| Database maintenance is being performed. If something doesn’t work, please try again shortly. |
Filed On 6/4/09 6:08am ET · SEC File 333-159722 · Accession Number 950123-9-11206
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
6/04/09 NetApp/Inc S-4 8:275 Bowne of NY City...01/FA
Registration of Securities Issued in a Business-Combination Transaction · Form S-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-4 Registration of Securities Issued in a HTML 1,561K
Business-Combination Transaction
2: EX-5.1 Opinion re: Legality HTML 7K
3: EX-8.1 Opinion re: Tax Matters HTML 11K
4: EX-8.2 Opinion re: Tax Matters HTML 14K
5: EX-23.2 Consent of Experts or Counsel HTML 6K
6: EX-23.3 Consent of Experts or Counsel HTML 6K
7: EX-99.1 Miscellaneous Exhibit HTML 10K
8: EX-99.2 Miscellaneous Exhibit HTML 8K
S-4 · Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
As filed with the Securities and
Exchange Commission on June 4, 2009
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
NetApp, Inc.
(Exact name of Registrant as
specified in its charter)
| |
|
|
|
|
|
|
|
3572
|
|
77-0307520
|
(State or other jurisdiction
of incorporation)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification Number)
|
495 East Java Drive
(Address, including Zip Code,
and Telephone Number, including Area Code, of Registrant’s
Principal Executive Offices)
Daniel J. Warmenhoven
Chief Executive Officer and
Director
NetApp, Inc.
495 East Java Drive
(Name, Address, including Zip
Code, and Telephone Number, including Area Code, of Agent for
Service)
With copies to:
| |
|
|
|
|
Steven E. Bochner, Esq.
Michael S. Ringler, Esq.
Nathaniel P. Gallon, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
(650) 493-9300
|
|
Robert G. Specker, Esq.
Vice President, In-house Counsel
Data Domain, Inc.
2421 Mission College Blvd.
Santa Clara, California 95054
(408) 980-4800
|
|
Gordon K. Davidson, Esq.
Dennis R. Debroeck, Esq.
Robert A. Freedman, Esq.
R. Gregory Roussel, Esq.
Fenwick & West LLP
801 California Street
Mountain View, California 94041
(650) 938-5200
|
Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable
after this Registration Statement becomes effective and upon
completion of the merger described in the enclosed document.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether
the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and
“smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
| Large
accelerated
filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller reporting
company o
|
(Do not check if a smaller
reporting company)
If applicable, place an X in the box to designate the
appropriate rule provision relied upon in conducting this
transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender
Offer) o
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender
Offer) o
CALCULATION OF REGISTRATION
FEE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Each Class of
|
|
|
Amount to be
|
|
|
Offering
|
|
|
Aggregate
|
|
|
Registration
|
|
Securities to be Registered(1)
|
|
|
Registered(2)
|
|
|
Price per Unit
|
|
|
Offering Price(3)
|
|
|
Fee
|
|
Common Stock, par value $0.001 per share
|
|
|
54,695,347
|
|
|
N/A
|
|
|
$613,152,900
|
|
|
$34,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This Registration Statement relates
to shares of common stock, par value $0.001 per share, of the
Registrant (“NetApp”) issuable to holders of shares of
common stock, par value $0.0001 per share, of Data Domain, Inc.,
a Delaware corporation (“Data Domain”), in the
proposed acquisition of Data Domain by the Registrant pursuant
to the terms of the Agreement and Plan of Merger, dated as of
May 20, 2009, as amended on June 3, 2009, by and among
the Registrant, Kentucky Merger Sub One Corporation, Derby
Merger Sub Two LLC and Data Domain.
|
| |
|
(2)
|
|
Based on the maximum number of
shares of NetApp common stock to be issued in connection with
the merger, calculated as the product of
(a) 70,275,404 shares, the maximum number of shares of
Data Domain common stock that may be cancelled and exchanged in
the merger and (b) the maximum exchange ratio of
0.7783 shares of the Registrant’s common stock for
each share of Data Domain common stock, which represents the
highest possible exchange ratio pursuant to the Agreement and
Plan of Merger.
|
| |
|
(3)
|
|
Estimated solely for purposes of
calculating the registration fee in accordance with
Rules 457(c) and 457(f) of the Securities Act of 1933, as
amended, the market value of the securities to be registered was
calculated as the product of (A) $25.175, the average of
the high and low prices per share of Data Domain common stock on
May 29, 2009, as quoted on the NASDAQ Global Select Market,
multiplied by (B) 70,275,404, the maximum number of shares
of Data Domain common stock that may be cancelled and exchanged
in the merger; less $1,156,030,396, the aggregate amount of cash
that would be payable to the holders of Data Domain common stock
in the merger assuming 70,275,404 shares of Data Domain
common stock were outstanding and assuming a per share cash
amount of $16.45.
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such dates as
the Commission, acting pursuant to said Section 8(a), may
determine.
Information
contained herein is subject to completion or amendment. A
registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective.
This document shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of
these securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such
jurisdiction.
|
MERGER
PROPOSAL
YOUR VOTE IS VERY IMPORTANT
Dear Stockholder:
On
May 20, 2009, Data Domain, Inc., referred to as Data
Domain, and NetApp, Inc., referred to as NetApp, announced a
business combination in which a direct, wholly owned subsidiary
of NetApp will merge with Data Domain, with Data Domain
continuing as the interim surviving entity, and, immediately
thereafter, subject to certain conditions, Data Domain will
merge with a second direct, wholly owned subsidiary of NetApp,
with such subsidiary continuing as the final surviving entity.
On
June 3, 2009, NetApp and Data Domain amended the
original merger agreement to reflect the terms described in this
proxy statement/prospectus. The first merger is referred to
herein as the first-step merger, the second merger is referred
to herein as the second-step merger, and together such mergers
are referred to herein as the merger. If the first-step merger
is completed, you will have the right to receive $16.45 in cash,
without interest and less any applicable withholding, referred
to as the cash consideration, subject to adjustment, and a
number of shares of NetApp common stock equal to the exchange
ratio, referred to as the stock consideration, and together with
the cash consideration, referred to as the merger consideration,
for each outstanding share of common stock of Data Domain that
you hold immediately prior to the first-step merger.
The exchange ratio is equal to (i) 0.7783 shares of
NetApp common stock if the closing average (as described below)
is less than $17.41, (ii) 0.6370 shares of NetApp
common stock if the closing average is greater than $21.27, and
(iii) that fraction of a share of NetApp common stock
(rounded to the nearest ten thousandth) equal to the quotient
obtained by dividing $13.55 by the closing average, if the
closing average is (A) less than or equal to $21.27 and
(B) greater than or equal to $17.41. The closing average
means the average of the closing sales prices for NetApp common
stock (rounded to the nearest one-hundredth of a cent) as
reported on the NASDAQ Global Select Market for the 10 most
recent consecutive trading days ending on the third trading day
immediately prior to the closing of the first-step merger. Data
Domain stockholders may contact Innisfree M&A Incorporated,
Data Domain’s information agent, toll free at
(888) 750-5834,
and banks or brokers may call collect at
(212) 750-5833,
for information regarding the approximate merger consideration
payable in connection with the first-step merger based on
information available as of the date of inquiry. In addition, on
the third trading day preceding the date of the special meeting
of the Data Domain stockholders described below, NetApp and Data
Domain will issue a joint
press release announcing the aggregate
merger consideration that would be payable to the Data Domain
stockholders, assuming that the merger closed on the date of the
special meeting. As further described in this proxy
statement/prospectus, under certain conditions, NetApp may elect
to reduce, or be required to reduce, the stock consideration,
and in the event of such a reduction, NetApp will be required to
increase the cash consideration.
If the closing average is less than $17.41, the value of the
merger consideration will be less than the aggregate $30.00
value of the merger consideration on
June 3, 2009, the date
on which the revised terms of the merger were announced. If the
closing average is greater than $21.27, the value of the merger
consideration will be greater than the aggregate $30.00 value of
the merger consideration on
June 3, 2009. The following
table shows the closing sale prices of NetApp common stock and
Data Domain common stock as reported on the NASDAQ Global Select
Market on
May 19, 2009, the last trading day before the
initial announcement of the potential merger, on
June 2,
2009, the last trading day before the revised terms of the
merger were announced and on
[ ],
2009, the last trading day before the distribution of the
enclosed proxy statement/prospectus for which data was
available. This table also shows the implied value of the merger
consideration proposed for each share of Data Domain common
stock, which was calculated by adding to $16.45, or the cash
consideration, the product obtained by multiplying the closing
price of NetApp common stock on those dates by the implied
exchange ratio for the stock consideration that would apply if
the closing average were equal to such closing price on such
dates.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implied Value of
|
|
|
|
|
|
|
|
|
|
|
One Share of
|
|
|
|
|
NetApp
|
|
|
Data Domain
|
|
|
Data Domain
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
$
|
18.07
|
|
|
$
|
17.43
|
|
|
$
|
25.00
|
|
|
|
|
$
|
19.34
|
|
|
$
|
31.58
|
|
|
$
|
30.00
|
|
|
[ ],
2009
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
|
|
|
(1)
|
|
Based on the terms of the original
merger agreement.
|
The market prices of both NetApp common stock and Data Domain
common stock will fluctuate before the merger. You should obtain
current stock price quotations for NetApp common stock and Data
Domain common stock. NetApp common stock is quoted on the NASDAQ
Global Select Market under the symbol “NTAP.” Data
Domain common stock is quoted on the NASDAQ Global Select Market
under the symbol “DDUP.”
We cannot complete the merger unless Data Domain’s
stockholders adopt the merger agreement, the proposal to adopt
the merger agreement being referred to in the proxy
statement/prospectus as the merger proposal. Data Domain will
hold a special meeting of its stockholders to vote on the merger
proposal at 2421 Mission College Blvd.,
Santa Clara,
CA
95054 at
[ ],
local time, on
[ ],
2009.
Your vote is important. The market price of NetApp
common stock will continue to fluctuate following the date of
the stockholder vote on the merger proposal at the special
meeting. Consequently, at the time of the stockholder vote, the
value of the stock consideration will not yet be determined.
Regardless of whether you plan to attend the special meeting,
please take the time to vote your shares in accordance with the
instructions contained in this proxy statement/prospectus.
Failing to vote will have the same effect as voting against the
merger proposal. You will also have an opportunity to vote to
approve the adjournment or postponement of the special meeting,
if necessary, to solicit additional proxies in favor of the
approval of the merger proposal, referred to as the adjournment
proposal.
The Data Domain board of directors unanimously recommends
that Data Domain stockholders vote “FOR” approval of
the merger proposal and “FOR” the adjournment
proposal.
This proxy statement/prospectus describes the special meeting,
the merger proposal and the adjournment proposal, the documents
related to each proposal, and other related matters. Please
carefully read this entire proxy statement/prospectus, including
“Risk Factors” beginning on page 16, for a
discussion of the risks relating to the merger proposal. You
also can obtain information about NetApp and Data Domain from
documents that each of us has filed with the Securities and
Exchange Commission.
By Order of the Board of Directors
Sincerely,
Frank Slootman
President and Chief Executive
Officer
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the NetApp
common stock to be issued under this proxy statement/prospectus
or determined if this proxy statement/prospectus is accurate or
adequate. Any representation to the contrary is a criminal
offense.
The date of this proxy statement/prospectus is
[ ],
2009, and it is first being mailed or otherwise delivered to
Data Domain stockholders on or about
[ ],
2009.
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
[ ],
2009
To the Stockholders of Data Domain, Inc.:
Data Domain, Inc., or Data Domain, will hold a special meeting
of stockholders at 2421 Mission College Blvd.,
Santa Clara,
CA 95054 at
[ ],
local time, on
[ ],
2009 to consider and vote upon the following proposals:
1. To adopt the Agreement and
Plan of Merger, dated as of
May 20, 2009, as amended on
June 3, 2009, by and among
NetApp, Kentucky Merger Sub One Corporation, Derby Merger Sub
Two LLC and Data Domain, as the agreement may be amended from
time to time, which proposal is referred to as the merger
proposal; and
2. To approve the adjournment or postponement of the
special meeting, if necessary, to solicit additional proxies, in
the event that there are not sufficient votes at the time of the
special meeting to approve the merger proposal, which proposal
is referred to as the adjournment proposal.
The Data Domain board of directors has fixed the close of
business on
[ ],
2009 as the record date for the special meeting. Only Data
Domain stockholders of record at that time are entitled to
notice of, and to vote at, the special meeting, or any
adjournment or postponement of the special meeting. In order for
the merger proposal to be approved, the holders of at least a
majority of the Data Domain shares outstanding and entitled to
vote thereon must vote in favor of approval of the merger
proposal. In the event that a quorum is not present in person or
represented by proxy at the special meeting, the chairman of the
meeting may adjourn the meeting to another place, date or time.
If a quorum is present in person or represented by proxy at the
special meeting, approval of the adjournment proposal requires
the affirmative vote of the majority of the outstanding shares
that are present in person or represented by proxy and entitled
to vote at the special meeting.
Regardless of whether you plan to attend the special meeting,
please submit your proxy with voting instructions. Please vote
as soon as possible. If you hold stock in your name as a
stockholder of record, please vote your shares by
(i) completing, signing, dating and returning the enclosed
proxy card, (ii) using the telephone number on your proxy
card, or (iii) using the Internet voting instructions on
your proxy card. If you hold your stock in “street
name” through a bank, broker, or other nominee, please
direct your bank, broker, or other nominee to vote in accordance
with the instructions you have received from your bank, broker,
or other nominee. This will not prevent you from voting in
person, but it will help to secure a quorum and avoid additional
solicitation costs. Any holder of Data Domain common stock who
is present at the special meeting may vote in person instead of
by proxy, thereby canceling any previous proxy. In any event, a
proxy may be revoked in writing at any time before the special
meeting in the manner described in the accompanying document.
The Data Domain board of directors has unanimously approved
the merger proposal and unanimously recommends that Data Domain
stockholders vote “FOR” approval of the merger
proposal and “FOR” approval of the adjournment
proposal.
BY ORDER OF THE BOARD OF DIRECTORS,
Sincerely,
Frank Slootman
President and Chief Executive Officer
[ ],
2009
YOUR VOTE IS IMPORTANT.
PLEASE VOTE YOUR SHARES PROMPTLY, REGARDLESS OF WHETHER
YOU PLAN TO ATTEND THE SPECIAL MEETING.
REFERENCES
TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business
and financial information about NetApp and Data Domain from
documents that are not included in or delivered with this
document. You can obtain
documents incorporated by reference in
this proxy statement/prospectus, other than certain exhibits to
those documents, or filed as exhibits to the registration
statement of which this proxy statement/prospectus is a part, by
requesting them in writing or by telephone from the appropriate
company at the following addresses:
| |
|
|
NetApp, Inc.
495 East Java Drive
Sunnyvale, CA 94089
Attention: Investor Relations
Telephone:
(408) 822-7098
|
|
Data Domain, Inc.
2421 Mission College Blvd.
Santa Clara, CA 95054
Attention: Investor Relations
Telephone: (408) 980-4909
|
You will not be charged for any of these documents that
you request. Data Domain stockholders requesting documents
should do so by
[ ],
2009 (which is five business days prior to the date of the
special meeting) to ensure that they receive them before the
special meeting.
See “Where You Can Find More Information” on
page 119.
ABOUT
THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus, which forms a part of a
registration statement on
Form S-4
filed with the Securities and Exchange Commission, referred to
as the SEC, by NetApp, constitutes a prospectus of NetApp under
Section 5 of the Securities Act of 1933, as amended,
referred to as the Securities Act, with respect to the shares of
NetApp common stock to be issued to Data Domain stockholders in
connection with the merger. This document also constitutes a
proxy statement under Section 14(a) of the Securities
Exchange Act of 1934, as amended, referred to as the Exchange
Act, and the rules thereunder, and a notice of meeting with
respect to the special meeting of Data Domain stockholders to
consider and vote upon the merger proposal and the adjournment
proposal.
Except as otherwise provided herein, all descriptions of and
calculations made under the terms of the merger agreement and
the transactions contemplated by the merger agreement, including
the merger, assume that no Data Domain stockholders exercise
appraisal rights under Delaware law.
To facilitate the reading of this proxy statement/prospectus, in
referring to “we,” “us” and other first
person declarations, we are referring to both NetApp and Data
Domain or, in some instances, the combined company as it would
exist following the completion of the merger.
QUESTIONS
AND ANSWERS ABOUT VOTING PROCEDURES FOR THE
DATA DOMAIN SPECIAL MEETING
|
|
|
|
Q: |
|
Why am I receiving this proxy statement/prospectus? |
| |
|
A: |
|
NetApp, Inc., referred to as NetApp, has agreed to acquire Data
Domain, Inc., referred to as Data Domain, by means of a merger
of Data Domain with a subsidiary of NetApp. Please see
“Data Domain Proposal 1 — The Merger”
beginning on page 48 and “The Merger Agreement”
beginning on page 76 for a description of the merger and
the merger agreement. A copy of the merger agreement is attached
to this proxy statement/prospectus as Appendix A. |
| |
|
|
|
To complete the merger, Data Domain stockholders must vote to
approve the merger proposal. Data Domain will hold a special
meeting of stockholders to obtain this approval. You will also
be given an opportunity to vote to approve the adjournment or
postponement of the special meeting, if necessary, to solicit
additional proxies in favor of the merger proposal, referred to
as the adjournment proposal. |
| |
|
Q: |
|
What will happen in the merger? |
| |
|
A: |
|
As the first step in the transaction, a direct, wholly owned
subsidiary of NetApp will merge with Data Domain, with Data
Domain continuing as the surviving entity, and as a direct,
wholly owned subsidiary of NetApp. Immediately thereafter,
provided that certain conditions described below are satisfied,
Data Domain will merge with a second direct, wholly owned
subsidiary of NetApp, with such second subsidiary continuing as
the surviving corporation. The first merger is referred to
herein as the first-step merger and the second merger is
referred to herein as the second-step merger. If the second-step
merger occurs, the first-step merger and the second-step merger
together are referred to herein as the merger. If the
second-step merger does not occur, references herein to the
merger shall mean the first-step merger. Upon completion of the
first-step merger, Data Domain common stock will cease trading
on the NASDAQ Global Select Market, and Data Domain common
stockholders will be entitled to receive the merger
consideration for each outstanding share of Data Domain common
stock held immediately prior to the first-step merger. |
| |
|
Q: |
|
What will Data Domain stockholders receive in the merger? |
| |
|
A: |
|
In the merger, subject to the possible adjustments to the cash
consideration and the stock consideration described below, each
Data Domain stockholder will have a right to receive a cash
amount of $16.45, without interest and less any applicable
withholding, plus a number of shares of NetApp common stock
equal to the exchange ratio for each outstanding share of Data
Domain common stock. The exchange ratio will depend on the
closing average of NetApp common stock. The closing average is
the average of the closing sales prices for NetApp common stock
as reported on the NASDAQ Global Select Market for the 10 most
recent consecutive trading days ending on the third trading day
immediately prior to the closing of the first-step merger. |
| |
|
|
|
The exchange ratio is equal to (i) 0.7783 shares of
NetApp common stock if the closing average is less than $17.41,
(ii) 0.6370 shares of NetApp common stock if the
closing average is greater than $21.27, and (iii) that
fraction of a share of NetApp common stock equal to the quotient
obtained by dividing $13.55 by the closing average, if the
closing average is (A) less than or equal to $21.27 and
(B) greater than or equal to $17.41. |
| |
|
|
|
For example, if the closing average of NetApp common stock is
$16.00, a holder of 100 shares of Data Domain common stock
will receive $1,645 in cash and 77 shares of NetApp common
stock (i.e., 100 x $16.45 = $1,645 in cash and 100 x 0.7783 =
77 shares of common stock), plus cash equal to the value of
the fractional share of NetApp common stock to which such holder
would otherwise be entitled. |
| |
|
|
|
If the closing average of NetApp common stock is $18.00, a
holder of 100 shares of Data Domain common stock will
receive $1,645 in cash and 75 shares of NetApp common stock
(i.e., 100 x $16.45 = $1,645 in cash and 100 x ($13.55/$18.00) =
75 shares of common stock), plus cash equal to the value of
the fractional share of NetApp common stock to which such holder
would otherwise be entitled. |
| |
|
|
|
Finally, if the closing average of NetApp common stock is
$22.00, a holder of 100 shares of Data Domain common stock
will receive $1,645 in cash and 63 shares of NetApp common
stock (i.e., 100 x $16.45 = $1,645 in cash and 100 x 0.6370 =
63 shares of common stock), plus cash equal to the value of
the fractional share of NetApp common stock to which such holder
would otherwise be entitled. |
ii
|
|
|
|
|
|
The range of outcomes is illustrated by the following graph: |
|
|
|
|
|
|
Stockholders of Data Domain should bear in mind, however, that
under the merger agreement, if the exchange ratio is greater
than or equal to 0.7006 and less than 0.7783, NetApp, in its
sole discretion may reduce the number of shares of NetApp common
stock you will receive and proportionately increase the amount
of cash you will receive. However, NetApp may not reduce the
amount of stock consideration and increase the cash
consideration to the extent that it would reasonably be expected
to cause the merger to fail to qualify as a tax-free
reorganization under the Internal Revenue Code, except as may be
required as described herein. |
| |
|
|
|
If the aggregate amount of the stock consideration issuable in
the merger (including the stock consideration issuable to
holders of Data Domain options and restricted stock units) would
exceed 19.5% of the outstanding shares of NetApp common stock
immediately prior to the effective time of the first-step
merger, the stock consideration will be decreased to the minimum
extent necessary so that no more than 19.5% of the outstanding
shares of NetApp common stock will be issued in the merger (with
such percentage measured immediately prior to the effective time
of the first-step merger). In such event, the cash consideration
will be increased by an amount equal to the product of
(a) the amount of the reduction in the stock consideration
multiplied by (b) the closing average. In the event that
the stock consideration is decreased in accordance with this
paragraph, the merger may to fail to qualify as a tax-free
reorganization under the Internal Revenue Code. |
| |
|
|
|
Data Domain stockholders may contact Innisfree M&A
Incorporated, Data Domain’s information agent, toll free at
(888) 750-5834,
and banks or brokers may call collect at
(212) 750-5833,
for information regarding the approximate merger consideration
payable in connection with the merger. In addition, on the third
trading day preceding the date of the special meeting of the
Data Domain stockholders, NetApp and Data Domain will issue a
joint press release announcing the aggregate merger
consideration that would be payable to the Data Domain
stockholders and whether the merger would qualify as a tax-free
reorganization, assuming that the merger closed on the date of
the special meeting. However, there can be no assurance that the
merger will close on the date of the special meeting of the
stockholders, and, as such, the assumptions in that announcement
may differ from the actual merger consideration payable in, and
the tax treatment of, the merger at the closing. |
| |
|
Q: |
|
What do I need to do now? |
| |
|
A: |
|
After you have carefully read this proxy statement/prospectus
and have decided how you wish to vote your shares, please vote
your shares promptly. If you hold stock in your name as a
stockholder of record, please vote your shares by
(i) completing, signing, dating and returning the enclosed
proxy card, (ii) using the telephone number on your proxy
card or (iii) using the Internet voting instructions on
your proxy card. If you have Internet access, you are encouraged
to record your vote via the Internet. |
iii
|
|
|
|
|
|
If you hold your stock in “street name” through a
bank, broker or other nominee, you must direct your bank, broker
or other nominee to vote in accordance with the instructions you
have received from your bank, broker or other nominee.
Submitting your proxy card or directing your bank, broker or
other nominee to vote your shares will ensure that your shares
are represented and voted at the special meeting. |
| |
|
Q: |
|
Why is my vote important? |
| |
|
A: |
|
If you do not vote by proxy or vote in person at the special
meeting, it will be more difficult for us to obtain the
necessary quorum to hold the special meeting. In addition, your
failure to vote, by proxy or in person, or failure to instruct
your broker, will have the same effect as a vote against the
merger proposal. The merger proposal must be approved by the
holders of a majority of the outstanding shares of Data Domain
common stock entitled to vote at the special meeting. In the
event that a quorum is not present in person or represented by
proxy at the special meeting, the chairman of the meeting may
adjourn the meeting to another place, date or time. Approval of
the adjournment proposal requires the affirmative vote of the
majority of the outstanding shares that are present in person or
represented by proxy and entitled to vote at the special
meeting. The Data Domain board of directors unanimously
recommends that you vote to approve the merger proposal and the
adjournment proposal. |
| |
|
Q: |
|
If my shares of common stock are held in street name by my
broker, will my broker automatically vote my shares for me? |
| |
|
A: |
|
No. Your broker cannot vote your shares without
instructions from you. You should instruct your broker as to how
to vote your shares, following the directions your broker
provides to you. Please check the voting form used by your
broker. |
| |
|
Q: |
|
What if I abstain from voting or fail to instruct my
broker? |
| |
|
A: |
|
If you abstain from voting, the abstention will be counted
toward a quorum at the special meeting, but it will have the
same effect as a vote against the merger proposal and against
the adjournment proposal. If you fail to instruct your broker, a
“broker non-vote,” those shares would be counted
towards a quorum at the special meeting, but the shares would
not be considered entitled vote, and thus it will have the same
effect as a vote against the merger proposal, but it will have
no effect on the adjournment proposal. |
| |
|
Q: |
|
Can I attend the special meeting and vote my shares in
person? |
| |
|
A: |
|
Yes. All stockholders, including stockholders of record and
stockholders who hold their shares through banks, brokers,
nominees or any other holder of record, are invited to attend
the special meeting. Holders of record of Data Domain common
stock can vote in person at the special meeting. If you are not
a stockholder of record, you must obtain a proxy, executed in
your favor, from the record holder of your shares, such as a
broker, bank or other nominee, to be able to vote in person at
the special meeting. If you plan to attend the special meeting,
you must hold your shares in your own name or have a letter from
the record holder of your shares confirming your ownership, and
you must bring a form of personal photo identification with you
to be admitted. Data Domain reserves the right to refuse
admittance to anyone without proper proof of share ownership or
without proper photo identification. |
| |
|
Q: |
|
Can I change my vote? |
| |
|
A: |
|
Yes. You may revoke any proxy at any time before it is voted by
signing and returning a proxy card with a later date, delivering
a written revocation letter to the Data Domain Corporate
Secretary, or by attending the special meeting in person,
notifying the Corporate Secretary and voting by ballot at the
special meeting. The Data Domain Corporate Secretary’s
mailing address is 2421 Mission College Blvd., Santa Clara,
CA 95054. |
| |
|
|
|
Any stockholder entitled to vote in person at the special
meeting may vote in person regardless of whether a proxy has
been previously given, but the mere presence (without notifying
the Data Domain Corporate Secretary) of a stockholder at the
special meeting will not constitute revocation of a previously
given proxy. |
| |
|
Q: |
|
If I am a Data Domain stockholder, should I send in my Data
Domain stock certificates now? |
iv
|
|
|
|
A: |
|
No. You should not send in your Data Domain stock
certificates at this time. After the merger is completed, NetApp
will send you instructions for exchanging Data Domain stock
certificates for the merger consideration. Unless Data Domain
stockholders specifically request to receive NetApp stock
certificates, the shares of NetApp stock they receive in the
merger will be issued in book-entry form. |
| |
|
Q: |
|
Is the merger subject to the approval of stockholders of
NetApp? |
| |
|
A: |
|
No. NetApp is not required to obtain the approval of its
stockholders with respect to the merger proposal. |
| |
|
Q: |
|
When do you expect to complete the merger? |
| |
|
A: |
|
Data Domain currently expects to complete the merger in the late
summer or early fall of 2009. However, there can be no assurance
as to when, or if, the merger will occur. Data Domain must first
obtain the approval of Data Domain stockholders at the special
meeting and the necessary regulatory approvals. |
| |
|
Q: |
|
What are the material U.S. tax consequences of the merger? |
| |
|
A: |
|
The U.S. tax consequences of the merger depend on whether the
second-step merger occurs. The second-step merger will occur
only if Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel to NetApp, and Fenwick & West
LLP, counsel to Data Domain, deliver opinions to the effect that
the first-step merger and the second-step merger together will
qualify as a “reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
amended, or the Code. The tax opinions are conditioned upon
receipt of customary written representations from NetApp and
Data Domain, including representations that the stock
consideration, valued as of the last business day immediately
prior to the closing date of the first-step merger, will
constitute at least 40% of the total consideration paid or
payable to Data Domain stockholders in the first-step merger,
referred to as the continuity of interest test. |
| |
|
|
|
Whether the continuity of interest test will be satisfied
depends primarily upon the market value of the NetApp common
stock immediately before the first-step merger. No assurances
can be given that the continuity of interest test will be met.
As a result, in deciding whether to approve the merger, you
should consider the possibility that it may be taxable to you
because the continuity of interest test is not satisfied and the
second-step merger does not occur. You will not be entitled to
change your vote in the event that the merger is taxable. |
| |
|
|
|
If the second-step merger occurs and the merger qualifies as a
reorganization, a U.S. holder of Data Domain common stock
receiving NetApp common stock and cash in exchange for Data
Domain common stock in the merger generally will recognize gain
equal to the lesser of (i) the amount of cash received by
the U.S. holder (excluding any cash received in lieu of
fractional shares) and (ii) the excess of the “amount
realized” by the U.S. holder over the U.S. holder’s
tax basis in the Data Domain common stock. The “amount
realized” by the U.S. holder will equal the sum of the fair
market value of the NetApp common stock and the amount of cash
(including any cash received in lieu of fractional shares)
received by the U.S. holder. Losses will not be permitted to be
recognized. Realized gain or loss must be calculated separately
for each identifiable block of shares (i.e., shares acquired at
different times and prices) exchanged in the merger, and a loss
realized on the exchange of one block cannot be used to offset a
gain recognized on the exchange of another block. |
| |
|
|
|
If the second-step merger does not occur, the exchange of Data
Domain common stock for NetApp common stock and cash in the
first-step merger will be a fully taxable transaction in which a
U.S. holder generally will recognize gain or loss equal to the
difference between the “amount realized” (as defined
above) and the U.S. holder’s tax basis in the Data Domain
common stock. Gain or loss must be calculated separately for
each identifiable block of shares (i.e., shares acquired at
different times and prices) exchanged in the first-step merger. |
| |
|
|
|
Please see “Material U.S. Federal Income Tax Consequences
of the Merger” beginning on page 95. |
| |
|
Q: |
|
Whom should I call with questions? |
| |
|
A: |
|
If you need any assistance in completing your proxy card or have
questions regarding the special meeting, you may call Innisfree
M&A Incorporated, Data Domain’s proxy solicitor, at
(888) 750-5834 (toll-free) if you are a stockholder or (212)
750-5833 (collect) if you are a bank or broker. |
v
SUMMARY
This summary highlights material information from this proxy
statement/prospectus. It may not contain all of the information
that is important to you. Data Domain urges you to read
carefully the entire proxy statement/prospectus and the other
documents to which we refer to fully understand the merger and
the related transactions. See “Where You Can Find More
Information” on page 119. Each item in this summary
refers to the page of this proxy statement/prospectus on which
that subject is discussed in more detail.
Following the first-step merger, for each share of Data
Domain common stock held by them, Data Domain stockholders will
have a right to receive a cash amount of $16.45, without
interest and less any required withholding under United States
federal, state, or local law or under foreign law, plus a number
of validly issued, fully paid and non-assessable shares of
NetApp common stock equal to the exchange ratio. The exchange
ratio is equal to (i) 0.7783 shares of NetApp common
stock if the closing average (as described below) is less than
$17.41, (ii) 0.6370 shares of NetApp common stock if
the closing average is greater than $21.27, and (iii) that
fraction of a share of NetApp common stock equal to the quotient
obtained by dividing $13.55 by the closing average, if the
closing average is (A) less than or equal to $21.27 and
(B) greater than or equal to $17.41. The closing average
means the average of the closing sales prices for NetApp common
stock as reported on the NASDAQ Global Select Market for the 10
most recent consecutive trading days ending on the third trading
day immediately prior to the closing of the first-step merger.
Under certain conditions, NetApp may elect to reduce, or may be
required to reduce, the stock consideration, and, in the event
of such a reduction, NetApp will be required to increase the
cash consideration. See “The Merger Agreement —
Per Share Merger Consideration.” Data Domain stockholders
may contact Innisfree M&A Incorporated, Data Domain’s
information agent, toll free at
(888) 750-5834,
and banks or brokers can call collect at
(212) 750-5833,
for information regarding the merger consideration to be
received upon exchange of each share of Data Domain common stock
in connection with the merger. In addition, on the third trading
day preceding the date of the special meeting of the Data Domain
stockholders, NetApp and Data Domain will issue a joint press
release announcing the aggregate merger consideration that would
be payable to the Data Domain stockholders and whether the
merger would qualify as a tax-free reorganization, assuming that
the merger closed on the date of the special meeting. However,
there can be no assurance that the merger will close on the date
of the special meeting of the stockholders, and, as such, the
assumptions in that announcement may differ from the actual
merger consideration payable in, and the tax treatment of, the
merger at the closing.
On
May 20, 2009, NetApp entered into an Agreement and Plan
of Merger, referred to as the original merger agreement, by and
among NetApp, Kentucky Merger Sub One Corporation, a wholly
owned subsidiary of NetApp, referred to as Merger Sub One, Derby
Merger Sub Two LLC, a wholly owned subsidiary of NetApp,
referred to as Merger Sub Two, and Data Domain, pursuant to
which for each share of Data Domain common stock held by them,
Data Domain stockholders would have had a right to receive a
cash amount of $11.45 plus a number of validly issued, fully
paid and non-assessable shares of NetApp common stock equal to
an exchange ratio of (i) 0.833 shares of NetApp common
stock if the closing average was less than $16.26,
(ii) 0.682 shares of NetApp common stock if the
closing average was greater than $19.88, and (iii) that
fraction of a share of NetApp common stock equal to the quotient
obtained by dividing $13.55 by the closing average, if the
closing average was (A) less than or equal to $19.88 and
(B) greater than or equal to $16.26. On
June 3, 2009,
NetApp and Data Domain amended the original merger agreement to
reflect the terms described in this proxy statement/prospectus.
The merger agreement provides for the acquisition of Data Domain
by NetApp by means of a merger of Merger Sub One with and into
Data Domain, referred to as the first-step merger, with Data
Domain as the interim surviving entity. Immediately thereafter,
subject to certain conditions, Data Domain, as the interim
surviving entity, will merge with and into Merger Sub Two,
referred to as the second-step merger, with Merger Sub Two as
the final surviving entity. Unless otherwise specified herein,
the second-step merger, taken together with the first-step
merger, is referred to in this proxy statement/prospectus as the
merger. As a result of the first-step merger, Data Domain will
become a wholly owned subsidiary of NetApp. See
“Material
U.S. Federal Income Tax Consequences of the Merger” for an
explanation of the two-step merger structure. Based on
NetApp’s stock trading price as of
June 2, 2009, the
aggregate value of the consideration payable in connection with
the merger, is $1.9 billion on a fully diluted basis (net
of cash on Data
1
Domain’s balance sheet). The aggregate value of the
consideration payable at closing is subject to change, as
further described in this proxy statement/prospectus.
Each share of Data Domain common stock issued and outstanding
immediately prior to the effective time of the merger will be
cancelled and extinguished and automatically converted into the
right to receive a cash amount of $16.45, or the cash
consideration, without interest and less any required
withholding under United States federal, state, local or foreign
law, plus a number of validly issued, fully paid and
non-assessable shares of NetApp common stock equal to the
exchange ratio, referred to as the stock consideration, and
together with the cash consideration, the merger consideration.
The merger agreement is included as Appendix A to this
proxy statement/prospectus.
What
Holders of Data Domain Stock Options and Other Equity-Based
Awards Will Receive (page 77)
Each of the vested and unvested options to purchase shares of
Data Domain common stock that is outstanding at the effective
time of the first-step merger will be assumed and converted into
an option to acquire shares of NetApp common stock, subject to
the option exchange ratio, at the effective time of the merger,
and will otherwise be subject to the terms and conditions of
such award prior to the completion of the first-step merger,
including vesting and exercisability.
Each of Data Domain’s restricted stock units outstanding at
the effective time of the first-step merger will be assumed and
converted into a restricted stock unit representing the right to
receive the merger consideration payable for shares underlying
each assumed and converted Data Domain restricted stock unit.
The assumed and converted restricted stock units will otherwise
be subject to the same terms and conditions, including vesting
restrictions, applicable to such Data Domain restricted stock
units prior to the effective time of the first-step merger.
Each of Data Domain’s unvested shares of restricted stock
outstanding at the effective time of the first-step merger will
be assumed and converted into the right to receive the merger
consideration payable for such shares. The merger consideration
payable for such unvested shares of restricted stock will be
subject to the same terms and conditions, including vesting
restrictions, applicable to such shares of Data Domain
restricted stock prior to the effective time of the first-step
merger.
Material
U.S. Federal Income Tax Consequences of the Merger to Data
Domain Stockholders (page 95)
The U.S. tax consequences of the merger depend on whether
the second-step merger occurs. The second-step merger will occur
only if Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel to NetApp, and Fenwick & West
LLP, counsel to Data Domain, deliver tax opinions to the effect
that the merger will qualify as a “reorganization”
within the meaning of Section 368(a) of the Code. The tax
opinions are conditioned upon receipt of customary written
representations from NetApp and Data Domain, including
representations that continuity of interest test will be
satisfied, requiring that the stock consideration constitute at
least 40% of the total consideration paid or payable to Data
Domain stockholders in the first-step merger.
Whether the continuity of interest test will be satisfied
depends primarily upon the market value of the NetApp common
stock immediately before the first-step merger. No assurances
can be given that the continuity of interest test will be met.
As a result, in deciding whether to approve the merger, you
should consider the possibility that the it may be taxable to
you because the continuity of interest test is not satisfied and
the second-step merger does not occur. You will not be entitled
to change your vote in the event that the merger is taxable.
If the second-step merger occurs and the merger qualifies as a
reorganization, a U.S. holder of Data Domain common stock
receiving NetApp common stock and cash in exchange for such Data
Domain common stock in the merger generally will recognize gain
equal to the lesser of (i) the amount of cash received by
the U.S. holder (excluding any cash received in lieu of
fractional shares) and (ii) the excess of the “amount
realized” by the U.S. holder over the
U.S. holder’s tax basis in the Data Domain common
stock. The “amount realized” by the U.S. holder
will equal the sum of the fair market value of the NetApp common
stock and the amount of cash (including any cash received in
lieu of fractional shares) received by the U.S. holder.
Losses will not be permitted to be recognized. Realized gain or
loss must be calculated separately for each identifiable block
of shares (i.e., shares acquired at different times and prices)
exchanged in the merger, and a loss realized on the exchange of
one block
2
cannot be used to offset a gain recognized on the exchange of
another block. Any gain recognized by a U.S. holder of Data
Domain common stock generally will be long-term capital gain if
the U.S. holder’s holding period of the Data Domain
common stock is more than one year, and short-term capital gain
if the U.S. holder’s holding period is one year or
less, at the time of the first-step merger. Long-term capital
gains of individuals are eligible for reduced rates of taxation.
If the second-step merger does not occur, the exchange of Data
Domain common stock for NetApp common stock and cash in the
first-step merger will be a fully taxable transaction in which a
U.S. holder generally will recognize gain or loss equal to
the difference between the “amount realized” (as
defined above) and the U.S. holder’s tax basis in the
Data Domain common stock. Gain or loss must be calculated
separately for each identifiable block of shares (i.e., shares
acquired at different times and prices) exchanged in the
first-step merger. Any gain or loss recognized by a
U.S. holder of Data Domain common stock generally will be
long-term capital gain or loss if the U.S. holder’s
holding period of the Data Domain common stock is more than one
year, and short-term capital gain or loss if the
U.S. holder’s holding period is one year or less, at
the time of the first-step merger. Long-term capital gains of
individuals are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations.
The U.S. federal income tax consequences described above
may not apply to all holders of Data Domain common stock. Your
tax consequences will depend on your individual situation.
Accordingly, NetApp and Data Domain strongly urge you to consult
with your tax advisor for a full understanding of the particular
tax consequences of the merger to you.
Comparative
Market Prices and Dividends (page 177)
NetApp common stock trades on the NASDAQ Global Select Market
under the symbol
“NTAP,” and Data Domain common stock
trades on the NASDAQ Global Select Market under the symbol
“DDUP.” The following table shows the closing sale
prices of NetApp common stock and Data Domain common stock as
reported on the NASDAQ Global Select Market on
May 19,
2009, the last trading day before the signing of the original
merger agreement, on
June 2, 2009, the last trading day
before the signing of the amended merger agreement, and on
[ ],
2009, the last trading day before the distribution of this proxy
statement/prospectus for which data was available. This table
also shows the implied value of the merger consideration
proposed for each share of Data Domain common stock, which was
calculated by adding to $16.45, or the cash consideration, the
product obtained by multiplying the closing price of a share of
NetApp common stock on those dates by the implied exchange ratio
for the stock consideration that would apply if the closing
average were equal to the closing sale price on those dates.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implied Value of
|
|
|
|
|
|
|
|
|
|
|
One Share of
|
|
|
|
|
NetApp
|
|
|
Data Domain
|
|
|
Data Domain
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
$
|
18.07
|
|
|
$
|
17.43
|
|
|
$
|
25.00
|
|
|
|
|
$
|
19.34
|
|
|
$
|
31.58
|
|
|
$
|
30.00
|
|
|
[ ], 2009
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
|
|
|
(1) |
|
Based on the terms of the original merger agreement. |
The market price of NetApp common stock and Data Domain
common stock will fluctuate prior to the closing of the
first-step merger. You should obtain current market quotations
for the shares.
The Data
Domain Board of Directors Unanimously Recommends that Data
Domain Stockholders Vote “FOR” the Proposals
(pages 48 and 118)
The Data Domain board of directors believes that the merger is
in the best interests of Data Domain and its stockholders and
has unanimously approved the merger and the merger agreement.
The Data Domain board of directors unanimously recommends that
Data Domain stockholders vote “FOR” the merger
proposal and “FOR” the adjournment proposal.
3
Qatalyst
Partners Provided an Opinion to the Data Domain Board of
Directors (page 62)
As financial advisor to Data Domain, on
May 20, 2009,
Qatalyst Partners LP, which is referred to herein as Qatalyst,
rendered to the Data Domain board of directors its opinion that,
as of such date and based upon and subject to the various
assumptions, qualifications and limitations set forth in its
opinion, the merger consideration to be received by the holders
of shares of Data Domain common stock, other than affiliates who
have executed voting agreements, pursuant to the original merger
agreement was fair, from a financial point of view, to such
holders.
The full text of the written opinion of Qatalyst, dated
May 20, 2009, is attached hereto as Appendix D and is
incorporated by reference herein. The opinion sets forth, among
other things, the assumptions made, procedures followed, matters
considered and limitations and qualifications of the review
undertaken by Qatalyst in rendering its opinion. You should read
the opinion carefully in its entirety. Qatalyst’s opinion
was provided to the Data Domain board of directors and addresses
only the fairness, from a financial point of view, of the merger
consideration to be received by the holders of shares of Data
Domain common stock pursuant to the original merger agreement as
of the date of the opinion. It does not address any other aspect
of the transaction and does not constitute a recommendation to
the stockholders of Data Domain as to how to vote with respect
to the merger proposal or act on any other matter.
Data
Domain’s Officers and Directors Have Financial Interests in
the Merger That Differ From Your Interests
(page 68)
Data Domain’s executive officers and directors have
interests in the merger that are different from those of other
Data Domain stockholders. As of the record date, all directors
and executive officers of Data Domain, together with their
affiliates, beneficially owned approximately
[ ]% of the outstanding shares of
Data Domain common stock, which includes shares of common stock
and shares of restricted stock that will vest within
60 days of the record date, shares underlying vested
options and options that will vest within 60 days of the
record date, and shares issuable upon settlement of restricted
stock units and that will be issuable within 60 days of
such date. Additionally, certain executive officers and the
non-employee directors of Data Domain will be entitled to
additional benefits as a result of the completion of the merger
or upon certain events following the completion of the merger.
Directors
and Executive Officers of Data Domain Have Agreed to Vote in
Favor of the Merger Proposal (page 93)
In connection with the execution of the merger agreement,
directors and executive officers of Data Domain and certain of
their affiliates entered into voting agreements pursuant to
which they have agreed to vote all shares of Data Domain common
stock owned by them in favor of the merger proposal. As of the
record date these directors, executive officers and affiliates
owned shares representing approximately
[ ]% of Data Domain’s issued
and outstanding common stock. They have also agreed to comply
with certain restrictions on the disposition of their shares,
subject to the terms and conditions contained in the voting
agreements. Pursuant to their terms, these voting agreements
will terminate concurrently with any termination of the merger
agreement.
The form of voting agreement is included as Appendix B to
this proxy statement/prospectus.
Holders
of Data Domain Common Stock Are Entitled to Appraisal Rights
(page 72)
Under the Delaware General Corporation Law, referred to as the
DGCL, holders of Data Domain common stock who do not vote for
the approval of the first-step merger proposal have the right to
seek appraisal of the fair value of their shares as determined
by the Delaware Court of Chancery if the merger is completed,
but only if they comply with all requirements of Delaware law,
which are summarized in this proxy statement/prospectus. This
appraisal amount could be more than, the same as, or less than
the amount a Data Domain stockholder would be entitled to
receive under the merger agreement. Any holder of Data Domain
common stock intending to exercise appraisal rights, among other
things, must submit a written demand for appraisal to Data
Domain prior to the vote on the approval of the merger proposal
and must not vote or otherwise submit a proxy in favor of
approval of the merger proposal. Failure to follow exactly the
procedures specified under Delaware law will result in the loss
of appraisal rights. Because of the complexity of the Delaware
law relating to appraisal rights, if you are considering
exercising your appraisal right, Data Domain encourages you to
seek the advice of your own legal counsel.
4
A copy of Section 262 of the DGCL is also included as
Appendix C to this proxy statement/prospectus.
Conditions
That Must Be Satisfied or Waived for the Merger to Occur
(page 88)
Currently, NetApp and Data Domain expect to complete the
first-step merger in the late summer or early fall of 2009. As
more fully described in this proxy statement/prospectus and in
the merger agreement, the completion of the first-step merger
depends on a number of conditions being satisfied or, where
legally permissible, waived. These conditions include, among
others, approval of the merger proposal by Data Domain
stockholders, the expiration or termination of the applicable
Hart-Scott-Rodino
waiting period, the receipt of all required regulatory approvals.
Neither NetApp nor Data Domain can be certain when, or if, the
conditions to the merger will be satisfied or waived, or that
the merger will be completed.
Termination
of the Merger Agreement (page 90)
Either NetApp or Data Domain may terminate the merger agreement
under certain circumstances, which would prevent the merger from
being completed.
Termination
Fee (page 92)
A termination fee of $57,000,000 may be payable by Data Domain
to NetApp upon the termination of the merger agreement under
several circumstances.
Regulatory
Approvals Required for the Merger (page 74)
NetApp and Data Domain have agreed to use reasonable best
efforts to obtain as promptly as practicable all regulatory
approvals that are required to complete the transactions
contemplated in the merger agreement. This includes filing all
required notices to governmental authorities, including the
required filings with the Department of Justice and the Federal
Trade Commission pursuant to the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, referred to
herein as the HSR Act. NetApp and Data Domain are not permitted
to complete the merger until the applicable waiting periods
under the HSR Act have expired or been terminated.
Although neither NetApp nor Data Domain know of any reason why
regulatory approvals would not be obtained in a timely manner,
NetApp and Data Domain cannot be certain when, or if, the
approvals will be obtained.
Board of
Directors and Management of NetApp following Completion of the
Merger (page 72)
The directors of Data Domain and its
subsidiaries will resign in
connection with the first-step merger. The composition of
NetApp’s board of directors and management is not
anticipated to change in connection with the completion of the
first-step merger, although it is possible that following the
first-step merger, one or more members of Data Domain’s
management may be asked to join NetApp’s board of directors
and/or
management.
The
Rights of Data Domain Stockholders will Change as a Result of
the Merger (page 111)
The rights of Data Domain stockholders will change as a result
of the merger due to differences in NetApp’s and Data
Domain’s governing documents. This proxy
statement/prospectus contains a summary description of
stockholder rights under each of the NetApp and Data Domain
governing documents and describes the material differences
between them.
Data
Domain will Hold its Special Meeting on
[ ],
2009 (page 43)
The special meeting will be held on
[ ],
2009 at
[ ] ,
local time, at 2421 Mission College Blvd.,
Santa Clara,
CA
95054. At the special meeting, Data Domain stockholders will be
asked to:
|
|
|
| |
•
|
Adopt the merger agreement; and
|
5
|
|
|
| |
•
|
Approve the adjournment or postponement of the special meeting,
if necessary, to solicit additional proxies, in the event that
there are not sufficient votes at the time of the special
meeting to adopt the merger agreement.
|
Record Date. Only holders of record at the
close of business on
[ ],
2009 will be entitled to vote at the special meeting. Each share
of Data Domain common stock is entitled to vote. As of the
record date,
[ ] shares
of Data Domain common stock were outstanding, held by
approximately
[ ]
registered holders.
Required Vote. Approval of the merger proposal
requires the affirmative vote of the holders of a majority of
the outstanding shares of Data Domain common stock entitled to
vote at the special meeting. Because approval of the merger
proposal is based on the affirmative vote of a majority of
shares outstanding, a Data Domain stockholder’s failure to
vote, abstention or failure to instruct a broker, a “broker
non-vote,” will have the same effect as a vote against the
merger proposal.
In the event that a quorum is not present in person or
represented by proxy at the special meeting, the chairman of the
meeting may adjourn the meeting to another place, date or time.
If a quorum is present in person or represented by proxy at the
special meeting, approval of the adjournment proposal requires
the affirmative vote of the majority of the outstanding shares
that are present in person or represented by proxy and entitled
to vote at the special meeting. A Data Domain stockholder’s
abstention will have the same effect as a vote against the
adjournment proposal. A broker non-vote will have no effect on
the adjournment proposal.
Information
about the Companies (page 47)
NetApp,
Inc.
NetApp, a Delaware corporation, was established in 1992. NetApp
is a leading provider of storage and data management solutions.
NetApp common stock is traded on the NASDAQ Global Select Market
under the symbol
“NTAP.” The principal executive
offices of NetApp are located at 495 East Java Drive,
Sunnyvale,
CA 94089, and its telephone number is
(408) 822-6000.
Kentucky
Merger Sub One Corporation
Kentucky Merger Sub One Corporation, a wholly owned subsidiary
of NetApp, was formed solely for the purpose of completing the
merger. Kentucky Merger Sub One Corporation has not carried on
any activities to date, except for activities incidental to its
formation and activities undertaken in connection with the
transactions contemplated by the merger agreement. The principal
executive offices of Kentucky Merger Sub One Corporation are
located at 495 East Java Drive,
Sunnyvale,
CA 94089, and its
telephone number is
(408) 822-6000.
Derby
Merger Sub Two LLC
Derby Merger Sub Two LLC, a wholly owned subsidiary of NetApp,
was formed solely for the purpose of completing the merger.
Derby Merger Sub Two LLC has not carried on any activities to
date, except for activities incidental to its formation and
activities undertaken in connection with the transactions
contemplated by the merger agreement. The principal executive
offices of Derby Merger Sub Two LLC are located at 495 East Java
Drive,
Sunnyvale,
CA 94089, and its telephone number is
(408) 822-6000.
Data
Domain, Inc.
Data Domain, a Delaware corporation, was incorporated in
Delaware in October 2001. Data Domain is a leading provider of
storage solutions for backup and archive applications based on
deduplication technology.
Data Domain common stock is traded on the NASDAQ Global Select
Market under the symbol
“DDUP.” The principal
executive offices of Data Domain are located at 2421 Mission
College Blvd.,
Santa Clara,
CA 95054, and its telephone
number is
(408) 980-4800.
6
SELECTED
CONSOLIDATED HISTORICAL FINANCIAL DATA OF NETAPP
The tables below present selected consolidated financial data of
NetApp prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The data below are only a
summary and should be read in conjunction with NetApp’s
consolidated financial statements and accompanying notes, as
well as NetApp’s management’s discussion and analysis
of financial condition and results of operations, all of which
can be found in publicly available documents, including those
incorporated by reference in this proxy statement/prospectus.
For a complete list of
documents incorporated by reference in
this proxy statement/prospectus, see
“Where You Can Find
More Information” beginning on page 119.
NetApp derived the consolidated statements of income data for
the years ended
April 25, 2008,
April 27, 2007 and
April 28, 2006, and the consolidated balance sheet data as
of
April 25, 2008 and
April 27, 2007, from its audited
consolidated financial statements
incorporated by reference in
this proxy statement/prospectus. NetApp derived the consolidated
statements of income data for the years ended
April 29,
2005 and
April 30, 2004, and the consolidated balance sheet
data as of
April 28, 2006,
April 29, 2005 and
April 30, 2004, from its audited consolidated financial
statements not included or
incorporated by reference in this
proxy statement/prospectus. The unaudited consolidated
statements of income data for the nine month periods ended
January 23, 2009 and
January 25, 2008, and the
unaudited consolidated balance sheet data as of
January 23,
2009, are derived from its unaudited consolidated financial
statements
incorporated by reference in this proxy
statement/prospectus. NetApp has prepared the unaudited
information on the same basis as the audited consolidated
financial statements and has included, in its opinion, all
adjustments, consisting only of normal recurring adjustments,
that it considers necessary for a fair presentation of the
financial information set forth in those statements.
NetApp’s historical results are not necessarily indicative
of the results to be expected in the future.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
January 23,
|
|
|
January 25,
|
|
|
April 25,
|
|
|
April 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(1)
|
|
$
|
2,526,750
|
|
|
$
|
2,365,436
|
|
|
$
|
3,303,167
|
|
|
$
|
2,804,282
|
|
|
$
|
2,066,456
|
|
|
$
|
1,598,131
|
|
|
$
|
1,170,310
|
|
|
Total cost of revenue(2)
|
|
|
1,070,730
|
|
|
|
924,932
|
|
|
|
1,289,791
|
|
|
|
1,099,782
|
|
|
|
809,995
|
|
|
|
623,083
|
|
|
|
465,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,456,020
|
|
|
|
1,440,504
|
|
|
|
2,013,376
|
|
|
|
1,704,500
|
|
|
|
1,256,461
|
|
|
|
975,048
|
|
|
|
704,521
|
|
|
Total operating expenses
|
|
|
1,442,773
|
|
|
|
1,230,111
|
|
|
|
1,699,776
|
|
|
|
1,403,258
|
|
|
|
948,170
|
|
|
|
721,861
|
|
|
|
546,058
|
|
|
Income from operations
|
|
|
13,247
|
|
|
|
210,393
|
|
|
|
313,600
|
|
|
|
301,242
|
|
|
|
308,291
|
|
|
|
253,187
|
|
|
|
158,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(1)
|
|
$
|
11,461
|
|
|
$
|
219,918
|
|
|
$
|
309,738
|
|
|
$
|
297,735
|
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
$
|
152,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
0.03
|
|
|
$
|
0.62
|
|
|
$
|
0.88
|
|
|
$
|
0.80
|
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted
|
|
$
|
0.03
|
|
|
$
|
0.60
|
|
|
$
|
0.86
|
|
|
$
|
0.77
|
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic net income per share calculation
|
|
|
330,067
|
|
|
|
354,799
|
|
|
|
351,676
|
|
|
|
371,204
|
|
|
|
371,061
|
|
|
|
361,009
|
|
|
|
346,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted net income per share calculation
|
|
|
335,070
|
|
|
|
365,290
|
|
|
|
361,090
|
|
|
|
388,454
|
|
|
|
388,381
|
|
|
|
380,412
|
|
|
|
366,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 23,
|
|
|
April 25,
|
|
|
April 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
2,460,869
|
|
|
$
|
1,164,390
|
|
|
$
|
1,308,781
|
|
|
$
|
1,322,892
|
|
|
$
|
1,169,965
|
|
|
$
|
807,965
|
|
|
Working capital
|
|
|
1,599,034
|
|
|
|
653,331
|
|
|
|
1,053,256
|
|
|
|
1,116,047
|
|
|
|
1,055,700
|
|
|
|
745,013
|
|
|
Total assets
|
|
|
5,189,740
|
|
|
|
4,070,988
|
|
|
|
3,658,478
|
|
|
|
3,260,965
|
|
|
|
2,372,647
|
|
|
|
1,877,266
|
|
|
Short-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
85,110
|
|
|
|
166,211
|
|
|
|
—
|
|
|
|
—
|
|
|
Long-term debt and other
|
|
|
1,430,687
|
|
|
|
318,658
|
|
|
|
9,487
|
|
|
|
138,200
|
|
|
|
4,474
|
|
|
|
4,858
|
|
|
Total stockholders’ equity
|
|
|
1,527,393
|
|
|
|
1,700,339
|
|
|
|
1,989,021
|
|
|
|
1,923,453
|
|
|
|
1,660,804
|
|
|
|
1,415,848
|
|
|
|
|
|
(1) |
|
Total revenues and net income for the nine months ended
January 23, 2009 included a reserve for GSA contingency of
$128,000. Net income for fiscal 2006 included an income tax
expense of $22,500 related to the American Jobs Creation Act and
the repatriation of foreign subsidiary earnings back to the U.S.
net income for fiscal 2004 included an income tax benefit of
$16,800 associated with a favorable foreign tax ruling. . |
| |
|
(2) |
|
In the first quarter of fiscal 2009, NetApp implemented a
change in the reporting of warranty costs and reported these
costs in cost of product revenues. These costs were included in
cost of service revenues in previous periods. This change had no
effect on the reported amounts of total cost of revenue, gross
profit or net income for any period presented. NetApp’s
Consolidated Statements of Income data for fiscal years 2008,
2007 and 2006 reflect a reclassification of $26,997, $22,082 and
$18,532, respectively, to conform to current period presentation. |
9
SELECTED
CONSOLIDATED HISTORICAL FINANCIAL DATA OF DATA DOMAIN
The tables below present selected consolidated financial data of
Data Domain prepared in accordance with GAAP. The data below are
only a summary and should be read in conjunction with Data
Domain’s consolidated financial statements and accompanying
notes, as well as Data Domain’s management’s
discussion and analysis of financial condition and results of
operations, all of which can be found in publicly available
documents, including those
incorporated by reference in this
proxy statement/prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements and include, in the opinion of
management, all adjustments, which include only normal recurring
adjustments that management considers necessary for the fair
presentation of the financial information set forth in those
statements. Historical results are not necessarily indicative of
future results. For a complete list of documents incorporated by
reference in this proxy statement/prospectus, see
“Where
You Can Find More Information” beginning on page 119.
The consolidated statements of operations data for the three
months ended
March 31, 2009 and
2008, and the consolidated
balance sheet data as of
March 31, 2009 are derived from
the unaudited consolidated financial statements of Data Domain
and the related notes thereto that are
incorporated by reference
into this proxy statement/prospectus. The consolidated statement
of operations data for the fiscal years ended
December 31,
2008,
2007 and
2006, and the consolidated balance sheet data as
of
December 31, 2008 and
2007 are derived from the audited
consolidated financial statements of Data Domain and the related
notes thereto that are
incorporated by reference into this proxy
statement/prospectus. The consolidated statements of operations
data for the fiscal years ended
December 31, 2005 and
2004,
and the consolidated balance sheet data as of
December 31,
2006 and
2005 are derived from audited consolidated financial
statements not included, or
incorporated by reference, in this
proxy statement/prospectus. The consolidated balance sheet data
as of
December 31, 2004 are derived from unaudited
consolidated financial statements not included, or incorporated
by reference, into this proxy statement/prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
79,036
|
|
|
$
|
52,615
|
|
|
$
|
274,085
|
|
|
$
|
123,622
|
|
|
$
|
46,434
|
|
|
$
|
8,121
|
|
|
$
|
779
|
|
|
Total cost of revenue
|
|
|
22,831
|
|
|
|
13,806
|
|
|
|
76,180
|
|
|
|
35,901
|
|
|
|
14,523
|
|
|
|
5,170
|
|
|
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
56,205
|
|
|
|
38,809
|
|
|
|
197,905
|
|
|
|
87,721
|
|
|
|
31,911
|
|
|
|
2,951
|
|
|
|
(645
|
)
|
|
Total operating expenses
|
|
|
54,083
|
|
|
|
37,574
|
|
|
|
181,095
|
|
|
|
94,910
|
|
|
|
36,449
|
|
|
|
16,984
|
|
|
|
9,370
|
|
|
Operating income (loss)
|
|
|
2,122
|
|
|
|
1,235
|
|
|
|
16,810
|
|
|
|
(7,189
|
)
|
|
|
(4,538
|
)
|
|
|
(14,033
|
)
|
|
|
(10,015
|
)
|
|
Net income (loss)
|
|
$
|
1,250
|
|
|
$
|
2,741
|
|
|
$
|
21,593
|
|
|
$
|
(3,660
|
)
|
|
$
|
(4,026
|
)
|
|
$
|
(13,783
|
)
|
|
$
|
(9,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
$
|
0.37
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(2.38
|
)
|
|
$
|
(2.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.33
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(2.38
|
)
|
|
$
|
(2.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per share
|
|
|
60,157
|
|
|
|
56,414
|
|
|
|
58,254
|
|
|
|
31,482
|
|
|
|
7,128
|
|
|
|
5,801
|
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per share
|
|
|
65,739
|
|
|
|
65,378
|
|
|
|
65,814
|
|
|
|
31,482
|
|
|
|
7,128
|
|
|
|
5,801
|
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
246,852
|
|
|
$
|
233,892
|
|
|
$
|
207,136
|
|
|
$
|
11,857
|
|
|
$
|
12,505
|
|
|
$
|
9,358
|
|
|
Working capital
|
|
|
248,058
|
|
|
|
232,996
|
|
|
|
203,688
|
|
|
|
12,856
|
|
|
|
9,692
|
|
|
|
8,233
|
|
|
Total assets
|
|
|
400,713
|
|
|
|
386,981
|
|
|
|
261,364
|
|
|
|
30,913
|
|
|
|
18,896
|
|
|
|
11,394
|
|
|
Other liabilities
|
|
|
2,058
|
|
|
|
2,910
|
|
|
|
594
|
|
|
|
3,319
|
|
|
|
—
|
|
|
|
—
|
|
|
Mandatorily redeemable convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41,514
|
|
|
|
41,309
|
|
|
|
26,273
|
|
|
Common stock and additional paid-in capital
|
|
|
308,619
|
|
|
|
295,564
|
|
|
|
248,078
|
|
|
|
3,049
|
|
|
|
1,542
|
|
|
|
1,293
|
|
|
Total stockholders’ equity (deficit)
|
|
|
289,748
|
|
|
|
276,884
|
|
|
|
207,862
|
|
|
|
(33,566
|
)
|
|
|
(31,037
|
)
|
|
|
(17,516
|
)
|
11
SELECTED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following selected unaudited pro forma condensed combined
financial data was prepared using the purchase method of
accounting. The NetApp and Data Domain selected unaudited pro
forma condensed combined balance sheet data assume that the
merger of NetApp and Data Domain took place on
January 23,
2009, and combines the NetApp historical consolidated balance
sheet at
January 23, 2009 with Data Domain’s
historical consolidated balance sheet at
March 31, 2009.
The NetApp and Data Domain selected unaudited pro forma
condensed combined statement of operations data assume that the
merger of NetApp and Data Domain took place as of
April 28,
2007. The selected unaudited pro forma condensed combined
statement of operations data for the fiscal year ended
April 25, 2008 combines NetApp’s historical
consolidated statement of income for the fiscal year then ended
with Data Domain’s results of operations for the twelve
months ended
March 31, 2008. The selected unaudited pro
forma condensed combined statement of operations data for the
nine months ended
January 23, 2009 combines NetApp’s
historical consolidated statement of income for the nine months
then ended with Data Domain’s historical consolidated
statement of operations for the nine months ended
December 31, 2008.
The selected unaudited pro forma condensed combined financial
data is presented for illustrative purposes only and is not
necessarily indicative of the combined financial position or
results of operations of future periods or the results that
actually would have been realized had the entities been a single
entity during these periods. The selected unaudited pro forma
condensed combined financial data as of and for the nine months
ended
January 23, 2009 and for the fiscal year ended
April 25, 2008 is derived from the unaudited pro forma
condensed combined financial statements included elsewhere in
this proxy statement/prospectus and should be read in
conjunction with those statements and the related notes. See
“Unaudited Pro Forma Condensed Combined Financial
Statements.”
| |
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Fiscal Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
January 23,
|
|
|
April 25,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Selected Unaudited Pro Forma Condensed Combined Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,748,220
|
|
|
$
|
3,459,195
|
|
|
Gross profit
|
|
|
1,580,016
|
|
|
|
2,081,320
|
|
|
Income (loss) before income taxes
|
|
|
(41,425
|
)
|
|
|
291,615
|
|
|
Net income (loss)
|
|
|
(12,228
|
)
|
|
|
251,087
|
|
|
Net income (loss) per share: basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.63
|
|
|
Net income (loss) per share: diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.61
|
|
|
Weighted average number of shares used in computing net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
378,198
|
|
|
|
399,807
|
|
|
Diluted
|
|
|
378,198
|
|
|
|
412,596
|
|
| |
|
|
|
|
|
|
|
As of
|
|
|
|
|
January 23,
|
|
|
|
|
2009
|
|
|
|
|
Selected Unaudited Pro Forma Condensed Combined Balance Sheet
Data:
|
|
|
|
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
1,668,449
|
|
|
Working capital
|
|
|
819,185
|
|
|
Total assets
|
|
|
6,435,350
|
|
|
Long-term liabilities
|
|
|
2,267,860
|
|
|
Stockholders’ equity
|
|
|
2,537,715
|
|
12
COMPARATIVE
HISTORICAL AND PRO FORMA PER SHARE DATA
The following table shows historical information about
NetApp’s and Data Domain’s respective income (loss)
per share and book value per share, and similar information
reflecting the merger, referred to as pro forma information. As
NetApp has a fiscal year ending on the last Friday in April and
Data Domain has a fiscal year ending on December 31, the
unaudited pro forma condensed combined balance sheet combines
the historical balances of NetApp as of
January 23, 2009
with the historical balances of Data Domain as of
March 31,
2009, plus pro forma adjustments as if the merger had occurred
on
January 23, 2007. In addition, the unaudited pro forma
condensed combined statements of operations combine the
historical results of NetApp for the year ended
April 25,
2008 and for the nine months ended
January 23, 2009 with
the historical results of Data Domain for the twelve months
ended
March 31, 2008 and the nine months ended
December 31, 2008, respectively, plus pro forma adjustments
as if the merger had occurred on
April 28, 2007. Data
Domain’s data has been calculated by combining its reported
interim data for each quarter within the respective period.
NetApp is required to account for the merger using the purchase
method of accounting under GAAP, for accounting and financial
reporting purposes. Under the purchase method of accounting, the
assets acquired and liabilities assumed from Data Domain as of
the completion of the merger will be recorded at their
respective fair values and added to those of NetApp. Any excess
of the purchase price over the fair value of assets acquired and
liabilities assumed will be recorded as goodwill. The
consolidated financial statements of NetApp issued after the
merger will reflect these fair values and will not be restated
retroactively to reflect the historical financial position or
results of operations of Data Domain.
The pro forma financial information includes estimates of the
purchase price and adjustments to record certain assets and
liabilities of Data Domain at their respective fair values.
These pro forma adjustments are subject to updates as additional
information becomes available and as additional analyses are
performed. Certain other assets and liabilities of Data Domain
will also be subject to adjustment to their respective fair
values. Pending more detailed analyses, no pro forma adjustments
are included for those assets and liabilities, including
additional intangible assets that may be identified. Any change
in the fair value of the net assets of Data Domain will change
the amount of the purchase price allocable to goodwill.
Additionally, changes to Data Domain’s stockholders’
equity, including net income through the date the merger is
completed, will change the amount of goodwill recorded. The
final adjustments may differ materially from the pro forma
adjustments reflected in this proxy statement/prospectus.
NetApp also anticipates that the merger will provide it with
financial benefits that include, with respect to the combined
entity, revenue and operating expense synergies, but these
financial benefits are not reflected in the pro forma
information. Accordingly, the pro forma information does not
attempt to predict or suggest future results. It also does not
necessarily reflect what the historical results of NetApp would
have been had NetApp and Data Domain been combined during the
periods presented.
The information in the following table is based on historical
financial information and related notes for Data Domain and
NetApp, as well as the unaudited pro forma condensed combined
financial statements. You should read the summary financial
information provided in the following table together with
historical financial information and related notes. The
historical financial information of Data Domain and NetApp is
also
incorporated by reference into this proxy
statement/prospectus. See
“Where You Can Find More
Information” beginning on page 119 for a description
of where you can find this historical information. Neither
NetApp nor Data Domain has declared dividends on its common
stock during the last three fiscal years.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetApp
|
|
|
Data Domain(1)
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Ended
|
|
|
Twelve Months
|
|
|
|
|
|
|
|
Ended
|
|
|
April 25, 2008
|
|
|
Ended
|
|
|
|
|
|
|
|
April 25, 2008
|
|
|
Pro Forma
|
|
|
March 31, 2008
|
|
|
Pro Forma
|
|
|
|
|
Historical
|
|
|
Combined
|
|
|
Historical
|
|
|
Equivalent(2)
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.88
|
|
|
$
|
0.63
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
Diluted
|
|
$
|
0.86
|
|
|
$
|
0.61
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
Book value per share at period end
|
|
$
|
4.98
|
|
|
|
n/a
|
|
|
$
|
3.86
|
|
|
$
|
2.99
|
|
13
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NetApp
|
|
|
Data Domain(1)
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
January 23, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
Historical
|
|
|
Combined
|
|
|
Historical
|
|
|
Equivalent(2)
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.32
|
|
|
$
|
0.25
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
Book value per share at period end
|
|
$
|
4.62
|
|
|
$
|
6.70
|
|
|
$
|
4.65
|
|
|
$
|
3.60
|
|
|
|
|
|
(1) |
|
Data Domain book value per share is stockholders’ equity
divided by total shares outstanding reduced by shares subject to
repurchase. |
| |
|
(2) |
|
The pro forma Data Domain equivalent per share amounts were
calculated by applying an exchange ratio of 0.7738 to the pro
forma combined income (loss) and book value per share, as
described in Note 4 to the Unaudited Pro Forma Condensed
Combined Financial Statements. The exchange ratio used in this
pro forma table reflects the value of the per share merger
consideration, exclusive of the cash portion of $16.45, of
$14.28 divided by the value of a share of NetApp common stock of
$18.46 (as of May 22, 2009), with each of the numerator and
denominator calculated based on the average of the closing price
for NetApp common stock for the 10 trading day period ended
May 19, 2009. The final ratio of the per share merger
consideration to the value of a share of NetApp common stock
will vary based on the trading price of NetApp common stock. |
14
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this proxy
statement/prospectus contains or incorporates by reference
certain “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not historical facts but instead
represent NetApp’s beliefs and expectations regarding
future events, many of which are, by their nature, inherently
uncertain and outside NetApp’s control. Forward-looking
statements include statements preceded by, followed by, or
including the words “could,” “would,”
“should,” “may,” “will,”
“target,” “plan, “believe,”
“expect,” “intend,” anticipate,”
“estimate,” “project,”
“potential,” “possible,”
“objective,” “outlook,”
“probably,” “seek,” “strategy” and
other similar expressions. In particular, the forward-looking
statements contained in this proxy statement/prospectus include,
but are not limited to, statements regarding:
|
|
|
| |
•
|
the expected financial condition, results of operations,
earnings outlook and prospects of NetApp, Data Domain and the
combined company;
|
| |
| |
•
|
the expected benefits and synergies of the merger;
|
| |
| |
•
|
the likelihood that NetApp and Data Domain will receive the
regulatory approvals required to complete the merger;
|
| |
| |
•
|
NetApp’s expectation that customers will continue to adopt
deduplication technology;
|
| |
| |
•
|
the expectation that the acquisition of Data Domain will
complement NetApp’s storage and data management business;
|
| |
| |
•
|
the expectation that the merger will allow NetApp to capture a
greater share of the capacity optimized disk market;
|
| |
| |
•
|
the expectation that the merger will result in increased
operational efficiency and create opportunities for cost
reduction through the elimination of redundant overhead expenses
and public company costs; and
|
| |
| |
•
|
the expectation that the second-step merger will occur.
|
The forward-looking statements contained or incorporated by
reference herein are subject to certain risks and uncertainties
that may cause actual results to differ materially from those
reflected in the forward-looking statements. Such risk and
uncertainties include those set forth on page 16 under the
heading “Risk Factors,” as well as, among others, the
following:
|
|
|
| |
•
|
the expenses of the merger being greater than anticipated,
including as a result of unexpected factors or events and
unanticipated tax consequences of the merger;
|
| |
| |
•
|
the exposure to litigation, including the possibility that
litigation relating to the merger agreement and related
transactions could delay or impede the completion of the merger;
|
| |
| |
•
|
the integration of Data Domain’s business and operations
with those of NetApp taking longer than anticipated, being
costlier than anticipated and having unanticipated adverse
results relating to Data Domain’s or NetApp’s existing
businesses; and
|
| |
| |
•
|
the anticipated cost savings and other synergies of the merger
taking longer to be realized or failing to be achieved in their
entirety, and attrition in key client, partner and other
relationships relating to the merger greater than expected.
|
You are cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as
of the date of this proxy statement/prospectus or the date of
any document
incorporated by reference in this document. Except
to the extent required by applicable law or regulation, neither
NetApp nor Data Domain undertakes any obligation to update these
forward-looking statements to reflect events or circumstances
after the date of this proxy statement/prospectus or to reflect
the occurrence of unanticipated events.
All subsequent written and oral forward-looking statements
concerning the merger or other matters addressed in this proxy
statement/prospectus and attributable to NetApp or Data Domain
or any person acting on their behalf are expressly qualified in
their entirety by the preceding cautionary statement.
15
RISK
FACTORS
In addition to the other information included in and
incorporated by reference into this proxy statement/prospectus,
including the matters addressed in the section entitled
“Cautionary Statement Regarding Forward-Looking
Statements” beginning on page 15, you should carefully
consider the following risk factors before deciding whether to
vote for approval of the merger proposal and the adjournment
proposal. In addition, you should read and consider the risks
associated with the business of NetApp and the business of Data
Domain because these risks will also affect the combined
company. These risks can be found in NetApp’s and Data
Domain’s respective
Forms 10-K
and
Forms 10-Q,
which are filed with the SEC and incorporated by reference into
this proxy statement/prospectus. You should also read and
consider the other information in this proxy
statement/prospectus and the other documents incorporated by
reference into this proxy statement/prospectus. See the section
entitled “Where You Can Find More Information”
beginning on page 119.
Risks
Relating to the Merger
The
consideration that you will receive in the merger depends upon
the price of NetApp’s common stock at the closing of the
first-step merger and may fall below $30 per share of Data
Domain stock.
At the closing of the first-step merger, each share of Data
Domain common stock will be converted into the right to receive
a cash payment of $16.45, plus a fraction of a share of NetApp
common stock equal to the exchange ratio. The exchange ratio is
based on the closing average of NetApp common stock and, within
a certain range of possible closing averages, will result in the
right to receive NetApp common stock with a market value of
$13.55 per share of Data Domain stock, or a total merger
consideration of $30 per share. Under the terms of the merger
agreement, the exchange ratio will be calculated as follows:
|
|
|
| |
•
|
if the closing average is less than $17.41, then the exchange
ratio will be 0.7783;
|
| |
| |
•
|
if the closing average is greater than $21.27, then the exchange
ratio will be 0.6370; and
|
| |
| |
•
|
if the closing average is less than or equal to $21.27 and
greater than or equal to $17.41, then the exchange ratio will be
calculated as the fraction obtained by dividing $13.55 by the
closing average.
|
As a result of the collar mechanism described above, if the
closing average (as described in the second paragraph of the
section entitled “Summary” beginning on page 1)
is less than $17.41, then for each share of Data Domain stock
you own, you will receive less than $13.55 worth of NetApp
common stock, resulting in a total merger consideration of less
than $30 per share.
The
market price of NetApp’s common stock may decline as a
result of the merger.
The market price of NetApp’s common stock may decline as a
result of the merger for a number of reasons, including:
|
|
|
| |
•
|
the integration of Data Domain by NetApp may be unsuccessful;
|
| |
| |
•
|
NetApp may not achieve the perceived benefits of the merger as
rapidly as, or to the extent, anticipated by financial or
industry analysts; or
|
| |
| |
•
|
the effect of the merger on NetApp’s financial results may
not be consistent with the expectations of financial or industry
analysts.
|
These factors are, to some extent, beyond NetApp’s control.
In addition, for Data Domain stockholders who hold their shares
in certificated form, there will be a time period between the
effective time of the merger and the time when Data Domain
stockholders actually receive book-entry shares evidencing
NetApp common stock. Until book-entry shares are received, Data
Domain stockholders will not be able to sell their shares of
NetApp common stock in the open market and, thus, will not be
able to avoid losses resulting from any decline in the market
price of NetApp common stock during this period.
16
The
failure of NetApp to operate and manage the combined company
effectively could have a material adverse effect on
NetApp’s business, financial condition and operating
results.
NetApp will need to meet significant challenges to realize the
expected benefits and synergies of the merger. These challenges
include:
|
|
|
| |
•
|
integrating the management teams, strategies, cultures,
technologies and operations of the two companies;
|
| |
| |
•
|
retaining and assimilating the key personnel of each company;
|
| |
| |
•
|
retaining existing Data Domain customers; and
|
| |
| |
•
|
creating uniform standards, controls, procedures, policies and
information systems.
|
The accomplishment of these post-merger objectives will involve
considerable risk, including:
|
|
|
| |
•
|
the potential disruption of each company’s ongoing business
and distraction of their respective management teams;
|
| |
| |
•
|
the difficulty of incorporating acquired technology and rights
into NetApp’s operations;
|
| |
| |
•
|
unanticipated expenses related to the integration;
|
| |
| |
•
|
potential unknown liabilities associated with the
merger; and
|
| |
| |
•
|
managing the risks related to Data Domain’s business as
described in Data Domain’s Annual Report on
Form 10-K
for the period ending December 31, 2008, as amended, that
may continue to impact the business following the merger.
|
NetApp and Data Domain have operated and, until the completion
of the merger, will continue to operate, independently. It is
possible that the integration process could result in the loss
of the technical skills and management expertise of key
employees, the disruption of each company’s ongoing
businesses or inconsistencies in standards, controls, procedures
and policies due to possible cultural conflicts or differences
of opinions on technical decisions and product roadmaps that
adversely affect NetApp’s ability to maintain relationships
with customers, suppliers and employees or to achieve the
anticipated benefits of the merger.
Even if NetApp is able to integrate the Data Domain business
operations successfully, this integration may not result in the
realization of the full benefits of synergies, cost savings,
innovation and operational efficiencies that may be possible
from this integration, and these benefits may not be achieved
within a reasonable period of time.
The
merger may be a fully taxable transaction for U.S. federal
income tax purposes.
The U.S. tax consequences of the merger depend on whether
it meets the requirements of Section 368(a) of the Code,
including the continuity of interest test, which will be
satisfied if the stock consideration, valued as of the last
business day immediately prior to the closing date of the
merger, constitutes at least 40% of the total consideration paid
or payable to Data Domain stockholders in the
first-step
merger. Whether the continuity of interest test will be
satisfied depends primarily upon the market value of the NetApp
common stock immediately before the
first-step
merger and the extent to which NetApp is required to substitute
cash for stock at the closing pursuant to the terms of merger
agreement. No assurances can be given that the continuity of
interest test will be met. If the test is not met, the
second-step merger will not occur, and the merger will be a
fully taxable transaction. In deciding whether to approve the
merger, you should consider the possibility that the merger may
be fully taxable to you, because you will not be entitled to
change your vote in that event.
Failure
to retain key employees could diminish the anticipated benefits
of the merger.
The success of the merger will depend in part on the retention
of personnel critical to the business and operations of the
combined company due to, for example, their technical skills or
management expertise. Employees may experience uncertainty about
their future role with Data Domain and NetApp until strategies
with regard to these employees are announced or executed. If
Data Domain and NetApp are unable to retain personnel, including
Data Domain’s key management, technical and sales
personnel, who are critical to the
17
successful integration and future operations of the companies,
Data Domain and NetApp could face disruptions in their
operations, loss of existing customers, loss of key information,
expertise or know-how, and unanticipated additional recruitment
and training costs. In addition, the loss of key personnel could
diminish the anticipated benefits of the merger.
Uncertainty
regarding the merger may cause customers, suppliers or strategic
partners to delay or defer decisions concerning NetApp and Data
Domain and adversely affect each company’s ability to
attract and retain key employees.
The merger will happen only if stated conditions are met,
including the approval of the merger proposal by Data
Domain’s stockholders, the receipt of regulatory approvals,
and the absence of any material adverse effect in the business
of Data Domain or NetApp. Many of the conditions are outside the
control of Data Domain and NetApp, and both parties also have
stated rights to terminate the merger agreement. Accordingly,
there may be uncertainty regarding the completion of the merger.
This uncertainty may cause customers, suppliers or strategic
partners to delay or defer decisions concerning Data Domain or
NetApp, which could negatively affect their respective
businesses. Any delay or deferral of those decisions or changes
in existing agreements could have a material adverse effect on
the respective businesses of Data Domain and NetApp, regardless
of whether the merger is ultimately completed. Moreover,
diversion of management focus and resources from the
day-to-day
operation of the business to matters relating to the merger
could have a material adverse effect on each company’s
business, regardless of whether the merger is completed. Current
and prospective employees of each company may experience
uncertainty about their future roles with the combined company.
This may adversely affect each company’s ability to attract
and retain key management, sales, marketing and technical
personnel.
The
market price of NetApp common stock after the merger may be
affected by factors different from those affecting the shares of
Data Domain or NetApp currently.
The businesses of NetApp and Data Domain differ in important
respects and, accordingly, the results of operations of the
combined company and the market price of the combined
company’s shares of common stock may be affected by factors
different from those currently affecting the independent results
of operations of NetApp and Data Domain. For a discussion of the
businesses of NetApp and Data Domain and of certain factors to
consider in connection with those businesses, see the documents
incorporated by reference in this proxy statement/prospectus and
referred to under
“Where You Can Find More
Information” beginning on page 119.
The
merger may go forward in certain circumstances even if NetApp or
Data Domain suffers a material adverse effect.
In general, either party can refuse to complete the merger if a
“material adverse effect” (as defined below under the
heading “The Merger Agreement — Material Adverse
Effect”) occurs with regard to the other party before the
closing. However, neither party may refuse to complete the
merger on that basis as a result of any fact, circumstance,
change or effect resulting from:
|
|
|
| |
•
|
changes in the general economic conditions in the United States
or any other country or region in the world, or changes in
conditions in the global economy generally, to the extent that
they do not have a disproportionate impact on NetApp or Data
Domain relative to other companies and operating in the same
industries in which NetApp or Data Domain operates;
|
| |
| |
•
|
changes in general conditions in the industries in which NetApp
or Data Domain operates, to the extent that they do not have a
disproportionate impact on NetApp or Data Domain relative to
other companies operating in the same industries in which NetApp
or Data Domain, as a operates;
|
| |
| |
•
|
changes in generally accepted accounting principles or other
accounting standards, or the interpretation of such principles
or standards by a third party, applicable federal, state, local,
municipal, foreign or other law or regulatory conditions, or the
interpretation of such law or regulations by a third party;
|
| |
| |
•
|
any failure to take any action or the taking of any specific
action by NetApp or Data Domain taken with the prior written
consent or written direction of the other party;
|
18
|
|
|
| |
•
|
the taking of any specific action expressly required by the
merger agreement;
|
| |
| |
•
|
acts of war, armed hostilities or terrorism, to the extent that
they do not have a disproportionate impact on NetApp or Data
Domain relative to other companies operating in the same
industries in which NetApp or Data Domain operates;
|
| |
| |
•
|
changes in the trading price or trading volume of NetApp’s
or Data Domain’s common stock, in and of itself, provided
that the exception described in this bullet shall not in any way
prevent or otherwise affect a determination that any fact,
circumstance, change or effect that has resulted in, or
contributed to, a material adverse effect;
|
| |
| |
•
|
the public announcement of the merger agreement or pendency of
the merger, including any loss of employees, provided that the
exception described in this bullet shall not apply to any fact,
circumstance, change or effect related to or caused by any legal
proceedings resulting from the announcement and pendency of the
merger and the transactions contemplated by the merger agreement;
|
| |
| |
•
|
any failure of NetApp or Data Domain to meet any public or
internal estimates or expectations of revenue, earnings or other
financial performance or results of operations for any period,
or failure to meet any internal budgets, plans, or forecasts of
revenues, earnings or other financial performance or results of
operations (it being understood that any underlying cause of any
such failure may be deemed to constitute, in and of itself, a
material adverse effect and may be taken into consideration when
determining whether a material adverse effect has
occurred); or
|
| |
| |
•
|
stockholder class action, derivative litigation or other legal
proceedings made or brought by any of the current or former
stockholders of NetApp or Data Domain against NetApp or Data
Domain arising out of the merger or any other transactions
contemplated by the merger agreement.
|
If adverse changes occur but NetApp and Data Domain must still
complete the merger, NetApp’s stock price may suffer. This
in turn may reduce the value of the merger to Data Domain
stockholders.
Data
Domain stockholders will have a reduced ownership and voting
interest after the merger and will exercise less influence over
management.
Data Domain stockholders currently have the right to vote in the
election of the board of directors of Data Domain and on other
matters affecting Data Domain. When the merger occurs, each Data
Domain stockholder that receives shares of NetApp common stock
will become a stockholder of NetApp with a percentage ownership
of the combined company that is much smaller than the
stockholder’s percentage ownership of Data Domain. It is
expected that the former stockholders of Data Domain as a group
will own less than [ ]% of the outstanding shares of
NetApp immediately after the completion of merger. Because of
this, Data Domain’s stockholders will have less influence
on the management and policies of NetApp than they now have on
the management and policies of Data Domain.
The
merger agreement limits Data Domain’s ability to pursue
alternatives to the merger.
The merger agreement contains “no shop” provisions
that, subject to limited exceptions, limit Data Domain’s
ability to discuss, facilitate or commit to competing
third-party proposals to acquire all or a significant part of
Data Domain, as well as a termination fee that is payable by
Data Domain under certain circumstances. These provisions might
discourage a potential competing acquiror that might have an
interest in acquiring all or a significant part of Data Domain
from considering or proposing that acquisition even if it were
prepared to pay consideration with a higher per share market
price than that proposed in the merger or might result in a
potential competing acquiror proposing to pay a lower per share
price to acquire Data Domain than it might otherwise have
proposed to pay.
19
The
merger is subject to the receipt of consents and approvals from
regulatory authorities that may impose conditions that could
have an adverse effect on NetApp or, if not obtained, could
prevent completion of the merger.
Before the merger may be completed, various approvals or
consents must be obtained from various regulatory and other
authorities. While NetApp and Data Domain believe that they will
receive the requisite regulatory approvals from these
governmental authorities, there can be no assurance of this. If
such approvals are not obtained, the merger will not be
completed. In addition, these governmental authorities may
impose conditions on the completion of the merger or require
changes to the terms of the merger. Although NetApp and Data
Domain do not currently expect that any such conditions or
changes would be imposed, there can be no assurance that they
will not be, and such conditions or changes could have the
effect of delaying completion of the merger or imposing
additional costs on or limiting the revenues of NetApp following
the merger, any of which might have a material adverse effect on
NetApp following the merger. For a full description of the
regulatory clearances, consents and approvals required for the
merger, please see
“Data Domain Proposal 1 —
The Merger — Regulatory Approvals Required for the
Merger” beginning on page 74.
Failure
to complete the merger could negatively affect Data
Domain’s stock price and its future business and
operations.
If the merger is not completed for any reason, Data Domain may
be subject to a number of material risks, including the
following:
|
|
|
| |
•
|
Data Domain may be required under certain circumstances to pay
NetApp a termination fee of $57.0 million;
|
| |
| |
•
|
the price of Data Domain’s common stock may
decline; and
|
| |
| |
•
|
costs related to the merger, such as financial advisory, legal,
accounting and printing fees, must be paid even if the merger is
not completed.
|
If the merger agreement is terminated, Data Domain may be unable
to pursue another business combination transaction on terms as
favorable as those set forth in the merger agreement, or at all.
This could limit Data Domain’s ability to pursue its
strategic goals.
NetApp
and Data Domain may waive one or more of the conditions of the
merger without re-soliciting stockholder approval for the
merger.
Each of the conditions to NetApp’s and Data Domain’s
obligations to complete the merger may be waived, in whole or in
part, to the extent permitted by applicable law, by agreement of
NetApp and Data Domain, if the condition is a condition to both
NetApp’s and Data Domain’s obligation to complete the
merger, or by the party for which such condition is a condition
of its obligation to complete the merger. The boards of
directors of NetApp and Data Domain may evaluate the materiality
of any such waiver to determine whether amendment of this proxy
statement/prospectus and re-solicitation of proxies are
necessary. NetApp and Data Domain, however, generally do not
expect any such waiver to be significant enough to require
re-solicitation of stockholders. In the event that any such
waiver is not determined to be significant enough to require
re-solicitation of stockholders, the companies will have the
discretion to complete the merger without seeking further
stockholder approval.
If
Data Domain stockholders sell the NetApp common stock received
in the merger, they could cause a decline in the market price of
NetApp common stock.
NetApp’s issuance of common stock in the merger will be
registered with the SEC. As a result, those shares will be
immediately available for resale in the public market. The
maximum number of shares of NetApp common stock to be issued to
Data Domain stockholders in connection with the merger and
immediately available for resale will equal approximately
[ ]% of the number of outstanding shares of NetApp
common stock currently in the public market. Data Domain
stockholders may sell the stock they receive commencing
immediately after the merger. If this occurs, or if other
holders of NetApp common stock sell significant amounts of
NetApp common stock immediately after the merger is completed,
the market price of NetApp common stock may decline.
20
A
shift or decline in the demand for deduplication technology
could substantially reduce the anticipated benefits of the
merger.
NetApp expects that customers will continue to adopt
deduplication technology and that the acquisition of Data Domain
will result in certain market synergies. However, if customer
demand in the deduplication market decreases or is less than
expected, or if customer preferences shift to a new or different
technology, then NetApp may not realize all of the anticipated
benefits of the merger.
Although
NetApp has traditionally used a single operating system,
NetApp’s ability to realize the expected benefits of the
merger will depend upon its ability to successfully operate the
Data Domain operating system as a separate
platform.
NetApp currently runs a single platform, Data ONTAP, and expects
to run the Data Domain operating system as a separate platform.
Running two platforms could require significant investments of
time and financial resources. If NetApp is unable to effectively
maintain and support both platforms or otherwise adjust its
infrastructure and processes to accommodate the parallel
operation of both platforms in a timely manner, then the
strategic benefits of the merger may not be realized or could be
significantly reduced.
Failure
to achieve significant cost synergies could harm NetApp’s
business and operating results.
NetApp anticipates that the merger will result in cost synergies
associated with combining facilities, IT infrastructure,
and certain functions such as finance, human resources and
administrative services. However, differences between the two
companies’ operations could cause unforeseen delays in the
integration process, result in lower savings than originally
anticipated, or both, which could adversely affect NetApp’s
business and operating results.
Risks
Relating to NetApp’s Business, Generally
NetApp’s
operating results may be adversely affected by unfavorable
economic and market conditions, including the current economic
downturn.
NetApp is subject to the effects of general global economic and
market conditions challenging economic conditions worldwide have
from time to time contributed, and are currently contributing,
to slowdowns in the computer, storage, and networking industries
at large, as well as the market for information technology or
IT, resulting in:
|
|
|
| |
•
|
Reduced demand for our products as a result of continued
constraints on IT related spending by our customers;
|
| |
| |
•
|
Increased price competition for our products from competitors;
|
| |
| |
•
|
Deferment of purchases and orders by customers due to budgetary
constraints or changes in current or planned utilization of our
systems;
|
| |
| |
•
|
Risk of excess and obsolete inventories;
|
| |
| |
•
|
Excess facilities costs;
|
| |
| |
•
|
Higher overhead costs as a percentage of revenue;
|
| |
| |
•
|
Increased risk of losses or impairment charges related to our
investment portfolio;
|
| |
| |
•
|
Negative impacts from increased financial pressures on
customers, distributors and resellers;
|
| |
| |
•
|
Negative impacts from increased financial pressures on key
suppliers or contract manufacturers; and
|
| |
| |
•
|
Potential discontinuance of product lines or businesses and
related asset impairments.
|
The turmoil in the global credit markets, the recent instability
in the geopolitical environment in many parts of the world and
other disruptions may continue to put pressure on global
economic conditions. The economic challenges we initially
experienced in the United States have spread throughout the
world. If global economic and market conditions,
21
or economic conditions in the United States or other key
markets, remain uncertain, persist, or deteriorate further, we
may experience material adverse impacts on our business,
operating results, and financial condition.
NetApp’s
quarterly operating results may fluctuate, which could adversely
impact its common stock price.
NetApp believes that
period-to-period
comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future
performance. Our operating results have in the past, and will
continue to be, subject to quarterly fluctuations as a result of
numerous factors, some of which may contribute to more
pronounced fluctuations in an uncertain global economic
environment. These factors include, but are not limited to, the
following:
|
|
|
| |
•
|
Fluctuations in demand for our products and services, in part
due to changes in general economic conditions and specific
economic conditions in the computer, storage, and networking
industries;
|
| |
| |
•
|
A shift in federal government spending patterns;
|
| |
| |
•
|
Changes in sales and implementation cycles for our products and
reduced visibility into our customers’ spending plans and
associated revenue;
|
| |
| |
•
|
The level of price and product competition in our target product
markets;
|
| |
| |
•
|
The impact of the current adverse economic and credit
environment on our customers, channel partners, and suppliers,
including their ability to obtain financing or to fund capital
expenditures;
|
| |
| |
•
|
The overall movement toward industry consolidations among both
our competitors and our customers;
|
| |
| |
•
|
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;
|
| |
| |
•
|
The timing of bookings or the cancellation of significant orders;
|
| |
| |
•
|
Product configuration and mix;
|
| |
| |
•
|
The extent to which our customers renew their service and
maintenance contracts with us;
|
| |
| |
•
|
Market acceptance of new products and product enhancements;
|
| |
| |
•
|
Announcements and introductions of, and transitions to, new
products by us or our competitors;
|
| |
| |
•
|
Deferrals of customer orders in anticipation of new products or
product enhancements introduced by us or our competitors;
|
| |
| |
•
|
Our ability to develop, introduce, and market new products and
enhancements in a timely manner;
|
| |
| |
•
|
Technological changes in our target product markets;
|
| |
| |
•
|
Our levels of expenditure on research and development and sales
and marketing programs;
|
| |
| |
•
|
Our ability to achieve targeted cost reductions;
|
| |
| |
•
|
Adverse movements in foreign currency exchange rates as a result
of our international operations;
|
| |
| |
•
|
Excess or inadequate facilities;
|
| |
| |
•
|
Actual events, circumstances, outcomes and amounts differing
from judgments, assumptions, and estimates used in determining
the values of certain assets (including the amounts of valuation
allowances), liabilities, and other items reflected in our
consolidated financial statements;
|
| |
| |
•
|
Disruptions resulting from new systems and processes as we
continue to enhance and scale our system infrastructure;
|
| |
| |
•
|
Future accounting pronouncements and changes in accounting
rules, such as the increased use of fair value measures and the
potential requirement that U.S. registrants prepare
financial statements in accordance with International Financial
Reporting Standards, or IFRS;
|
22
|
|
|
| |
•
|
Seasonality, such as our historical seasonal decline in revenues
in the first quarter of our fiscal year and seasonal increase in
revenues in the second quarter of our fiscal year, with the
latter due in part to the impact of the U.S. federal
government’s September 30 fiscal year end on the timing its
orders; and
|
| |
| |
•
|
Linearity, such as our historical intraquarter revenue pattern
in which a disproportionate percentage of each quarter’s
total revenues occur in the last month of the quarter.
|
Due to such factors, operating results for a future period are
difficult to predict, and, therefore, prior results are not
necessarily indicative of results to be expected in future
periods. Any of the foregoing factors, or any other factors
discussed elsewhere herein, could have a material adverse effect
on our business, results of operations, and financial condition.
It is possible that in one or more 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.
NetApp’s
revenue for a particular period is difficult to forecast, and a
shortfall in revenue may harm its business and operating
results.
NetApp’s revenues for a particular period are difficult to
forecast, especially in light of the current global economic
downturn and related market uncertainty. 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. New or additional
product introductions also increase the complexities of
forecasting revenues.
Additionally, we derive a majority of our revenue in any given
quarter from orders booked in the same quarter. Bookings
typically follow intraquarter seasonality patterns weighted
toward the back end of the quarter. If we do not achieve
bookings in the latter part of a quarter consistent with our
quarterly targets, our financial results will be adversely
impacted.
We use a
“pipeline” system, a common industry
practice, to forecast bookings and trends in our business. Sales
personnel monitor the status of potential business and estimate
when a customer will make a purchase decision, the dollar amount
of the sale and the products or services to be sold. These
estimates are aggregated periodically to generate a bookings
pipeline. Our pipeline estimates may prove to be unreliable
either in a particular quarter or over a longer period of time,
in part because the
“conversion rate” of the pipeline
into
contracts varies from customer to customer, can be
difficult to estimate, and requires management judgment. Small
deviations from our forecasted conversion rate may result in
inaccurate plans and budgets and could materially and adversely
impact our business or our planned results of operations. In
particular, the continued adverse events in the economic
environment and financial markets have made it even more
difficult for us to forecast our future results and may result
in a reduction in our quarterly conversion rate as our
customers’ purchasing decisions are delayed, reduced in
amount, or cancelled.
Uncertainty about current and future global economic conditions
has caused consumers, businesses and governments to defer
purchases in response to tighter credit, decreased cash
availability and declining customer confidence. Accordingly,
future demand for our products could differ from our current
expectations.
NetApp
has experienced periods of alternating growth and decline in
revenues and operating expenses. If it is not able to
successfully manage these fluctuations, our business, financial
condition and results of operations could be significantly
impacted.
The ongoing global financial crisis has led to a worldwide
economic downturn that has negatively affected NetApp’s
business. If the current economic downturn continues or worsens,
demand for our products and services and our revenues may be
further reduced. A prolonged downturn can adversely affect our
revenues, gross margin and results of operations. During such
economic downturns, it is critical to appropriately align our
cost structure with prevailing market conditions and to minimize
the effect of such downturns on our operations, while also
maintaining our capabilities and strategic investments for
future growth.
Our expense levels are based in part on our expectations as to
future revenues, and a significant percentage of our expenses
are fixed. We have a limited ability to quickly or significantly
reduce our fixed costs, and if revenue levels are below our
expectations, operating results will be adversely impacted.
During uneven periods of growth,
23
we may incur costs before we realize some of the anticipated
benefits, which could harm our operating results. We have
significant investments in engineering, sales, service support,
marketing programs and other functions to support and grow our
business. We are likely to recognize the costs associated with
these investments earlier than some of the anticipated benefits,
and the return on these investments may be lower, or may develop
more slowly, than we expect, which could harm our business,
operating results and financial condition.
Conversely, if we are unable to effectively manage our resources
and capacity, during periods of increasing demand for our
products, we could experience a material adverse effect on
operations and financial results. If the network storage market
fails to grow, or grows slower than we expect, our revenues will
be adversely affected. Also, even if IT spending increases, our
revenue may not grow at the same pace.
NetApp’s
gross margins have varied over time and may continue to vary,
and such variation may make it more difficult to forecast its
earnings.
NetApp’s product gross margins have been and may continue
to be affected by a variety of factors, including:
|
|
|
| |
•
|
Demand for storage and data management products;
|
| |
| |
•
|
Pricing actions, rebates, initiatives, discount levels, and
price competition;
|
| |
| |
•
|
Direct versus indirect and Original Equipment Manufacturer or
OEM sales;
|
| |
| |
•
|
Changes in customer, geographic, or product mix, including mix
of configurations within each product group;
|
| |
| |
•
|
Product and add-on software mix;
|
| |
| |
•
|
The mix of services as a percentage of revenue;
|
| |
| |
•
|
The mix and average selling prices of products;
|
| |
| |
•
|
The mix of disk content;
|
| |
| |
•
|
The timing of revenue recognition and revenue deferrals;
|
| |
| |
•
|
New product introductions and enhancements;
|
| |
| |
•
|
Excess inventory purchase commitments as a result of changes in
demand forecasts and possible product and software defects as we
transition our products; and
|
| |
| |
•
|
The cost of components, manufacturing labor, quality, warranty,
and freight.
|
Changes in software entitlements and maintenance gross margins
may result from various factors, such as:
|
|
|
| |
•
|
The size of the installed base of products under support
contracts;
|
| |
| |
•
|
The timing of technical support service contract renewals;
|
| |
| |
•
|
Demand for and the timing of delivery of upgrades;
|
| |
| |
•
|
The timing of our technical support service initiatives; and
|
| |
| |
•
|
The level of spending on our customer support infrastructure.
|
Changes in service gross margins may result from various
factors, such as:
|
|
|
| |
•
|
The mix of customers;
|
| |
| |
•
|
The size and timing of service contract renewals;
|
| |
| |
•
|
The volume and use of outside partners to deliver support
services on our behalf; and
|
| |
| |
•
|
Product quality and serviceability issues.
|
Due to such factors, gross margins are subject to variations
from period to period and are difficult to predict.
24
NetApp’s
cost-reduction initiatives and restructuring plans may not
result in anticipated savings or more efficient operations.
NetApp’s most recently-announced restructuring may disrupt
its operations and adversely affect its operations and financial
results.
On
February 11, 2009, in response to the worsening global
economic conditions and uncertainty about future
IT spending, NetApp announced a restructuring of our
worldwide operations in an effort to strategically align its
cost structure with expected revenues, as well as to reallocate
resources into areas of our business with more growth potential.
Additionally, in December 2008, we decided to cease development
and availability of our
SnapMirror®
for Open Systems product, or SMOS product, and as a result
recorded restructuring and other charges attributable primarily
to severance and employee-related and facility closure costs, as
well as the impairment of certain acquired intangible assets.
We may not be able to successfully complete and realize the
expected benefits of these restructuring plans. Our
restructuring plans may involve higher costs or a longer
timetable, or they may fail to improve our gross margins,
results of operations and cash flows as we anticipate. Our
inability to realize these benefits may result in an ineffective
business structure that could negatively impact our results of
operations. In addition to costs related to severance and other
employee-related costs, our restructuring plans may also subject
us to litigation risks and expenses.
In addition, our restructuring plans may have other adverse
consequences, such as attrition beyond our planned reduction in
workforce, the loss of employees with valuable knowledge or
expertise, a negative impact on employee morale, or a gain in
competitive advantage by our competitors over us. The
restructuring efforts could also be disruptive to our
day-to-day
operations and cause our remaining employees to be less
productive, which in turn may affect our revenue and other
operating results in the future. In the event that the economy
recovers sooner than we expect and results in increased IT
spending, we may not have sufficient capacity to capitalize on
the related increase in demand for our products and services.
We may undertake future cost-reduction initiatives and
restructuring plans that may adversely impact our operations;
and we may not realize all of the anticipated benefits of our
prior or any future restructurings.
Changes
in market conditions have led, and in the future could lead, to
charges related to the discontinuance of certain of
NetApp’s products and asset impairments.
In response to changes in economic conditions and market
demands, NetApp may be required to strategically realign our
resources and consider cost containment measures including
restructuring, disposing of, or otherwise discontinuing certain
products. Any decision to limit investment in, dispose of, or
otherwise exit products may result in the recording of charges
to earnings, such as inventory and technology-related or other
intangible asset write-offs, workforce reduction costs, charges
relating to consolidation of excess facilities, cancellation
penalties or claims from third parties who were resellers or
users of discontinued products, which would harm our operating
results. Our estimates with respect to the useful life or
ultimate recoverability of our carrying basis of assets,
including purchased intangible assets, could change as a result
of such assessments and decisions. Additionally, we are required
to perform goodwill impairment tests on an annual basis, and
between annual tests in certain circumstances when impairment
indicators exist or if certain events or changes in
circumstances have occurred. Future goodwill impairment tests
may result in charges to earnings, which could materially harm
our operating results.
NetApp’s
OEM relationship with IBM may not continue to generate
significant revenue.
In April 2005, NetApp entered into an OEM agreement with IBM,
which enables IBM to sell IBM branded solutions based on
NetApp®
unified solutions, including
NearStore®
and V-Series systems, as well as associated software offerings.
While this agreement is an element of our strategy to expand our
reach into more customers and countries, we do not have an
exclusive relationship with IBM, and there is no minimum
commitment for any given period of time; therefore, this
relationship may not continue to contribute revenue in future
years. In addition, we have no control over the products that
IBM selects to sell, or its release schedule and timing of those
products; nor do we control its pricing. In the event that sales
through IBM increase, we may experience distribution channel
conflicts between our direct sales force and IBM or among our
channel partners. If we fail to minimize channel conflicts, our
operating results and financial condition could be harmed. We
cannot assure you that this OEM
25
relationship will continue to generate significant revenue while
the agreement is in effect, or that the relationship will
continue to be in effect for any specific period of time.
If
NetApp is unable to maintain our existing relationships and
develop new relationships with major strategic partners, our
revenue may be impacted negatively.
An element of NetApp’s 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 co-market our products with these vendors. We have
significant partner relationships with database, business
application, backup management and server virtualization
companies, including Microsoft, Oracle, SAP, Symantec and
VMware. 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 relationships with these
or other partners, these partnerships may not generate
significant revenue or may not continue to be in effect for any
specific period of time. If these relationships fail to
materialize as expected, we could suffer delays in product
development or other operational difficulties.
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 that we are unsuccessful in developing new relationships
or 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 our revenues and operating results.
Disruption
of or changes in NetApp’s distribution model could harm our
sales.
If NetApp fails to manage distribution of our products and
services properly, or if our distributors’ financial
condition or operations weaken, our revenue and gross margins
could be adversely affected.
We market and sell our storage solutions directly through our
worldwide sales force and indirectly through channel partners
such as value-added resellers, systems integrators,
distributors, OEMs and strategic business partners, and we
derive a significant portion of our revenue from these channel
partners. For the three and nine-month periods ended
January 23, 2009, revenues generated from sales through our
channel partners accounted for 81.3% and 69.3%, respectively, of
our revenues. In order for us to maintain or increase our
revenues, we must effectively manage our relationships with
channel partners.
Several factors could result in disruption of or changes in our
distribution model, which could materially harm our revenues and
gross margins, including the following:
|
|
|
| |
•
|
We compete with some of our channel partners through our direct
sales force, which may lead these partners to use other
suppliers who do not directly sell their own products;
|
| |
| |
•
|
Our channel partners may demand that we absorb a greater share
of the risks that their customers may ask them to bear;
|
| |
| |
•
|
Our channel partners may have insufficient financial resources
and may not be able to withstand changes and challenges in
business conditions; and
|
| |
| |
•
|
Revenue from indirect sales could suffer if our channel
partners’ financial condition or operations weaken.
|
In addition, we depend on our channel partners to comply with
applicable regulatory requirements in the jurisdictions in which
they operate. Their failure to do so could have a material
adverse effect on our revenues and operating results.
26
The
U.S. government has contributed to NetApp’s revenue growth
and has become an important customer for us. Future revenue from
the U.S. government is subject to shifts in government spending
patterns. A decrease in government demand for our products could
materially affect our revenues. In addition, our business could
be adversely affected as a result of future examinations by the
U.S. government.
The U.S. government has become an important customer for
the storage market and for NetApp; however, government demand is
unpredictable, and there can be no assurance that we will
maintain or grow our revenue from the U.S. government.
Government agencies are subject to budgetary processes and
expenditure constraints that could lead to delays or decreased
capital expenditures in IT spending. If the government or
individual agencies within the government reduce or shift their
capital spending patterns, our revenues and operating results
may be harmed.
In addition, selling our products to the U.S. government
also subjects us to certain regulatory requirements. The failure
to comply with these requirements could subject us to fines and
other penalties, which could have a material adverse effect on
our revenues and operating results. For example, in April 2009,
we entered into a settlement agreement with the United States of
America, acting through the United States Department of Justice,
or the DOJ, and on behalf of the General Services
Administration, or the GSA, under which we agreed to pay the
United States $128.0 million, plus interest, related to a
dispute regarding our discount practices and compliance with the
price reduction clause provisions of its GSA
contracts between
August 1997 and February 2005. If we were subject to an adverse
outcome of any future examinations, or if we were suspended or
debarred from contracting with the federal government generally,
or with any specific agency, or if the government otherwise
ceased doing business with us or significantly decreased the
amount of business it does with us, our revenue and operating
results could be materially adversely affected.
A
portion of NetApp’s revenue is generated by large,
recurring purchases from various customers, resellers and
distributors. A loss, cancellation or delay in purchases by
these parties has and could continue to negatively affect our
revenue.
During the three-month period ended
January 23, 2009, two
U.S. distributors accounted for approximately 11.5% and
12.1% of NetApp’s revenues, respectively. During the
nine-month period ended
January 23, 2009, the same two
U.S. distributors accounted for approximately 10.8% and
10.5% of our revenues, respectively. The loss of continued
orders from any of our more significant customers, strategic
partners, distributors or resellers could cause our revenue and
profitability to suffer. Our ability to attract new customers
will depend on a variety of factors, including the
cost-effectiveness, reliability, scalability, breadth and depth
of our products.
We generally do not enter into binding purchase commitments with
our customers for an extended period of time, and thus we may
not be able to continue to receive large, recurring orders from
these customers, resellers or distributors. For example, our
reseller agreements generally do not require minimum purchases
and our customers, resellers and distributors can stop
purchasing and marketing our products at any time.
Recent turmoil in the credit markets may further negatively
impact our operations by affecting the solvency of our
customers, resellers and distributors, or the ability of our
customers to obtain credit to finance purchases of our products.
If the global economy and credit markets continue to deteriorate
and our future sales decline, our financial condition and
operating results could be adversely impacted.
Because our expenses are based on our revenue forecasts, a
substantial reduction or delay in sales of our products to, or
unexpected returns from, customers and resellers, or the loss of
any significant customer or reseller, could harm our business.
Although our largest customers may vary from period to period,
we anticipate that our operating results for any given period
will continue to depend on large orders from significant
customers. In addition, a change in the mix of our customers
could adversely affect our revenue and gross margins.
NetApp
is exposed to the credit risk of some of our customers,
resellers, and distributors, as well as credit exposures in
weakened markets, which could result in material
losses.
Most of NetApp’s sales to customers are on an open credit
basis, with typical payment terms of 30 days in the
United States and, because of local customs or conditions,
longer in some markets outside the United States. We
27
monitor individual customer payment capability in granting such
open credit arrangements, and seek to limit such open credit to
amounts we believe the customers can pay. Beyond our open credit
arrangements, we also have recourse or nonrecourse customer
financing leasing arrangements with third party leasing
companies through preexisting relationships with customers.
Under the terms of recourse leases, which are treated as
off-balance sheet arrangements, we remain liable for the
aggregate unpaid remaining lease payments to the third party
leasing company in the event that any customers default. We
expect demand for customer financing to continue. During periods
of economic downturn in the storage industry and the global
economy, our exposure to credit risks from our customers
increases. In addition, our exposure to credit risks of our
customers may increase if our customers and their customers or
their lease financing sources are adversely affected by the
current global economic downturn, or if there is a continuation
or worsening of the downturn. Although we have programs in place
to monitor and mitigate the associated risks, such programs may
not be effective in reducing our credit risks.
In the past, there have been bankruptcies by our customers both
who have open credit and who have lease financing arrangements
with us, causing us to incur bad debt charges, and, in the case
of financing arrangements, a loss of revenues. There can be no
assurance that additional losses will not occur in future
periods. Any future losses could harm our business and have a
material adverse effect on our operating results and financial
condition. Additionally, to the extent that the recent turmoil
in the credit markets makes it more difficult for customers to
obtain open credit or lease financing, those customers’
ability to purchase our product could be adversely impacted,
which in turn could have a material adverse impact on our
financial condition and operating results.
The
market price for NetApp’s common stock has fluctuated
significantly in the past and will likely continue to do so in
the future.
The market price for NetApp’s 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;
|
| |
| |
•
|
Variations between our operating results and either the guidance
we have furnished to the public or the published expectations of
securities analysts;
|
| |
| |
•
|
Economic developments in the storage and data management market
as a whole;
|
| |
| |
•
|
Fluctuations in the valuation of companies perceived by
investors to be comparable to us;
|
| |
| |
•
|
Changes in analysts’ recommendations or projections;
|
| |
| |
•
|
Inquiries by the SEC, NASDAQ, law enforcement, or other
regulatory bodies;
|
| |
| |
•
|
International conflicts and acts of terrorism;
|
| |
| |
•
|
Announcements of new products, applications, or product
enhancements by us or our competitors;
|
| |
| |
•
|
Changes in our relationships with our suppliers, customers,
channel and strategic partners; and
|
| |
| |
•
|
General market conditions, including the recent financial and
credit crisis and global economic downturn.
|
In addition, the stock market has experienced volatility that
has particularly affected the market prices of the equity
securities of many technology companies. Certain macroeconomic
factors such as changes in interest rates, the market climate
for the technology sector, and levels of corporate spending on
IT, as well as variations in our expected operating performance,
could continue to 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 may materially and adversely affect the market price of
our common stock.
28
If
NetApp is unable to develop and introduce new products and
respond to technological change, if our new products do not
achieve market acceptance, if we fail to manage the transition
between our new and old products, or if we cannot provide the
expected level of service and support for our new products, our
operating results could be materially and adversely
affected.
NetApp’s future growth depends upon the successful
development and introduction of new hardware and software
products. Due to the complexity of storage subsystems and
storage security appliances and the difficulty in gauging the
engineering effort required to produce new products, such
products are subject to significant technical risks. 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. New or additional product
introductions increase the complexities of forecasting revenues,
and if not managed effectively, may adversely affect our sales
of existing products.
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.
As we enter new or emerging markets, we will likely increase
demands on our service and support operations and may be exposed
to additional competition. We may not be able to provide
products, service and support to effectively compete for these
market opportunities.
An
increase in competition and industry consolidation could
materially and adversely affect NetApp’s operating
results.
The storage markets are intensely competitive and are
characterized by rapidly changing technology. In the storage
market, NetApp’s primary and near-line storage system
products and our associated software portfolio compete primarily
with storage system products and data management software from
EMC, Hitachi Data Systems, HP, IBM, and Sun Microsystems. In
addition, Dell, Inc. is a competitor in the storage marketplace
through its business arrangement with EMC, which allows Dell to
resell EMC storage hardware and software products, as well as
through Dell’s acquisition of EqualLogic, through which
Dell offers low-priced storage solutions. In the secondary
storage market, which includes the
disk-to-disk
backup, compliance and business continuity segments, our
solutions compete primarily against products from EMC and Sun
Microsystems. Our VTL products also compete with traditional
tape backup solutions in the broader data backup/recovery space.
Additionally, a number of small, newer companies have recently
entered the storage systems and data management software
markets, the near-line and VTL storage markets and the
high-performance clustered storage markets, some of which may
become significant competitors in the future.
There has been a trend toward industry consolidation in our
markets for several years. We expect this trend to continue as
companies attempt to strengthen or hold their market positions
in an evolving industry and as companies are acquired or are
unable to continue operations. We believe that industry
consolidation may result in stronger competitors that are better
able to compete as sole-source vendors for customers. 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 may not be able to compete
successfully against current or future competitors. Competitive
pressures we face could materially and adversely affect our
business and operating results.
NetApp’s
future financial performance depends on growth in the storage
and data management markets. If these markets do not perform as
we expect and upon which we calculate and forecast our revenues,
our operating results will be materially and adversely
impacted.
All of NetApp’s products address the storage and data
management markets. Accordingly, our future financial
performance will depend in large part on continued growth in the
storage and data management markets and on our ability to adapt
to emerging standards in these markets. The markets for storage
and data management have been
29
adversely impacted by the current global economic downturn and
may not grow as anticipated or may continue to decline.
Additionally, emerging standards in these markets may adversely
affect the
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,
pharmaceutical 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 we will not be able to expand our
product offerings in these market and geographical segments at
the rates which we have forecasted.
Supply
chain issues, including financial problems of contract
manufacturers or component suppliers, or a shortage of adequate
component supply or manufacturing capacity that increase
NetApp’s costs or cause a delay in our ability to fulfill
orders, could have a material adverse impact on our business and
operating results, and our failure to estimate customer demand
properly may result in excess or obsolete component supply,
which could adversely affect our gross margins.
The fact that NetApp does not own or operate our manufacturing
facilities and supply chain exposes us to risks, including
reduced control over quality assurance, production costs and
product supply, which could have a material adverse impact on
the supply of our products and on our business and operating
results.
Financial problems of either
contract manufacturers or component
suppliers could limit supply, increase costs, or result in
accelerated payment terms. The loss of any
contract manufacturer
or key supplier could negatively impact our ability to
manufacture and sell our products. Qualifying a new
contract
manufacturer and commencing volume production is expensive and
time-consuming. If we are required to change
contract
manufacturers, we may lose revenue and damage our customer
relationships. Disruption or termination of manufacturing
capacity or component supply 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 and suppliers, and our
competitive position and reputation could be harmed.
A return to growth in the economy is likely to put greater
pressures on us, our
contract manufacturers and our suppliers to
accurately project demand and to establish optimal purchase
commitment levels. Additionally, the reservation of
manufacturing capacity at our
contract manufacturers by other
companies, inside or outside of our industry, or the inability
by us to appropriately cancel, reschedule, or adjust our
manufacturing or components requirements based upon business
needs could result in either limitation of supply or increased
costs from these suppliers.
If we inaccurately forecast demand for our products or if there
is lack of demand for our products, we may have excess or
inadequate inventory or incur cancellation charges or penalties,
which would increase our costs and have an adverse impact on our
gross margins.
We rely on a limited number of suppliers for components such as
disk drives, computer boards and microprocessors utilized in the
assembly of our products. In recent years, rapid industry
consolidation has led to fewer component suppliers, which has
and could subject us to future periodic supply constraints and
price rigidity.
Furthermore, as a result of binding price or purchase
commitments with suppliers, we may be obligated to purchase
components at prices that are higher than those available in the
current market, or in amounts greater than our needs. In the
event that we become committed to purchase components at prices
in excess of the current market price when the components are
actually used, or are committed to buy components in amounts
greater than our needs, our gross margins could decrease.
Component quality is a risk and 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.
30
As suppliers upgrade their components, they regularly “end
of life” older components. As we become aware of an end of
life situation, we attempt to make purchases or purchase
commitments to cover all future requirements or find a suitable
substitute component. We may not be able to obtain a sufficient
supply of components on a timely and cost effective basis. Our
failure to do so may lead to an adverse impact on our business.
On the other hand, if we fail to anticipate customer demand
properly or if there is reduced demand or no demand for our
products, an oversupply of end of life components could result
in excess or obsolete components that could adversely affect our
gross margins.
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 quality functions to meet
anticipated demand. The inability of our
contract manufacturers
or our component suppliers to provide us with adequate supplies
of high-quality products and materials suitable for our needs
could cause a delay in our ability to fulfill orders.
Our
acquisitions may not provide the anticipated benefits and may
disrupt our existing business.
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. On
May 20,
2009, we announced that we have entered into a definitive
agreement to acquire Data Domain. We subsequently amended the
terms of the definitive agreement on
June 3, 2009.
The success of this and any future acquisition is impacted by a
number of factors, and may be subject to the following risks:
|
|
|
| |
•
|
The inability to successfully integrate the operations,
technologies, products and personnel of the acquired companies;
|
| |
| |
•
|
The diversion of management’s attention from normal daily
operations of the business;
|
| |
| |
•
|
The loss of key employees; and
|
| |
| |
•
|
Substantial transaction costs and accounting charges.
|
This and any future acquisitions may also result in risks to our
existing business, including:
|
|
|
| |
•
|
Dilution of our current stockholders’ percentage ownership
to the extent we issue new equity;
|
| |
| |
•
|
Assumption of additional liabilities;
|
| |
| |
•
|
Incurrence of additional debt or a decline in available cash;
adverse effects to our financial statements, such as the need to
make large and immediate write-offs or the incurrence of
restructuring and other related expenses;
|
| |
| |
•
|
Liability for intellectual property infringement and other
litigation claims, which we may or may not be aware of at the
time of acquisition; and
|
| |
| |
•
|
Creation of goodwill or other intangible assets that could
result in significant future amortization expense or impairment
charges.
|
In addition, failure to complete the Data Domain acquisition as
planned could negatively impact our stock price.
The failure to achieve the anticipated benefits of an
acquisition may also result in impairment charges for goodwill
or acquired intangibles. For example, in fiscal 2009 we
announced our decision to cease the development and availability
of our SMOS product, which was originally acquired through our
acquisition of Topio, Inc. in fiscal 2007, resulting in the
impairment of acquired intangibles related to such acquisition.
Additional or realized risks of this nature could have a
material adverse effect on our business, financial condition and
results of operations.
The occurrence of any of the above risks could seriously harm
our business.
31
NetApp
is exposed to fluctuations in the market values of our portfolio
investments and in interest rates; impairment of our investments
could harm our financial results.
As of
January 23, 2009, NetApp had $2.7 billion in
cash, cash equivalents,
available-for-sale
securities and restricted cash and investments. We invest our
cash in a variety of financial instruments, consisting
principally of investments in U.S. Treasury securities,
U.S. government agency bonds, corporate bonds, corporate
securities, auction rate securities, certificates of deposit,
and money market funds, including the Primary Fund. These
investments are subject to general credit, liquidity, market and
interest rate risks, which have been exacerbated by unusual
events such as the financial and credit crisis, and bankruptcy
filings in the United States which have affected various sectors
of the financial markets and led to global credit and liquidity
issues. These securities are generally classified as
“available-for-sale”
and, consequently, are recorded on our Consolidated Balance
Sheets at fair value with unrealized gains or losses reported as
a component of accumulated other comprehensive income (loss),
net of tax.
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed
rate debt securities may have their market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates. Currently, we do not use derivative financial instruments
in our investment portfolio. We may suffer losses if forced to
sell securities that have experienced a decline in market value
because of changes in interest rates. Currently, we do not use
financial derivatives to hedge our interest rate exposure.
The fair value of our investments may change significantly due
to events and conditions in the credit and capital markets.
These securities/issuers could be subject to review for possible
downgrade. Any downgrade in these credit ratings may result in
an additional decline in the estimated fair value of our
investments. Changes in the various assumptions used to value
these securities and any increase in the markets’ perceived
risk associated with such investments may also result in a
decline in estimated fair value. If such investments suffer
market price declines, as we experienced with some of our
investments during the first nine months of fiscal 2009, we may
recognize in earnings the decline in the fair value of our
investments below their cost basis when the decline is judged to
be
other-than-temporary.
As a result of the bankruptcy filing of Lehman Brothers, which
occurred during the first nine months of fiscal 2009, we
recorded an
other-than-temporary
impairment charge of $11.8 million on our corporate bonds
related to investments in Lehman Brothers securities and
approximately $9.3 million on our investments in the
Primary Fund that held Lehman Brothers investments. As of
January 23, 2009, we have an investment in the Primary
Fund, an AAA-rated money market fund at the time of purchase,
with a par value of $128.5 million and an estimated fair
value of $119.2 million, which suspended redemptions in
September 2008 and is in the process of liquidating its
portfolio of investments. We received total distributions of
$478.8 million in the third quarter of fiscal 2009 and an
additional $40.3 million on
February 20, 2009 from the
Primary Fund. The Primary Fund suspended redemptions in
September 2008, and on
December 3, 2008, it announced a
plan for liquidation and distribution of assets that includes
the establishment of a special reserve to be set aside out of
its assets for pending or threatened claims, as well as
anticipated costs and expenses, including related legal and
accounting fees. On
February 26, 2009, the Primary Fund
announced a plan to set aside $3.5 billion of the
fund’s remaining assets as the
“special reserve”
which may be increased or decreased as further information
becomes available. Our pro rata share of the $3.5 billion
special reserve is approximately $41.5 million. The Primary
Fund plans to continue to make periodic distributions, up to the
amount of the special reserve, on a pro-rata basis. We could
realize additional losses in our holdings of the Primary Fund
and may not receive all or a portion of our remaining balance in
the Primary Fund as a result of market conditions and ongoing
litigation against the fund.
If the conditions in the credit and capital markets continue to
worsen, our investment portfolio may be impacted and we could
determine that more of our investments have experienced an
other-than-temporary
decline in fair value, requiring further impairments, which
could adversely impact our financial position and operating
results.
32
Funds
associated with certain of NetApp’s auction rate securities
may not be accessible for more than 12 months and our
auction rate securities may experience further
other-than-temporary
declines in value, which would adversely affect our
earnings.
Auction rate securities, or ARS, held by NetApp are securities
with long-term nominal maturities, which, in accordance with
investment policy guidelines, had credit ratings of AAA and Aaa
at time of purchase. Interest rates for ARS are reset through a
Dutch auction each month, which prior to February 2008 had
provided a liquid market for these securities.
Substantially all of our ARS are backed by pools of student
loans guaranteed by the U.S. Department of Education, and
we believe the credit quality of these securities is high based
on this guarantee. However liquidity issues in the global credit
markets resulted in the failure of auctions for certain of our
ARS investments, with a par value of $75.6 million at
January 23, 2009. For each failed auction, the interest
rate resets to a maximum rate defined for each security, and the
ARS continue to pay interest in accordance with their terms,
although the principal associated with the ARS will not be
accessible until there is a successful auction or such time as
other markets for ARS investments develop.
As of
January 23, 2009, we determined there was a total
decline in the fair value of our ARS investments of
approximately $6.5 million, of which we recorded temporary
impairment charges of $5.1 million, offset by unrealized
gains of $0.7 million, and $2.1 million was recognized
as an
other-than-temporary
impairment charge. In addition, we have classified all of our
auction rate securities as long-term assets in our consolidated
balance sheet of
January 23, 2009 as our ability to
liquidate such securities in the next 12 months is
uncertain. Although we currently have the ability and intent to
hold these ARS investments until liquidity returns to the market
or until maturity, if the current market conditions deteriorate
further, or the anticipated recovery in market liquidity does
not occur, we may be required to record additional impairment
charges in future quarters.
NetApp’s
leverage and debt service obligations may adversely affect our
financial condition and results of operations.
As a result of NetApp’s sale of $1.265 billion of
1.75% convertible senior notes in June 2008, or the Notes, we
have a greater amount of long-term debt than we have maintained
in the past. We also have a credit facility and various
synthetic lease arrangements. In addition, subject to the
restrictions in our existing and any future financings
agreements, we may incur additional debt.
Our maintenance of higher levels of indebtedness could have
adverse consequences including:
|
|
|
| |
•
|
Adversely affecting our ability to satisfy our obligations;
|
| |
| |
•
|
Increasing the portion of our cash flows from operations may
have to be dedicated to interest and principal payments and may
not be available for operations, working capital, capital
expenditures, expansion, acquisitions or general corporate or
other purposes;
|
| |
| |
•
|
Impairing our ability to obtain additional financing in the
future;
|
| |
| |
•
|
Limiting our flexibility in planning for, or reacting to,
changes in our business and industry; and
|
| |
| |
•
|
Making us more vulnerable to downturns in our business, our
industry or the economy in general.
|
Our ability to meet our expenses and debt obligations will
depend on our future performance, which will be affected by
financial, business, economic, regulatory and other factors. We
will not be able to control many of these factors, such as
economic conditions and governmental regulations. Furthermore,
our operations may not generate sufficient cash flows from
operations to enable us to meet our expenses and service our
debt. As a result, we may be required to repatriate funds from
our foreign
subsidiaries, which could result in a significant
tax liability to us. If we are unable to generate sufficient
cash flows from operations, or if we are unable to repatriate
sufficient or any funds from our foreign
subsidiaries, in order
to meet our expenses and debt service obligations, we may need
to utilize our existing line of credit to obtain the necessary
funds, or we may be required to raise additional funds. If we
determine it is necessary to seek additional funding for any
reason, we may not be able to obtain such funding or, if funding
is
33
available, obtain it on acceptable terms. If we fail to make a
payment on our debt, we could be in default on such debt, and
this default could cause us to be in default on our other
outstanding indebtedness.
NetApp
is subject to restrictive and financial covenants in our credit
facility and synthetic lease arrangements. The restrictive
covenants may restrict our ability to operate our
business.
NetApp’s access to undrawn amounts under our credit
facility and the ongoing extension of credit under our synthetic
lease arrangements are subject to continued compliance with
financial covenants, which could be more challenging in a
difficult operating environment. If we do not comply with these
restrictive and financial covenants or otherwise default under
the facility or arrangements, we may be required to repay any
outstanding amounts under this credit facility or repurchase the
properties and facility which are subject to the synthetic lease
arrangements. If we lose access to these credit facility and
synthetic lease arrangements, we may not be able to obtain
alternative financing on acceptable terms, which could limit our
operating flexibility.
The agreements governing our credit facility and synthetic lease
arrangements contain restrictive covenants that limit our
ability to operate our business, including restrictions on our
ability to:
|
|
|
| |
•
|
Incur indebtedness;
|
| |
| |
•
|
Incur indebtedness at the subsidiary level;
|
| |
| |
•
|
Grant liens;
|
| |
| |
•
|
Sell all or substantially all our assets:
|
| |
| |
•
|
Enter into certain mergers;
|
| |
| |
•
|
Change our business;
|
| |
| |
•
|
Enter into swap agreements;
|
| |
| |
•
|
Enter into transactions with our affiliates; and
|
| |
| |
•
|
Enter into certain restrictive agreements.
|
As a result of these restrictive covenants, our ability to
respond to changes in business and economic conditions and to
obtain additional financing, if needed, may be significantly
restricted. We may also be prevented from engaging in
transactions that might otherwise be beneficial to us, such as
strategic acquisitions or joint ventures.
We are also required to comply with financial covenants under
our credit facility and synthetic lease arrangements, and our
ability to comply with these financial covenants is dependent on
our future performance, which will be subject to many factors,
some of which are beyond our control, including prevailing
economic conditions.
Our failure to comply with the restrictive and financial
covenants could result in a default under our credit facility
and our synthetic lease arrangements, which would give the
counterparties thereto the ability to exercise certain rights,
including the right to accelerate the amounts owed thereunder
and to terminate the arrangement, and could also result in a
cross default with respect to our other indebtedness. In
addition, our failure to comply with these covenants and the
acceleration of amounts owed under our credit facility and
synthetic lease arrangements could result in a default under the
Notes, which could permit the holders to accelerate the Notes.
If all of our debt is accelerated, we may not have sufficient
funds available to repay such debt.
Future
issuances of NetApp common stock and hedging activities by
holders of the Notes may depress the trading price of our common
stock and the Notes.
Any new issuance of equity securities, including the issuance of
shares upon conversion of the Notes, could dilute the interests
of NetApp’s existing stockholders, including holders who
receive shares upon conversion of their Notes, and could
substantially decrease the trading price of our common stock and
the Notes. We may issue equity securities in the future for a
number of reasons, including to finance our operations and
business strategy (including in connection with acquisitions,
strategic collaborations or other transactions), to increase our
capital, to adjust our
34
ratio of debt to equity, to satisfy our obligations upon the
exercise of outstanding warrants or options, or for other
reasons.
In addition, the price of our common stock could also be
affected by possible sales of our common stock by investors who
view the Notes as a more attractive means of equity
participation in
our company and by hedging or arbitrage trading
activity that we expect to develop involving our common stock by
holders of the Notes. The hedging or arbitrage could, in turn,
affect the trading price of the Notes, or any common stock that
holders receive upon conversion of the Notes.
Conversion
of NetApp’s Notes will dilute the ownership interest of
existing stockholders.
The conversion of some or all of NetApp’s outstanding Notes
will dilute the ownership interest of existing stockholders to
the extent we deliver common stock upon conversion of the Notes.
Upon conversion of a Note, we will satisfy our conversion
obligation by delivering cash for the principal amount of the
Note and shares of common stock, if any, to the extent the
conversion value exceeds the principal amount. There would be no
adjustment to the numerator in the net income per common share
computation for the cash settled portion of the Notes as that
portion of the debt instrument will always be settled in cash.
The number of shares delivered upon conversion, if any, will be
included in the denominator for the computation of diluted net
income per common share. Any sales in the public market of any
common stock issuable upon such conversion could adversely
affect prevailing market prices of our common stock. In
addition, the existence of the Notes may encourage short selling
by market participants because the conversion of the Notes could
be used to satisfy short positions, or anticipated conversion of
the Notes into shares of our common stock could depress the
price of our common stock.
The
note hedges and warrant transactions that NetApp entered into in
connection with the sale of the Notes may affect the trading
price of our common stock.
In connection with the issuance of the Notes, NetApp entered
into privately negotiated convertible note hedge transactions
with certain option counterparties, which are expected to reduce
the potential dilution to our common stock upon any conversion
of the Notes. At the same time, we also entered into warrant
transactions with the counterparties pursuant to which we may
issue shares of our common stock above a certain strike price.
In connection with these hedging transactions, the
counterparties may have entered into various
over-the-counter
derivative transactions with respect to our common stock or
purchased shares of our common stock in secondary market
transactions at or following the pricing of the Notes. Such
activities may have had the effect of increasing the price of
our common stock. The counterparties are likely to modify their
hedge positions from time to time prior to conversion or
maturity of the Notes by purchasing and selling shares of our
common stock or entering into other derivative transactions.
Additionally, these transactions may expose us to counterparty
credit risk for nonperformance. We manage our exposure to
counterparty credit risk through specific minimum credit
standards and the diversification of counterparties. The effect,
if any, of any of these transactions and activities on the
market price of our common stock or the Notes will depend, in
part, on market conditions and cannot be ascertained at this
time, but any of these activities could adversely affect the
value of our common stock. In addition, if our stock price
exceeds the strike price for the warrants, there could be
additional dilution to our stockholders, which could adversely
affect the value of our common stock.
Lehman Brothers OTC Derivatives, Inc., or Lehman OTC, is the
counterparty to 20% of our Note hedges. The bankruptcy filing by
Lehman OTC on
October 3, 2008 constituted an
“event of
default” under the hedge transaction that could, at our
option, lead to termination under the hedge transaction to the
extent we provide notice to Lehman OTC. We have not terminated
the Note hedge transaction with Lehman OTC, and will continue to
carefully monitor the developments impacting Lehman OTC. This
“event of default” is not expected to have an impact
on our financial position or results of operations. However, we
could incur significant costs if we elect to replace this hedge
transaction originally held with Lehman OTC. If we do not elect
to replace this hedge transaction, then we would be subject to
potential dilution upon conversion of the Notes if on the date
of conversion the per-share market price of our common stock
exceeds the conversion price of $31.85. The terms of the Notes,
the rights of the holders of the Notes and other counterparties
to Note hedges and warrants were not affected by the bankruptcy
filings of Lehman OTC.
35
NetApp’s
synthetic leases are off-balance sheet arrangements that could
negatively affect our financial condition and results. We have
invested substantial resources in new facilities and physical
infrastructure, which will increase our fixed costs. Our
operating results could be harmed if our business does not grow
proportionately to our increase in fixed costs.
NetApp has various synthetic lease arrangements with BNP Paribas
Leasing Corporation, or BNPPLC, as lessor for our headquarters
office buildings and land in Sunnyvale, California. On
April 1, 2009, we terminated two of the synthetic lease
arrangements in an effort to manage our capital structure in
light of the current economic environment. The lease payments
commitments associated with the remaining arrangements as of the
termination date totaled $141.5 million through fiscal
2013. These synthetic leases qualify for operating lease
accounting treatment under SFAS No. 13,
“Accounting for Leases (as amended),” and are
not considered variable interest entities under
FIN No. 46R
“Consolidation of Variable
Interest Entities (revised).” Therefore, we do not
include the properties or the associated debt on our condensed
consolidated balance sheet. However, if circumstances were to
change regarding our or BNPPLC’s ownership of the
properties, or in BNPPLC’s overall portfolio, we could be
required to consolidate the entity, the leased facilities and
the associated debt.
Our future minimum lease payments under these synthetic leases
limit our flexibility in planning for, or reacting to, changes
in our business by restricting the funds available for use in
addressing such changes. If we are unable to grow our business
and revenues proportionately to our increase in fixed costs, our
operating results will be harmed. If we elect not to purchase
the properties at the end of the lease term, we have guaranteed
a minimum residual value to BNPPLC. Therefore, if the fair value
of the properties declines below that guaranteed minimum
residual value, our residual value guarantee would require us to
pay the difference to BNPPLC, which could have a material
adverse effect on our cash flows, financial condition and
operating results.
Reductions in headcount growth have resulted in excess capacity
and vacant facilities. In addition, we may experience changes in
our operations in the future that could result in additional
excess capacity and vacant facilities. We will continue to be
responsible for all carrying costs of these facilities’
operating leases until such time as we can sublease these
facilities or terminate the applicable leases based on the
contractual terms of the operating lease agreements, and these
costs may have an adverse effect on our business, operating
results and financial condition.
Risks
inherent in NetApp’s international operations could have a
material adverse effect on our operating results.
NetApp conducts a significant portion of our business outside
the United States. A substantial portion of our revenues is
derived from sales outside of the U.S. During fiscal 2008
and 2007, our international revenues accounted for 47.1% and
44.7% of our total revenues, respectively. In addition, we have
several research and development centers overseas, and a
substantial portion of our products are manufactured outside of
the U.S. Accordingly, our business and our future operating
results could be materially and adversely affected by a variety
of factors affecting our international operations, 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. In addition, we may not be able to
maintain or increase international market demand for our
products.
We face exposure to adverse movements in foreign currency
exchange rates as a result of our international operations.
These exposures may change over time as business practices
evolve, and they could have a material adverse impact on our
financial results and cash flows. 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.
Conversely, lowering our price in local currency may result in
lower
U.S.-based
revenue. A decrease in the value of the U.S. dollar
relative to foreign currencies could increase the cost of local
operating expenses. Additionally, we have exposures to emerging
market currencies, which can have extreme currency volatility.
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 flows. All balance
sheet hedges are marked to market through earnings every
quarter. The time-value component of our cash flow hedges is
recorded in earnings while all other gains and losses are marked
to market through other
36
comprehensive income until forecasted transactions occur, at
which time such realized gains and losses are recognized in
earnings. 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 as well as widening
interest rate differentials and the volatility of the foreign
exchange market. 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. Our international operations are subject
to other risks, including general import/export restrictions and
the potential loss of proprietary information due to piracy,
misappropriation or laws that may be less protective of our
intellectual property rights than U.S. law.
Moreover, in many foreign countries, particularly in those with
developing economies, it is common to engage in business
practices that are prohibited by regulations applicable to us,
such as the Foreign Corrupt Practices Act. Although we implement
policies and procedures designed to ensure compliance with these
laws, our employees, contractors and agents, as well as those
companies to which we outsource certain of our business
operations, may take actions in violation of our policies. Any
such violation, even if prohibited by our policies, could
subject us to fines and other penalties, which could have a
material adverse effect on our business, financial condition or
results of operations.
NetApp
also has credit exposure to our hedging
counterparties.
In order to minimize volatility in earnings associated with
fluctuations in the value of foreign currency relative to the
U.S. Dollars, NetApp utilizes forward and option
contracts
to hedge our exposure to foreign currencies. As a result of
entering into these hedging
contracts with major financial
institutions, we may be subject to counterparty nonperformance
risk. Should there be a counterparty default, we could be
exposed to the net losses on the original hedge
contracts or be
unable to recover anticipated net gains from the transactions.
A
significant portion of NetApp’s cash and cash equivalents
balances is held overseas. If we are not able to generate
sufficient cash domestically in order to fund our U.S.
operations and strategic opportunities and service our debt, we
may incur a significant tax liability in order to repatriate the
overseas cash balances, or we may need to raise additional
capital in the future.
A portion of NetApp’s earnings which is generated from our
international operations is held and invested by certain of our
foreign
subsidiaries. These amounts are not freely available for
dividend repatriation to the United States without triggering
significant adverse tax consequences, which could adversely
affect our financial results. As a result, unless the cash
generated by our domestic operations is sufficient to fund our
domestic operations, our broader corporate initiatives such as
stock repurchases, acquisitions, and other strategic
opportunities, and to service our outstanding indebtedness, we
may need to raise additional funds through public or private
debt or equity financings, or we may need to expand our existing
credit facility to the extent we choose not to repatriate our
overseas cash. Such additional financing may not be available on
terms favorable to us, or at all, and any new equity financings
or offerings would dilute our current stockholders’
ownership. Furthermore, lenders, particularly in light of the
current challenges in the credit markets, may not agree to
extend us new, additional or continuing credit. If adequate
funds are not available, or are not available on acceptable
terms, we may be forced to repatriate our foreign cash and incur
a significant tax expense or we may not be able to take
advantage of strategic opportunities, develop new products,
respond to competitive pressures or repay our outstanding
indebtedness. In any such case, our business, operating results
or financial condition could be materially adversely affected.
37
Changes
in NetApp’s effective tax rate or adverse outcomes
resulting from examination of our income tax returns could
adversely affect our results.
NetApp’s effective tax rate could be adversely affected by
several factors, many of which are outside of our control,
including:
|
|
|
| |
•
|
Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the U.S. statutory tax
rate;
|
| |
| |
•
|
Material differences between forecasted and actual tax rates as
a result of a shift in the mix of pretax profits and losses by
tax jurisdiction, our ability to use tax credits, or effective
tax rates by tax jurisdiction that differ from our estimates;
|
| |
| |
•
|
Changing tax laws or related interpretations, accounting
standards, regulations, and interpretations in multiple tax
jurisdictions in which we operate, as well as the requirements
of certain tax rulings;
|
| |
| |
•
|
An increase in expenses not deductible for tax purposes,
including certain stock-based compensation expense, write-offs
of acquired in-process research and development, and impairment
of goodwill;
|
| |
| |
•
|
The tax effects of purchase accounting for acquisitions and
restructuring charges that may cause fluctuations between
reporting periods;
|
| |
| |
•
|
Changes related to our ability to ultimately realize future
benefits attributed to our deferred tax assets, including those
related to
other-than-temporary
impairments;
|
| |
| |
•
|
Tax assessments resulting from income tax audits or any related
tax interest or penalties could significantly affect our income
tax expense for the period in which the settlements take
place; and
|
| |
| |
•
|
A change in our decision to indefinitely reinvest foreign
earnings.
|
We receive significant tax benefits from sales to our
non-U.S. customers.
These benefits are contingent upon existing tax regulations in
the United States and in the countries in which our
international operations are located. Future changes in domestic
or international tax regulations could adversely affect our
ability to continue to realize these tax benefits. We have not
provided for United States federal and state income taxes or
foreign withholding taxes that may result on future remittances
of undistributed earnings of foreign
subsidiaries.
The Obama administration recently announced several proposals to
reform United States tax rules, including proposals that may
result in a reduction or elimination of the deferral of United
States income tax on our future unrepatriated earnings. Absent a
restructuring of some legal entities and their functionality,
some of the future unrepatriated earnings would be taxed at the
United States federal income tax rate. Additionally, the United
States Court of Appeals for the Ninth Circuit on
May 27,
2009 held in Xilinx Inc. v. Commissioner that stock-based
compensation must be included in the research and development
cost base of companies that have entered into a cost sharing
arrangement and must, therefore, be allocated among the
participants based on anticipated benefits. The Court’s
reversal of the prior U.S. Tax Court decision could change
our estimate of tax benefits that were required to be recognized
in connection with our adoption of Financial Interpretation
No. 48,
“Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement
No. 109” (
“FIN 48”) at the beginning of
fiscal year 2008. We are currently evaluating the impact of the
Xilinx case for FIN 48 purposes for the first quarter of
fiscal 2010. Our international operations currently benefit from
a tax ruling concluded in the Netherlands, which expires in
2010. If we are unable to negotiate a similar tax ruling upon
expiration of the current ruling, our effective tax rate could
increase and our operating results could be adversely affected.
Our effective tax rate could also be adversely affected by
different and evolving interpretations of existing law or
regulations, which in turn would negatively impact our operating
and financial results as a whole. The price of our common stock
could decline to the extent that our financial results are
materially affected by an adverse change in our effective tax
rate.
We are currently undergoing federal income tax audits in the
United States and several foreign tax jurisdictions. The rights
to some of our intellectual property, or IP, are owned by
certain of our foreign
subsidiaries, and payments are made
between U.S. and foreign tax jurisdictions relating to the
use of this IP in a qualified cost sharing arrangement. In
recent years, several other U.S. companies have had their
foreign IP arrangements challenged as part of IRS examinations,
which has resulted in material proposed assessments
and/or
pending litigation with
38
respect to those companies. During fiscal 2009, we received
Notices of Proposed Adjustments from the IRS in connection with
federal income tax audits conducted with respect to our fiscal
2003 and 2004 tax years. If the ultimate determination of income
taxes assessed under the current IRS audit or under audits being
conducted in any of the other tax jurisdictions in which we
operate results in an amount in excess of the tax provision we
have recorded or reserved for, our operating results, cash flows
and financial condition could be adversely affected.
NetApp
may face increased risks and uncertainties related to our
current or future investments in nonmarketable securities of
private companies, and these investments may not achieve our
objectives.
On occasion, NetApp makes strategic investments in nonmarketable
securities of development stage entities. As of
January 23,
2009, the carrying value of our investments in nonmarketable
securities totaled $6.6 million. Investments in
nonmarketable securities are inherently risky, and some of these
companies are likely to fail. Their success (or lack thereof) is
dependent on product development, market acceptance, operational
efficiency and other key business success factors. In addition,
depending on these companies’ future prospects, they may
not be able to raise additional funds when needed, or they may
receive lower valuations, with less favorable investment terms
than in previous financings, and our investments in them would
likely become impaired. We could lose our entire investment in
these companies. For example, during the three and nine-month
periods ended
January 23, 2009 we determined that our
investments in nonmarketable securities of two companies had
been impaired, and we recorded impairment charges of
$1.7 million and $3.7 million, respectively.
If
NetApp is unable to establish fair value for any undelivered
element of a sales arrangement, all or a portion of the revenue
relating to the arrangement could be deferred to future
periods.
In the course of our sales efforts, NetApp often enters into
multiple element arrangements that include our systems and one
or more of the following undelivered software-related elements:
software entitlements and maintenance, premium hardware
maintenance, and storage review services. If we are required to
change the pricing of our software related elements through
discounting, or otherwise introduce variability in the pricing
of such elements, we may be unable to maintain Vendor Specific
Objective Evidence of fair value of the undelivered elements of
the arrangement, and would therefore be required to delay the
recognition of all or a portion of the related arrangement. A
delay in the recognition of revenue may cause fluctuations in
our financial results and may adversely affect our operating
margins.
NetApp’s
business could be materially and adversely affected as a result
of a natural disaster, terrorist acts or other catastrophic
events.
NetApp depends on the ability of our personnel, raw materials,
equipment and products to move reasonably unimpeded around the
world. Any political, military, world health or other issue that
hinders this movement or restricts the import or export of
materials could lead to significant business disruptions.
Furthermore, any strike, economic failure or other material
disruption caused by fire, floods, hurricanes, power loss, power
shortages, telecommunications failures, break-ins and similar
events could also adversely affect our ability to conduct
business. If such disruptions result in cancellations of
customer orders or contribute to a general decrease in economic
activity or corporate spending on information technology, or
directly impact our marketing, manufacturing, financial and
logistics functions, our results of operations and financial
condition could be materially adversely affected. 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.
NetApp
depends 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.
NetApp’s 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, background 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
39
engineers or salespeople could be disruptive to our development
efforts or business relationships and could materially and
adversely affect our operating results.
Undetected
software errors, hardware errors, or failures found in new
products may result in loss of or delay in market acceptance of
NetApp’s products, which could increase our costs and
reduce our revenues. Product quality problems could lead to
reduced revenue, gross margins and operating
results.
NetApp’s products may contain undetected software errors,
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 fail to remedy a product defect, we may experience a
failure of a product line, temporary or permanent withdrawal
from a product or market, damage to our reputation, inventory
costs or product reengineering expenses, any of which could have
a material impact on our revenue, gross margins and operating
results.
In addition, we may be subject to losses that may result from or
are alleged to result from defects in our products, which could
subject us to claims for damages, including consequential
damages. Based on our historical experience, we believe that the
risk of exposure to product liability claims is low. However,
should we experience increased exposure to product liability
claims, our business could be adversely impacted.
NetApp
is exposed to various risks related to legal proceedings or
claims and protection of intellectual property rights, which
could adversely affect our operating results.
NetApp is a party to lawsuits in the normal course of our
business, including our ongoing litigation with Sun
Microsystems. Litigation can be expensive, lengthy and
disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict. An
unfavorable resolution of a particular lawsuit could have a
material adverse effect on our business, operating results, or
financial condition.
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 of our U.S. 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 our existing and future patents may be challenged.
If such challenges are brought, the patents may be invalidated.
We may not be able to develop proprietary products or
technologies that are patentable, or where any issued patent
will provide us with any competitive advantages or will not be
challenged by third parties. Further, the patents of others may
materially and adversely affect our ability to do business. In
addition, a failure to obtain and defend our trademark
registrations may impede our marketing and branding efforts and
competitive position.
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 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. Our means of protecting our proprietary rights
may not be adequate or our competitors may 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 network
storage market will increasingly be subject to infringement
claims as the number of products and competitors in our industry
segment grows and the functionality of products in different
industry segments overlaps.
40
Any such claims could be time consuming, result in costly
litigation, cause product shipment delays, require us to
redesign our products or 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.
NetApp
is continually seeking ways to make our cost structure more
efficient, including moving activities from higher-to lower-cost
owned locations, as well as outsourcing certain business process
functions. Problems with the execution of these changes could
have an adverse effect on our business or results of
operations.
NetApp continuously seeks to make our cost structure more
efficient. We are focused on increasing workforce flexibility
and scalability, and improving overall competitiveness by
leveraging our global capabilities, as well as external talent
and skills worldwide. For example, certain engineering
activities and projects that were formally performed in the
U.S. have been moved to lower cost international locations.
The challenges involved with these initiatives include executing
business functions in accordance with local laws and other
obligations while maintaining adequate standards, controls and
procedures.
In addition, we will rely on partners or third party service
providers for the provision of certain business process
functions in IT and accounting, and as a result, we may incur
increased business continuity risks. For example, we may no
longer be able to exercise control over some aspects of the
future development, support or maintenance of outsourced
operations and processes, including the internal controls
associated with those outsourced business operations and
processes, which could adversely affect our business. If we are
unable to effectively utilize or integrate and interoperate with
external resources or if our partners or third party service
providers experience business difficulties or are unable to
provide business process services as anticipated, we may need to
seek alternative service providers or resume providing these
business processes internally, which could be costly and time
consuming and have a material adverse effect on our operating
results.
NetApp’s
business could be materially adversely affected by changes in
regulations or standards regarding energy efficiency of our
products.
NetApp continually seeks ways to increase the energy efficiency
of our products. Recent analyses have estimated the amount of
global carbon emissions that are due to information technology
products. As a result, governmental and non-governmental
organizations have turned their attention to development of
regulations and standards to drive technological improvements
and reduce such amount of carbon emissions. There is a risk that
the rush to development of these standards will not fully
address the complexity of the technology developed by the IT
industry or will favor certain technological approaches.
Depending on the regulations or standards that are ultimately
adopted, compliance could adversely affect our business,
financial condition or operating results.
NetApp’s
business is subject to increasingly complex corporate
governance, public disclosure, accounting and tax requirements
that have increased both our costs and the risk of
noncompliance.
Because NetApp’s 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 requirements and regulations and continue developing
additional regulations and requirements in response to corporate
scandals and laws enacted by Congress, most notably the
Sarbanes-Oxley Act of 2002. Our efforts to comply with these
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 completed our evaluation of our internal controls over
financial reporting for the fiscal year ended
April 25,
2008 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
April 25, 2008, 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
41
management’s time in connection with further evaluations,
either of which could materially increase our operating expenses
and accordingly reduce our operating results.
Because new and modified laws, regulations, and standards are
subject to varying interpretations in many cases due to their
lack of specificity, their application in practice may evolve
over time as new guidance is provided by regulatory and
governing bodies. This evolution may result in continuing
uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and
governance practices.
Changes
in financial accounting standards may cause adverse unexpected
fluctuations and affect NetApp’s reported results of
operations.
A change in accounting standards or practices and varying
interpretations of existing accounting pronouncements, such as
the increased use of fair value measures and the potential
requirement that U.S. registrants prepare financial
statements in accordance with IFRS, could have a significant
effect on NetApp’s reported financial results or the way we
conduct our business.
42
THE DATA
DOMAIN SPECIAL MEETING
This section contains information about the special meeting of
Data Domain stockholders that has been called to consider and
approve the merger proposal and the adjournment proposal.
Together with this proxy statement/prospectus, Data Domain is
also sending you a notice of the special meeting and a form of
proxy that is solicited by the Data Domain board of directors.
Time,
Date and Place
The special meeting will be held on
[ ],
2009 at
[ ],
local time, at 2421 Mission College Blvd.,
Santa Clara,
CA
95054.
Matters
to Be Considered
The purpose of the special meeting is to vote on the following
proposals:
1. To adopt the Agreement and
Plan of Merger, dated as of
May 20, 2009, as amended on
June 3, 2009, by and among
NetApp, Kentucky Merger Sub One Corporation, Derby Merger Sub
Two LLC and Data Domain, as the agreement may be amended from
time to time, which proposal is referred to as the merger
proposal; and
2. To approve the adjournment or postponement of the
special meeting, if necessary, to solicit additional proxies, in
the event that there are not sufficient votes at the time of the
special meeting to approve the merger proposal, which proposal
is referred to as the adjournment proposal.
Proxies
Each copy of this proxy statement/prospectus mailed to holders
of Data Domain common stock is accompanied by a form of proxy
with instructions for voting. If you hold stock in your name as
a stockholder of record, you should vote your shares by
(i) completing, signing, dating and returning the enclosed
proxy card, (ii) using the telephone number on your proxy
card or (iii) using the Internet voting instructions on
your proxy card to ensure that your vote is counted at the
special meeting, or at any adjournment or postponement of the
special meeting, regardless of whether you plan to attend the
special meeting.
If you hold your stock in “street name” through a
bank, broker or other nominee, you must direct your bank, broker
or other nominee to vote in accordance with the instructions you
have received from your bank, broker or other nominee.
If you hold stock in your name as a stockholder of record, you
may revoke any proxy at any time before it is voted by signing
and returning a proxy card with a later date, delivering a
written revocation letter to Data Domain’s Secretary, or by
attending the special meeting in person, notifying Data
Domain’s Corporate Secretary, and voting by ballot at the
special meeting.
Any stockholder entitled to vote in person at the special
meeting may vote in person regardless of whether a proxy has
been previously given, but the mere presence (without notifying
Data Domain’s Corporate Secretary) of a stockholder at the
special meeting will not constitute revocation of a previously
given proxy.
Written notices of revocation and other communications about
revoking your proxy should be addressed to:
Data Domain, Inc.
2421 Mission College Blvd.
Santa Clara,
CA 95054
Attention: Corporate Secretary
If your shares are held in “street name” by a bank,
broker or other nominee, you should follow the instructions of
your bank, broker or other nominee regarding the revocation of
proxies.
According to the Data Domain amended and restated
bylaws,
business to be conducted at a special meeting of stockholders
may only be brought before the meeting by or at the direction of
the Data Domain board of directors, or by any Data Domain
stockholder who is entitled to vote at the meeting and who
complies with the notice provisions
43
set forth in the Data Domain amended and restated
bylaws. No
matters other than the matters described in this document are
anticipated to be presented for action at the special meeting or
at any adjournment or postponement of the special meeting.
Data Domain stockholders should not send Data Domain stock
certificates with their proxy cards. After the merger is
completed, NetApp will mail to holders of Data Domain common
stock a transmittal form with instructions on how to exchange
their Data Domain stock certificates for the merger
consideration.
Solicitation
of Proxies
Since many Data Domain stockholders may be unable to attend the
special meeting, Data Domain’s board of directors is
soliciting proxies to be voted at the special meeting to give
each stockholder an opportunity to vote on all matters scheduled
to come before the meeting and set forth in this proxy
statement/prospectus. Data Domain’s board of directors is
asking stockholders to designate Frank Slootman and Michael P.
Scarpelli, or any one of them, as their proxies.
NetApp will pay the costs of printing and mailing this proxy
statement/prospectus to Data Domain’s stockholders, and
Data Domain will pay all other costs incurred by it in
connection with the solicitation of proxies from its
stockholders on behalf of its board of directors, including the
entire cost of soliciting proxies from you. In addition to
solicitation of proxies by mail, Data Domain will request that
banks, brokers, and other record holders send proxies and proxy
material to the beneficial owners of Data Domain common stock
and secure their voting instructions. Data Domain will reimburse
the record holders for their reasonable expenses in taking those
actions. Data Domain has also made arrangements with Innisfree
M&A Incorporated to assist it in soliciting proxies and has
agreed to pay them $50,000 plus reasonable expenses for these
services over a three month period. Data Domain has agreed to
indemnify Innisfree M&A Incorporated for claims related to
these services. If necessary, Data Domain may use several of its
directors, executive officers and employees, who will not be
specially compensated, to solicit proxies from Data Domain
stockholders, either personally or by telephone, facsimile,
letter or other electronic means.
Record
Date
The close of business on
[ ],
2009 has been fixed as the record date for determining the Data
Domain stockholders entitled to receive notice of and to vote at
the special meeting. At that time,
[ ] shares
of Data Domain common stock were outstanding, held by
approximately
[ ]
registered holders.
Voting
Rights and Vote Required
The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Data Domain common stock
entitled to vote is necessary to constitute a quorum at the
special meeting. Abstentions will be counted for the purpose of
determining whether a quorum is present.
Approval of the merger proposal requires the affirmative vote of
the holders of a majority of the outstanding shares of Data
Domain common stock entitled to vote at the special meeting. You
are entitled to one vote for each share of Data Domain common
stock you hold as of the record date.
Because the affirmative vote of the holders of a majority of the
outstanding shares of Data Domain common stock entitled to vote
at the special meeting is needed to approve the merger proposal,
the failure to vote by proxy or in person will have the same
effect as a vote against the approval of the merger proposal.
Abstentions and broker non-votes will also have the same effect
as a vote against the approval of the merger proposal.
Accordingly, the Data Domain board of directors urges Data
Domain stockholders to promptly vote by (i) completing,
signing, dating and returning the enclosed proxy card,
(ii) using the telephone number on your proxy card, or
(iii) using the Internet voting instructions on your proxy
card, or, if you hold your stock in “street name”
through a bank, broker or other nominee, by following the voting
instructions of your bank, broker or other nominee.
Approval of the adjournment proposal requires the affirmative
vote of the holders of a majority of the shares entitled to vote
and present in person or by proxy. Because approval of this
proposal requires the affirmative vote of a majority of shares
present in person or by proxy, abstentions will have the same
effect as a vote against this
44
proposal. However, the failure to vote, either by proxy or in
person, and broker non-votes, will have no effect on the
adjournment proposal.
Stockholders may vote at the meeting by ballot. Votes cast at
the meeting, in person or by proxy, will be tallied by Innisfree
M&A Incorporated, Data Domain’s proxy solicitor.
As of the record date, directors and executive officers of Data
Domain, and their affiliates, had the right to vote
[ ]
shares of Data Domain common stock, or
[ ]% of the outstanding Data Domain
common stock at that date. Data Domain currently expects that
each of these individuals will vote their shares of Data Domain
common stock in favor of the proposals to be presented at the
special meeting. Certain executive officers of Data Domain and
their affiliates, collectively holding
[ ] shares
of Data Domain common stock, or
[ ] % of the outstanding Data
Domain common stock as of the record date have entered voting
agreements with NetApp. Pursuant to the voting agreements, these
officers have agreed to vote such shares of Data Domain common
stock in favor of the approval of the merger proposal, and have
granted a proxy to NetApp to vote the shares in such manner.
Recommendation
of the Data Domain Board of Directors
The Data Domain board of directors has unanimously approved and
adopted the merger agreement and the transactions contemplated
thereby. The Data Domain board of directors determined that the
merger agreement and the transactions contemplated thereby are
advisable and in the best interests of Data Domain and its
stockholders and unanimously recommends that you vote
“FOR” approval of the merger proposal and
“FOR” approval of the adjournment proposal. See
“Data Domain Proposal 1 — The
Merger — Data Domain’s Reasons for the Merger;
Recommendation of the Data Domain Board of Directors” on
page 48 for a more detailed discussion of the Data Domain board
of directors’ recommendation.
Attending
the Meeting
All holders of Data Domain common stock, including stockholders
of record and stockholders who hold their shares through banks,
brokers, nominees or any other holder of record, are invited to
attend the special meeting. Stockholders of record can vote in
person at the special meeting. If you are not a stockholder of
record, you must obtain a proxy executed in your favor, from the
record holder of your shares, such as a broker, bank or other
nominee, to be able to vote in person at the special meeting. If
you plan to attend the special meeting, you must hold your
shares in your own name or have a letter from the record holder
of your shares confirming your ownership and you must bring a
form of personal photo identification with you in order to be
admitted. Data Domain reserves the right to refuse admittance to
anyone without proper proof of share ownership and without
proper photo identification.
Voting By
Telephone or Via the Internet
In addition to voting by proxy or in person at the special
meeting, Data Domain stockholders that hold their shares as the
stockholder of record also may vote their shares by using the
telephone number on the proxy card or using the Internet voting
instructions on the proxy card. Data Domain stockholders that
hold their shares in “street name” through a bank,
broker or other nominee may also vote their shares by following
the telephone or Internet voting instructions provided by the
bank, broker or other nominee. If you have access to the
Internet, you are encouraged to vote via the Internet.
Adjournments
and Postponements
Although it is not currently expected, the special meeting may
be adjourned for the purpose of soliciting additional proxies if
Data Domain has not received sufficient votes to approve the
merger proposal at the special meeting of stockholders. Any
adjournments may be made without notice, other than an
announcement at the special meeting, by approval of the
affirmative vote of holders of at least a majority of shares of
Data Domain common stock who are present in person or
represented by proxy at the special meeting. Any adjournment of
the special meeting for the purpose of soliciting additional
proxies will allow stockholders who have already sent in their
proxies to revoke them at any time prior to their use.
45
At any time prior to convening the special meeting, Data
Domain’s board of directors may postpone the special
meeting for any reason without the approval of Data Domain
stockholders. If postponed, Data Domain will provide notice of
the new meeting date as required by law. Although it is not
currently expected, Data Domain’s board of directors may
postpone the special meeting for the purpose of soliciting
additional proxies if Data Domain has not received sufficient
proxies to constitute a quorum or sufficient votes for adoption
of the merger agreement. Similar to adjournments, any
postponement of the special meeting for the purpose of
soliciting additional proxies will allow stockholders who have
already sent in their proxies to revoke them at any time prior
to their use.
Appraisal
Rights
Under Delaware law, Data Domain stockholders are entitled to
appraisal rights in connection with the merger. Failure to take
any of the steps required under Delaware law on a timely basis
may result in the loss of these appraisal rights, as more fully
described in
“Data Domain Proposal 1 — The
Merger — Appraisal Rights” beginning on
page 72.
Other
Matters
As of the date of this proxy statement/prospectus, the Data
Domain board of directors does not know of any other business to
be presented for consideration at the special meeting. If other
matters properly come before the special meeting, the persons
named in the accompanying form of proxy intend to vote on such
matters based on their best judgment and they intend to vote the
shares as the Data Domain board of directors may recommend.
Questions
and Additional Information
Data Domain stockholders who would like additional copies,
without charge, of this proxy statement/prospectus or have
additional questions about the merger, including the procedures
for voting their shares of Data Domain common stock, should
contact:
Data Domain,
Inc.
2421 Mission College Blvd.
Santa Clara, CA 95054
Attention: Investor Relations
Telephone:
(408) 980-4909
or Data Domain’s solicitation agent:
Innisfree M&A Incorporated
501 Madison Avenue,
20
th
Floor
New York,
NY 10022
Stockholders Call Toll-Free at:
(888) 750-5834
Banks and Brokers Call Collect at:
(212) 750-5833
46
INFORMATION
ABOUT THE COMPANIES
NetApp,
Inc.
NetApp is a supplier of enterprise storage and data management
software and hardware products and services. NetApp provides
solutions to 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.
NetApp was incorporated in 1992 and shipped the world’s
first networked storage appliance a year later. Since then,
NetApp has brought to market many significant innovations and
industry firsts in storage and data management.
NetApp common stock is traded on the NASDAQ Global Select Market
under the symbol
“NTAP.” The principal executive
offices of NetApp are located at 495 East Java Drive,
Sunnyvale,
CA 94089, and its telephone number is
(408) 822-6000.
On
May 22, 2009, NetApp commenced an option exchange
program pursuant to which employees of NetApp (other than
executive officers and directors) who hold certain options to
purchase shares of NetApp’s common stock are being given
the opportunity to exchange such options for restricted stock
units. The option exchange program was approved by NetApp’s
stockholders on
April 21, 2009. Unless extended by NetApp,
the option exchange offer will expire on
June 19, 2009. For
more information, please see NetApp’s tender offer
statement on Schedule TO, as filed with the SEC on
May 22, 2009, as may be amended from time to time.
Kentucky
Merger Sub One Corporation
Kentucky Merger Sub One Corporation, a wholly owned subsidiary
of NetApp, was formed solely for the purpose of completing the
merger. Kentucky Merger Sub One has not carried on any
activities to date, except for activities incidental to its
formation and activities undertaken in connection with the
transactions contemplated by the merger agreement. The principal
executive offices of Kentucky Merger Sub One Corporation are
located at 495 East Java Drive,
Sunnyvale,
CA 94089, and
its telephone number is
(408) 822-6000.
Derby
Merger Sub Two LLC
Derby Merger Sub Two LLC, a wholly owned subsidiary of NetApp,
was formed solely for the purpose of completing the merger.
Derby Merger Sub Two has not carried on any activities to date,
except for activities incidental to its formation and activities
undertaken in connection with the transactions contemplated by
the merger agreement. The principal executive offices of Derby
Merger Sub Two LLC are located at 495 East Java Drive,
Sunnyvale,
CA 94089, and its telephone number is
(408) 822-6000.
Data
Domain, Inc.
Data Domain, a Delaware corporation, was incorporated in
Delaware in October 2001. Data Domain is a leading provider of
storage solutions for backup and archive applications based on
deduplication technology. Data Domain deduplication storage
systems are designed to deliver reliable, efficient and
cost-effective solutions that enable enterprises of all sizes to
manage, retain and protect their data.
Data Domain common stock is traded on the NASDAQ Global Select
Market under the symbol
“DDUP.” The principal
executive offices of Data Domain are located at 2421 Mission
College Blvd.,
Santa Clara,
CA 95054 and its telephone
number is
(408) 980-4800.
Additional information about Data Domain and its
subsidiaries is
included in
documents incorporated by reference in this proxy
statement/prospectus. See
“Where You Can Find More
Information” beginning on page 119. Data Domain also plans
to file a proxy statement for its 2009 annual meeting of
stockholders with the SEC. The annual meeting is expected to be
held on
July 2, 2009, and the purpose of the meeting is to
reelect three members of Data Domain’s board of directors
and to ratify Data Domain’s independent registered public
accounting firm for the fiscal year ending
December 31,
2009.
47
DATA
DOMAIN PROPOSAL 1 — THE MERGER
The stockholders of Data Domain are being asked to adopt the
Agreement and
Plan of Merger, dated as of
May 20, 2009, as
amended on
June 3, 2009, by and among NetApp, Inc.,
Kentucky Merger Sub One Corporation, Derby Merger Sub Two LLC
and Data Domain, as the agreement may be amended from time to
time. This proposal is referred to as the merger proposal.
Background
of the Merger
Since 2006, Frank Slootman, President and Chief Executive
Officer of Data Domain, and Daniel J. Warmenhoven, Chairman and
Chief Executive Officer of NetApp, have from time to time had
informal discussions regarding their respective businesses and
the data storage industry in general.
Goldman Sachs & Co., or Goldman Sachs, had served as
co-managing underwriters in Data Domain’s initial public
offering in June 2007. In November 2008, prior to the engagement
of Goldman Sachs by NetApp, a representative of Goldman Sachs
arranged for a meeting between Messrs. Slootman and
Warmenhoven to discuss the possibility of a business combination
involving NetApp and Data Domain.
On
November 4, 2008, Messrs. Slootman and Warmenhoven
and a representative of Goldman Sachs met to discuss the merits
of a potential business combination involving NetApp and Data
Domain. Messrs. Slootman and Warmenhoven agreed that
although there was value in a potential business combination,
considering current market conditions and trading prices of the
stock of the respective companies, such a business combination
was not feasible at that time. Messrs. Slootman and
Warmenhoven agreed that no further discussions of a potential
business combination involving NetApp and Data Domain would
occur for the foreseeable future.
In early 2009, Mr. Slootman and a representative of Goldman
Sachs had ongoing discussions of potential strategic
transactions involving Data Domain. A representative of Goldman
Sachs arranged for a meeting on
March 17, 2009, between
Mr. Slootman and Thomas Georgens, President and Chief
Operating Officer of NetApp to discuss potential strategic
opportunities involving NetApp and Data Domain.
On
March 17, 2009, Messrs. Slootman and Georgens and a
representative of Goldman Sachs met to discuss potential
strategic opportunities involving NetApp and Data Domain.
Mr. Georgens inquired as to whether Data Domain would be
interested in a potential business combination with NetApp at
that time. Mr. Slootman agreed to discuss such a potential
business combination with members of the Data Domain board of
directors.
On
March 17, 2009, Mr. Slootman briefed Aneel Bhusri,
Chairman of the Data Domain board of directors, and some of the
other members of the Data Domain board of directors on his
discussions with Mr. Georgens regarding a potential
business combination with NetApp. The members of the Data Domain
board of directors agreed to open a dialogue with NetApp
regarding a potential business combination dependent upon the
value of the consideration offered by NetApp.
On
March 18, 2009, Mr. Slootman telephoned
Mr. Georgens to inform him that Data Domain was receptive
to a potential business combination with NetApp, but that
further discussions would be dependent upon the value of the
consideration offered by NetApp to the Data Domain stockholders.
On
March 24, 2009, Mr. Slootman, Michael P. Scarpelli,
Senior Vice President and Chief Financial Officer of Data
Domain, Mr. Georgens and Steven J. Gomo, Executive Vice
President and Chief Financial Officer of NetApp, met to discuss
a potential business combination involving NetApp and Data
Domain. After discussing the potential synergies, cultural fit
and strategic benefits of a potential business combination
involving NetApp and Data Domain, the parties expressed their
respective continued interests in further exploring such a
business combination.
On
March 26, 2009, the Data Domain board of directors held
a meeting to discuss a potential business combination with
NetApp. Mr. Slootman reviewed the conversation he and
Mr. Scarpelli had with Messrs. Georgens and Gomo
regarding a potential proposal from NetApp to acquire Data
Domain. Mr. Slootman proposed hiring Qatalyst Partners LP,
or Qatalyst, as Data Domain’s financial advisor to advise
the Data Domain board of directors regarding the evaluation of a
potential NetApp proposal and other strategic alternatives for
Data Domain. Mr. Slootman noted that Goldman Sachs had been
previously engaged by NetApp to serve as its financial advisor.
The Data Domain board of directors approved the engagement of
Qatalyst as Data Domain’s financial advisor.
48
Mr. Slootman also reviewed potential benefits and synergies
from a potential business combination with NetApp.
Representatives of Fenwick & West LLP, or
Fenwick & West, Data Domain’s legal counsel, then
reviewed considerations regarding the Data Domain board of
directors’ fiduciary duties in the context of such a
potential business combination. Representatives of Qatalyst led
a discussion regarding current macro economic market conditions,
recent strategic developments in the technology sector,
potential deal structures, processes and other issues to
consider in such a potential business combination. The Data
Domain board of directors expressed concerns regarding the
potential harm to Data Domain’s business relating to any
uncertainty perceived by its current or future customers should
they learn of discussions regarding a potential business
combination involving Data Domain and the ability of Data
Domain’s competition to take advantage of any such
perceived uncertainty. At the conclusion of the meeting, the
Data Domain board of directors confirmed that it had not been
seeking a sale of Data Domain, however should NetApp elect to
proceed with an offer it would merit further consideration.
On
March 27, 2009, NetApp and Goldman Sachs executed an
engagement letter for Goldman Sachs to act as NetApp’s
financial advisor.
On
April 1, 2009, the NetApp board of directors met to
discuss the potential business combination between NetApp and
Data Domain.
On
April 2, 2009, Messrs. Slootman and Warmenhoven met
to further discuss the opportunities and strategic benefits of a
potential business combination involving NetApp and Data Domain.
Mr. Warmenhoven indicated his interest in Data
Domain’s business and his respect for the long-term value
of Data Domain as an enterprise. Mr. Warmenhoven indicated
that NetApp was serious about making an offer for Data Domain
and that the value of the consideration that NetApp would offer
would reflect NetApp’s commitment to securing such a
potential business combination with Data Domain. Later that day
representatives of Qatalyst had a call with Mr. Warmenhoven
in which he informed them that the NetApp board of directors had
authorized him to move forward with discussions regarding a
potential business combination with Data Domain and the parties
discussed the potential timing of a potential business
combination.
On
April 3, 2009, Messrs. Warmenhoven and Bhusri met
to discuss the strategic rationale and benefits of a potential
business combination involving NetApp and Data Domain. Both
parties reiterated their interest in considering such a
potential business combination. Mr. Bhusri indicated that
the amount and certainty of the value of the consideration to be
delivered to the Data Domain stockholders at closing was a
priority of the Data Domain board of directors given the general
economic uncertainty and volatile stock market conditions over
the past several months. Mr. Bhusri indicated that the Data
Domain board of directors intended to continue operating Data
Domain as an independent entity absent a potential business
combination at a sufficient value and therefore he expressed
concern over the risks to Data Domain’s business if
competitors or customers became aware of discussions regarding a
business combination involving Data Domain. Mr. Warmenhoven
informed Mr. Bhusri that NetApp intended to place
discussions of a potential business combination with Data Domain
on hold temporarily. Mr. Bhusri agreed that the parties
should not move forward at all until such time as both of the
parties were in a position to move forward expeditiously.
On
April 6, 2009, Mr. Slootman met with a
representative of Company A to discuss the terms of a proposed
commercial relationship that was being negotiated. The
representative of Company A indicated that Company A might be
interested in a business combination involving Data Domain and
asked Mr. Slootman when a discussion of such a potential
business combination would be appropriate. Mr. Slootman
informed the representative of Company A that such a discussion
should happen sooner rather than later. After this meeting, the
parties continued to discuss the proposed commercial
relationship, but no representatives of Company A contacted
Mr. Slootman or any other representatives of Data Domain
regarding a business combination involving Data Domain and
Company A.
On
April 9, 2009, the Data Domain board of directors met to
further discuss the potential business combination with NetApp.
Mr. Bhusri reviewed the status of discussions with
Mr. Warmenhoven regarding NetApp’s potential interest
in pursuing a business combination, but noted that no offer or
specific terms had been proposed to date and that NetApp did not
wish to engage in further conversations regarding a business
combination for the time being and likely would not be in a
position to reengage in such discussions until near the end of
NetApp’s fiscal quarter. Mr. Slootman reviewed his
discussion with the representative of Company A. Representatives
of Qatalyst summarized their conversations with
Mr. Warmenhoven regarding the potential business
combination with NetApp.
49
Representatives of Fenwick & West reviewed the Data
Domain board of directors’ fiduciary duties and commented
on legal considerations in the event Data Domain were to receive
an offer from NetApp. At the conclusion of the meeting, the Data
Domain board of directors confirmed that it was not seeking a
sale of Data Domain absent a potential business combination
involving sufficient value. However, the Data Domain board of
directors acknowledged that should NetApp elect to proceed with
an offer that provided for significant value to Data
Domain’s stockholders a transaction with NetApp would merit
further consideration. The Data Domain board of directors
further determined that Data Domain would not initiate any
further discussions with NetApp or any other parties at this
time.
On
April 14, 2009, the NetApp board of directors held a
meeting to discuss a potential business combination with Data
Domain. Certain members of management presented the board of
directors with a market analysis, as well as evaluations of the
potential market opportunities and Data Domain’s valuation
and discounted cash flows. Following discussion among the NetApp
board of directors and management, the NetApp board of directors
authorized NetApp management to approach Data Domain with an
offer to acquire Data Domain, subject to the parameters
discussed and approved by the NetApp board of directors.
On
April 21, 2009, the Data Domain board of directors held
a meeting, during which it discussed, among other matters,
trends in the data storage market and potential consolidation in
the data storage market. Mr. Slootman reviewed the
opportunities and challenges of remaining an independent entity
in the current and foreseeable market environment in light of
the storage market trends toward vertically integrated product
offerings, noting that Data Domain may need to consider
strategic alternatives or partnerships in the future to provide
a more complete product offering in order to grow and remain
competitive in the marketplace.
On
April 22, 2009, Data Domain and Qatalyst executed an
engagement letter for Qatalyst to act as Data Domain’s
financial advisor.
On
April 24, 2009, Mr. Warmenhoven contacted
Mr. Slootman to arrange a meeting to reinitiate discussions
about a potential business combination involving NetApp and Data
Domain.
On
April 27, 2009, Fenwick & West provided a
mutual non-disclosure agreement to Wilson Sonsini
Goodrich & Rosati P.C., or Wilson Sonsini,
NetApp’s legal counsel, which, after some discussions
between respective counsel, was executed later that day by Data
Domain and NetApp.
On
April 27, 2009, Messrs. Slootman, Bhusri,
Warmenhoven and Georgens met to further discuss a potential
business combination involving NetApp and Data Domain.
Messrs. Warmenhoven and Georgens presented a written
summary of proposed terms for the potential transaction,
including, among other items, consideration consisting of a mix
of $7.00 to $8.00 per share in cash and 0.805 shares of
NetApp common stock per share of Data Domain common stock,
representing an implied value of $22.00 to $23.00 per share. The
proposed terms also provided for a limited period of exclusivity
for discussions with NetApp. Messrs. Slootman and Bhusri
indicated that an exclusivity agreement was not acceptable to
Data Domain, but that they would discuss the other aspects of
the proposal with the Data Domain board of directors.
Mr. Warmenhoven informed Mr. Bhusri of the potential
for a role on the NetApp board of directors for Mr. Bhusri
and a role in the management of NetApp for Mr. Slootman.
On
April 28, 2009, the Data Domain board of directors met
to discuss the status of the potential business combination with
NetApp. Mr. Slootman reviewed the discussions that occurred
with Messrs. Warmenhoven and Georgens regarding
NetApp’s interest in a business combination with Data
Domain and the written terms that were proposed by NetApp,
including the proposed per share consideration. Mr. Bhusri
informed the Data Domain board of directors of the potential for
a role on the NetApp board of directors for Mr. Bhusri and
a role in the management of NetApp for Mr. Slootman. A
discussion then ensued among the Data Domain board of directors,
Qatalyst and Fenwick & West regarding the NetApp proposal
and potential responses thereto. Representatives of
Fenwick & West reviewed the Data Domain board of
directors’ fiduciary duties, the various processes the Data
Domain board of directors might adopt and discussed potential
responses to the offer from NetApp. Given the recent
fluctuations of the trading prices of the respective
companies’ stock and fluctuations in the market indices
generally, the Data Domain board of directors determined that
establishing a collar mechanism around any portion of the stock
consideration was important to providing some protection for the
value to be received to the Data Domain stockholders in the
event that the market price of NetApp’s common stock price
fluctuated within a given range
50
between signing and closing of the proposed transaction. The
Data Domain board of directors also expressed concerns regarding
the timing of a potential business combination and the certainty
of closing such a transaction once a definitive agreement was
signed. Of particular concern was the negative impact of any
uncertainty to Data Domain’s business perceived by its
current or future customers and the ability of Data
Domain’s competition to take advantage of any such
uncertainty. The Data Domain board of directors considered the
heightened risk of these harms to Data Domain’s business if
any of Data Domain’s competitors were contacted regarding a
potential strategic transaction. The Data Domain board of
directors agreed that Mr. Bhusri would talk to
Mr. Warmenhoven regarding NetApp’s offer, specifically
to seek to increase the amount of total consideration in the
potential transaction, to increase the cash component of the mix
of consideration and to provide further protection from
fluctuations in NetApp’s stock price between signing and
closing of the potential transaction. The Data Domain board of
directors also instructed representatives of Qatalyst to contact
representatives of NetApp to seek favorable financial terms
consistent with the objectives they provided to Mr. Bhusri.
Following the meeting of the Data Domain board of directors on
April 28, 2009, Mr. Bhusri called Mr. Warmenhoven
to discuss the potential business combination with NetApp.
Mr. Bhusri indicated that the Data Domain board of
directors was interested in pursuing a potential business
combination with NetApp, however, they believed enhanced
financial terms would be necessary for discussions to continue.
Mr. Bhusri also informed Mr. Warmenhoven that the Data
Domain board of directors thought the cash component of the mix
of consideration should be increased and that the Data Domain
board of directors wanted down-side protection around the stock
component of the consideration to protect the value to the Data
Domain stockholders in the event that the market price of
NetApp’s common stock price fluctuated between signing and
closing of the proposed transaction. Mr. Bhusri reiterated
that Data Domain could not agree to an exclusive negotiating
period for NetApp. Mr. Warmenhoven said that he would
review this information with the NetApp board of directors.
On
April 28, 2009 Fenwick & West provided a form
of standstill agreement to Wilson Sonsini that provided that
NetApp would not acquire shares of Data Domain, subject to
limited exceptions.
On
April 29, 2009, representatives of Qatalyst had a call
with representatives of Goldman Sachs seeking a proposal with
enhanced financial terms along the lines described above.
On
May 1, 2009, Messrs. Slootman and Georgens met to
further discuss the potential market, customer, product and cost
synergies that could be achieved through a business combination
of NetApp and Data Domain, the corporate culture of the two
companies and how the companies would fit together and generally
discussed the business of their respective companies.
Messrs. Slootman and Georgens did not negotiate or discuss
the substantive terms of the proposed business combination at
this meeting.
On
May 1, 2009, the NetApp board of directors held a
meeting to further discuss the potential acquisition of Data
Domain. The board of directors discussed with management the
status of negotiations with Data Domain and NetApp’s
strategy with respect to the transaction. The NetApp board of
directors then authorized management to present Data Domain with
a revised offer, subject to the parameters discussed and
approved by the board of directors.
On
May 4, 2009, Mr. Warmenhoven called Mr. Bhusri
and indicated that NetApp would increase the proposed aggregate
consideration to Data Domain stockholders in the business
combination to $24.00 per share, comprised of $6.00 in cash and
$18.00 dollars worth of shares of NetApp common stock for each
share of Data Domain common stock, with a symmetrical 7.5%
collar on the stock portion of the consideration so that Data
Domain stockholders would receive a fixed amount of
consideration in the event that the market price of
NetApp’s common stock price fluctuated within that range
between signing and closing of the proposed transaction.
Mr. Bhusri informed Mr. Warmenhoven that while the
Data Domain board of directors was interested in the potential
business combination with NetApp, there were still several
issues with the offer that needed to be resolved before the
parties could move forward, including an increase in the
aggregate consideration, the need for a greater portion of the
aggregate consideration to be provided in cash and for a wider
collar to be placed around the stock component of the
consideration. On that same day, Mr. Slootman and
Mr. Georgens also discussed NetApp’s revised proposal.
Mr. Slootman also indicated that amount of the aggregate
consideration, price certainty and protection against
fluctuations NetApp’s common stock price were important to
Data Domain and that the terms of any business combination
involving Data Domain should include an increase in the
aggregate consideration, an increased amount of cash and an
appropriate collar on the stock portion of the consideration.
Also on
May 4, 2009, a
51
representative of Qatalyst discussed the details of Data
Domain’s views regarding the financial terms of a potential
business combination involving Data Domain and NetApp with a
representative of Goldman Sachs.
On
May 5, 2009, Mr. Warmenhoven emailed a revised
written summary of proposed terms of the potential business
combination with NetApp to Mr. Bhusri. The revised offer
consisted of $24.00 per share in aggregate consideration,
comprised of $9.50 per share in cash and $14.50 worth of shares
of NetApp common stock for each share of Data Domain common
stock, with a symmetrical 7.5% collar on the stock portion of
the consideration.
On
May 6, 2009, the Data Domain board of directors held a
meeting at which it had an extensive discussion with Qatalyst
and Fenwick & West regarding, among other matters,
NetApp’s original offer, NetApp’s subsequent offers
and the current offer of $24.00 per share (consisting of $9.50
per share in cash and $14.50 per share in NetApp common stock,
with a 7.5% symmetrical collar around the stock portion of the
consideration), NetApp’s desire to sign a merger agreement
for any potential transaction by
May 20, 2009 (the
scheduled date for the announcement of NetApp’s fiscal
fourth quarter results) and other parties that may potentially
be interested in a strategic transaction with Data Domain.
Representatives of Fenwick & West reviewed the
fiduciary duties of the Data Domain board of directors and the
various processes the Data Domain board of directors might
adopt. The Data Domain board of directors considered conducting
a market check prior to the signing of a merger agreement with
NetApp only if it could be conducted in a manner that did not
jeopardize securing a firm proposal from NetApp and did not
disrupt Data Domain’s relationships with its current and
future customers during the process. However, the Data Domain
board of directors ultimately determined that it was not clear
that Data Domain could come to mutually agreeable terms
regarding a business combination with NetApp and therefore such
a market check would involve a high degree of risk to Data
Domain’s customer relationships. The Data Domain board of
directors authorized Mr. Bhusri and representatives of
Qatalyst to propose a counteroffer to NetApp seeking a higher
price of $26.00 per share in the aggregate and wider collar of
15% around the stock portion of the consideration.
After the Data Domain board of directors meeting on
May 6,
2009, Mr. Bhusri called Mr. Warmenhoven to make a
counter proposal at a higher price of $26.00 in aggregate
consideration per share. After further negotiation, the parties
tentatively agreed on $25.00 in aggregate consideration per
share, with the remaining financial terms to be negotiated the
following day at a meeting that included Mr. Bhusri,
representatives of Qatalyst, Messrs. Georgens and Gomo,
J.R. Ahn, Vice President, Corporate Development of NetApp, and
representatives of Goldman Sachs.
On
May 6, 2009, representatives of Qatalyst contacted
representatives of Goldman Sachs to discuss the revised terms of
the proposed transaction.
On
May 7, 2009, Data Domain and NetApp executed a revised
mutual non-disclosure agreement that contained a
“standstill” provision with respect to shares of Data
Domain common stock.
On
May 7, 2009, Mr. Bhusri, representatives of
Qatalyst, Messrs. Georgens, Gomo and Ahn, and
representatives of Goldman Sachs met to discuss the detailed
financial terms of the proposed business combination between
NetApp and Data Domain. The parties agreed to a mix of
consideration consisting of $11.00 per share in cash and $14.00
per share in NetApp common stock. The parties also agreed to a
10% symmetrical collar so that Data Domain stockholders would
receive a fixed amount of consideration in the event that the
market price of NetApp’s common stock price fluctuated
within a that range between signing and closing of the proposed
transaction.
On
May 7, 2009, Mr. Slootman, David L. Schneider,
Senior Vice President Worldwide Sales of Data Domain,
Mr. Georgens and Robert E. Salmon, Executive Vice
President, Field Operations of NetApp, met to get acquainted and
discuss potential product sales synergies to be derived from a
business combination between NetApp and Data Domain.
On
May 7, 2009, a member of the board of directors of EMC,
a competitor of Data Domain, contacted Mr. Slootman. The
EMC board member sought to arrange a meeting between
Mr. Slootman and the Chief Executive Officer of EMC to
share with them EMC’s vision for the future.
Mr. Slootman asked for more specific information on the
nature of the meeting, but the board member of EMC did not
provide any further detail.
On
May 7, 2009, the Data Domain board of directors held a
meeting to further discuss the potential business combination
with NetApp. At this meeting, Mr. Bhusri reviewed for the
Data Domain board of directors his discussion with
Mr. Warmenhoven regarding valuation and informed the Data
Domain board of directors that they
52
had negotiated an increase in NetApp’s offer from $24.00 to
$25.00 per share in aggregate consideration, consisting of
$11.00 per share in cash and $14.00 per share in NetApp common
stock, with a 10% symmetrical collar around the value of the
stock portion of the consideration. The Data Domain board of
directors then discussed with representatives of Qatalyst the
negotiations regarding the collar mechanism around the value of
the stock portion of the consideration, the progression of the
proposed terms from NetApp and the value of the current NetApp
proposal. Mr. Slootman reviewed for the Data Domain board
of directors the call he received from a director of EMC asking
whether Mr. Slootman would be available to meet with the
Chief Executive Officer of EMC. The Data Domain board of
directors engaged in an extensive discussion regarding the
NetApp offer and the whether to call other companies, including
competitors, that could be candidates for a strategic
transaction prior to signing a definitive merger agreement with
NetApp. The Data Domain board of directors expressed further
concerns regarding the high risk of potential harm to Data
Domain’s business relating to any uncertainty perceived by
its current or future customers should they learn of discussions
regarding a business combination involving Data Domain prior to
the announcement of a definitive agreement and the ability of
Data Domain’s competition to take advantage of any such
perceived uncertainty. The Data Domain board of directors
further evaluated the heightened risk of these harms to Data
Domain’s business if any of Data Domain’s competitors
were contacted regarding a potential strategic transaction.
Representatives of Fenwick & West then discussed the
fiduciary duties of the Data Domain board of directors and the
various processes the Data Domain board of directors might
adopt. The Data Domain board of directors was concerned that
initiating a market check at this time could jeopardize securing
a firm agreement from NetApp and could disrupt Data
Domain’s relationships with its current and future
customers during the process. The Data Domain board of directors
determined that Data Domain should move forward with the
potential business combination with NetApp without contacting
other companies that might be candidates for a strategic
transaction with Data Domain, but that the Data Domain board of
directors would continue to evaluate this strategy and consider
the matter further based upon the progress and terms of the
potential business combination with NetApp.
On
May 7, 2009, with the authorization of the Data Domain
board of directors, Mr. Bhusri called Mr. Warmenhoven
to inform him of the conversation between the EMC board member
and Mr. Slootman earlier that day.
On
May 8, 2009, Wilson Sonsini delivered an initial draft
of the merger agreement to Data Domain and Fenwick &
West. Also on
May 8, 2009, Fenwick & West granted
access to an online data room containing Data Domain due
diligence materials to representatives of NetApp, Wilson Sonsini
and Goldman Sachs.
On
May 8, 2009, the Chief Executive Officer of EMC
contacted Mr. Slootman via email to request a meeting the
next time that the Chief Executive Officer was in the
San Francisco Bay Area and suggested proposed dates.
Mr. Slootman agreed via email to such dates, resulting in a
meeting being scheduled on
May 27, 2009.
On
May 9, 2009, Messrs, Scarpelli and Slootman and Robert
Specker, Vice President, In-house Counsel to Data Domain
provided financial and business due diligence on Data Domain to
representatives of NetApp and Goldman Sachs.
Between May 9 and
May 20, 2009, Messrs. Warmenhoven,
Georgens and Gomo, other executive officers of NetApp, and other
employees of NetApp met numerous times with Messrs. Bhusri,
Slootman, Scarpelli and Specker, other executive officers and
employees of Data Domain to discuss various aspects of the
potential business combination. During this period, NetApp and
its advisors reviewed due diligence materials relating to Data
Domain made available to NetApp in an online data room,
requested and reviewed additional materials relating to Data
Domain and engaged in due diligence discussions with their
counterparts.
On
May 11, 2009, the Data Domain board of directors met to
further discuss, among other matters, the potential business
combination with NetApp. Mr. Slootman informed the Data
Domain board of directors that the Chief Executive Officer of
EMC had contacted him to schedule a meeting and, based upon the
availability of the Chief Executive Officer of EMC, the meeting
had been scheduled for
May 27, 2009. A representative of
Qatalyst reviewed a discussion with Mr. Warmenhoven in
which Mr. Warmenhoven had reiterated NetApp’s position
that NetApp would not engage in a bidding contest if additional
parties emerged seeking to acquire Data Domain. Representatives
of Fenwick & West reviewed key terms of the initial
draft of the merger agreement, including the omission of the
ability of Data Domain to accept such a superior proposal and
terminate the merger agreement with NetApp and the Data Domain
board of directors’ ability to change its recommendation in
favor of the proposed
53
business combination with NetApp for any reason consistent with
its fiduciary duties and NetApp’s initial request of a
termination fee of 5.00% of the transaction value, and then
discussed the fiduciary duties of the Data Domain board of
directors and the various processes the Data Domain board of
directors might adopt. The Data Domain board of directors and
its advisors determined that in the negotiations with NetApp,
Data Domain would insist on a process that would permit a
superior proposal from a third party to surface after the
signing of the merger agreement with NetApp and for the Data
Domain board of directors to consider and accept such a superior
proposal and terminate the merger agreement with NetApp, the
Data Domain board of directors’ ability to change its
recommendation in favor of the proposed business combination
with NetApp for any reason consistent with its fiduciary duties
and an amount of the termination fee that would not be
preclusive of a superior proposal. The Data Domain board of
directors reaffirmed the priority of its objectives of retaining
the compelling valuation of the proposed business combination
with NetApp, obtaining deal certainty with respect to the
proposed business combination with NetApp and not exposing Data
Domain’s business and customers to uncertainty and risk.
The Data Domain board of directors and its advisors discussed
the fact that NetApp’s board of directors would be meeting
on
May 13, 2009, and that it would be important to assess
NetApp’s continued resolve to pursue a deal with Data
Domain before deciding whether to taking any action relative to
soliciting the interest of other parties with respect to a
strategic transaction with Data Domain. In the interim, the Data
Domain board of directors determined that Data Domain should
move forward with the due diligence and other aspects of the
potential business combination with NetApp.
On
May 12, 2009, Fenwick & West delivered
proposed revisions to the draft merger agreement to NetApp and
Wilson Sonsini. Between May 12 and
May 20, 2009, in
addition to continuing their due diligence investigations of
each other, NetApp and Data Domain, along with their respective
legal and financial advisors, negotiated the terms of the merger
agreement.
On May 12 and 13, 2009, Messrs. Warmenhoven, Georgens, Gomo
and Ahn, other employees of NetApp and representatives of
Goldman Sachs met with Messrs. Slootman, Scarpelli and
Specker, other employees of Data Domain and representatives of
Qatalyst to discuss specific functional areas of diligence with
respect to Data Domain and the potential business combination
between NetApp and Data Domain, including financial, sales and
marketing, human resources, services, product, supply chain and
manufacturing, information technologies and facilities, and
legal and intellectual property.
On
May 13, 2009, the Data Domain board of directors held a
meeting at which it discussed with representatives of Qatalyst
the current financial terms of the transaction, the significant
premiums the proposed business combination from NetApp provided
and the likelihood that another party would offer more value to
the Data Domain stockholders. The Data Domain board of directors
engaged in further extensive discussions regarding the NetApp
offer. The Data Domain board of directors reviewed the value of
the NetApp offer, the significant premiums implied by the offer,
the current economic conditions and stock market volatility. The
Data Domain board of directors confirmed the desire to avoid the
downside risk of further economic and stock market uncertainties
by securing the attractive deal value reflected in the proposed
business combination with NetApp, while obtaining protection of
this deal value with the cash component of the offer and the
collar around the stock portion of the consideration.
Representatives of Fenwick & West discussed key terms
of the merger agreement and the fiduciary duties of the Data
Domain board of directors. The Data Domain board of directors
discussed with representatives of Fenwick & West the legal
issues surrounding its decision of whether to contact other
companies, including competitors, that could be candidates for a
strategic transaction with Data Domain prior to signing a
definitive merger agreement with NetApp in light of the
applicable merger agreement terms proposed by NetApp. The Data
Domain board of directors expressed further concerns regarding
the potential harm to Data Domain’s business relating to
any uncertainty perceived by its current or future customers
should they learn of discussions regarding a business
combination involving Data Domain prior to the announcement of a
definitive agreement and the ability of Data Domain’s
competition to take advantage of any such perceived uncertainty.
The Data Domain board of directors acknowledged the heightened
risk of these harms to Data Domain’s business if any of
Data Domain’s competitors were contacted regarding a
potential strategic transaction. The Data Domain board of
directors was concerned that initiating a market check at this
time could jeopardize securing the proposed business combination
with NetApp. The Data Domain board of directors also expressed
concerns regarding additional delay and uncertainty associated
with soliciting the interest of other parties with respect to a
strategic transaction with Data Domain. The Data Domain board of
directors determined that Data Domain should move forward with
the potential
54
business combination with NetApp without contacting other
companies and reaffirmed its commitment to insisting on merger
agreement terms that would not unduly preclude the possibility
of Data Domain receiving and implementing a superior proposal
after the signing of a merger agreement with NetApp.
On
May 13, 2009, the NetApp board of directors held a
meeting to discuss the progress of the potential acquisition of
Data Domain. Members of NetApp’s management team were
present to update the board of directors on work completed to
date, initial findings from the due diligence process and next
steps. The board of directors reviewed with management the
preliminary terms of the potential transaction and discussed at
length the stand-alone prospects of the potential transaction as
well as expected net synergies. Following such discussion, the
members of the board of directors authorized management to
continue with its diligence review and discussions with Data
Domain regarding a potential transaction.
On
May 14, 2009, Messrs. Warmenhoven, Georgens, Gomo
and Ahn, other employees of NetApp and representatives of
Goldman Sachs met with Messrs. Bhusri, Slootman, Scarpelli
and Specker, and representatives of Qatalyst to discuss due
diligence of NetApp with respect to the potential business
combination between NetApp and Data Domain. Between May 14 and
May 19, 2009, representatives of NetApp and its advisors
met with representatives of Data Domain and its advisors to
engage in further due diligence discussions regarding the
potential business combination between NetApp and Data Domain.
On
May 14, 2009, Messrs. Bhusri and Warmenhoven met to
discuss the terms of the proposed merger agreement.
Mr. Bhusri indicated that, among other items, the Data
Domain board of directors considered it important that the
merger agreement allow for a process by which other parties
could submit offers for alternate strategic transactions after
the signing of a definitive merger agreement and that the Data
Domain board of directors maintain the ability to consider such
offers presented to it after the signing of a merger agreement
with NetApp consistent with its fiduciary duties. Specifically,
the Data Domain board of directors insisted on the ability to
change its recommendation in favor of the proposed business
combination with NetApp for any reason consistent with its
fiduciary duties, a right to terminate the merger agreement
after receipt of an alternative offer with respect to a
strategic transaction that it determines to be a superior
proposal and that the termination fee proposed by NetApp to be
reduced. Mr. Warmenhoven also mentioned to Mr. Bhusri
that NetApp was currently conducting a search for a new member
of its board of directors of Directors and suggested that
Mr. Bhusri consider participating in the search process.
Both parties agreed that no determinations would be made with
respect to Mr. Bhusri’s consideration for a position
on the NetApp board of directors until after completion of the
business combination between Data Domain and NetApp. On the same
day, representatives of Qatalyst placed a
follow-up
call to Mr. Warmenhoven to underscore the views that
Mr. Bhusri had communicated regarding the deal protection
terms of the merger agreement.
Also on
May 14, 2009, Wilson Sonsini delivered an initial
draft of the form of voting agreement to Fenwick &
West.
On
May 16, 2009, the Data Domain board of directors met to
further discuss the potential business combination with NetApp.
Representatives of Qatalyst reviewed due diligence that had been
conducted on NetApp with respect to, among other matters,
NetApp’s recent financial results and outlook.
Representatives of Fenwick & West then led a
discussion regarding the voting agreements that were requested
from officers, directors and associated funds and the status of
the previous day’s negotiations on key terms of the merger
agreement. Representatives of Fenwick & West informed
the Data Domain board of directors that NetApp agreed to include
a process that would permit a superior proposal from a third
party to surface after the signing of the merger agreement with
NetApp and for the Data Domain board of directors to consider
and accept such a superior proposal and terminate the merger
agreement with NetApp and had proposed a termination fee of
4.50% of the transaction value, and the impact of the outcome of
these negotiations on the Data Domain board of directors’
fiduciary duties. The D
