No. 133. For cash flow
hedges outstanding at January 27, 2006, the gains or losses
were included in other comprehensive income.
We do not enter into foreign exchange contracts for speculative
or trading purposes. In entering into forward and option foreign
exchange contracts, we have assumed the risk that might arise
from the possible inability of counterparties to meet the terms
of their contracts. We attempt to limit our exposure to credit
risk by executing foreign exchange contracts with creditworthy
multinational commercial banks. All contracts have a maturity of
less than one year.
The following table provides information about our foreign
exchange forward and option contracts outstanding on
January 27, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Contract Value
|
|
|
Fair Value
|
|
Currency
|
|
Buy/Sell
|
|
|
Currency Amount
|
|
|
USD
|
|
|
in USD
|
|
|
Forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD
|
|
|
Sell
|
|
|
|
17,272
|
|
|
$
|
15,032
|
|
|
$
|
15,032
|
|
CHF
|
|
|
Sell
|
|
|
|
2,362
|
|
|
$
|
1,844
|
|
|
$
|
1,844
|
|
EUR
|
|
|
Sell
|
|
|
|
146,497
|
|
|
$
|
178,356
|
|
|
$
|
177,874
|
|
GBP
|
|
|
Sell
|
|
|
|
32,928
|
|
|
$
|
58,395
|
|
|
$
|
58,223
|
|
ILS
|
|
|
Sell
|
|
|
|
14,495
|
|
|
$
|
3,124
|
|
|
$
|
3,124
|
|
ZAR
|
|
|
Sell
|
|
|
|
9,229
|
|
|
$
|
1,494
|
|
|
$
|
1,508
|
|
AUD
|
|
|
Buy
|
|
|
|
11,886
|
|
|
$
|
8,913
|
|
|
$
|
8,913
|
|
DKK
|
|
|
Buy
|
|
|
|
9,215
|
|
|
$
|
1,496
|
|
|
$
|
1,496
|
|
EUR
|
|
|
Buy
|
|
|
|
11,700
|
|
|
$
|
14,312
|
|
|
$
|
14,207
|
|
GBP
|
|
|
Buy
|
|
|
|
2,775
|
|
|
$
|
4,940
|
|
|
$
|
4,906
|
|
NOK
|
|
|
Buy
|
|
|
|
8,308
|
|
|
$
|
1,248
|
|
|
$
|
1,248
|
|
SEK
|
|
|
Buy
|
|
|
|
19,884
|
|
|
$
|
2,611
|
|
|
$
|
2,611
|
|
Option contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
9,000
|
|
|
$
|
10,918
|
|
|
$
|
11,030
|
|
GBP
|
|
|
Sell
|
|
|
|
2,000
|
|
|
$
|
3,536
|
|
|
$
|
3,569
|
|
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure controls are controls and procedures designed to
ensure that information required to be disclosed in our reports
filed under the Exchange Act, such as this Quarterly Report, is
recorded, processed, summarized and reported within the time
periods specified in the U.S. Securities and Exchange
Commissions rules and forms. Disclosure controls and
procedures are also designed to ensure that such information is
accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act
46
NETWORK
APPLIANCE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of 1934, as amended, as of January 27, 2006, the end of the
fiscal period covered by this quarterly report (the
Evaluation Date). Based on this evaluation, our
principal executive officer and principal financial officer
concluded as of the Evaluation Date that our disclosure controls
and procedures were effective such that the information relating
to Network Appliance, including our consolidated subsidiaries,
required to be disclosed in our Securities and Exchange
Commission (SEC) reports (i) is recorded,
processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated
and communicated to Network Appliances management,
including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
There was no change in our internal control over financial
reporting that occurred during the period covered by this
Quarterly Report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
47
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
None
The information required by this item is on page 35.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The table below sets forth activity in the third quarter of
fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Approximate Dollar Value
|
|
|
|
|
|
|
Average
|
|
|
as Part of the
|
|
|
of Shares That May yet Be
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Repurchase
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Program(1)
|
|
|
Repurchase Program(2)
|
|
|
October 29,
2005 November 25, 2005
|
|
|
|
|
|
$
|
|
|
|
|
24,152,324
|
|
|
$
|
650,000,000
|
|
November 26,
2005 December 23, 2005
|
|
|
4,825,463
|
|
|
$
|
29.02
|
|
|
|
28,977,787
|
|
|
$
|
509,955,012
|
|
December 24,
2005 January 27, 2006
|
|
|
200,000
|
|
|
$
|
27.69
|
|
|
|
29,177,787
|
|
|
$
|
504,416,692
|
|
|
|
|
(1) |
|
This amount represented total number of shares purchased under
our publicly announced repurchase programs since inception. |
|
(2) |
|
In May 2005, our Board of Directors approved an incremental
stock repurchase program in which up to $300,000,000 of
additional shares of our outstanding common stock may be
purchased. In November 2005, our Board of Directors approved a
new $650,000,000 stock repurchase program which amount includes
the $76,361,270 remaining from all prior authorizations. The
stock repurchase program may be suspended or discontinued at any
time. |
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None
|
|
Item 5.
|
Other
Information
|
The information required by this item is incorporated by
reference from our Proxy Statement for the 2005 Annual Meeting
of Stockholders.
|
|
|
|
|
|
2
|
.1(3)
|
|
Agreement and Plan of Merger,
dated as of November 3, 2003, by and among Network
Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.
|
|
2
|
.2(3)
|
|
Amendment to Merger Agreement,
dated as of February 9, 2004, by and among Network
Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.
|
|
2
|
.3(8)
|
|
Agreement and Plan of Merger and
Reorganization, dated as of June 15, 2005, by and among
Network Appliance, Inc., Dolphin Acquisition Corp., and Decru,
Inc.
|
|
3
|
.1(1)
|
|
Certificate of Incorporation of
the Company.
|
|
3
|
.2(1)
|
|
Bylaws of the Company.
|
|
3
|
.3(6)
|
|
Certificate of Amendment to the
Bylaws of the Company.
|
|
4
|
.1(1)
|
|
Reference is made to
Exhibits 3.1 and 3.2.
|
|
4
|
.2(4)
|
|
Spinnaker Networks, Inc. 2000
Stock Plan.
|
48
|
|
|
|
|
|
4
|
.3(7)
|
|
Form of Stock Option Grant Notice
and Option Agreement under the Decru, Inc. Amended and Restated
2001 Equity Incentive Plan, and the 2001 Equity Incentive Plan
filed under Attachment II.
|
|
4
|
.4(7)
|
|
Form of Stock Option Grant Notice
and Option Agreement under the Decru, Inc. 2001 Equity Incentive
Plan and the 2001 Equity Incentive Plan filed under
Attachment II.
|
|
4
|
.5(7)
|
|
Form of Early Exercise Stock
Purchase Agreement under the Decru, Inc. 2001 Equity Incentive
Plan.
|
|
4
|
.6(7)
|
|
Form of Restricted Stock Bonus
Grant Notice and Agreement under the Decru, Inc. 2001 Equity
Incentive Plan.
|
|
10
|
.1(2)
|
|
Asset Purchase Agreement dated
June 20, 2003, by and between Auspex Systems, Inc. and the
Company.
|
|
10
|
.2(5)
|
|
Purchase and Sale Agreement dated
July 27, 2004 by and between Cisco Systems, Inc. and the
Company.
|
|
10
|
.3
|
|
Closing Certificate and Agreement,
dated December 15, 2005, by and between BNP Leasing
Corporation and the Company.
|
|
10
|
.4
|
|
Construction Management Agreement,
dated December 15, 2005, by and between BNP Leasing
Corporation and the Company.
|
|
10
|
.5
|
|
Lease Agreement, dated
December 15, 2005, by and between BNP Leasing Corporation.
|
|
10
|
.6
|
|
and the Company. Purchase
Agreement, dated December 15, 2005, by and between BNP
Leasing Corporation and the Company.
|
|
10
|
.7
|
|
Ground Lease, dated
December 15, 2005, by and between BNP Leasing Corporation
and the Company.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Securities Exchange Act
Rules 13a-15(e)
and
15d-15(e) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated March 7, 2006.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Securities Exchange Act
Rules 13a-15(e)
and
15d-15(e) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated March 7, 2006.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to 18 U .S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated March 7, 2006.
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated March 7, 2006.
|
|
|
|
(1) |
|
Previously filed as an exhibit with the Companys Current
Report on Form
8-K dated
December 4, 2001. |
|
(2) |
|
Previously filed as an exhibit with the Companys Quarterly
Report on
Form 10-Q
dated September 3, 2003. |
|
(3) |
|
Previously filed as an exhibit with the Companys Current
Report on Form
8-K dated
February 27, 2004. |
|
(4) |
|
Previously filed as an exhibit with the Companys
Form S-8
registration statement dated March 1, 2004. |
|
(5) |
|
Previously filed as an exhibit with the Companys Quarterly
Report on
Form 10-Q
dated August 31, 2004. |
|
(6) |
|
Previously filed as an exhibit with the Companys Current
Report on Form
8-K dated
May 4, 2005. |
|
(7) |
|
Previously filed as an exhibit with the Companys
Form S-8
registration statement dated September 2, 2005. |
|
(8) |
|
Previously filed as an exhibit with the Companys Quarterly
Report on
Form 10-Q
dated September 2, 2005. |
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
NETWORK APPLIANCE INC.
(Registrant)
Steven J. Gomo
Executive Vice President of Finance and
Chief Financial Officer
Date: March 7, 2006
50
EXHIBIT INDEX
|
|
|
|
|
|
2
|
.1(3)
|
|
Agreement and Plan of Merger, dated
as of November 3, 2003, by and among Network Appliance,
Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.
|
|
2
|
.2(3)
|
|
Amendment to Merger Agreement,
dated as of February 9, 2004, by and among Network
Appliance, Inc., Nagano Sub, Inc., and Spinnaker Networks, Inc.
|
|
2
|
.3(8)
|
|
Agreement and Plan of Merger and
Reorganization, dated as of June 15, 2005, by and among
Network Appliance, Inc., Dolphin Acquisition Corp., and Decru,
Inc.
|
|
3
|
.1(1)
|
|
Certificate of Incorporation of the
Company.
|
|
3
|
.2(1)
|
|
Bylaws of the Company.
|
|
3
|
.3(6)
|
|
Certificate of Amendment to the
Bylaws of the Company.
|
|
4
|
.1(1)
|
|
Reference is made to
Exhibits 3.1 and 3.2.
|
|
4
|
.2(4)
|
|
Spinnaker Networks, Inc. 2000 Stock
Plan.
|
|
4
|
.3(7)
|
|
Form of Stock Option Grant Notice
and Option Agreement under the Decru, Inc. Amended and Restated
2001 Equity Incentive Plan and the 2001 Equity Incentive Plan
filed under Attachment II.
|
|
4
|
.4(7)
|
|
Form of Stock Option Grant Notice
and Option Agreement under the Decru, Inc. 2001 Equity Incentive
Plan and the 2001 Equity Incentive Plan filed under
Attachment II.
|
|
4
|
.5(7)
|
|
Form of Early Exercise Stock
Purchase Agreement under the Decru, Inc. 2001 Equity Incentive
Plan.
|
|
4
|
.6(7)
|
|
Form of Restricted Stock Bonus
Grant Notice and Agreement under the Decru, Inc. 2001 Equity
Incentive Plan.
|
|
10
|
.1(2)
|
|
Asset Purchase Agreement dated
June 20, 2003, by and between Auspex Systems, Inc. and the
Company.
|
|
10
|
.2(5)
|
|
Purchase and Sale Agreement dated
July 27, 2004 by and between Cisco Systems, Inc. and the
Company.
|
|
10
|
.3
|
|
Closing Certificate and Agreement,
dated December 15, 2005, by and between BNP Leasing
Corporation and the Company.
|
|
10
|
.4
|
|
Construction Management Agreement,
dated December 15, 2005, by and between BNP Leasing
Corporation and the Company.
|
|
10
|
.5
|
|
Lease Agreement, dated
December 15, 2005, by and between BNP Leasing Corporation
and the Company.
|
|
10
|
.6
|
|
Purchase Agreement, dated
December 15, 2005, by and between BNP Leasing Corporation
and the Company.
|
|
10
|
.7
|
|
Ground Lease, dated
December 15, 2005, by and between BNP Leasing Corporation
and the Company.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Securities Exchange Act
Rules 13a-15(e)
and
15d-15(e) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated March 7, 2006.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Securities Exchange Act
Rules 13a-15(e)
and
15d-15(e) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated March 7, 2006.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to 18 U .S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated March 7, 2006.
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated March 7, 2006.
|
|
|
|
(1)
|
|
Previously filed as an exhibit with
the Companys Current Report on Form
8-K dated
December 4, 2001.
|
|
(2)
|
|
Previously filed as an exhibit with
the Companys Quarterly Report on
Form 10-Q
dated September 3, 2003.
|
|
(3)
|
|
Previously filed as an exhibit with
the Companys Current Report on Form
8-K dated
February 27, 2004.
|
|
(4)
|
|
Previously filed as an exhibit with
the Companys
Form S-8
registration statement dated March 1, 2004.
|
|
(5)
|
|
Previously filed as an exhibit with
the Companys Quarterly Report on
Form 10-Q
dated August 31, 2004.
|
|
(6)
|
|
Previously filed as an exhibit with
the Companys Current Report on Form
8-K dated
May 4, 2005.
|
|
(7)
|
|
Previously filed as an exhibit with
the Companys
Form S-8
registration statement dated September 2, 2005.
|
|
(8)
|
|
Previously filed as an exhibit with
the Companys Quarterly Report on
Form 10-Q
dated September 2, 2005.
|