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Securities registered pursuant to Section 12(b) of the
Act:
None
Title of Each Class
Name of Exchange on Which Registered
none
none
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
The aggregate market value of voting stock held by nonaffiliates
of the Registrant, as of October 29, 2004, the last day of
registrant’s most recently completed second fiscal quarter,
was $4,994,618,364 (based on the closing price for shares of the
Registrant’s common stock as reported by the Nasdaq
National Market for the last business day prior to that date).
Shares of common stock held by each executive officer, director,
and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On May 27, 2005, 367,747,347 shares of the
Registrant’s common stock, $0.001 par value, were
outstanding.
The information called for by Part III of this
Form 10-K is hereby incorporated by reference from the
definitive Proxy Statement for our annual meeting of
stockholders to be held on August 31, 2005, which will be
filed with the Securities and Exchange Commission not later than
120 days after April 30, 2005.
With the exception of historical facts, the statements contained
in this Annual Report on Form 10-K are forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
and are subject to the safe harbor provisions set forth in the
Exchange Act. Forward-looking statements usually contain the
words “estimate,”“intend,”“plan,”“predict,”“seek,”“may,”“will,”“should,”“would,”“anticipate,”“expect,”“believe,” or similar expressions and variations or
negatives of these words. In addition, any statements that refer
to expectations, projections or other characterizations of
future events or circumstances, including any underlying
assumptions, are forward-looking statements. All forward-looking
statements, including, but not limited to, (1) our belief
that the trend towards unification of storage continues to
accelerate; (2) our expectation that we will see strong
demand for storage in many areas; (3) our plans to continue
to leverage our product capabilities to enhance our storage grid
architectures; (4) our belief that the data storage market
will continue to experience growth and increased IT spending;
(5) our belief that our continued investment in emerging
technologies will increasingly contribute to our growth over the
long term; (6) our expectation that there will be a further
decline in the price per petabyte; (7) our belief that our
strategic investments are targeted at some of the strongest
growth areas of the storage market; (8) our estimates of
future intangibles and stock compensation amortization expense
relating to the Spinnaker acquisition; (9) our expectation
that service margins will vary over time; (10) our
expectation that we will continue to add sales capacity;
(11) our expectation that we will increase sales and
marketing expenses commensurate with future revenue growth;
(12) our intention to continuously broaden our existing
product offerings and introduce new products; (13) our
estimates regarding future capitalized patents amortization
expenses and future amortization of existing technology;
(14) our expectation that we will continuously support
current and future product development and enhancement efforts
and incur corresponding charges; (15) our belief that our
research and development expenses will increase in absolute
dollars in fiscal 2006; (16) our belief that our general
and administrative expenses will increase in absolute terms in
fiscal 2006; (17) our expectation regarding estimated
future deferred stock compensation amortization expenses and
future covenants not to compete; (18) the possibility that
we may be obligated for additional lease payments to be payable
through November 2010 in the event that our vacated facilities
are not subleased; (19) our expectation that interest
income will increase in fiscal 2006; (20) our expectations
regarding our contractual cash obligations and other commercial
commitments at April 30, 2005 for fiscal years 2006 through
2010 and thereafter, which we anticipate will be
$116.8 million in the aggregate; (21) our expectation
that capital expenditures will increase consistent with our
business growth; (22) our expectation that our existing
facilities and those currently being developed, will be
sufficient for our needs for at least the next two years and
that these construction projects will be financed through cash
from operations and existing cash and investments; (23) our
belief that our existing liquidity and capital resources are
sufficient to fund our operations for at least the next twelve
months; (24) our belief that the accounting policies
described under the Critical Accounting Estimates and Policies
are the ones that most frequently require us to make estimates
and judgments; (25) our belief that foreign currency
hedging contracts will not subject us to significant credit
risk; (26) our belief that we have been able to compete
successfully with our principal competitors based on the
superior technology of our products; (27) our intent to
regularly introduce new products and product enhancements;
(28) the possibility that we may need to increase our
materials purchases, contract manufacturing capacity and
internal test and quality functions to meet anticipated demand;
(29) our intention to continue to establish and maintain
business relationships with technology companies; (30) the
possibility that we may engage in future acquisitions;
(31) our expectation that we will increasingly rely on our
indirect sales channel for a significant portion of our revenue;
(32) our expectation that the ultimate costs to resolve any
outstanding legal claims or proceedings will not be material to
our business; (33) our expectation that companies in the
appliance market will increasingly be subject to infringement
claims as the industry grows; (34) our expectation that the
value of our investments will not decline significantly because
of changes in market interest rates, (35) our expectation
regarding ATA’s future impact on the storage market;
(36) our anticipation that we will comply with existing
laws and future laws and
regulations and the adoption will not have a material adverse
impact on our business; (37) our expectation that we will
release Spinnaker integrated capabilities in our products by the
end of calendar year 2005; (38) our belief that the current
enterprise disk drive supply constraints and price rigidity will
not negatively impact our gross margin; (39) our belief
that our Windows® business will be a strong driver of the
growth of our block storage solutions; (40) our expectation
to continue to expand our global services and support and such
investment will accelerate the adoption rate of our technology;
(41) our expectation that the Alacritus acquisition will
extend our ability to provide a high performance data protection
solution to customers and accelerate customer transitions to
disk-based back up; (42) our expectation to refresh our
product line and offer a comprehensive suite of data protection
solutions during fiscal 2006; and (43) cash from operating
activities may fluctuate in future periods, are inherently
uncertain as they are based on management’s current
expectations and assumptions concerning future events, and they
are subject to numerous known and unknown risks and
uncertainties. Therefore, our actual results may differ
materially from the forward-looking statements contained herein.
Factors that could cause actual results to differ materially
from those described herein include, but are not limited to:
(1) the amount of orders received in future periods;
(2) our ability to ship our products in a timely manner;
(3) our ability to achieve anticipated pricing, cost and
gross margin levels; (4) our ability to successfully
introduce new products; (5) our ability to achieve and
capitalize on changes in market demand; (6) acceptance of,
and demand for, our products; (7) our ability to identify
and respond to significant market trends and emerging standards;
(8) our ability to realize our financial objectives through
increased investment in people, process and systems;
(9) acceptance of, and demand for, our products;
(10) our ability to maintain our supplier and contract
manufacturer relationships; (11) the ability of our
competitors to introduce new products that compete successfully
with our products; (12) our ability to expand direct and
indirect sales and global service and support; (13) the
general economic environment and the continued growth of the
storage and content delivery markets; (14) our ability to
sustain and/or improve our cash and overall financial position;
and (15) those factors discussed under “Risk
Factors” elsewhere in this Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof and are based upon information available to us at this
time. These statements are not guarantees of future performance.
We disclaim any obligation to update information in any
forward-looking statement.
Overview
Network Appliance, Inc. (“NetApp” or “Network
Appliance”), is a leading supplier of enterprise storage
and data management software and hardware products and services.
Our solutions help global enterprises meet major information
technology challenges such as managing storage growth, assuring
secure and timely information access, protecting data and
controlling costs by providing innovative solutions that
simplify the complexity associated with managing corporate data.
Network
Appliancetm
solutions are the data management and storage foundation for
many of the world’s leading corporations and government
agencies.
Network Appliance was founded in 1992 with the goal of
simplifying data access by creating the world’s first
network storage appliance. The first system was shipped in 1993.
Today Network Appliance is a multinational corporation with over
3,800 employees and an installed base of products in over 120
countries.
NetApp success to date has been in delivering cost-effective
enterprise storage solutions that reduce the complexity
associated with managing conventional storage systems. Our goal
is to deliver exceptional value to our customers by providing
products and services that set the standard for simplicity and
ease of operation. This philosophy drives the entire company,
from product design and system operation through support and
business processes. This results in significant customer
advantages, including:
•
Lower total cost of ownership, in part because system
administrators can more efficiently manage much greater amounts
of information, and also because recovery times are
significantly reduced in the event of a disaster or data
corruption
•
Business agility, by improving our customers’ ability to
react quickly to changes via rapid deployment or reconfiguration
of storage assets
•
Improved information availability, due to increased reliability
Improved application performance, enabling customers to advance
their time-to-market goals and create new revenue-generating
opportunities
•
Business continuance via online rapid restore and disaster
recovery deployments
•
Satisfying customers’ growing regulatory compliance
requirements with our comprehensive software, solutions, and
partnerships
Total Customer Experience
At Network Appliance, we believe in offering complete solutions
to help customers effectively streamline operations. Through an
internal program we call TCE (“Total Customer
Experience”), we strive to provide customers with the best
experience in the industry at every touchpoint they have with
NetApp® products, services, and people. In addition to
providing them with global service and support and offering them
flexible financing solutions, we strive to simplify customer
environments whenever possible by utilizing open standards,
driving industry collaboration, and partnering with other
industry leaders. Using the right combination of products,
technologies, and partners, NetApp helps solve customer business
challenges while maximizing their ROI (“return on
investment”).
•
Simplicity. Network Appliance offers one single operating
system and file management system across all of its storage
appliances. This unified architecture allows enterprises to
reduce management overhead, decrease deployment times, increase
utilization, and eliminate the downtime typically associated
with general-purpose architectures. Network Appliance plans to
continue to expand on the single architecture concept in future
product designs and service offerings.
•
Open standards and industry collaboration. NetApp helps
ensure rapid application deployment and smooth integration into
our customers’ existing infrastructures by utilizing and
supporting open standards. Network Appliance participates in and
leads many industry initiatives and organizations, such as the
Storage Networking Industry Association (“SNIA”), the
Enterprise Grid Alliance (“EGA”), the Open Source
Development Lab (“OSDL”), and the Internet Engineering
Task Force (“IETF”), that have defined standards that
are widely deployed today. Standards that Network Appliance has
helped advance include the Network File System (“NFS”)
protocol for file access in UNIX® and Linux®
environments; the Common Internet File System (“CIFS”)
protocol for file access in Windows environments; the Network
Data Management Protocol (“NDMP”) for simplifying
backup of networked storage; the Internet Content Adaptation
Protocol (“ICAP”) for content adaptation in Web
environments; the Direct Access File System (“DAFS”)
protocol for high-performance, high-throughput access to data;
and the Internet Small Computer System Interface
(“iSCSI”) protocol for building block-based storage
area networks using widely deployed Ethernet infrastructures. We
plan to continue to participate in driving emerging standards,
including 10 Gigabit Ethernet and NFS version 4.
•
Business application integration and partnerships. The
goal of Network Appliance is to deliver complete network storage
solutions to customers. Our partners are vital to our success in
this area, and we have significant partner relationships with
database and business application companies including Dassault
Systèmes, Documentum, FileNet, several solutions from IBM,
including DB2, Content Manager, Lotus, and Rational, iLumin,
Interwoven, Landmark Graphics, Microsoft, Mobius, Oracle, SAP,
Stellent, Sybase, UGS Corp., and Zantaz. These application
partnerships enhance our ability to reduce implementation times,
increase application availability, and provide the highest level
of solution support to customers. Technology and infrastructure
solution partners enable seamless integration into
customers’ existing environments, resulting in lower costs
and more rapid deployment. Our infrastructure partner list
includes ADIC, Atempo, Bakbone, Brocade, Cisco, Commvault,
Computer Associates, Decru, Egenera, FalconStor, Fujitsu Siemens
Computers, Hitachi Data Systems, IBM Tivoli, Intel,
IronMountain, Legato, McData, Novell/ SuSE, NuView, Peribit,
Quantum/ ATL, Red Hat, RLX Technologies, Secure Computing,
Spectra Logic, StorageTek, Symantec, Syncsort, and VERITAS.
Global service and support. Network Appliance customers
demand high availability and reliability of their storage
infrastructure to ensure the successful, ongoing operation of
their businesses. Network Appliance Global Services
(“NGS”) is designed with this in mind. We utilize a
global, integrated model to provide consistent, service and
support during every phase of the customer engagement, from
presales analysis through implementation and ongoing support.
Service and support often involve phased rollouts, technology
transitions and migrations, and other long-term engagements.
Network Appliance delivers support as well as a comprehensive
range of consulting services leveraging our expertise in
architecture and design, project management, solution
implementation and analysis, network integration, training, best
practices, standard operating procedures, and ongoing
optimization.
NGS continues to expand and accelerate our professional service
and support offerings, including our worldwide delivery
capabilities, partner ecosystem, and customer footprint. In the
past year we have taken a number of steps to further build out
our service and support portfolio by adding new and enhanced
offerings to our customers. We have grown our global services
organization by expanding our storage service portfolios,
deepening and broadening our storage services partnerships,
innovating service delivery tools and technology, and continuing
to drive supportability in NGS products and services as well as
executing on new business and customer growth.
•
Network Appliance Financial Solutions (“NAFS”).
NAFS, the customer finance group for Network Appliance, offers a
variety of standard and tailored financial products to help our
customers acquire NetApp solutions. NAFS offers financial
programs in the United States, Canada, Europe, and Asia Pacific.
Our financial product offerings are designed to help enhance our
customers’ ROI and reduce their TCO (“total cost of
ownership”) by providing competitive rates; matching
budgetary or cash flow requirements by spreading the payments
out over time; providing technology refresh options within the
initial term; and financing the entire solution, including
hardware, software, and services.
Customer Challenges
Network Appliance enterprise storage and data management
solutions directly address the major information technology
challenges that enterprises face — ensuring business
continuance, reducing costs associated with data center
operations, managing data throughout the globally distributed
enterprise, reducing business risks associated with regulatory
compliance requirements, and consolidating rapidly growing
quantities of storage.
•
Business continuance. Many enterprises are increasingly
focused on disaster preparedness and recovery and must avoid
costly downtime in the event of a major disaster or localized
disruption. Minutes of downtime are costly, and hours of
downtime can be catastrophic. Working in tandem with the
existing network infrastructure (both Fibre Channel and
Ethernet), our storage appliances and data management software
enable customers to implement disaster recovery and data
mirroring plans quickly and effectively, while minimizing
incremental telecommunications and administration costs.
•
Data center operations. More than just applications and
hardware, the data center is the nerve center of an
organization, controlling the flow of information throughout the
enterprise. Many of the costs that drive up the total cost of
information technology (“IT”) ownership are associated
with data center operations and include tasks such as data
backup and recovery, hardware and software maintenance,
performance management, and resource allocation. Our appliance
architecture, with one common operating system, simplifies many
of these complex tasks by automating or eliminating them and
delivers simple, centrally managed, flexible data storage that
leverages and increases the performance of existing IT
infrastructures
•
Distributed enterprise. As enterprises grow, they are
challenged with providing timely information to remote locations
and branch offices, jeopardizing their productivity. NetApp
products accelerate information access and application
performance while reducing bandwidth costs, as well as the cost
and complexity associated with managing the data in these
distributed offices. Our solutions enable enterprises to quickly
replicate and relay information to and from one or many
locations, fully protecting data in remote offices and locations.
Regulatory compliance. Regulatory compliance is a growing
concern for every industry on a global basis. Regulations such
as Sarbanes-Oxley, Patriot Act, and Gramm-Leach-Bliley affect
companies regardless of size or location. Furthermore,
industry-specific businesses are affected by such regulatory
acts as Rule 17a-4 of the Securities and Exchange Act of
1934, as amended, which relates to preservation of certain
records by certain exchange members as well as brokers and
dealers; Health Insurance Portability and Accountability Act
(“HIPAA”); and several government defense
requirements. NetApp offers compliance and security solutions
designed to address such regulations and the need for data
permanence, security, and confidentiality while reducing
business risks. By utilizing open industry-standard solutions
and best-in-class partners, the NetApp regulatory compliance
solutions improve access to information in a transparent and
seamless solution.
•
Storage consolidation. Managing the continued growth in
the volume of data is one of the great challenges enterprises
face today. Network Appliance enables enterprises to effectively
consolidate and simplify data management of their
mission-critical applications. Data
ONTAPtm
7G provides a dynamic virtualization engine that is capable of
aggregating physical storage components that can be easily
provisioned on-the-fly without significant administrative
intervention. With data management functions that are tailored
for individual application data sets, it provides IT
administrators with tools to easily accommodate the changing
storage demands of an enterprise. The net effects are lower
storage management costs and significant time savings as storage
is intelligently configured and reconfigured nondisruptively,
even during production hours. By freeing up valuable
infrastructure and staff resources, Network Appliance storage
consolidation solutions improve enterprise productivity,
performance, and profitability.
Classes of Data
NetApp products and solutions are based on the premise that not
all data is created equal. Enterprise customers face a
significant challenge in designing networked storage
infrastructures that balance the availability requirements of
their applications and associated data with the cost of the
storage solution. Storing all data on an expensive, monolithic,
mainframe-class array is no longer acceptable as customers more
carefully evaluate the value of their information. As a result,
data is being classified by availability and performance
requirements in relation to cost.
•
Business-critical data. Business-critical applications,
including trading-floor applications and enterprise resource
planning (“ERP”) systems, require the highest levels
of availability and reliability, have more dedicated management
resources, and exhibit the least amount of cost sensitivity. If
this data is unavailable, the business is typically not
generating revenue and may incur other financial penalties.
•
Operational/internal data. This class of data is accessed
by internal employees, and while the availability of the data is
not important to customers outside the business, it can have a
big impact on the users of the data inside the business.
Examples of business internal data include corporate intranets,
e-mail, human resource systems, and data warehouses used for
analytical purposes.
•
Departmental and remote office data. Departmental and
remote office deployments also require a low-cost solution, but
typically need high data availability with low management
overhead. Data in this class is typically not used outside the
department or remote office.
•
Compliance/reference/archive data. These assets represent
much of the corporate and personal data related to conducting
business with customers, performing research, buying and selling
securities, or other mission-critical, fiduciary, or private
activities. This information needs to be protected, monitored,
maintained, exchanged, and secured. Types of reference data
include e-mail archives; bank, brokerage, and billing
statements; medical images and records; mechanical
computer-aided design (“MCAD”) drawings; integrated
chip designs; and seismic and satellite data. Customers require
fast data access at costs comparable to much slower high-end
tape or optical libraries, with minimal ongoing management
costs. Enterprises require a low-cost storage solution for
archive data and backups, which have historically been stored on
magnetic tape. Many customers are now replacing
magnetic tape with more flexible disk-based systems, which
reduce backup windows and enable rapid recovery in the event of
a disaster.
Network Appliance solutions are tailored to match the needs of
archive, reference, departmental/remote office, business
internal, business operations, and business-critical data with a
common product architecture and data management methodology,
enabling customers to easily deploy and efficiently manage all
their networked storage infrastructure in the same way.
A Solutions-Based Approach
Network Appliance turnkey solutions, which include hardware,
software, service, and financing components, enable our
customers to simplify their storage management, leverage their
existing infrastructure, and increase their return on
investment. The solutions include:
•
Storage consolidation. Network Appliance enables
enterprises to effectively consolidate and simplify data
management of their mission-critical applications. Data ONTAP 7G
provides a dynamic virtualization engine that is capable of
aggregating physical storage components that can be easily
provisioned on-the-fly without significant administrative
intervention. With data management functions that are tailored
for individual application data sets, it provides IT
administrators with tools to easily accommodate changing storage
demands of an enterprise. The net effects are lower storage
management costs and significant time savings as storage is
intelligently configured and reconfigured nondisruptively, even
during production hours. By freeing up valuable infrastructure
and staff resources, Network Appliance storage consolidation
solutions improve enterprise productivity, performance, and
profitability.
•
Data protection. Network Appliance offers a comprehensive
suite of disk-based data protection solutions particularly in
heterogeneous environments and has been further enhanced by the
recent acquisition of Alacritus and its virtual tape library
(“VTL”) technology. NetApp simplifies complex backup
and recovery tasks; reduces data storage requirements; ensures
rapid, complete disaster recovery; and leverages existing data
protection investments. Working with our customers, we help to
ensure that their mission-critical data is backed up,
replicated, and accessible on demand, while reducing the
complexity of management and operations. Our solutions also
enable our customers to recover rapidly from downtime caused by
unplanned events such as user error, system failure, operational
outages, or natural disasters.
•
Grid computing. As the trend continues toward
consolidating storage and serving a variety of applications from
a unified storage pool, we provide solutions that allow
customers to more easily and cost-effectively provision, access,
manage, and share data across their entire compute grid and user
base. The combination of NetApp unified storage and data
management solutions with the advanced distributed storage
technologies acquired from Spinnaker Networks will further our
strategy to deliver storage grid solutions as the foundation for
data infrastructures of the future. In the near term, the
Spinnaker acquisition allows us to target markets with customers
who are already deploying such grid-like architectures using
large-scale Linux farms for high-performance computing
applications in industry verticals such as energy,
entertainment, and the federal government. One of the goals for
the NetApp storage grid is to offer customers the ability to run
their IT infrastructures as a utility.
•
Information lifecycle management (“ILM”). The
Network Appliance open approach to ILM enables the deployment of
a best-of-breed solution that reduces the risk, cost, and
complexity of managing enterprise information throughout its
lifecycle. Whether customers are looking at data protection,
archival, accessibility, security, or compliance, NetApp enables
customers to appropriately align the cost of storage resources
with the importance of the data being stored.
•
Internet access and security (“IAS”). The
Internet access and security solution merges proxy caching and
storage technologies to improve and secure Internet access from
evolving threats to the enterprise. IAS enables customers to
enforce security policies to protect IT assets, address
compliance regulations
to reduce business liability, and improve the quality of service
experienced by end users. NetApp delivers a critical security
layer that reduces costs and increases productivity.
•
Regulatory compliance. Network Appliance regulatory
compliance solutions are designed to address growing regulatory
concerns for data permanence, security, and confidentiality
while reducing business risks and improving information access.
In conjunction with partners, NetApp is delivering
comprehensive, standards-based compliance solutions for
structured, semi-structured, and unstructured data to customers
across many vertical markets and geographies. The NetApp
solution incorporates specialized software that delivers write
once, read many (“WORM”) capabilities to store
critical business records in a nonerasable, nonrewritable format
across the full family of NetApp systems.
NetApp Storage Systems
NetApp products share a common architecture across all of our
storage systems, allowing for optimal scalability and increased
flexibility. Customers can protect their existing investments
and consolidate both compliance- and noncompliance-related data
on a single platform, helping to simplify compliance management
and reduce storage costs. Through open standards, NetApp helps
ensure rapid application deployment and smooth integration into
its customers’ existing infrastructure. Our data management
features help provide customers simple management, improved data
protection, and reduced operational costs.
All NetApp systems come packaged in rack-mountable enclosures
that can be installed in a customer’s existing server racks
or can be factory-installed and configured in cabinets. Our
appliances are based primarily on industry-standard hardware,
including Intel® Pentium® processors, Broadcom
processors, an advanced implementation of the industry-standard
PCI bus architecture, standard Ethernet adapters, and either
Fibre Channel-Arbitrated Loop (“FC-AL”) or Advanced
Technology Attachment (“ATA”) disk interconnects.
FAS Enterprise Systems
The NetApp family of modular, scalable, highly available,
unified networked systems provides enterprise data storage
services and simplifies data management. These systems are
specifically designed with a high level of resiliency for
network-centric enterprise IT infrastructures and support
network-attached storage (“NAS”), storage area network
(“SAN”), and iSCSI environments with simple, unified
solutions. We call this fabric-attached storage
(“FAS”). These systems are designed to deliver lower
total costs of ownership than alternative competitive systems.
Heterogeneous data sharing allows our systems to deliver
simultaneous data access to Linux, UNIX, Windows, and Web-based
clients and servers, dramatically lowering the cost of ownership
and management complexity versus siloed homogeneous storage
systems. With a high degree of built-in data integrity and
redundancy, NetApp enterprise storage systems ensure data
availability for business-critical environments. Current NetApp
storage system products include:
•
NetApp FAS980c/ FAS980 enterprise storage system. Built
for the most demanding customers, the FAS980c is our
highest-performance clusterable storage system. The FAS980c
continues the NetApp tradition of providing industry-leading
performance in a simple, reliable, flexible, and easily
manageable system. The FAS980c is designed to accommodate
thousands of independent users and large, high-bandwidth
applications. With the capability of managing up to 64TB of data
in one system, and 16TB in one file system, the FAS980c can meet
the storage demands of virtually any enterprise.
•
NetApp FAS960c/ FAS960 enterprise storage system. Similar
to the FAS980c/ FAS980, the FAS960c and FAS960 systems are
deployed for demanding NAS, SAN, and iSCSI applications that do
not require the performance and capacity levels supported by our
most powerful systems. Available with up to 48TB of storage,
these systems are deployed in a broad range of enterprise
applications, including customer relationship management
(“CRM”), enterprise resource planning
(“ERP”), decision support solutions (“DSS”),
massive home directory consolidations, and Web serving.
•
NetApp FAS3000 series enterprise storage system.
Introduced in May 2005, the newest addition to the NetApp family
of enterprise storage systems, the FAS3020 and FAS3050 systems,
are designed to meet the needs of the fast-growing midtier
enterprise storage market. FAS3000 series systems are
ideally suited for enterprise application infrastructures such
as database and e-mail/messaging, home directory consolidation,
and disaster recovery solutions. Designed with enterprise
serviceability and manageability in mind, these systems increase
reliability and storage utilization while reducing storage
infrastructure complexity. With storage capacity up to 84TB,
they offer the highest capacity and best value in their class.
•
NetApp FAS940c/ FAS940 enterprise storage system. The
flexibility and performance capabilities of the FAS940c bring
FAS900 series features to a broad range of enterprise
applications, including CRM, ERP, DSS, massive home directory
consolidation, and Web serving. The FAS940c/940 is available
with up to 24 TB of storage.
•
NetApp FAS920c/ FAS920 enterprise storage system. The
FAS920c/ FAS920 was introduced in early fiscal year 2005.
Available with up to 12TB of storage, the FAS920 series
continues our unified storage leadership but at a lower entry
price point and capacity. Still deployed on a broad range of
mission-critical enterprise applications, these systems leverage
the NetApp solution’s ability to easily scale to meet
changing customer requirements.
•
NetApp FAS270c/ FAS270 enterprise storage system. The
FAS270c/ FAS270 offer an entry-level Fibre Channel SAN solution
while providing strong price/performance for NAS and IP SAN
(iSCSI) infrastructures. The FAS270 offers enhanced
price/performance and is available with up to 8TB of storage.
•
NetApp FAS250 enterprise storage system. The NetApp
FAS250 is an entry-level storage system supporting capacities up
to 2TB in a compact form factor. The FAS250 is completely
software compatible with all other NetApp products and uses the
same storage shelves and Fibre Channel disks currently available
for the FAS900 series systems. The FAS250 provides customers
with an attractive entry-level price and a simple upgrade path
to higher-capacity, higher-performance enterprise storage
systems.
V-Series Systems
The Network Appliance V-Series family, an evolution of the
enterprise
gFilertm
product line, is a network-based, scalable storage
virtualization solution with over 500 units installed, that
virtualizes tiered, heterogeneous storage arrays, allowing
customers to leverage the dynamic virtualization capabilities
delivered in our Data ONTAP 7G software across multiple tiers of
third-party storage.
The V-Series family supports a broad spectrum of enterprise
storage systems, including Hitachi® Data Systems TagmaStore
Universal Storage Platform, Lightning and Thunder storage
systems; Hitachi Limited SANRISE storage systems; Hewlett
Packard® XP storage systems; IBM® TotalStorage
Enterprise Storage Server and DS4000 storage systems;
StorageTek® FlexLine storage systems; and Engenio®
storage systems.
V-Series systems offer customers new levels of performance,
scalability, and a robust portfolio of proven data management
software for sharing, consolidating, protecting, and recovering
mission critical data across a variety of heterogeneous storage
systems. V-Series systems seamlessly integrate into
mission-critical SAN environments and provide a simple, elegant
data management solution while decreasing management complexity,
improving asset utilization, and streamlining operations to
increase business agility and reduce total cost of ownership.
Current V-Series systems include:
•
NetApp GF980c/ GF980 system. The GF980c/ GF980 provides
the highest performance and greatest scalability to the most
demanding enterprise environments. Scales to 96TB of managed
capacity.
•
NetApp GF960c/ GF960 system. The GF960c/960 provides an
industry-leading performance to demanding IT environments with
high-bandwidth applications and thousands of independent users.
Scales to 48TB of managed capacity.
•
NetApp V3050c/ V3050 system. The V3050c/3050 provides
flexibility and an industry-leading performance across a broad
range of enterprise applications. Scales to 80TB of managed
capacity.
NetApp V3020c/ V3020 system. The V3020c/ V3020 provides
flexibility and an industry-leading price/performance across a
broad range of enterprise applications. Scales to 48TB of
managed capacity.
•
NetApp GF270c system. The GF270c provides an entry-level,
integrated, highly available solution for small to midsize
workloads. Scales to 16TB of managed capacity.
NearStore®Systems
NetApp NearStore products are designed to improve data backup
and recovery architectures, store reference and regulated data,
and archive infrequently accessed files on more economical ATA
drives. NearStore systems backup and restore data with speed,
consistency, ease of use, and scalability, particularly compared
to tape-based backup/restore solutions. The product complements
and improves upon existing tape backup processes by inserting
economical ATA-based secondary disk storage between primary
application storage and archive tape libraries, resulting in an
efficient two-stage backup configuration. Almost any type of
primary storage can be backed up to NearStore systems, including
UNIX, Linux, and Windows servers with DAS, SAN, or NAS storage
from other storage vendors, desktop and notebook computers, and
NetApp storage systems. NearStore can also be used as a
replication target within a data center or for replicating data
from remotely distributed branch offices to a central location
in a fully heterogeneous, platform-independent architecture.
NearStore systems are ideal for consolidating nearline data
resources, including reference and archive data, into a single
storage platform. This platform can be located and managed
centrally, thus reducing costs associated with data center
operations.
NearStore, in conjunction with NetApp
SnapLocktm
software, satisfies the regulatory data retention requirements
of Rule 17a-4 under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), of HIPAA, as well as
several governmental defense requirements, and has become part
of an open access, compliant data retention solution targeted at
regulated data industries, such as financial services,
healthcare, pharmaceuticals, and government.
Our current NearStore product, the R200, is available in system
capacities scaling from 8TB to 96TB and provides full
fabric-attached storage connectivity via FCP, iSCSI, and NAS
protocols.
NetCache®Appliances
The NetCache product line is a scalable suite of secure content
and application delivery appliances designed to solve complex
problems faced by enterprises and service providers. These
appliances are deployed across the entire network, from the
primary data center to remote points of presence
(“POPs”) and local offices worldwide. They improve
Internet gateway security and deliver Web content and
applications throughout a customer’s network. NetCache
appliances address three major areas of customer challenge:
•
Internet security. NetCache appliances form the
foundation of the NetApp Internet access and security
(“IAS”) solution, which enables many Internet security
services, including proxy, caching, access control, content
filtering, Web antivirus, SSL scanning, IM and P2P blocking,
antispam, and reporting.
•
Web content and application acceleration. NetCache
appliances reduce end-user access delays, bandwidth usage, and
server load to improve delivery of Web content and Web-based
applications such as ERP and CRM systems.
•
Video delivery. NetCache appliances improve delivery
quality of online training, executive video broadcasts, and
large-scale video-on-demand services. Use of NetCache appliances
enables customers to deploy audio and video solutions when
existing network bandwidth is unable to support streaming media.
In May 2005, NetApp introduced two new NetCache models, the
C2300 and the C3300. These new midrange NetCache products
optimize price/performance by supporting a wide range of
capacity and reliability features:
•
NetCache C2300. The NetCache C2300 offers an
industry-leading price/performance for the data center.
Reliability and availability of mission-critical data are
ensured with features such as RAID4, redundant hardware, and
hot-swap drives.
•
NetCache C3300. The NetCache C3300 solutions offer all
the reliability and availability of the NetCache C2300 series,
plus greater performance and storage capacity. Large content
libraries — up to 1TB of storage — can be
reliably stored and protected with RAID4 support.
Other current NetCache hardware models include:
•
NetCache C1200. Designed for remote offices and service
providers’ POPs, the C1200 combines space-sensitive design,
reliability, and modular configurations at an attractive price
point. The C1200 does not sacrifice reliability for low
cost — it includes features such as RAID4 and SCSI
disk drives.
•
NetCache C6200. The NetCache C6200 high-end model
delivers the ultimate performance and reliability for the data
center and other high-bandwidth locations. Large content
libraries — up to 2TB of storage — can be
reliably stored and protected with RAID4 support.
Software Products
Enterprise Storage System Software
Network Appliance created an integrated storage appliance that
uses highly specialized software for simplifying storage
administration and increasing data availability, coupled with
industry-standard hardware. Data ONTAP includes our patented
WAFL® (Write Anywhere File Layout) file management system
with
FlexVoltm
technology, as well as the storage resiliency offered by
RAID-DPtm,
a unique double-parity software RAID architecture. Data ONTAP
supports protocols for NAS, SAN, and IP SAN (iSCSI)
environments, as well as our complete suite of data management,
data replication, and data protection software products. The
Data ONTAP microkernel offers a unique set of features to ensure
mission-critical availability, while lowering the total cost of
ownership and the complexity typically associated with the
management of large-scale enterprise storage infrastructures.
Snapshottm
technology, included as part of the base system, enables online
backups and provides rapid access to previous versions of data,
without requiring complete separate copies. Snapshot technology
also eliminates the need to recover data from a tape archive in
the event of a disaster or user error.
Data ONTAP supports all of the major industry-standard protocols
available on our products. These include:
•
Common Internet File System (“CIFS”). CIFS is
an industry-standard network file-sharing protocol used in
Microsoft® Windows environments.
•
Network File System (“NFS”). NFS is an
industry-standard network file-sharing protocol used in Linux
and UNIX environments.
•
iSCSI protocol. iSCSI, a protocol defined by the Internet
Engineering Task Force, offers customers the consolidation,
scalability, and management advantages of a SAN, without
requiring the use of unfamiliar, complex, and expensive Fibre
Channel network infrastructure. The iSCSI protocol is a block I/
O protocol implemented on industry standard TCP/ IP and
Ethernet-based networks.
•
Fibre Channel Protocol (“FCP”). FCP is the
standard protocol used for performing block I/ O across Fibre
Channel SAN networks. FCP is a heterogeneous protocol supported
by Fibre Channel SAN hardware that is used with standard Linux,
UNIX, and Windows operating systems.
•
HyperText Transfer Protocol (“HTTP”). HTTP is
the de facto standard for serving documents to Internet
browsers. Having the HTTP server embedded inside the Data ONTAP
operating system
offers a significant performance advantage over traditional Web
servers. In addition, the same set of files can be served by
NetApp storage systems via NFS, CIFS, or HTTP, eliminating the
need to replicate data and servers to serve different users.
The comprehensive NetApp suite of software products provide
specialized functionality to solve the data availability,
management, and protection challenges faced by today’s
global enterprise. Our software products include:
•
ApplianceWatchtm.
ApplianceWatch software allows IT professionals to centrally
manage and administer NetApp appliances using standard
management frameworks, including products from HP OpenView
and Tivoli. By supporting leading systems management frameworks,
ApplianceWatch helps IT organizations lower their training costs.
•
Clustered Failover. Clustered failover software for our
storage systems ensures high data availability for
business-critical environments by eliminating any single point
of failure through a fully redundant, simultaneously accessed
network storage cluster configuration.
•
DataFabric®Manager. DataFabric Manager
software offers the ability to manage multiple
NetApp storage appliances, including NearStore systems and
NetCache appliances, from a single administrative console,
reducing administrative complexity and total cost of ownership.
•
FilerView®. FilerView is a Web-based administration
tool that allows IT administrators to fully manage NetApp
storage systems from remote locations on the network using a Web
browser.
•
FlexCache. FlexCache enables customers to cache Data
ONTAP volumes in multiple NetApp storage systems and use
NFS to access the cached files. This capability can be used for
improving performance in compute farm environments and/or
enhancing data access time for remote offices.
•
FlexClonetm.
FlexClone software provides virtual copies of data volumes and
data sets without requiring additional storage space to store
the copies at the time of creation. FlexClone software
facilitates easy, cost-effective testing and simulation of IT
procedures without incurring risk to production environments.
•
FlexVol. FlexVol, which is included in our base operating
system, enables more efficient storage architectures with
flexible volumes that don’t require prepartitioning of
physical storage space. These capabilities enable customers to
tailor data management to the requirements of each data set,
respond quickly to changing needs of the enterprise, enhance
overall system performance, and reduce provisioning and
management overhead.
•
LockVaulttm.
LockVault solves the regulatory compliance problem associated
with unstructured data in a comprehensive and manageable
fashion. LockVault unifies compliance with backup and disaster
recovery solutions, delivering a comprehensive, all-in-one
integrated compliance and data protection solution for
unstructured data. LockVault integrates our NetApp SnapLock and
SnapVault® technologies to create the only solution
specifically designed to address regulatory compliance
requirements for unstructured data.
•
MetroCluster. MetroCluster is a highly available business
continuance solution ideal for campus and metropolitan area
networks. MetroCluster enables customers to quickly and easily
resume mission-critical operation at a remote site with no data
loss and minimal downtime. The built-in simplicity of
MetroCluster allows customers to quickly fail over to a remote
site and continue operations while turning their attention back
to critical business decisions.
•
MultiStore®. MultiStore provides a logical
partitioning of an appliance’s network and storage
resources, enabling multidomain storage consolidation on a
single system. MultiStore software allows for simplified tiered
storage management and enables virtualized storage servers that
can be seamlessly migrated between different appliances.
•
SAN Manager. NetApp SAN Manager is a network management
application that provides a single point of control for all the
devices on a SAN. SAN Manager can help customers discover,
configure,
and monitor both NetApp devices and devices from other vendors
and help plan for and respond to the evolving needs of the
enterprise.
•
SecureAdmintm.
SecureAdmin encrypts administrative sessions between NetApp
storage systems and the administration console, delivering
maximum security for online administration in a nonsecure
environment.
•
Single Mailbox Recovery for Exchange. The combination of
NetApp SnapManager® for Exchange and Single Mailbox
Recovery functionality enables fast, accurate, cost-effective
backup and recovery of Microsoft Exchange data. NetApp software
enables customers to create near-instantaneous online backups of
Exchange databases, verify that the backups are consistent, and
rapidly recover Exchange at any level of granularity —
storage group, database, folder, single mailbox, or single
message.
•
SnapDrivetm.
The SnapDrive management software package enables customers to
take full advantage of the simple data management capabilities
of a NetApp storage appliance in block-based storage
environments. SnapDrive software offers a rich set of
capabilities to virtualize and enhance storage management for
Microsoft Windows and UNIX environments. It is tightly
integrated with the native file system and provides a layer of
abstraction between application data and physical storage
associated with that data.
•
SnapLock. SnapLock is designed to meet the requirements
of data permanence as stipulated in various government
regulations — most notably Rule 17a-4 under the
Exchange Act for financial services broker-dealers. SnapLock
provides WORM (write once, read many) attributes such as
nonerasability and nonrewritability that prevent data, once it
is committed to storage, from being subsequently altered or
deleted.
•
SnapManager. SnapManager software for Microsoft Exchange
and Microsoft SQL Server allows customers to perform online
backup and rapid recovery of their business-critical application
data. SnapManager enables application-aware disk-based data
recovery, restoring critical application services as quickly as
possible in the event of a disaster.
•
SnapMirror®. SnapMirror remote mirroring software
enables automated data replication between NetApp storage
systems located at different sites. SnapMirror supports fully
synchronous, near-synchronous, and asynchronous modes of
operation and enables customers to quickly recover from site
disasters, easily replicate critical data, and cost-effectively
deploy centralized backup architectures.
•
SnapMover®. SnapMover migrates data among NetApp
storage systems with no impact on data availability and no
disruption to users.
•
SnapRestore®. SnapRestore allows rapid restoration
of a volume from an earlier point in time, typically in only a
few seconds. SnapRestore is based on the Data ONTAP Snapshot
technology and enables customers to greatly minimize recovery
time in the event of data corruption or loss.
•
Snapshot. Snapshot technology is included as part of the
base system, enabling online backups and providing rapid access
to previous versions of data without requiring complete separate
copies. Snapshot copies also eliminate the need to recover data
from a tape archive in the event of a disaster or user error.
•
SnapValidatortm.
SnapValidator software provides the highest possible level of
protection for Oracle® data. It detects and prevents
potential corruptions of Oracle data before they happen. NetApp
SnapValidator is tightly integrated with the Oracle Database
architecture and complies with the Oracle HARD initiative.
•
SnapVault and Open Systems SnapVault (“OSSV”).
SnapVault/ OSSV provides extended and centralized disk-based
backup for heterogeneous storage environments by frequently
backing up data stored on NetApp or any other storage platform
to Network Appliance enterprise storage or NearStore appliances.
Storing backup data in multiple Snapshot copies on the SnapVault
secondary storage system lets enterprises keep weeks, months, or
years of backups online for faster restoration. SnapVault
also gives users the power to choose which data gets backed up,
the frequency of backup, and how long the backup copies are
retained.
•
SyncMirror®. SyncMirror is a local synchronous
mirroring facility that can be used to provide the highest
possible levels of data availability for mission-critical
applications in a local data center environment. Used in
conjunction with other NetApp advanced data protection
technologies such as RAID-DP, SyncMirror allows NetApp storage
systems to continue delivering data after as many as five
simultaneous physical disk component failures.
•
VFMtm(Virtual File Manager). VFM is a file virtualization
solution for managing distributed storage in Windows and
multiprotocol environments. VFM provides a global namespace that
dramatically simplifies the administration of large file server
environments and enables nondisruptive data migration between
NetApp storage appliances, as well as within heterogeneous
storage environments.
These software features and products are supported on our
following product lines:
Primary
Nearline/
Product Name
Storage
NearStore
V-Series
ApplianceWatch
•
•
•
Clustered Failover
•
•
DataFabric Manager
•
•
•
FilerView
•
•
•
FlexCache
•
•
•
FlexClone
•
•
•
FlexVol
•
•
•
LockVault
•
•
MetroCluster
•
•
MultiStore
•
•
•
SAN Manager
•
•
•
SecureAdmin
•
•
•
Single Mailbox Recovery for Exchange
•
•
•
SnapDrive
•
•
•
SnapLock
•
•
•
*
SnapManager
•
•
•
SnapMirror
•
•
•
SnapMover
•
•
•
SnapRestore
•
•
•
Snapshot
•
•
•
SnapValidator
•
•
•
SnapVault
•
•
•
SyncMirror
•
•
Virtual File Manager
•
•
•
*
SnapLock Enterprise is supported.
NetCache Appliance Software
NetCache Web delivery and security appliances support many
applications, including proxy, Web caching, content filtering,
virus scanning, Web application acceleration, streaming media
delivery, content distribution, and usage analysis applications.
NetApp technology provides the unique ability to deploy all of
these solutions on a single appliance. Our technology advantages
provide greater multifunctional capabilities from a single
appliance, so networks can be scaled more quickly, with greater
manageability.
The NetCache product line includes support for proxy and caching
of many standard Web protocols, including:
•
Domain Name Service (“DNS”). DNS caching
improves lookups of Web site addresses to improve overall Web
access and reduce IP traffic.
•
File Transfer Protocol (“FTP”). FTP is an
industry standard used to exchange files between computers.
•
HyperText Transfer Protocol (“HTTP”). HTTP is
the de facto standard for serving documents to Internet browsers.
NetCache protocols available for an additional license fee
include:
•
Network News Transfer Protocol (“NNTP”). NNTP
is the de facto standard for online discussions on the Internet.
NNTP caching enables Internet service providers
(“ISPs”) to provide a high-quality NetNews service at
a fraction of the cost of traditional NetNews servers.
•
Secure Sockets Layer (“SSL”): SSL is used to
securely transfer encrypted data on the Web. With this feature
enabled, NetCache can terminate a SSL connection in order to
cache and accelerate HTTPS (Hypertext Transfer Protocol over
Secure Sockets Layer) traffic between clients and Web servers,
providing end users with better quality of service.
Network Appliance also offers a suite of software products that
provide specialized functionality to solve a variety of business
problems. Additional add-on software features and products for
the NetCache family include:
Content delivery:
•
Microsoft Windows
Mediatmstreaming. Fully supports Windows Media features such as
live stream splitting; delivery of video-on-demand; and digital
rights management, authentication, authorization, and logging.
•
QuickTimetmstreaming. QuickTime software supports Apple®
QuickTime streaming servers and the Apple QuickTime Player to
optimize the delivery of QuickTime content.
•
RealNetworks®streaming. RealNetworks
software supports
RealAudiotm
and
RealVideotm
and replicates
SureStreamtm
functionality between
RealSystemtm
servers and RealPlayer®.
Internet access and security:
•
Internet content filtering. On-box Internet content
filtering provided via Secure Computing SmartFilter®,
Websense® Enterprise and Webwasher®
DynaBLocatortm.
Off-box content filtering provided via Websense Enterprise and
Webwasher® CSM Suite.
•
Virus scanning. The NetCache family supports ICAP-enabled
virus scanning by leading antivirus engines. Webwasher CSM Suite
is available through NetApp, and others are available through
our partners, including Trend
Microtm
InterScantm
Web Security Suite and Symantec
AntiVirustm
Scan Engine.
•
Webwasher
ContentReportertm.
Webwasher ContentReporter provides a library of rich,
customizable reports based on built-in cache, streaming media,
e-mail activity, Internet access, and content filtering queries
for monitoring, managing, and securing Internet content and
network activity.
Systems setup and administration:
•
ApplianceWatch. ApplianceWatch software allows IT
professionals to centrally manage and administer NetApp
appliances using standard management frameworks, including
products from HP OpenView and Tivoli. By supporting leading
systems management frameworks, ApplianceWatch helps IT
organizations lower their training costs.
DataFabric Manager (“DFM”). DataFabric Manager
offers the ability to manage multiple NetApp storage
systems, NearStore systems, and NetCache appliances from a
single administrative console, reducing administrative
complexity and total cost of ownership.
•
Global Request Manager (“GRM”). GRM provides a
mechanism to redirect Web requests to the NetCache appliance
with the greatest availability and closest proximity to the end
user, which simplifies the deployment of a content delivery
network and lowers the total cost of ownership.
•
SecureAdmin. SecureAdmin encrypts administrative sessions
between NetCache and the administration console, delivering
maximum security for online administration in a nonsecure
environment.
NetApp customers may purchase our Software Subscription Plan
(SSP), an upgrade that provides online access to all NetApp
software and firmware updates.
Sales and Marketing
Network Appliance markets and distributes products globally in
over 120 countries. NetApp employs a multichannel distribution
strategy, selling products and services to end users through a
direct sales force, value-added resellers, system integrators,
original equipment manufacturers (“OEMs”), and
distributors. In North America, Europe and Australia, we employ
a mix of resellers and direct sales channels to sell to end
users. In Asia, Africa, and South America, our products are
primarily sold through resellers, which are supported by channel
sales representatives and technical support personnel. No single
customer accounted for 10% or more of net sales in fiscal 2005,
2004, or 2003.
In the fourth quarter of fiscal year 2005, NetApp and IBM
announced a strategic storage relationship to drive information
on demand solutions and to expand IBM’s portfolio of
storage solutions, which is one of the largest and most advanced
sets of storage and information management products in the
industry. As part of the relationship, IBM and NetApp entered
into an OEM agreement that allows IBM to sell IBM-branded
solutions based on Network Appliance unified and open
network-attached storage and iSCSI/ IP SAN solutions,
including NearStore and the NetApp V-Series systems, as well as
associated software offerings.
NetApp Global Services
Customers demand high availability and reliability from their
storage infrastructure to ensure successful ongoing operation of
their business. Each of our customers faces a different set of
challenges and requires varying degrees of professional services
and support. With storage environments becoming more complex,
customers are investing significantly more management time and
are seeking ways to simplify and reduce the complexity of their
storage solutions.
NetApp provides a comprehensive, end-to-end suite of service and
support solutions. Our personnel enable us to provide
continually increasing levels of customer support at all stages
of engagement. All of our offerings are designed to help our
customers meet their goals of simplifying and reducing the
complexity of their storage solutions and lowering the overall
total cost of ownership in managing their storage
infrastructures.
Our Global Support Center (“GSC”) operations ensure
that all of our enterprise customers’ support needs are met
24x7, worldwide. All of our Global Support Centers have received
and maintain the Support Center Practices (“SCP”)
certification, which are an internationally recognized standard
created by the Service & Support Professionals
Association (“SSPA”) and a consortium of IT companies
to create a recognized quality certification for support centers.
The NGS organization offers NetApp customers the following
support, consulting, and training services:
SupportEdge. SupportEdge offers unprecedented
flexibility, allowing enterprise customers the ability to create
an integrated support strategy that encompasses everything from
corporate data centers to remote offices. Outstanding support
services are essential to the success of enterprise IT
operations. Potential problems must be anticipated and prevented
to ensure the highest possible data availability and operational
efficiency. Network Appliance SupportEdge programs feature
sophisticated monitoring and
diagnostic tools plus regular system availability audits of
installed equipment to help anticipate problems before they
affect availability. NetApp offers three distinct SupportEdge
solutions: SupportEdge Standard, SupportEdge Premium, and
SupportEdge Choice, which can be tailored to customer’s
unique requirements:
•
SupportEdge Standard. SupportEdge Standard offers
flexible remote support services designed for less critical
operations within an enterprise or for customers with the
expertise and staffing to perform their own on-site maintenance.
•
SupportEdge Premium. SupportEdge Premium provides
comprehensive support for data centers or other
business-critical operations where on-site support is essential
to ongoing business operations and success. SupportEdge Premium
is designed specifically to meet the needs of business-critical
enterprise and data center operations, offering direct, on-site
services and advanced remote monitoring, diagnosis, and repair
to the capabilities offered with SupportEdge Standard.
Authorized personnel work on-site as needed, becoming an
integral part of an IT team and ensuring the success of storage
operations while reducing the burden on IT staff.
•
SupportEdge Secure for Government. SupportEdge Secure for
Government extends the offerings of SupportEdge Premium by
providing confidential and secure assistance in the support and
management of NetApp storage solutions. SupportEdge Secure is
designed to provide comprehensive yet flexible service, offering
our Government customers self support, enhanced remote support,
or on-site support, based on their required level of security.
If a Government customer requires additional assistance, NetApp
has designed a first-in-class set of tools that allow filtering
of restricted or classified information from files prior to
providing them to NetApp for troubleshooting. Should a
customer’s policies prevent them from providing filtered
information, we have a dedicated team of NetApp professionals
with the appropriate level of clearance who will work on-site at
the customer’s facility.
•
SupportEdge Choice. The SupportEdge Choice service
program provides customers with a range of optional and/or
customized support solutions. By choosing from a list of
existing NetApp support services, including hardware and
software installation, software subscription plan, parts
delivery, system availability management (“SAM”), and
Technical Global Advisor, customers are able to choose exactly
the support solution that meets their unique needs.
ConsultingEdge. NetApp ConsultingEdge services are
designed to meet the complex storage needs our customers
experience as a result of rapid growth or change in their
organizational, end-customer, and technological requirements.
Business continuity, data security, and improving the efficiency
of access and management for ever-expanding volumes of
business-critical and mission-critical data are requirements.
New solutions must integrate seamlessly with existing
applications, servers, and storage to maximize asset utilization
and preserve existing investments. Benefits from using
ConsultingEdge services include:
•
Risk avoidance. Ensuring a seamless transition to new
technologies through world-class domain expertise coupled with
active project management and training.
•
Cost reduction. Extracting maximum value from existing IT
investments through better resource allocation and improved
day-to-day storage management without sacrificing readiness for
the future.
•
Improved performance. Enhanced storage service quality,
resource utilization, and ease of administration.
•
Accelerated time-to-deployment. Speeding up production
implementation and deriving benefit from IT investments more
quickly and without adverse impact on an organizations’
productivity.
•
Ensuring scalability and readiness for the future.
Enabling future growth by implementing best-practice policies
and processes, which can also improve performance while lowering
TCO.
NetApp University. The computing environments in which
NetApp products operate are highly varied and can be very
complex. NetApp offers training designed to prepare customers
for potential challenges they
may face in their data-dependent enterprise, as well as creating
self-reliance by sharing best practices and improving skills and
competencies.
NetApp University delivers a comprehensive set of training
courses and certification programs. Our curriculum is designed
to be modular and flexible so customers can choose the courses
directly relevant to their own unique set of requirements.
Courses are interactive, skills-based, hands-on events that can
be accessed in a variety of formats, including self-paced Web-
and CD-based training, virtual classroom, live classes taught at
regional training centers, and customized on-site training
courses. All courses are practical lessons and engage
participants in installation, configuration, application design,
and troubleshooting.
Manufacturing
Manufacturing operations, with insourced and outsourced
locations in Sunnyvale, California; San Jose, California;
and Livingston, Scotland, include materials procurement,
commodity management, component engineering, test engineering,
manufacturing engineering, product assembly, product assurance,
quality control, final test, and global logistics. We rely on a
limited number of suppliers for materials, as well as several
key subcontractors for the production of certain subassemblies
and finished systems. We multisource wherever possible to
mitigate supply risk. Our strategy has been to develop close
relationships with our suppliers, exchanging critical
information and implementing joint quality programs. We also use
contract manufacturers for the production of major subassemblies
to improve our manufacturing redundancy.
See “Risk Factors — We rely on a limited number
of suppliers” and “Risk Factors — The loss
of our contract manufacturers.” This manufacturing strategy
minimizes capital investment and overhead expenditures and
creates flexibility for rapid expansion. We were awarded the ISO
9001 certification on May 29, 1997, ISO 9001:2000
certification on December 3, 2003, and continue to be ISO
9001:2000 certified. We were awarded ISO 14001 certification on
December 8, 2004.
Research and Development
During fiscal year 2005, Network Appliance continued to
add functionality to our unified storage platform, which
supports SAN, iSCSI, and NAS simultaneously. We introduced newer
versions of existing software products that continue to improve
data management capabilities; provide new solutions in the areas
of data protection, backup, and recovery; and enable new
business continuance functionality. We also announced new
compliance solutions such as LockVault that address the
requirements established by SEC Rule 17a-4
regulations. We have deepened our engineering partnerships and
collaboration with VERITAS, Brocade, McData, Microsoft, Oracle,
Symantec, Redhat and others. In the fourth quarter of fiscal
2005, we announced a definitive agreement to acquire Alacritus,
a virtual tape library solution to complement and extend our
ability to provide a robust data protection solution to our
customers, and will help accelerate their transition to
disk-based backup. Network Appliance is also well on its way to
improve our data management solutions through the integration of
Spinnaker technologies into our Data ONTAP operating system. The
benefits of this acquisition will become more visible to
customers in the coming year.
See “Risk Factors — If we are unable to develop
and introduce new products and respond to technological change,
or if our new products do not achieve market acceptance, our
operating results could be materially adversely affected.”
Segment and Geographic Information
See Note 8 to the Consolidated Financials Statements
accompanying this Annual Report on Form 10-K.
Customer Base
Our diversified customer base spans a number of large segments
and vertical markets. Examples include:
•
Energy. Customers in the energy market have traditionally
deployed our products to support their upstream exploration and
production, and downstream refining and distribution activities,
where the simplicity of the appliance architecture and the
ability to support massive amounts of data are critical.
Our solutions help enable energy companies to meet their
workflow optimization objectives, improve quality, reduce cycle
times, and lower costs.
•
Federal government. The United States (“U.S.”)
federal government is one of the largest IT consumers in the
world, and Network Appliance Federal Systems, Inc., provides
solutions for many data-intensive activities, including
intelligence gathering, analysis, and civilian and military
operations.
•
Financial services. New data-processing methodologies,
shorter time frames for settlement transactions, and new demands
for better knowledge management have required financial services
firms to improve their data storage infrastructures. Network
Appliance solutions for enterprise storage enable these
financial institutions to effectively manage large amounts of
data in a high-speed distributed infrastructure, enabling
customers to leverage their existing technology investments and
derive maximum value from their time-sensitive information.
•
High technology. Global technology enterprises, including
semiconductor, systems, and software companies, are keenly
focused on reducing infrastructure cost and improving
time-to-market. Network Appliance solutions enable
high-technology firms to achieve these goals by reducing total
cost of ownership and providing highly reliable systems and
rapid access to corporate information assets.
•
Internet. Internet-focused businesses place considerable
and often unpredictable demands on transaction-intensive,
database-driven environments such as e-mail, World Wide Web
(“WWW”), and electronic commerce
(“e-commerce”). In a marketplace where retaining
customer loyalty is paramount, Internet-focused businesses must
have high performance and readily available data to ensure that
their customers do not seek alternative providers. Scalable
distributed architectures based on Network Appliance products
improve data availability, scalability, and performance, while
reducing the total cost of ownership.
•
Life sciences. Pharmaceutical, bioresearch, genomic
research, and care providers are focused on developing vital new
drugs, improving quality of patient care, and increasing their
returns on investment. Network Appliance solutions enable fast
access, integration, and sharing of massive amounts of
exponentially growing scientific and medical imaging data;
reduced time-to-market; and improvements in operational
efficiency.
•
Major manufacturing. Global manufacturing companies face
intense competitive pressure to develop attractive new products,
improve time-to-market, and optimize profitability. Network
Appliance solutions enable these companies to simplify the
management overhead associated with storing and protecting large
amounts of ERP, engineering, and manufacturing product data,
while ensuring that information can be easily and efficiently
distributed to manufacturing and distribution sites around the
world.
•
Telecommunications. Service providers in the
telecommunications industry are faced with deregulation,
globalization, increased competition, and often a substantial
debt burden. As a result, they must control infrastructure costs
while maintaining or improving services to existing customers
and at the same time identifying and developing compelling new
revenue streams in order to grow their business. Network
Appliance products and solutions allow these providers to
quickly and cost-effectively build the network storage
infrastructure and content delivery networks required by the
global telecommunications industry.
Seasonality
Although operating results have not been materially and
adversely affected by seasonality in the past, because of the
significant seasonal effects experienced within the industry,
particularly in Europe, our future operating results could be
materially adversely affected by seasonality.
See “Risk Factors — Factors beyond our control
could cause our quarterly results to fluctuate” and
“Risk Factors — Risks inherent in our
international operations could have a material adverse effect on
our operating results” accompanying this Annual Report on
Form 10-K.
Network Appliance manufactures products based on a combination
of specific order requirements and forecasts of our
customers’ demand. Orders are generally placed by customers
on an as-needed basis. Products are typically shipped within one
to four weeks following receipt of an order. In certain
circumstances, customers may cancel or reschedule orders without
penalty. For these reasons, “orders” may not
constitute a firm backlog and may not be a meaningful indicator
of revenues.
Competition
The storage and content delivery markets are intensely
competitive and are characterized by rapidly changing technology.
In the storage market, our primary and nearline storage system
products and our associated storage software portfolio competes
primarily with storage system products and data management
software from EMC Corporation, Hitachi Data Systems,
Hewlett-Packard Company, IBM Corporation, and Sun Microsystems,
Inc. We also see Dell, Inc. as an emerging competitor in the
storage marketplace, primarily due to a business partnership
that has been established between Dell and EMC, allowing Dell to
resell EMC storage hardware and software products. We have also
historically encountered less-frequent competition from
companies including Engenio Information Technologies, Inc.
(formerly the Storage Systems Group of LSI Logic Corp.),
StorageTek Technology Corporation, Dot Hill Systems Corporation,
and Xiotech Corporation. In the nearline storage market, which
includes the disk-to-disk backup and regulated data storage
segments, our NearStore appliances compete primarily against
products from EMC and StorageTek. Our NearStore appliances also
compete indirectly with traditional tape backup solutions in the
broader data backup/recovery space.
In the content delivery market, our NetCache appliances and
content delivery software compete against caching appliance and
content delivery software vendors including BlueCoat Systems
(formerly CacheFlow, Inc.) and Cisco Systems, Inc. Our NetCache
business is also subject to indirect competition from content
delivery service products such as those offered by Akamai
Technologies.
Additionally, a number of new, privately held companies are
currently attempting to enter the storage systems and data
management software markets, the nearline storage market, and
the caching and content delivery markets, some of which may
become significant competitors in the future. We believe that
the principal competitive factors affecting the storage and
content delivery markets include product benefits such as
response time, reliability, data availability, scalability, ease
of use, price, multiprotocol capabilities, and customer service
and support.
See “Risk Factors — An increase in competition
could materially adversely affect our operating results”
and “Risk Factors — If we are unable to develop
and introduce new products and respond to technological change,
or if our new products do not achieve market acceptance.”
Proprietary Rights
We currently rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, contractual
provisions, and patents to protect our proprietary rights. We
seek to protect our software, documentation, and other written
materials under trade secret, copyright, and patent laws, which
afford only limited protection. We have registered our Network
Appliance name and logo, DataFabric, FAServer®, FilerView,
NearStore, NetApp, NetCache, SecureShare®, SnapManager,
SnapMirror, SnapRestore, WAFL, and others as trademarks in the
United States. Other U.S. trademarks and some of the other
U.S. registered trademarks are registered internationally
as well. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into
confidentiality agreements with our employees, resellers, and
customers. We currently have multiple U.S. and international
patent applications pending and multiple U.S. patents
issued.
See “Risk Factors — If we are unable to protect
our intellectual property, we may be subject to increased
competition that could materially adversely affect our operating
results.”
As of April 30, 2005, we had 3,801 employees. Of the total,
1,918 were in sales and marketing, 827 in research and
development, 432 in finance and administration, and 624 in
manufacturing and customer service operations. Our future
performance depends in significant part on our key technical and
senior management personnel, none of whom are bound by an
employment agreement. We have never had a work stoppage and
consider relations with our employees to be good.
Executive Officers
Our executive officers and their ages as of May 27, 2005,
are as follows:
Executive Vice President, Finance and Chief Financial Officer
David Hitz
42
Founder and Executive Vice President
James K. Lau
46
Executive Vice President and Chief Strategy Officer
Daniel J. Warmenhoven joined the Company in October 1994
as president and chief executive officer and has been a member
of the Board of Directors since October 1994. In May 2000, he
resigned the role of president and currently serves as chief
executive officer and is a director of Network Appliance, Inc.
Prior to joining the Company, Mr. Warmenhoven served in
various capacities, including president, chief executive
officer, and chairman of the Board of Directors of Network
Equipment Technologies, Inc., a telecommunications company, from
November 1989 to January 1994. He holds a BS degree in
electrical engineering from Princeton University.
Thomas F. Mendoza joined NetApp in 1994 and has served as
president since 2000. Mr. Mendoza has more than
31 years as a high-technology executive. He holds a BA
degree in economics from Notre Dame and is an alumnus of
Stanford University’s Executive Business Program. In
September 2000, the University of Notre Dame renamed their
business school the Mendoza College of Business based upon an
endowment from Tom and his wife, Kathy.
Steven J. Gomojoined Network Appliance in August 2002 as
senior vice president of finance and chief financial officer. He
was appointed executive vice president of finance and chief
financial officer in October 2004. Prior to joining the Company,
he served as chief financial officer of Silicon Graphics, Inc.,
from February 1998 to August 2000, and most recently, chief
financial officer for Gemplus International S.A., headquartered
in Luxembourg from November 2000 to April 2002. Prior to
February 1998, he worked at Hewlett-Packard Company for
24 years in various positions, including financial
management, corporate finance, general management, and
manufacturing. Mr. Gomo holds a master’s degree in
business administration from Santa Clara University and a
BS degree in business administration from Oregon State
University.
David Hitz co-founded NetApp in 1992. As founder and
executive vice president, he is responsible for vision,
strategy, and direction for NetApp. Mr. Hitz served as
executive vice president, engineering from May 2000 to November
2004. Between 1992 and 2000, Mr. Hitz held executive
positions at NetApp, including vice president and senior vice
president, engineering. Prior to joining the Company in 1992,
Mr. Hitz was a senior engineer at Auspex Systems, Inc. and
held various engineering positions at MIPS Computer.
Mr. Hitz holds a BS degree in computer science and
electrical engineering from Princeton University.
James K. Lau, co-founder of Network Appliance, was
appointed executive vice president and chief strategy officer in
May 2000. Mr. Lau served as our vice president and chief
strategy officer from May 1997 until May 2000, and as our vice
president and chief technology officer from May 1996 to May
1997. Mr. Lau also served as our vice president engineering
from 1992 to May 1996. Prior to co-founding NetApp, he served as
director of software development at Auspex Systems, Inc. Prior
to Auspex, he served as group manager of
PC products at Bridge Communications, now known as 3Com.
Mr. Lau holds a BS degree in computer science and
mathematics from the University of California, Berkeley, and a
master’s degree in computer engineering from Stanford
University.
Additional Information
Our Internet address is www.netapp.com. We make available
through our Internet Web site our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission (“SEC”).
The SEC maintains an Internet site (www.sec.gov) that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The public also may read and copy these filings at the
SEC’s Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C., 20549. Information about this Public
Reference Room is available by calling (800) SEC 0330.
Risk Factors
The following risk factors and other information included in
this Annual Report on Form 10-K should be carefully
considered. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties not
presently known to us or that we presently deem less significant
may also impair our business operations. Please see page 1
of this Annual Report on Form 10-K for additional
discussion of these forward-looking statements. If any of the
following risks actually occur, our business, operating results,
and financial condition could be materially adversely
affected.
Factors beyond our control could cause our quarterly
results to fluctuate.
We believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be
relied upon as indicators of future performance. Many of the
factors that could cause our quarterly operating results to
fluctuate significantly in the future are beyond our control and
include, but are not limited to, the following:
•
Changes in general economic conditions and specific economic
conditions in the computer, storage, and networking industries
•
General decrease in global corporate spending on information
technology leading to a decline in demand for our products
•
A shift in federal government spending pattern
•
The effects of terrorist activity and international conflicts,
which could lead to business interruptions and difficulty in
forecasting
•
The level of competition in our target product markets
•
The size, timing, and 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, introductions, and transitions of 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
•
Changes in pricing by us in response to competitive pricing
actions
Our ability to develop, introduce, and market new products and
enhancements in a timely manner
•
Supply constraints
•
Technological changes in our target product markets
•
The levels of expenditure on research and development and sales
and marketing programs
•
Our ability to achieve targeted cost reductions
•
Excess facilities
•
Future accounting pronouncements and changes in accounting
policies
•
Seasonality
In addition, sales for any future quarter may vary and
accordingly be inconsistent with our plans. We manufacture
products based on a combination of specific order requirements
and forecasts of our customer demands. Products are typically
shipped within one to four weeks following receipt of an order.
In certain circumstances, customers may cancel or reschedule
orders without penalty. Product sales are also difficult to
forecast because the network storage market is rapidly evolving
and our sales cycle varies substantially from customer to
customer.
The majority of revenue in any given quarter is derived from
orders booked in the same quarter. Bookings typically follow
intra-quarter seasonality patterns weighted towards the back-end
of the quarter. If bookings in the latter part of a quarter are
not achieved, there is a potential impact to revenue.
Due to all of the foregoing factors, it is possible that in one
or more future quarters our results may fall below the
expectations of public market analysts and investors. In such
event, the trading price of our common stock would likely
decrease.
An increase in competition could materially adversely
affect our operating results.
The storage and content delivery markets are intensely
competitive and are characterized by rapidly changing technology.
In the storage market, our primary and nearline storage system
products and our associated storage software portfolio competes
primarily with storage system products and data management
software from EMC Corporation, Hitachi Data Systems,
Hewlett-Packard Company, IBM Corporation, and Sun Microsystems,
Inc. We also see Dell, Inc. as an emerging competitor in the
storage marketplace, primarily due to a business partnership
that has been established between Dell and EMC, allowing Dell to
resell EMC storage hardware and software products. We have also
historically encountered less-frequent competition from
companies including Engenio Information Technologies, Inc.
(formerly the Storage Systems Group of LSI Logic Corp.),
StorageTek Technology Corporation, Dot Hill Systems Corporation,
and Xiotech Corporation. In the nearline storage market, which
includes the disk-to-disk backup and regulated data storage
segments, our NearStore appliances compete primarily against
products from EMC and StorageTek. Our NearStore appliances also
compete indirectly with traditional tape backup solutions in the
broader data backup/recovery space.
In the content delivery market, our NetCache appliances and
content delivery software compete against caching appliance and
content delivery software vendors including BlueCoat Systems
(formerly CacheFlow, Inc.) and Cisco Systems, Inc. Our NetCache
business is also subject to indirect competition from content
delivery service products such as those offered by Akamai
Technologies.
Additionally, a number of new, privately held companies are
currently attempting to enter the storage systems and data
management software markets, the nearline storage market, and
the caching and content delivery markets, some of which may
become significant competitors in the future.
We believe that the principal competitive factors affecting the
storage and content delivery markets include product benefits
such as response time, reliability, data availability,
scalability, ease of use, price, multiprotocol capabilities, and
global service and support. We must continue to maintain and
enhance this
technological advantage over our competitors. Otherwise, if
those competitors with greater financial, marketing, service,
support, technical, and other resources were able to offer
products that matched or surpassed the technological
capabilities of our products, these competitors would, by virtue
of these greater resources, gain a competitive advantage over us
that could lead to greater sales for these competitors at the
expense of our own market share, which would have a material
adverse affect on our business, financial condition, and results
of operations.
Increased competition could also result in price reductions,
reduced gross margins, and loss of market share, any of which
could materially adversely affect our operating results. Our
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements or devote greater resources to the development,
promotion, sale, and support of their products. In addition,
current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties. Accordingly, it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire
significant market share. We cannot assure you that we will be
able to compete successfully against current or future
competitors. Competitive pressures we face could materially
adversely affect our operating results.
We rely on a limited number of suppliers, and any
disruption or termination of these supply arrangements could
delay shipment of our products and could materially and
adversely affect our operating results.
We rely on a limited number of suppliers of several key
components utilized in the assembly of our products. We purchase
most of our disk drives through a single supplier. We purchase
computer boards and microprocessors from a limited number of
suppliers. Our reliance on a limited number of suppliers
involves several risks, including:
•
A potential inability to obtain an adequate supply of required
components because we do not have long-term supply commitments
•
Supplier capacity constraints
•
Price increases
•
Timely delivery
•
Component quality
Component quality is particularly significant with respect to
our suppliers of disk drives. In order to meet product
performance requirements, we must obtain disk drives of
extremely high quality and capacity. In addition, there are
periodic supply-and-demand issues for disk drives,
microprocessors, and semiconductor memory components, which
could result in component shortages, selective supply
allocations, and increased prices of such components. We cannot
assure you that we will be able to obtain our full requirements
of such components in the future or that prices of such
components will not increase. In addition, problems with respect
to yield and quality of such components and timeliness of
deliveries could occur. Disruption or termination of the supply
of these components could delay shipments of our products and
could materially adversely affect our operating results. Such
delays could also damage relationships with current and
prospective customers.
In addition, we license certain technology and software from
third parties that is incorporated into our products. If we are
unable to obtain or license the technology and software on a
timely basis, we will not be able to deliver products to our
customers in a timely manner.
The loss of any contract manufacturers or the failure to
accurately forecast demand for our products or successfully
manage our relationships with our contract manufacturers could
negatively impact our ability to manufacture and sell our
products.
We currently rely on several contract manufacturers to
manufacture most of our products. Our reliance on our
third-party contract manufacturers reduces our control over the
manufacturing process, exposing us to
risks, including reduced control over quality assurance,
production costs, and product supply. If we should fail to
effectively manage our relationships with our contract
manufacturers, or if our contract manufacturers experience
delays, disruptions, capacity constraints, or quality control
problems in their manufacturing operations, our ability to ship
products to our customers could be impaired and our competitive
position and reputation could be harmed. Qualifying a new
contract manufacturer and commencing volume production are
expensive and time-consuming. If we are required to change
contract manufacturers or assume internal manufacturing
operations, we may lose revenue and damage our customer
relationships. If we inaccurately forecast demand for our
products, we may have excess or inadequate inventory or incur
cancellation charges or penalties, which could adversely impact
our operating results. As of April 30, 2005, we have no
purchase commitment under these agreements.
We intend to regularly introduce new products and product
enhancements, which will require us to rapidly achieve volume
production by coordinating with our contract manufacturers and
suppliers. We may need to increase our material purchases,
contract manufacturing capacity, and internal test and quality
functions to meet anticipated demand. The inability of our
contract manufacturers to provide us with adequate supplies of
high-quality products, or the inability to obtain raw materials,
could cause a delay in our ability to fulfill orders.
Our future financial performance depends on growth in the
network storage and content delivery markets. If these markets
do not continue to grow at the rates at which we forecast
growth, our operating results will be materially and adversely
impacted.
All of our products address the storage and content delivery
markets. Accordingly, our future financial performance will
depend in large part on continued growth in the storage and
content delivery markets and on our ability to adapt to emerging
standards in these markets. We cannot assure you that the
markets for storage and content delivery will continue to grow
or that emerging standards in these markets will not adversely
affect the growth of UNIX, Windows, and the World Wide Web
server markets upon which we depend.
For example, we provide our open access data retention solutions
to customers within the financial services, healthcare,
pharmaceuticals, and government market segments, industries that
are subject to various evolving governmental regulations with
respect to data access, reliability, and permanence (such as
Rule 17(a)(4) of the Securities and Exchange Act of 1934,
as amended) in the United States and in the other countries in
which we operate. If our products do not meet, and continue to
comply with, these evolving governmental regulations in this
regard, customers in these market and geographical segments will
not purchase our products, and, therefore, we will not be able
to expand our product offerings in these market and geographical
segments at the rates for which we have forecast.
In addition, our business also depends on general economic and
business conditions. A reduction in demand for network storage
and content delivery caused by weakening economic conditions and
decreases in corporate spending will result in decreased
revenues and lower revenue growth rates. The network storage and
content delivery market growth declined significantly beginning
in the third quarter of fiscal 2001, causing both our revenues
and operating results to decline. If the network storage and
content delivery markets grow more slowly than anticipated or if
emerging standards other than those adopted by us become
increasingly accepted by these markets, our operating results
could be materially adversely affected.
If we are unable to develop and introduce new products and
respond to technological change, if our new products do not
achieve market acceptance, or if we fail to manage the
transition between our new and old products, our operating
results could be materially and adversely affected.
Our future growth depends upon the successful development and
introduction of new hardware and software products. Due to the
complexity of storage subsystems and Internet caching devices,
and the difficulty in gauging the engineering effort required to
produce new products, such products are subject to significant
technical risks. However, we cannot assure you that any of our
new products will achieve market acceptance. Additional product
introductions in future periods may also impact our sales of
existing products. In addition, our new products must respond to
technological changes and evolving industry standards. If we
are unable, for technological or other reasons, to develop and
introduce new products in a timely manner in response to
changing market conditions or customer requirements, or if such
products do not achieve market acceptance, our operating results
could be materially adversely affected.
In particular, in conjunction with the introduction of our
product offerings in the fabric-attached storage market, we
introduced products with new features and functionality that
address the storage area network market. We face risks relating
to these product introductions, including risks relating to
forecasting of demand for such products, as well as possible
product and software defects and a potentially different sales
and support environment associated with selling these new
systems. If any of the foregoing occurs, our operating results
could be adversely affected.
As new or enhanced products are introduced, we must successfully
manage the transition from older products in order to minimize
disruption in customers’ ordering patterns, avoid excessive
levels of older product inventories, and ensure that enough
supplies of new products can be delivered to meet
customers’ demands.
Our gross margins may vary based on the configuration of
our product and service solutions, and such variation may make
it more difficult to forecast our earnings.
We derive a significant portion of our sales from the resale of
disk drives as components of our storage systems, and the resale
market for hard disk drives is highly competitive and subject to
intense pricing pressures. Our sales of disk drives generate
lower gross margin percentages than those of our storage
systems. As a result, as we sell more highly configured systems
with greater disk drive content, overall gross margin
percentages may be negatively affected.
Our gross margins have been and may continue to be affected by a
variety of other factors, including:
•
Demand for storage and content delivery products
•
Discount levels and price competition
•
Direct versus indirect sales
•
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
•
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
•
The cost of components, manufacturing labor, and quality
Changes in service gross margin may result from various factors
such as continued investments in our customer support
infrastructure, changes in the mix between technical support
services and professional services, as well as the timing of
technical support service contract initiations and renewals.
We may incur problems with current or future acquisitions
and equity investments, and these investments may not achieve
our objectives.
As part of our strategy, we are continuously evaluating
opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our
markets, or enhance our technical capabilities. See
Note 11 — Business Combinations and
Note 15 — Subsequent Events. We may engage in
future acquisitions that dilute our stockholders’
investments and cause us to use cash, to incur debt, or to
assume contingent liabilities.
Acquisitions of companies entail numerous risks, and we may not
be able to successfully integrate acquired operations and
products or realize anticipated synergies, economies of scale,
or other value. Integration risks and issues may include, but
not limited to, key personnel retention and assimilation,
management distraction, technical development, and unexpected
costs and liabilities, including goodwill impairment charges. In
addition, we may experience a diversion of management’s
attention, the loss of key employees of acquired operations, or
the inability to recover strategic investments in development
stage entities. Any such problems could have a material adverse
effect on our business, financial condition, and results of
operation.
From time to time, we make equity investments for the promotion
of business and strategic objectives. We have already made
strategic investments in a number of network storage-related
technology companies. Equity investments may result in the loss
of investment capital. The market price and valuation of our
equity investments in these companies may fluctuate due to
market conditions and other circumstances over which we have
little or no control. To the extent that the fair value of these
securities is less than our cost over an extended period of
time, our results of operations and financial position could be
negatively impacted. In fiscal 2003, we recorded noncash
write-downs of $2.0 million related to the impairment of
our investment in publicly traded and private companies as its
reduction in value was judged to be other-than-temporary.
Our ability to increase our revenues depends on expanding
our direct sales operations and reseller distribution channels
and continuing to provide excellent global service and support.
If we are unable to effectively develop, retain, and expand our
global sales and service workforce or to establish and cultivate
relationships with our indirect reseller and distribution
channels, our ability to grow and increase revenue could be
harmed.
In an effort to gain market share and support our global
customers, we will need to expand our worldwide direct sales
operations and global service and support infrastructure to
support new and existing enterprise customers. Expansion of our
direct sales operations, reseller/distribution channels, and
global service and support operations may not be successfully
implemented, and the cost of any expansion may exceed the
revenues generated.
We market and sell our storage solutions directly through our
worldwide sales force and indirectly through channels such as
value-added resellers (“VARs”), systems integrators,
distributors, and strategic business partners and derive a
significant portion of our revenue from these indirect channel
partners. However, in order for us to maintain our current
revenue sources and grow our revenue as we have forecasted, we
must effectively manage our relationships with these indirect
channel partners. To do so, we must attract and retain a
sufficient number of qualified channel partners to successfully
market our products. However, because we also sell our products
directly to customers through our sales force, on occasion we
compete with our indirect channels for sales of our products to
our end customers, competition that could result in conflicts
with these indirect channel partners and make it harder for us
to attract and retain these indirect channel partners. At the
same time, our indirect channel partners may develop and offer
products of their own that are competitive to ours. Or, because
our reseller partners generally offer products from several
different companies, including products of our competitors,
these resellers may give higher priority to the marketing,
sales, and support of our competitors’ products than ours.
If we fail to manage effectively our relationships with these
indirect channel partners to minimize channel conflict and
continue to evaluate and meet our indirect sales partners’
needs with respect to our products, we will not be able to
maintain or increase our revenue as we have forecasted, which
would have a materially adverse affect on our business,
financial condition, and results of operations. Additionally, if
we do not manage distribution of our products and services and
support effectively, or if our resellers’ financial
conditions or operations weaken, our revenues and gross margins
could be adversely affected.
Risks inherent in our international operations could have
a material adverse effect on our operating results.
We conduct business internationally. For fiscal year 2005, 47.9%
of our total revenues was from international customers
(including U.S. exports). Accordingly, our future operating
results could be materially
adversely affected by a variety of factors, some of which are
beyond our control, including regulatory, political, or economic
conditions in a specific country or region, trade protection
measures and other regulatory requirements, government spending
patterns, and acts of terrorism and international conflicts.
Our international sales are denominated in U.S. dollars and
in foreign currencies. An increase in the value of the
U.S. dollar relative to foreign currencies could make our
products more expensive and, therefore, potentially less
competitive in foreign markets. For international sales and
expenditures denominated in foreign currencies, we are subject
to risks associated with currency fluctuations. We utilize
forward and option contracts to hedge our foreign currency
exposure associated with certain assets and liabilities as well
as anticipated foreign currency cash flow. All balance sheet
hedges are marked to market through earnings every period, while
gains and losses on cash flow hedges are recorded in other
comprehensive income. These hedges attempt to reduce, but do not
always entirely eliminate, the impact of currency exchange
movements. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. There
can be no assurance that such hedging strategies will be
successful and that currency exchange rate fluctuations will not
have a material adverse effect on our operating results.
Additional risks inherent in our international business
activities generally include, among others, longer accounts
receivable payment cycles and difficulties in managing
international operations. Such factors could materially
adversely affect our future international sales and,
consequently, our operating results.
Potentially adverse tax consequences could also negatively
impact the operating and financial results from international
operations. International operations currently benefit from a
tax ruling concluded in the Netherlands.
Additional risks inherent in our international business
activities generally include, among others, longer accounts
receivable payment cycles, difficulties in managing
international operations, and potentially adverse tax
consequences. Such factors could materially adversely affect our
future international sales and, consequently, our operating
results.
Although operating results have not been materially adversely
affected by seasonality in the past, because of the significant
seasonal effects experienced within the industry, particularly
in Europe, our future operating results could be materially
adversely affected by seasonality.
We cannot assure you that we will be able to maintain or
increase international market demand for our products.
If we are unable to maintain our existing relationships
and develop new relationships with major strategic partners, our
revenue may be impacted negatively.
An element of our strategy to increase revenue is to
strategically partner with major third-party software and
hardware vendors that integrate our products into their products
and also comarket our products with these vendors. A number of
these strategic partners are industry leaders that offer us
expanded access to segments of the storage market. There is
intense competition for attractive strategic partners, and even
if we can establish strategic relationships with these partners,
we cannot assure you that these partnerships will generate
significant revenue or that the partnerships will continue to be
in effect for any specific period of time.
We intend to continue to establish and maintain business
relationships with technology companies to accelerate the
development and marketing of our storage solutions. To the
extent we are unsuccessful in developing new relationships and
maintaining our existing relationships, our future revenue and
operating results could be impacted negatively. In addition, the
loss of a strategic partner could have a material adverse effect
on the progress of our new products under development with that
partner.
A significant percentage of our expenses are fixed, which
could materially and adversely affect our net income.
Our expense levels are based in part on our expectations as to
future sales, and a significant percentage of our expenses are
fixed. As a result, if sales levels are below expectations or
previously higher levels, net income will be disproportionately
affected in a material and adverse manner.
If we fail to manage our expanding business effectively,
our operating results could be materially adversely
affected.
We have experienced growth in fiscal 2005 and 2004. Our future
operating results depend to a large extent on management’s
ability to successfully manage expansion and growth, including
but not limited to expanding international operations,
forecasting revenues, addressing new markets, controlling
expenses, implementing infrastructure and systems, and managing
our assets. In addition, an unexpected decline in the growth
rate of revenues without a corresponding and timely reduction in
expense growth or a failure to manage other aspects of growth
could materially adversely affect our operating results.
The market price for our common stock has fluctuated
significantly in the past and will likely continue to do so in
the future.
The market price for our common stock has experienced
substantial volatility in the past, and several factors could
cause the price to fluctuate substantially in the future. These
factors include but are not limited to:
•
Fluctuations in our operating results
•
Fluctuations in the valuation of companies perceived by
investors to be comparable to us
•
Economic developments in the network storage market as a whole
•
International conflicts and acts of terrorism
•
A shortfall in revenues or earnings compared to securities
analysts’ expectations
•
Changes in analysts’ recommendations or projections
•
Announcements of new products, applications, or product
enhancements by us or our competitors
•
Changes in our relationships with our suppliers, customers, and
channel and strategic partners
•
General market conditions
In addition, the stock market has experienced volatility that
has particularly affected the market prices of equity securities
of many technology companies. Additionally, certain
macroeconomic factors such as changes in interest rates, the
market climate for the technology sector, and levels of
corporate spending on information technology could also have an
impact on the trading price of our stock. As a result, the
market price of our common stock may fluctuate significantly in
the future, and any broad market decline, as well as our own
operating results, may materially and adversely affect the
market price of our common stock.
Our business could be materially adversely affected as a
result of a natural disaster, terrorist acts, or other
catastrophic events.
Our operations, including our suppliers’ and contract
manufacturers’ operations, are susceptible to outages due
to fire, floods, power loss, power shortages, telecommunications
failures, break-ins, and similar events. In addition, our
headquarters are located in Northern California, an area
susceptible to earthquakes. If any significant disaster were to
occur, our ability to operate our business could be impaired.
Weak economic conditions or terrorist actions could lead to
significant business interruptions. If such disruptions result
in cancellations of customer orders, a general decrease in
corporate spending on information
technology, or direct impacts on our marketing, manufacturing,
financial functions or our suppliers’ logistics function,
our results of operations and financial condition could be
adversely affected.
We depend on attracting and retaining qualified technical
and sales personnel. If we are unable to attract and retain such
personnel, our operating results could be materially and
adversely impacted.
Our continued success depends, in part, on our ability to
identify, attract, motivate, and retain qualified technical and
sales personnel. Because our future success is dependent on our
ability to continue to enhance and introduce new products, we
are particularly dependent on our ability to identify, attract,
motivate, and retain qualified engineers with the requisite
education, backgrounds, and industry experience. Competition for
qualified engineers, particularly in Silicon Valley, can be
intense. The loss of the services of a significant number of our
engineers or salespeople could be disruptive to our development
efforts or business relationships and could materially adversely
affect our operating results.
Undetected software, hardware errors, or failures found in
new products may result in loss of or delay in market acceptance
of our products, which could increase our costs and reduce our
revenues.
Our products may contain undetected software, hardware errors,
or failures when first introduced or as new versions are
released. Despite testing by us and by current and potential
customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could materially adversely
affect our operating results.
If we are unable to protect our intellectual property, we
may be subject to increased competition that could materially
adversely affect our operating results.
Our success depends significantly upon our proprietary
technology. We rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, contractual
provisions, and patents to protect our proprietary rights. We
seek to protect our software, documentation, and other written
materials under trade secret, copyright, and patent laws, which
afford only limited protection. Some U.S. trademarks and
some U.S.-registered trademarks are registered internationally
as well. We will continue to evaluate the registration of
additional trademarks as appropriate. We generally enter into
confidentiality agreements with our employees and with our
resellers, strategic partners, and customers. We currently have
multiple U.S. and international patent applications pending and
multiple U.S. patents issued. The pending applications may
not be approved, and if patents are issued, such patents may be
challenged. If such challenges are brought, the patents may be
invalidated. We cannot assure you that we will develop
proprietary products or technologies that are patentable, that
any issued patent will provide us with any competitive
advantages or will not be challenged by third parties, or that
the patents of others will not materially adversely affect our
ability to do business.
Litigation may be necessary to protect our proprietary
technology. Any such litigation may be time-consuming and
costly. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the
United States. We cannot assure you that our means of protecting
our proprietary rights will be adequate or that our competitors
will not independently develop similar technology, duplicate our
products, or design around patents issued to us or other
intellectual property rights of ours.
We are subject to intellectual property infringement claims. We
may, from time to time, receive claims that we are infringing
third parties’ intellectual property rights. Third parties
may in the future claim infringement by us with respect to
current or future products, patents, trademarks, or other
proprietary rights. We expect that companies in the appliance
market will increasingly be subject to infringement claims as
the number of products and competitors in our industry segment
grows and the functionality of products in different industry
segments overlaps. Any such claims could be time-consuming,
result in costly litigation, cause product shipment delays,
require us to redesign our products, or require us to enter into
royalty or
licensing agreements, any of which could materially adversely
affect our operating results. Such royalty or licensing
agreements, if required, may not be available on terms
acceptable to us or at all.
Our business is subject to changing laws and regulations
and public disclosure that has increased both our costs and the
risk of noncompliance. Failure to comply with these new
regulations could have an adverse effect on our business and
stock price.
Because our common stock is publicly traded, we are subject to
certain rules and regulations of federal, state, and financial
market exchange entities charged with the protection of
investors and the oversight of companies whose securities are
publicly traded. These entities, including the Public Company
Accounting Oversight Board, the SEC, and NASDAQ, have
implemented new requirements and regulations and continue
developing additional regulations and requirements in response
to recent corporate scandals and laws enacted by Congress, most
notably the Sarbanes-Oxley Act of 2002. Our efforts to comply
with these new regulations have resulted in, and are likely to
continue resulting in, increased general and administrative
expenses and diversion of management time and attention from
revenue-generating activities to compliance activities.
We have recently completed our evaluation of our internal
controls over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002. Although our
assessment, testing, and evaluation resulted in our conclusion
that as of April 30, 2005, 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 management’s time in connection with further
evaluations, either of which could materially increase our
operating expenses and accordingly reduce our net income.
We also face increasing complexity in our product design and
procurement operations as we adjust to new and upcoming
requirements relating to the materials composition of many of
our products. The European Union (“EU”) has adopted
two directives to facilitate the recycling of electrical and
electronic equipment sold in the EU. The first of these is the
Waste Electrical and Electronic Equipment (WEEE) directive,
which directs EU member states to enact laws, regulations, and
administrative provisions to ensure that producers of electrical
and electronic equipment are financially responsible for
specified collection, recycling, treatment, and environmentally
sound disposal of products placed on the market after
August 13, 2005, and from products in use prior to that
date that are being replaced. The EU has also adopted the
Restriction on the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (“RoHS”)
directive. The RoHS directive restricts the use of lead,
mercury, and certain other substances in electrical and
electronic products placed on the market in the European Union
after July 1, 2006.
Similar laws and regulations have been or may be enacted in
other regions, including in the United States, China, and Japan.
Other environmental regulations may require us to reengineer our
products to utilize components that are more environmentally
compatible, and such reengineering and component substitution
may result in additional costs to us. Although we do not
anticipate any material adverse effects based on the nature of
our operations and the effect of such laws, there is no
assurance that such existing laws or future laws will not have a
material adverse effect on our business.
Changes in financial accounting standards or practices may
cause adverse unexpected fluctuations and affect our reported
business and financial results.
In December 2004 the FASB issued SFAS No. 123R
(revised 2004), which will require us, beginning in the first
quarter of fiscal 2007, to expense employee stock options for
financial reporting purposes. Adoption of
SFAS No. 123R will result in lower reported earnings
per share, which could negatively impact our future stock price.
In addition, this could also impact our ability or future
practice of utilizing broad-based employee stock plans to
attract, reward, and retain employees, which could also
adversely impact our operations.
In addition, the FASB requires certain valuation models to
estimate the fair value of employee stock options. These models,
including the Black-Scholes option-pricing model, use varying
methods, inputs, and assumptions selected across companies. If
another party asserts that the fair value of our employee stock
options is misstated, securities class action litigation could
be brought against us, or the market price of our
common stock could decline, or both could occur. As a result of
these changes, we could incur losses, and our operating results
and gross margins may be below our expectations and those of
investors and stock market analysts.
The U.S. government has contributed to our revenue
growth and become an important customer for us. However,
government demand is unpredictable, and there is no guarantee of
future revenue growth from the U.S. government.
The U.S. government has become an important customer for
the storage market and for us. Government agencies are subject
to budgetary processes and expenditure constraints that could
lead to delays or decreased capital expenditures in IT spending
on infrastructures. If the government or individual agencies
within the government reduce or shift their capital spending
pattern, our financial results may be harmed. We cannot assure
you that revenue from the U.S. government will continue to
grow in the future.
Item 2.
Properties
Our headquarters site for corporate general administration,
sales and marketing, research and development, global services,
and manufacturing operations is located in Sunnyvale,
California. We own and occupy approximately 800,000 square
feet of space in buildings at our Sunnyvale headquarters. During
the first quarter of fiscal 2005, we purchased three buildings
in Research Triangle Park (“RTP”), North Carolina, for
$24.1 million. These buildings are being renovated and will
be used primarily for global service support, research and
development, and other functions.
We lease other sales offices and research and development
facilities throughout the United States and internationally. We
expect that our existing facilities and those being developed in
Sunnyvale, California; RTP, North Carolina; and worldwide are
adequate for our requirements over at least the next two years
and that additional space will be available as needed.
As a result of reductions in headcount in fiscal 2002, we have
exited office space under a noncancellable lease in the United
States. If we are unable to successfully sublease our vacated
and unoccupied office space, our operating results may be
adversely affected. See “Note 12 under Item 8.
Financial Statements and Supplementary Data — Notes to
Consolidated Financial Statements.”
See additional discussion regarding properties in
“Note 4 under Item 8. Financial Statements and
Supplementary Data — Notes to Consolidated Financial
Statements” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources.”
Item 3.
Legal Proceedings
We are subject to legal proceedings, claims, and litigation
arising in the ordinary course of business. We defend ourselves
vigorously against any such claims. While the outcome of these
matters is currently not determinable, management does not
expect that the ultimate costs to resolve these matters will
have a material adverse effect on our consolidated financial
position, results of operations, or cash flows.
Item 4.
Submissions of Matters to a Vote of Security
Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this Annual
Report on Form 10-K.
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock commenced trading on the Nasdaq National Market
on November 21, 1995, and is traded under the symbol
“NTAP.” As of April 30, 2005, there were 1,092
holders of record of the common stock. The following table sets
forth for the periods indicated the high and low closing sale
prices for our common stock as reported on the Nasdaq National
Market.
Fiscal 2005
Fiscal 2004
High
Low
High
Low
First Quarter
$
21.53
$
17.05
$
19.56
$
13.63
Second Quarter
24.83
16.57
26.13
14.88
Third Quarter
34.64
24.98
25.97
18.94
Fourth Quarter
34.36
25.91
23.63
18.61
We believe that a number of factors may cause the market price
of our common stock to fluctuate significantly. See
“Item 1. Business — Risk Factors.”
Dividend Policy
We have never paid cash dividends on our capital stock. We
currently anticipate retaining all available funds, if any, to
finance internal growth and product development as well as other
possible management initiatives, including stock repurchases and
acquisitions. Payment of dividends in the future will depend
upon our earnings and financial condition and such other factors
as the directors may consider or deem appropriate at the time.
Information regarding securities authorized for issuance under
equity compensation plans is incorporated by reference from our
Proxy Statement for the 2005 Annual Meeting of Stockholders.
Unregistered Securities Sold in Fiscal 2005
We did not sell any unregistered shares of our common stock
during fiscal 2005.
Issuer Purchases of Equity Securities
Through April 30, 2005, the Board of Directors had
authorized the repurchase of up to $350.0 million in shares
of our outstanding common stock. On May 24, 2005, our Board
approved a new, incremental stock repurchase program in which up
to $300.0 million of additional shares of its outstanding
common stock may be purchased. The stock repurchase program may
be suspended or discontinued at any time.
The table below sets forth activity in the fourth quarter of
fiscal 2005:
The data set forth below are qualified in their entirety by
reference to, and should be read in conjunction with,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated
Financial Statements and related notes thereto included in this
Annual Report on Form 10-K.
Net income for fiscal 2004 included a nonrecurring income tax
benefit of $16.8 million or approximately $0.05 per
share associated with a favorable foreign tax ruling. Net income
for fiscal 2002 includes restructuring charges of
$7.4 million (net of taxes of $4.8 million) and
impairment loss on investments of $7.8 million (net of
taxes of $5.2 million).
Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion of our financial condition and results
of operations should be read together with the financial
statements and the related notes set forth under
“Item 8. Financial Statements and Supplementary
Data.” The following discussion also contains trend
information and other forward looking statements that involve a
number of risks and uncertainties. The Risk Factors set forth in
“Item 1. Business” are hereby incorporated into
the discussion by reference.
Overview
Enterprises are generating vast quantities of data. The rapidly
growing amount of data a company generates and the requirements
to retain data for longer periods of time, are driving an
increasing demand for storage solutions. There is an increase in
demand for online access to historical information for business
or regulatory requirements. The growth in storage capacity
requirements further increases the complexity of data
management. Companies are looking for storage solutions to help
simplify data storage and reduce total costs of ownership.
Companies are migrating toward modular, unified storage systems
away from large, fixed, expensive, mainframe-class arrays and
inefficient direct-attached storage. There is a growing trend
toward consolidating storage and serving a variety of
applications from a unified storage pool. We believe that our
strategic investments are targeted at some of the strongest
growth areas of the storage market, such as modular storage,
data protection, iSCSI, and grid computing, however, if any
storage market trends and emerging standards on which we are
basing our assumptions do not materialize as anticipated, our
business could be materially adversely affected.
Over the course of the last several years, we believe that the
overall global economy has continued to strengthen and IT
spending has also improved. Although we expect our revenue to
grow in fiscal 2006, we cannot assure you that the storage
market will continue to improve or that we will be successful in
capitalizing on this improvement. The fiscal 2005 revenue growth
and increased gross margin have occurred while the
market for our storage products and solutions has grown more
competitive with downward pricing pressures that could
negatively impact our future revenue growth rate and our future
gross margin. At the same time, we anticipate and continue to
experience further price decline per petabyte for our products
which may have an adverse impact on our future gross margin if
not offset by favorable software mix and higher average selling
prices associated with new products. We expect our future gross
margin to be negatively affected by factors such as global
service investment cost; competition, partially offset by new
product introductions and enhancements and product and add-on
software mix. During fiscal 2005, there were industry-wide
constraints affecting the supply of enterprise class hard disk
drives (“HDD”). We have secured commitments from our
hard disk drive suppliers sufficient to meet our expected
requirements, and there has been no material impact on our
business in fiscal 2005. However, we remain exposed to risk
should there be global, industry-wide shortages affecting all
suppliers. We believe that the HDD market supply and demand have
regained their balance; however, we cannot assure you that we
will be able to obtain our full requirements of all our
components in the future or that prices of such components will
not increase. Component price increases and supplier capacity
constraints over time may negatively affect gross margin in the
future.
Continued revenue growth is dependent on the introduction and
market acceptance of our new products. In fiscal 2006, we expect
to refresh our product line, deliver our next-generation
operating system with enhanced storage grid functionality and
offer a comprehensive suite of data protection solutions. If we
fail to timely introduce new products or successfully integrate
acquired technology into our existing architecture, or if there
is no or reduced demand for these or our current products, we
may experience a decline in revenue. Additionally, we plan to
invest in the people, processes, and systems necessary to best
optimize our revenue growth and long-term profitability.
However, we cannot assure you that such investments will achieve
our financial objectives.
Fiscal 2005 Highlights
In fiscal 2005, we continued to enhance our enterprise
solutions, broaden our customer portfolio, extend our
channel/partner opportunities, and gain market share with our
NAS, iSCSI, SAN unified storage, and NearStore solutions. We
also continued to win enterprise customers in our target
industries with our storage and data management solutions. Our
vision is to simplify the data management challenges our
customers face through cost-effective innovative storage
solutions. Some of the key fiscal 2005 highlights included:
Continue to address the major IT challenges that
enterprises face by simplifying data management. Our
fiscal 2005 results were driven by our solutions based on the
unified storage architecture; providing our customers with all
three connection types — NAS, SAN and
iSCSI — along with multiple protocols for Windows and
UNIX, concurrently from the same system. Our unified storage
architecture supporting both SAN and NAS on the same hardware
and software platform, provides our customers the ability to
support both file- and block-level data, all from a single
operating system with common and consistent tools for data
management and disaster planning and recovery. With one
operating system, Data ONTAP, which runs on all of our systems,
we provide customers with the opportunity to choose the
cost-effective solutions for their unique environments. All our
advance software features are completely interoperable across
all of our storage products, with primary and secondary storage
and from our largest to smallest systems.
Continue to focus our development efforts on the higher
growth segments of the storage market, such as modular storage,
data protection, iSCSI, and Grid Computing. In fiscal
2005, we maintained our leadership position in both the NAS and
iSCSI markets and gained share in the SAN market. Our SAN
penetration continued to grow with the majority of fibre channel
SAN systems deployed in combination with either NAS or iSCSI
protocols. Our leadership in the iSCSI market facilitated SAN.
We offered customers the consolidation, scalability, and
management advantages of a SAN via low-cost SAN connectivity
through iSCSI, without requiring the use of complex, and
expensive Fibre Channel network infrastructures. We expect our
investment in emerging technologies such as iSCSI,
virtualization and the storage grid to increasingly contribute
to our growth over the long term. We experienced growth in our
Windows business and more storage-grid-style Linux deployments.
The majority of our iSCSI deployments are for Microsoft Exchange
and SQL Server projects and therefore we expect our Windows
business to be a strong driver of the growth of our block
storage solutions. We recently announced the rollout of the new
midrange FAS3000 series, which will offer high performance data
protection with the lowest storage costs through Serial ATA
(“SATA”), drives with RAID-DP for use in primary
storage. Customers can mix and match Fibre Channel and SATA
disks within one system, offering flexibility and high
availability to customers.
Continue to extend our channel/partner
opportunities. Our fiscal 2005 channel mix demonstrated
increased expansion through our partner programs, with
approximately 51.2% of our business coming through indirect
channels and the remaining 48.8% coming through direct sales.
The majority of our block-based storage business and the
U.S. Federal business came from indirect channels. Higher
growth rates in our indirect channels demonstrated our
increasing leverage, giving us broader market reach and
increasing enterprise penetration. The combination of our
two-tier distribution partners, Arrow and Avnet, contributed to
8.6% of total revenue for fiscal 2005. The latest addition to
our data management and virtualization portfolio is the NetApp
V-Series, which unifies SAN, IP SAN, and NAS under a common
architecture. V-Series systems enable customers to extend the
complete suite of virtualization capabilities in Data ONTAP 7G
software to third-party storage products from HDS, HP, IBM, and
SUN.
Continue to expand our global services and
support. It is an element of our strategy to expand and
offer a global, comprehensive, end-to-end suite of world-class
service and support solutions designed to help our customers
meet their goals of simplifying their storage solutions. We
increased our business with our top enterprise customers who
typically purchased more complete and longer-term service
packages. The growth in service revenue in fiscal 2005 was also
driven by increases in professional services. We expect to
continue to expand our global services and support and believe
that such investments will help accelerate the adoption rate of
our technology. We cannot assure you that service revenue will
continue to grow at previous rates. We expect to invest in our
services infrastructure commensurate with our revenue growth.
Fiscal 2005 Financial Performance
•
Our revenues for the fiscal 2005 were $1.6 billion, a 36.6%
increase over the same period a year ago. Our revenues for the
fiscal 2004 were $1.2 billion, a 31.2% increase compared to
revenues of $892.1 million in fiscal 2003. Our revenue
growth was driven by the adoption of our new products targeted
at the areas of fastest growth in storage, secondary storage for
compliance applications and our broadened NetApp storage
solutions that simplify data management.
•
Our overall gross margins were 61.0%, 60.2% and 61.3%, in fiscal
2005, 2004 and 2003, respectively. The improvement in our
overall gross margin for fiscal 2005 compared to 2004 was
primarily attributable to a favorable change in product and
add-on software mix and improved services margin. The
deterioration in overall gross margin for fiscal 2004 compared
to 2003 was primarily due to continued investment in our service
infrastructure to support our increasing enterprise customer
base.
•
Net income for fiscal 2005 increased 48.4% to
$225.8 million compared to net income of
$152.1 million for the same period a year ago. Net income
for fiscal 2004 increased 98.9% to $152.1 million compared
to net income of $76.5 million for the same period a year
ago. Net income for fiscal 2004 included a nonrecurring income
tax benefit of $16.8 million or approximately
$0.05 per share associated with a favorable foreign tax
ruling.
•
Except for the long-term restructuring and deferred rent
liabilities totaling $4.5 million, our balance sheet as of
April 30, 2005 remains debt-free, with cash, cash
equivalents and investments of $1,170.0 million due
primarily to our net income and the related cash generated from
operations. During fiscal 2005, we repurchased
$192.9 million of our common stock. Days Sales Outstanding
were 60 days, and 52 days, respectively, as of
April 30, 2005, and 2004, reflecting increased sales and
less linear shipments. Inventory turns were 17.9 times and 15.9
times, respectively, as of April 30, 2005 and 2004.
Deferred revenue increased to $449.2 million in fiscal 2005
from $278.9 million reported in fiscal 2004 due to higher
software subscription and service arrangements attributable to
our continuing shift
toward larger enterprise customers. Capital purchases of plant,
property, and equipment for fiscal 2005 were $93.6 million,
which included the $24.1 million site purchase in Research
Triangle Park, North Carolina.
Critical Accounting Estimates and Policies
Our discussion and analysis of financial condition and results
of operations is based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of such statements requires us to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period and the
reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical
experience and other assumptions that we consider to be
appropriate in the circumstances. However, actual future results
may vary from our estimates.
We believe that the following accounting policies are
“critical” as defined by the Securities and Exchange
Commission, in that they are both highly important to the
portrayal of our financial condition and results, and require
difficult management judgments and assumptions about matters
that are inherently uncertain. We also have other important
policies, including those related to derivative instruments and
concentration of credit risk. However, these policies do not
meet the definition of critical accounting policies because they
do not generally require us to make estimates or judgments that
are difficult or subjective. These policies are discussed in the
Note 2 to the Consolidated Financial Statements
accompanying this Annual Report on Form 10-K.
We believe the accounting policies described below are the ones
that most frequently require us to make estimates and judgments,
and therefore are critical to the understanding of our results
of operations:
•
Revenue recognition and allowances
•
Valuation of goodwill and intangibles
•
Accounting for income taxes
•
Inventory write-downs
•
Restructuring accruals
•
Impairment losses on investments
•
Accounting for stock-based compensation
•
Loss contingencies.
Revenue Recognition and Allowances
We apply the provisions of Statement of Position
(“SOP”) No. 97-2, “Software Revenue
Recognition”and related interpretations, to all
transactions that generate revenue. We recognize revenue when:
•
Persuasive evidence of an arrangement exists. It is our
customary practice to have a purchase order and/or contract
prior to recognizing revenue on an arrangement from our end user
customers, value-added resellers, or distributors.
•
Delivery has occurred. Our product is physically
delivered to our customers, generally with standard transfer
terms such as FOB origin or EXWorks point of origin. We
typically do not allow for restocking rights with any of our
value-added resellers or distributors. Products shipped with
acceptance criteria or return rights are not recognized as
revenue until all criteria are achieved. If undelivered products
or services exist that are essential to the functionality of the
delivered product in an arrangement, delivery is not considered
to have occurred.
•
The fee is fixed or determinable. Arrangements with
payment terms extending beyond our standard terms and conditions
practices are not considered to be fixed or determinable.
Revenue from such
arrangements is recognized as the fees become due and payable.
We typically do not allow for price-protection rights with any
of our value-added resellers or distributors.
•
Collection is probable. Probability of collection is
assessed on a customer-by-customer basis. Customers are subject
to a credit review process that evaluates the customer’s
financial position and ultimately their ability to pay. If it is
determined from the outset of an arrangement that collection is
not probable based upon our review process, revenue is deferred
and recognized when collection becomes probable.
For arrangements with multiple elements, we allocate revenue to
each element using the residual method based on vendor specific
objective evidence of fair value of the undelivered items. We
defer the portion of the arrangement fee equal to the vendor
specific objective evidence of fair value of the undelivered
elements until they are delivered. Vendor specific objective
evidence of fair value is based on the price charged when the
element is sold separately.
A typical arrangement includes product, software subscription,
and maintenance. Some arrangements include training and
consulting. Software subscriptions include unspecified product
upgrades and enhancements on a when-and-if-available basis, bug
fixes, and patch releases and are included in product revenues.
Service maintenance includes contracts for technical support and
hardware maintenance. Revenue from software subscriptions and
service maintenance is recognized ratably over the contractual
term, generally one to three years. Revenue from training and
consulting is recognized as the services are performed.
We record reductions to revenue for estimated sales returns at
the time of shipment. These estimates are based on historical
sales returns, changes in customer demand, and other factors. If
actual future returns and allowances differ from past
experience, additional allowances may be required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of the accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of
our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Valuation of Goodwill and Intangibles
We record goodwill and intangible assets when we acquire
companies. The cost of the acquisition is allocated to the
assets and liabilities acquired, including identifiable
intangible assets, with the remaining amount being classified as
goodwill. Goodwill and purchased intangible assets include
existing technology, patents, trademarks, customer contracts and
covenants not to compete. Identifiable intangible assets are
amortized over time, while in-process research and development
is recorded as a charge on the date of acquisition and goodwill
is capitalized, subject to periodic review for impairment.
Accordingly, the allocation of the acquisition cost to
identifiable intangible assets has a significant impact on our
future operating results. The allocation process requires
extensive use of estimates and assumptions, including estimates
of future cash flows expected to be generated by the acquired
assets. Should conditions be different than management’s
current assessment, material write-downs of the fair value of
intangible assets may be required. We periodically review the
estimated remaining useful lives of our other intangible assets.
A reduction in the estimate of remaining useful life could
result in accelerated amortization expense or a write-down in
future periods. As such, any future write-downs of these assets
would adversely affect our gross and operating margins.
We evaluate the impairment of goodwill and purchased indefinite
life intangible assets on an annual basis, or sooner if events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Triggering events for
impairment reviews may be indicators such as adverse industry or
economic trends, restructuring actions, lower projections of
profitability, or a sustained decline in our market
capitalization. Evaluations of possible impairment and, if
applicable, adjustments to carrying values, require us
to estimate, among other factors, future cash flows, useful
lives, and fair market values of our reporting units and assets.
Actual results may vary from our expectations.
Under our accounting policy we perform an annual review in the
fourth quarter of each fiscal year, or more often if indicators
of impairment exist. Accordingly, goodwill recorded in business
combinations may significantly affect our future operating
results to the extent impaired, but the magnitude and timing of
any such impairment is uncertain. When we conduct our evaluation
of goodwill, the fair value of goodwill is assessed using
valuation techniques that require significant management
judgment. Should conditions be different from management’s
last assessment, significant write-downs of goodwill may be
required. In fiscal 2005 and 2004, we performed such evaluation
and found no impairment. However, any future write-downs of
goodwill would adversely affect our operating margin. As of
April 30, 2005, our assets included $291.8 million in
goodwill related to the acquisitions of Orca, WebManage, and
Spinnaker. See Note 13, “Goodwill and Purchased
Intangible Assets” to our consolidated financial statements.
Accounting for Income Taxes
The determination of our tax provision is subject to judgments
and estimates due to operations in several tax jurisdictions
outside the U.S. Earnings derived from our international
business are generally taxed at rates that are lower than
U.S. rates, resulting in a reduction of our effective tax
rate. The ability to maintain our current effective tax rate is
contingent upon existing tax laws in both the U.S. and the
respective countries in which our international subsidiaries are
located. Future changes in domestic or international tax laws
could affect the continued realization of the tax benefits we
are currently receiving and expect to receive from international
business. In addition, a decrease in the percentage of our total
earnings from our international business or in the mix of
international business among particular tax jurisdictions could
increase our overall effective tax rate. Also, our current
effective tax rate assumes that U.S. income taxes are not
provided for undistributed earnings of certain
non-U.S. subsidiaries. These earnings could become subject
to incremental foreign withholding or federal and state income
taxes should they be either deemed or actually remitted to the
U.S. In fiscal 2004, we recorded a nonrecurring income tax
benefit of $16.8 million associated with a favorable
foreign tax ruling. This favorable ruling from the Netherlands
provided for retroactive benefits dating back to fiscal year
2001 and continuing until December 31, 2005. Subsequent to
our fiscal 2005 year end, we obtained a new tax ruling from
the Netherlands, which terminated the first ruling and provides
for continuing favorable tax rate benefits until April 30,2010.
The carrying value of our net deferred tax assets, which
consists primarily of the reversal of net deductible temporary
differences including credits and net operating loss
carryforwards, assumes that we will be able to generate
sufficient future taxable income to fully utilize these tax
attributes. If we do not generate sufficient future income, the
realization of these deferred tax assets may be impaired
resulting in additional income tax expense. We have provided a
valuation allowance on the deferred tax attributes associated
with the exercise of employee stock options (primarily credits
and net operating loss carryforwards) because of uncertainty
regarding their realizability due to the expectation of future
employee stock option exercises. If these attributes are
realized, the associated tax benefit will be credited to
stockholders’ equity, rather than as a reduction in the
income tax provision.
The American Jobs Creation Act of 2004 (“the Jobs
Act”) creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85% dividend-received deduction for
certain dividends from certain non-U.S. subsidiaries. The
deduction is subject to a number of limitations and we are
currently considering recently issued Treasury and IRS guidance
on the application of the deduction. We are not yet in a
position to decide whether, and to what extent, foreign earnings
that have not yet been remitted to the US might be repatriated.
Based on the analysis to date, however, it is reasonably
possible that as much as $355.0 million might be
repatriated, with a respective tax liability of up to
$15.0 million. We expect to be in a position to finalize
our analysis during the third quarter of fiscal 2006.
We write down inventory and record purchase commitment
liabilities for estimated excess and obsolete inventory equal to
the difference between the cost of inventory and the estimated
fair value based upon assumptions about future demand and market
conditions. Although we strive for accuracy in our forecasts of
future product demand, any significant unanticipated changes in
demand or technological developments could have a significant
impact on the value of our inventory and commitments, and our
reported results. If actual market conditions are less favorable
than those projected, additional write-downs and other charges
against earnings may be required. If actual market conditions
are more favorable, we may realize higher gross margin in the
period when the written-down inventory is sold.
We engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our
component suppliers. We also provide for the estimated cost of
known product failures based on known quality issues when they
arise. Should actual cost of product failure differ from our
estimates, revisions to the estimated liability would be
required.
Restructuring Accruals
In fiscal 2002, as a result of continuing unfavorable economic
conditions and a reduction in IT spending rates, we implemented
two restructuring plans, which included reductions in our
workforce and a consolidation of our facilities. These
restructuring accruals were accounted for in accordance with
Emerging Issues Task Force (“EITF”) Issue
No. 94-3, “Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring)”, and included various assumptions such
as the time period over which the facilities will be vacant,
expected sublease terms, and expected sublease rates. These
estimates are reviewed and revised periodically and may result
in a substantial change to restructuring expense should
different conditions prevail than were anticipated in original
management estimates. Future restructurings will be accounted
for under SFAS No. 146 “Accounting for Costs
associated with Exit or Disposal Activities,”which
superceded EITF No. 94-3. See Note 12 to the
Consolidated Financial Statements for further discussion.
Impairment Losses on Investments
We perform periodic reviews of our investments for impairment.
As of April 30, 2005, our short-term investments have been
classified as “available-for-sale” and are carried at
fair value. There have been no significant declines in fair
value of investments that are considered to be
other-than-temporary under the EITF No. 03-01, for any of
the three years in the period ended April 30, 2005. Our
investments in publicly held companies are generally considered
impaired when the fair value of an investment as measured by
quoted market prices is less than its carrying value and the
decline is not considered temporary. Our investments in
privately held companies are considered impaired when a review
of the investees’ operations and other indicators of
impairment indicate that the carrying value of the investment is
not likely to be recoverable. Such indicators include, but are
not limited to, limited capital resources, limited prospects of
receiving additional financing, and limited prospects for
liquidity of the related securities.
Accounting for Stock-based Compensation
We adopted the disclosure-only provisions of
SFAS No. 123 as amended by SFAS No. 148 and
provide pro forma disclosure using the Black-Scholes option
pricing model to value our employee stock options. The fair
value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, and is not
remeasured as a result of subsequent stock price fluctuations.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective
assumptions, including the expected stock price volatility. We
use projected volatility rates, which are based upon historical
volatility rates since our initial public offering, trended into
future years.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
“Share-Based Payment”
(“FAS 123R”), see discussion under New Accounting
Standards
below. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (“SAB 107”).
SAB 107 includes interpretive guidance for the initial
implementation of FAS 123R. We will apply the principles of
SAB 107 in conjunction with our adoption of FAS 123R
in our first quarter of fiscal 2007 which begins on May 1,2006.
Loss Contingencies
We are subject to the possibility of various loss contingencies
arising in the course of business. We consider the likelihood of
the loss or impairment of an asset or the incurrence of a
liability as well as our ability to reasonably estimate the
amount of loss in determining loss contingencies. An estimated
loss contingency is accrued when it is probable that a liability
has been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. We regularly evaluate
current information available to us to determine whether such
accruals should be adjusted.
New Accounting Standards
In November 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 151
“Inventory Costs”
(“SFAS No. 151”). This statement amends the
guidance in Accounting Research Bulletin No. 43,
Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage).
SFAS No. 151 requires that those items be recognized
as current-period charges. In addition, this statement requires
that allocation of fixed production overhead to costs of
conversion be based upon the normal capacity of the production
facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred in fiscal years beginning
after June 15, 2005. As such, we are required to adopt
these provisions at the beginning of fiscal 2007. We do not
expect the adoption of SFAS No. 151 to have a material
impact on its consolidated financial statements.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
“Share-Based Payment”
(“FAS 123R”) that addresses the accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of
the enterprise or liabilities that are based on the fair value
of the enterprise’s equity instruments or that may be
settled by the issuance of such equity instruments. The
statement eliminates the ability to account for share-based
compensation transactions using the intrinsic value method as
prescribed by Accounting Principles Board, or APB, Opinion
No. 25, “Accounting for Stock Issued to
Employees,” and generally requires that such transactions
be accounted for using a fair-value-based method and recognized
as expenses in our consolidated statement of income. The
statement requires companies to assess the most appropriate
model to calculate the value of the options. We currently use
the Black-Scholes option pricing model to value options and are
currently assessing which model we may use in the future under
the statement and may deem an alternative model to be the most
appropriate. The use of a different model to value options may
result in a different fair value than results from the use of
the Black-Scholes option pricing model. In addition, there are a
number of other requirements under the new standard that will
result in differing accounting treatments than currently
required. These differences include, but are not limited to, the
accounting for the tax benefits on employee stock options and
for stock issued under our employee stock purchase plan. In
addition to the appropriate fair value model to be used for
valuing share-based payments, we will also be required to
determine the transition method to be used at date of adoption.
The allowed transition methods include prospective and
retroactive adoption methods. Under the retroactive method,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of FAS 123R, while the
retroactive methods would record compensation expense for all
unvested stock options and restricted stock beginning with the
first period restated. The effective date of the new standard
for our consolidated financial statements is the first fiscal
quarter of fiscal 2007, which begins on May 1, 2006.
Upon adoption, this statement will have a significant impact on
our consolidated financial statements because we will be
required to expense the fair value of our stock option grants
and stock purchases under our employee stock purchase plan
rather than disclose the impact on our consolidated net income
within our footnotes as is our current practice (see Note 2
of the Notes to Consolidated Financial Statements contained
herein). The amounts disclosed within our footnotes are not
necessarily indicative of the amounts that will be expensed upon
the adoption of FAS 123R. Compensation expense calculated
under FAS 123R may differ from amounts currently disclosed
within our footnotes based on changes in the fair value of our
common stock, changes in the number of options granted or the
terms of such options, the treatment of tax benefits and changes
in interest rates or other factors. In addition, upon adoption
of FAS 123R we may choose to use a different valuation
model to value the compensation expense associated with employee
stock options.
In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (“SAB 107”).
SAB 107 includes interpretive guidance for the initial
implementation of FAS 123R. We will apply the principles of
SAB 107 in conjunction with our adoption of FAS 123R.
In January 2005, the FASB issued FASB Staff Position
(“FSP”) No. FAS 109-1, “Application of
SFAS No. 109 to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004.” This FSP provides guidance for the accounting of
a deduction provided to U.S. manufacturing companies and is
effective immediately. We believe the adoption of this position
currently will not have a material effect of its financial
position or results of operations. However, there is no
assurance that there will not be a material impact in the future.
In December 2004, the FASB issued FASB Staff Position
(“FSP”) No. 109-2, “Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004.”
The American Jobs Creation Act introduces a special one-time
dividends received deduction on the repatriation of certain
foreign earnings to U.S. companies, provided certain
criteria are met. FSP No. 109-2 provides accounting and
disclosure guidance on the impact of the repatriation provision
on a company’s income tax expense and deferred tax
liability. We are currently studying the impact of the one-time
favorable foreign dividend provision and intend to complete the
analysis during the third quarter of fiscal 2006. Accordingly,
we have not adjusted income tax expense or deferred tax
liability to reflect the tax impact of any repatriation of
non-U.S. earnings.
Results of Operations
The following table sets forth certain consolidated statements
of income data as a percentage of total revenues for the periods
indicated:
Product Revenues — Product revenues increased
by 35.2% to $1,430.3 million in fiscal 2005, from
$1,058.2 million in fiscal 2004. Product revenues growth
was across all geographies. This increase in product revenues
was specifically attributable to increased software licenses and
software subscriptions and an increase in units shipped,
compared to the same period in the previous year.
Product revenues were favorably affected by the following
factors:
•
Increased revenues from our current product portfolio, such as
FAS980, FAS960, FAS940, FAS920, FAS270 and FAS250 storage
systems; NearStore R200 nearline storage systems; and
NetCache C6200, C2100 appliances and add-on software;
•
Increased sales of software subscriptions representing 10.6% and
9.7% of total revenues for fiscal 2005 and 2004, respectively
•
Growth in secondary storage system and related software products
as enterprises continue to implement disk-to-disk
backup/archival, business continuance, and regulated compliance
initiatives
•
Increased demand for NetApp data protection, mission-critical
tier-one storage environments, iSCSI SAN deployments in the
Windows environment and distributed enterprise
•
Increased sales through indirect channels in absolute dollars,
including sales through our resellers, distributors, and OEM
partners, representing 51.2% and 47.9% of total revenues for
fiscal 2005 and 2004, respectively
Product revenues were negatively affected by the following
factors:
•
Lower-cost-per-megabyte disks
•
Declining average selling prices and unit sales of our older
products
•
Incremental revenue due to an extra week of business in fiscal
2004 compared to fiscal 2005
The Spinnaker acquisition, which closed in February 2004, did
not have a significant impact on our fiscal 2005 revenue. We
expect to release Spinnaker integrated capabilities at the end
of calendar year 2005. We cannot assure you that we will be able
to maintain or increase market demand for our products.
Service Revenues — Service revenues, which
include hardware support, professional services, and educational
services, increased by 49.7% to $167.8 million in fiscal
2005, from $112.1 million in fiscal 2004.
The increase in absolute dollars was due to the following
factors:
•
An increasing number of enterprise customers, which typically
purchase more complete and generally longer-term service
packages than our nonenterprise customers
•
A growing installed base resulting in new customer support
contracts in addition to support contract renewals by existing
customers
•
Growth in professional services revenue
While it is an element of our strategy to expand and offer a
more comprehensive, global enterprise support and service
solution, we cannot assure you that service revenue will grow at
the current rate in fiscal 2006.
Service revenues are generally deferred and, in most cases,
recognized ratably over the service obligation periods, which
are typically one to three years. Service revenues represented
10.5% and 9.6% of total revenues for fiscal year 2005 and 2004,
respectively.
International total revenues — International
total revenues (including U.S. exports) increased by 39.0%
in fiscal year 2005 compared with fiscal 2004. International
total revenues were $765.8 million, or 47.9% of total
revenues for fiscal year 2005 compared with $551.0 million
or 47.1% of total revenues for fiscal 2004. The increase in
international sales was primarily a result of revenue growth
from our European and Asia Pacific geography, driven by larger
storage implementations, increased demand for our solutions
portfolio, new customers, and higher storage spending in certain
geographic regions, as compared to the same period in the prior
fiscal year. We cannot assure you that we will be able to
maintain or increase international revenues in fiscal 2006.
Product Gross Margin — Product gross margin
increased to 65.9% for fiscal 2005, from 64.9% for fiscal 2004.
Product gross margin was favorably affected by the following
factors:
•
Favorable product and add-on software mix
•
Competitive pricing solutions with our bundled software and
solutions set
•
Higher average selling prices for our newer products
•
Growth in software subscription upgrades and software licenses
due primarily to a larger installed base and an increasing
number of new enterprise customers
•
Transitional expenses incurred in fiscal 2004 associated with
the initial implementation of a new Enterprise Resource Planning
(ERP) system, which we did not incur in fiscal 2005
Product gross margin was negatively affected by the following
factors:
•
Higher disk content with an expanded storage capacity for the
higher-end storage systems and NearStore systems, as resale of
disk drives generates lower gross margin
•
Increased sales through certain indirect channels, which
typically carry a lower gross margin than our direct sales
•
Sales price reductions due to competitive pricing pressure and
selective pricing discounts
•
Lower average selling price of certain add-on software options
We expect higher disk content associated with high-end storage
systems will negatively affect our gross margin in the future,
if not offset by software revenue and new products.
Amortization of existing technology included in cost of product
revenues was $3.4 million and $3.7 million for fiscal
2005 and 2004, respectively. Estimated future amortization of
existing technology to cost of product revenues relating to the
Spinnaker acquisition will be $3.4 million for each of
fiscal years 2006, 2007, and 2008; $2.8 million for fiscal
year 2009; and none thereafter.
Service Gross Margin — Service gross margin
increased to 19.4% in fiscal 2005 compared to 15.9% in fiscal
2004. Cost of service revenue increased by 43.4% to
$135.2 million in fiscal 2005, from $94.3 million in
fiscal 2004.
The improvement in service gross margin for fiscal 2005 compared
to fiscal 2004 was primarily due to an increase in services
revenue and improved headcount utilization offset by the
continued spending in our service infrastructure to support our
increasing enterprise customer base. This spending included
additional professional support engineers, increased support
center activities, and global service partnership programs.
Service gross margin will typically experience some variability
over time due to the timing of technical support service
initiations and renewals and additional investments in our
customer support infrastructure. In fiscal 2006, we expect
service margin to be in the low 20% range, as we continue to
build out our service capability and capacity to support our
growing enterprise customers and new products.
Sales and Marketing — Sales and marketing
expenses consist primarily of salaries, commissions, advertising
and promotional expenses, and certain customer service and
support costs. Sales and marketing expenses increased 33.3% to
$466.0 million for fiscal 2005, from $349.5 million
for fiscal 2004. These expenses were 29.1% and 29.9% of total
revenues for fiscal 2005 and fiscal 2004, respectively. The
increase in absolute dollars was attributed to increased
commission expenses resulting from increased revenues, higher
performance-based payroll expenses due to higher profitability,
higher sales kickoff expenses, higher partner program expenses,
and the continued worldwide spending in our sales and global
service organizations associated with selling complete
enterprise solutions, partially offset by an extra week of
business in fiscal 2004 as compared to fiscal 2005.
Amortization of Spinnaker trademarks/tradenames and customer
contracts, and relationships included in sales and marketing
expenses was $0.8 million and $0.2 million for fiscal
2005 and fiscal 2004, respectively. Estimated future
amortization of trademarks, tradenames, customer contracts, and
relationships relating to the Spinnaker acquisition and included
in sales and marketing expenses will be $0.3 million for
fiscal 2006, and $0.1 million for fiscal 2007, respectively.
Sales and marketing headcount increased to 1,918 at
April 30, 2005, from 1,421 at April 30, 2004. We
expect to continue to selectively add sales capacity in an
effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels,
and increase product and company awareness. We expect to
increase our sales and marketing expenses commensurate with
future revenue growth.
Research and Development — Research and
development expenses consist primarily of salaries and benefits,
prototype expenses, nonrecurring engineering charges, fees paid
to outside consultants and amortization of capitalized patents.
Research and development expenses increased 29.7% to
$171.0 million for fiscal 2005 from $131.9 million for
fiscal 2004. These expenses represented 10.7% and 11.3% of total
revenues for fiscal 2005 and 2004, respectively. The increase in
research and development expenses was primarily a result of
increased headcount, ongoing impact of the Spinnaker
acquisition, ongoing support of current and future product
development and enhancement efforts, higher performance-based
payroll expenses due to higher profitability, partially offset
by an extra week of expenses in fiscal 2004 compared to the
fiscal 2005, cost control, and reduction in discretionary
spending efforts. Research and development headcount increased
to 827 as of April 30, 2005, compared to 650 as of
April 30, 2004. For both fiscal 2005 and 2004, no software
development costs were capitalized.
Included in research and development expenses is capitalized
patents amortization of $1.8 million and $1.5 million
for fiscal 2005 and 2004, respectively. Based on capitalized
patents recorded at April 30, 2005, estimated future
capitalized patents amortization expenses will be
$2.0 million for each of the fiscal years 2006, 2007, and
2008, respectively, and $0.5 and $0.2 million for fiscal
2009 and 2010.
We believe that our future performance will depend in large part
on our ability to maintain and enhance our current product line,
develop new products that achieve market acceptance, maintain
technological competitiveness, and meet an expanding range of
customer requirements. We expect to continuously support current
and future product development and enhancement efforts, and
incur prototyping expenses and nonrecurring engineering charges
associated with the development of new products and
technologies. We intend to continuously broaden our existing
product offerings and introduce new products that expand our
solutions portfolio.
We believe that our research and development expenses will
increase in absolute dollars for fiscal 2006, primarily due to
ongoing costs associated with the development of new products
and technologies, projected headcount growth and the operating
impact of potential future acquisitions as compared to fiscal
2005.
General and Administrative — General and
administrative expenses increased 41.0% to $76.9 million
for fiscal 2005, from $54.6 million for fiscal 2004. These
expenses represented 4.8% and 4.7% of total revenues for fiscal
2005 and 2004, respectively. This increase in absolute dollars
was primarily due to expenses associated with expanded
regulatory requirements, higher legal expenses and professional
fees for general corporate matters including patents, higher
performance-based payroll expenses due to higher profitability,
partially offset by reduced expenses as a result of one less
week of expenses in the fiscal 2005 compared to fiscal 2004 and
higher expenses associated with investments in our
enterprise-wide ERP system and back-office infrastructure in
fiscal 2004, which we did not incur in fiscal 2005.
General and administrative headcount increased to 432 at
April 30, 2005, from 331 at April 30, 2004. We believe
that our general and administrative expenses will increase in
absolute dollars for fiscal 2006 due to projected G&A
headcount growth. Amortization of Spinnaker covenants not to
compete included in general and administrative expenses was
$5.1 million and $1.1 million for fiscal 2005 and
2004, respectively. Estimated future amortization of covenants
not to compete relating to the Spinnaker acquisition will be
$1.5 million for fiscal year 2006 and none thereafter.
Stock Compensation — Stock compensation
expenses were $8.1 million and $3.9 million for fiscal
2005 and 2004, respectively. This net increase year-over-year in
stock compensation expenses reflected primarily higher stock
compensation relating to the Spinnaker acquisition and
restricted stock awards partially offset by forfeitures of
unvested options and forfeited restricted stock assumed in the
Spinnaker acquisition. Based on deferred stock compensation
recorded at April 30, 2005, estimated future deferred stock
compensation amortization expenses are $6.8 million in
fiscal 2006, $5.3 million in fiscal 2007, $3.7 million
in fiscal 2008, and none thereafter.
Restructuring Charges — In fiscal 2002, as a
result of continuing unfavorable economic conditions and a
reduction in IT spending rates, we implemented two restructuring
plans, which included reductions in our workforce and
consolidations of our facilities.
Fiscal 2002 Second Quarter Restructuring Plan
In August 2001, we implemented the first restructuring plan,
which included a reduction in workforce by approximately 200
employees and a consolidation of facilities. The action was
required to properly align and manage the business commensurate
with our revenue at that time. All functional areas of the
Company were affected by the reduction. We completed our actions
during the second quarter of fiscal 2002. As a result of this
restructuring, we recorded a charge of $8.0 million. The
restructuring charge included $4.8 million of
severance-related amounts, $2.7 million of committed excess
facilities and facility closure expenses, including certain
facilities in foreign countries, and $0.5 million in fixed
assets write-offs.
During fiscal 2005, we paid $0.6 million pursuant to final
resolution of certain severance-related restructuring accruals.
As of April 30, 2005, we have no outstanding balance in our
restructuring liability for the second quarter fiscal 2002
restructuring.
The following analysis sets forth the significant components of
the second quarter fiscal 2002 restructuring at April 30,2005 (in thousands):
In April 2002, we completed a restructuring related to the
closure of an engineering facility and consolidation of
resources to the Sunnyvale headquarters. As a result of this
restructuring, we recorded a charge of $5.9 million. The
restructuring charge included $0.8 million of
severance-related amounts, $4.6 million of committed excess
facilities and facility closure expenses, and $0.5 million
in fixed assets write-offs. Of the reserve balance at
April 30, 2005, $0.8 million was included in other
accrued liabilities and the remaining $3.7 million was
classified as long-term obligations.
In fiscal 2003 and 2004, we updated our assumptions and
estimates based on certain triggering events, which resulted in
additional net charges of $0.9 million and
$1.3 million, respectively, primarily relating to sublease
assumptions for our engineering facility. The restructuring
liability will be fully paid through November 2010. In the event
that the engineering facility is not subleased as anticipated,
we will be obligated for an additional total lease payments of
$1.8 million as of April 30, 2005 to be payable
through November 2010.
The following analysis sets forth the significant components of
the fourth quarter fiscal 2002 restructuring at April 30,2005 (in thousands):
Interest Income — Interest income was
$24.2 million and $13.7 million for fiscal 2005 and
2004, respectively. Included in interest income for fiscal 2005
was a $1.3 million interest received on a tax refund. In
addition, the increase in interest income was primarily driven
by higher cash and investment balances provided by operating
activities and higher average interest rates on our investment
portfolio. We expect interest income to increase for fiscal 2006
as a result of rising average interest rates and higher cash and
invested balances in a higher interest-rate portfolio
environment.
Other Income (Expense), Net — Other Income
(Expense), Net, included net exchange losses from foreign
currency transactions of $1.6 million and $2.9 million
in fiscal 2005 and 2004, respectively. The net exchange loss was
a result of the volatility of the currency exchange market and
increased hedging costs associated with our forward and option
activities.
Provision for Income Taxes — For fiscal 2005,
we had an effective tax rate of 18.3% to pretax income. The
effective tax rate for fiscal 2005 differed from the
U.S. statutory rate primarily due to a foreign tax ruling
for our principal European subsidiary, the availability of tax
credits, and the generation of foreign earnings in lower tax
jurisdictions. For fiscal 2004, our effective tax rate was 10.8%
which included 9.9% reduction to account for the
$16.8 million nonrecurring benefit from the retroactive
portion of foreign tax ruling.
Fiscal 2004 Compared to Fiscal 2003
Business Combinations — During the fourth
quarter of fiscal 2004, we acquired Spinnaker for approximately
$305.6 million (including transaction costs) in an
all-stock transaction. Spinnaker provides scalable system
architectures, distributed file systems, next-generation
clustering technologies, and virtualization. The acquisition was
accounted for as a purchase transaction. The unaudited pro forma
information giving pro forma effect to the merger is presented
under Note 11, Notes to Consolidated Financial Statements.
Product Revenues — Product revenues increased
by 31.9% to $1,058.2 million in fiscal 2004, from
$802.3 million in fiscal 2003. Product revenues growth was
across all geographies. This increase in product revenues was
specifically attributable to increased software licenses and
software subscriptions and an increase in units shipped,
compared to the prior year.
Product revenues were favorably affected by the following
factors:
•
Increased revenues from our current products such as: FAS960,
FAS940, FAS270, and FAS250 storage systems; NearStore R200
and R150 nearline storage systems; NetCache C2100 and
C6200 appliances, as well as our gateway storage systems
(gFiler), GF960, GF940 and GF825
•
Increased revenues from data management software products that
are focused on solving enterprise customer storage challenges,
including regulatory and compliance data needs, storage
consolidation, Internet access and security, technical
applications, and data protection
•
Higher sales of software subscription upgrades representing 9.7%
and 8.4% of total revenues for fiscal year 2004 and 2003,
respectively
•
Increased demand for regulatory compliance WORM solutions and
back-up-to-disk solutions
•
Increased sales through indirect channels, including sales
through our resellers, distributors, and OEM partners,
representing 47.9% and 46.5% of total revenues for fiscal 2004
and 2003, respectively
•
Incremental revenue due to an extra week of business in fiscal
2004 compared to fiscal 2003
Product revenues were negatively affected by the following
factors:
•
Lower-cost-per-megabyte disks
•
Declining average selling price and unit sales of our older
storage systems
The acquisition of Spinnaker in the fourth quarter of fiscal
2004 did not have a significant impact on fiscal 2004 revenues.
Service Revenues — Service revenues, which
include hardware support, professional services, and educational
services, increased by 24.9% to $112.1 million in fiscal
2004, from $89.8 million in fiscal 2003. Service revenues
are generally deferred and, in most cases, recognized ratably
over the service obligation periods, which are typically one to
three years. Service revenues represented 9.6%, and 10.1% of
total revenues for fiscal year 2004 and 2003, respectively. The
increase in absolute dollars was due to an increasing number of
enterprise customers, which typically purchase more complete and
generally longer-term service packages.
Higher service revenues were also related to a growing installed
base resulting in new customer support contracts in addition to
support contract renewals by existing customers.
International Total Revenues — International
total revenues (including U.S. exports) increased by 46.9%
in fiscal year 2004 compared with fiscal 2003. International
total revenues were $551.0 million, or 47.1% of total
revenues for fiscal year 2004 compared with $375.2 million
or 42.1% of total revenues for fiscal 2003. The increase in
international sales for fiscal year 2004 was primarily a result
of European and Asia/ Pacific net revenues growth, driven by
larger storage implementations, new products, and higher storage
spending in certain geographic regions, compared to the previous
fiscal year.
Product Gross Margin — Product gross margin
decreased to 64.9% for fiscal 2004, from 65.1% for fiscal 2003.
Amortization of existing technology included in cost of product
revenues was $3.7 million and $5.5 million for fiscal
year 2004 and 2003, respectively.
Product gross margin was negatively affected by the following
factors:
•
Increased sales through certain indirect channels, which have a
lower gross margin than our direct sales
•
Transitional costs associated with implementation of a new
Enterprise Resource Planning (ERP) system
•
Higher disk content with an expanded storage capacity for the
higher-end storage systems and NearStore systems
•
Sales price reductions due to competitive pricing pressure and
selective pricing discounts
•
Lower average selling price of certain add-on software options
Product gross margin was favorably affected by the following
factors:
•
Favorable product and add-on software mix
•
Competitive pricing solutions with our bundled software and
solutions set
•
Higher average selling prices for our new products
•
Growth in software subscription upgrades and software licenses
due primarily to a larger installed base and an increasing
number of new enterprise customers
•
Lower cost of components
Service Gross Margin — Service gross margin
decreased to 15.9% in fiscal 2004 as compared to 26.5% in fiscal
2003. Investments in global service increased by 43.0% to
$94.3 million in fiscal 2004, from $66.0 million in
fiscal 2003. The decrease in service gross margin was primarily
due to the continued investment in our service infrastructure to
support our increasing enterprise customer base, partially
offset by improved headcount utilization. These investments
included additional professional support engineers, increased
support center activities, and global service partnership
programs.
Sales and Marketing — Sales and marketing
expenses consist primarily of salaries, commissions, advertising
and promotional expenses, and certain global service and support
costs. Sales and marketing expenses increased 14.9% to
$349.5 million for fiscal 2004, from $304.2 million
for fiscal 2003. These expenses were 29.9% and 34.2% of total
revenues for fiscal 2004 and fiscal 2003, respectively. The
increase in absolute dollars was attributed to sales kickoff and
club meetings, increased commission expenses resulting from
increased revenues, an extra week of expenses in fiscal 2004
compared to fiscal 2003, the continued worldwide investment in
our sales and global service organizations associated with
selling complete enterprise solutions and scaling our sales
infrastructure, offset by cost controls and reduction in
discretionary spending efforts. Sales and marketing headcount
increased to 1,421 at April 30, 2004, from 1,199 at
April 30, 2003.
Research and Development — Research and
development expenses consist primarily of salaries and benefits,
prototype expenses, nonrecurring engineering charges, fees paid
to outside consultants, and amortiza-
tion of capitalized patents. Included in research and
development expenses are capitalized patents amortization of
$1.5 million for April 30, 2004, compared to none for
the same periods in the prior year.
Research and development expenses increased 16.8% to
$131.9 million for fiscal 2004 from $112.9 million for
fiscal 2003. These expenses represented 11.3% and 12.7% of total
revenues for fiscal years 2004 and 2003, respectively. The
increase in research and development expenses was primarily a
result of an extra week of expenses in fiscal 2004 compared to
fiscal 2003, increased ongoing operating impact of the Spinnaker
acquisition, increased headcount, ongoing support of current and
future product development and enhancement efforts, prototyping
expenses, and nonrecurring engineering charges, offset by cost
controls and reduction in discretionary spending efforts.
Research and development headcount increased to 650 as of
April 30, 2004, compared to 526 as of April 30, 2003.
For both fiscal 2004 and 2003, no software development costs
were capitalized.
General and Administrative — General and
administrative expenses increased 48.1% to $54.6 million in
fiscal 2004, from $36.8 million in fiscal 2003. These
expenses represented 4.7% and 4.1% of total revenues for fiscal
2004 and 2003, respectively. Increases in absolute dollars were
primarily due to expenses associated with initiatives to enhance
and implement our enterprise-wide ERP system, back office
infrastructure and expanded regulatory requirements, partially
offset by cost control and reduction in discretionary spending
efforts. General and administrative headcount increased to 331
in fiscal 2004 from 283 in fiscal 2003.
Stock Compensation — Stock compensation
expenses were $3.9 million and $3.6 million for fiscal
2004 and 2003, respectively. This net increase in stock
compensation expenses reflected primarily higher stock
compensation relating to the Spinnaker acquisition and
restricted stock awards offset by forfeitures of unvested
options assumed in the Spinnaker and WebManage acquisitions.
Restructuring Charges — In fiscal 2002, as a
result of continuing unfavorable economic conditions and a
reduction in IT spending rates, we implemented two restructuring
plans, which included reductions in our workforce and
consolidations of our facilities.
Fiscal 2002 Second Quarter Restructuring Plan. In August
2001, we implemented the first restructuring plan, which
included a reduction in workforce by approximately 200 employees
and a consolidation of facilities. As a result of this
restructuring, we incurred a charge of $8.0 million.
During fiscal 2002, we purchased our Sunnyvale headquarters site
and terminated the operating leases. As a result, an adjustment
was made to reduce the previously recorded estimated facilities
lease losses by $1.5 million.
As of April 30, 2004, we have $0.7 million outstanding
in our accrued and unpaid severance-related restructuring costs
due to changes in estimated costs of certain severance-related
matters. The reserve balance of $0.8 million at
April 30, 2004, was included in other accrued liabilities.
The following analysis sets forth the significant components of
the second quarter fiscal 2002 restructuring at April 30,2004 (in thousands):
Fiscal 2002 Fourth Quarter Restructuring Plan. In April
2002, we completed a restructuring related to the closure of an
engineering facility and consolidation of resources to the
Sunnyvale headquarters. As a result
of this restructuring, we recorded a charge of
$5.9 million. Of the reserve balance at April 30,2004, $0.7 million was included in other accrued
liabilities and the remaining $4.5 million was classified
as long-term obligations.
In fiscal 2003 and 2004, we updated our assumptions and
estimates based on certain triggering events, which resulted in
additional net charges of $0.9 million and
$1.3 million, respectively, primarily relating to sublease
assumptions for our engineering facility.
The following analysis sets forth the significant components of
the fourth quarter fiscal 2002 restructuring at April 30,2004 (in thousands):
Interest Income — During fiscal 2004, interest
income was $13.7 million, compared to $12.2 million in
fiscal 2003. The increase in interest income was primarily
driven by higher cash and investment balances provided by
operating activities partially offset by lower average interest
rates on our investment portfolio.
Other Expenses, Net — Other expenses, net,
included a net exchange loss from foreign currency transactions
of $2.9 million and $1.0 million, respectively, for
fiscal 2004 and 2003. The increase in net exchange loss was
attributed to the impact of currency balance sheet hedging
activities resulting from forecast variances.
Net Gain (Loss) on Investments — Our
investments in publicly held companies are generally considered
impaired when a decline makes the fair value of an investment as
measured by quoted market prices less than its carrying value
and the decline is not considered temporary. In fiscal 2004, we
realized a net gain of $0.7 million on the sale of
previously impaired investments. In fiscal 2003, we recorded a
noncash write down of $2.0 million related to the
impairment of our investments, partially offset by a gain of
$0.8 million on previously impaired investments.
Gain on Sale of Intangible Assets — We recorded
a gain on sale of intangible assets of $0.6 million in
fiscal 2003 related to the sale of our ContentReporter software.
We intend to resell this software through a licensing
arrangement.
Provision (Benefit) for Income Taxes —
Provision for income taxes for fiscal 2004 included a
nonrecurring income tax benefit of $16.8 million or
approximately $0.05 per share associated with a favorable
foreign tax ruling, which occurred during the second quarter of
fiscal 2004. This favorable ruling from the Netherlands provides
for retroactive benefits dating back to fiscal year 2001 as well
as current and future tax rate benefits.
For fiscal 2004, we had an effective tax rate of 10.8% which
included 9.9% reduction to account for the $16.8 million
nonrecurring benefit from the foreign tax ruling. The effective
tax rate for fiscal 2004 differed from the U.S. statutory
rate primarily due to the retroactive and current benefits of
the foreign tax ruling, the availability of tax credits, and the
generation of foreign earnings in lower tax jurisdictions. For
fiscal 2003, our effective tax rate was 21.8%, which included
certain benefits from tax credits and foreign earnings in a
lower tax jurisdiction.
The following sections discuss the effects of changes in our
balance sheet and cash flow, contractual obligations and other
commercial commitments, stock repurchase program, capital
commitments, other sources and uses of cash flow and potential
tax opportunities on our liquidity and capital resources.
Balance Sheet and Other Cash Flows
As of April 30, 2005, compared to April 30, 2004, our
cash, cash equivalents, and short-term investments increased by
$362.0 million to $1,170.0 million. We derive our
liquidity and capital resources primarily from our cash flow
from operations and from working capital. Working capital
increased by $310.7 million to $1,055.7 million as of
April 30, 2005, compared to $745.0 million as of
April 30, 2004.
During fiscal 2005, we recorded cash flows from operating
activities of $462.1 million as compared with
$313.0 million and $192.4 million for fiscal 2004 and
fiscal 2003, respectively. The largest driver of this increase
was fiscal 2005 net income of $225.8 million as
compared to $152.1 million and $76.5 million in fiscal
2004 and fiscal 2003, respectively. Noncash adjustments were
higher in fiscal 2005 compared to fiscal 2004, including
amortization of intangible assets, which was higher by
$4.4 million and stock compensation which was higher by
$4.3 million, all relating to the Spinnaker acquisition. In
addition to higher net income and noncash adjustments in fiscal
2005, the primary factors that impacted the period-to-period
change in cash flows relating to operating activities included
the following:
•
An increase in deferred revenues from higher software
subscription and service billings attributable to our continuing
shift toward larger enterprise customers, as well as renewals of
existing maintenance agreements
•
An increase in accounts payable in fiscal 2005 as a result of
growth in business volumes and facilities expansion projects
•
Increased income taxes payable, primarily reflecting higher
profitability in fiscal 2005 compared to the fiscal 2004
•
Decreased prepaid expenses and other assets in fiscal 2005 due
to a tax refund of $9.0 million in connection with a
carryback of net operating losses generated in fiscal 2000
•
Increased accrued compensation and related benefits due to
higher commission and higher performance-based payroll expenses
reflecting higher revenue and profitability in fiscal 2005
compared to the fiscal 2004
The above factors were partially offset by the effects of the
following:
•
Increased accounts receivable balances due to increased sales in
fiscal 2005 compared to fiscal 2004
•
An increase in inventories due primarily to end-of-life buys for
certain products
We expect that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors,
including fluctuations in our operating results, shipment
linearity, accounts receivable collections, inventory
management, and the timing of tax and other payments.
Capital expenditures for fiscal 2005 were $93.6 million,
which included the $24.1 million site purchase in Research
Triangle Park (RTP), North Carolina, compared to
$48.7 million and $60.2 million in fiscal 2004 and
fiscal 2003, respectively. We used net proceeds of
$266.8 million, $191.7 million, and
$200.0 million in fiscal 2005, 2004, and 2003,
respectively, for net purchases/redemptions of short-term
investments. In fiscal 2005 and 2004, we acquired additional
patents for a purchase price of approximately $0.9 million
and $9.0 million, respectively. Investing activities in
fiscal 2005, 2004, and 2003 also included new investments in
privately held companies of $0.4 million and
$0.9 million and $0.7 million, respectively. We
received $0.3 million, $1.1 million, and
$0.8 million in proceeds from sales of investments in
fiscal 2005, 2004, and 2003, respectively. Under a split dollar
insurance arrangement with our CEO entered in May 2000, we paid
total premiums of $10.2 million, including
$0.2 million, $3.9 million, and $2.0 million for
fiscal years 2005,
2004, and 2003, respectively. In April 2005, our CEO reimbursed
us $10.2 million for these premiums. In fiscal 2004, we
incurred $8.0 million on a bridge loan and related
transactions costs and assumed $1.2 million relating to the
Spinnaker acquisition.
We used $12.1 million and $54.6 million in fiscal 2005
and 2004, respectively, and received $29.3 million in
fiscal 2003 in net financing activities, which included sales of
common stock related to employee stock transactions net of
common stock repurchases. During fiscal 2005 and 2004, we
repurchased 7.7 million and 6.9 million shares of
common stock at a total of $192.9 million and
$136.2 million, respectively. Other financing activities
provided $181.9 million, $81.5 million, and
$29.3 million in the fiscal 2005, 2004, and 2003,
respectively, which related to sales of common stock related to
employee stock transactions. During fiscal 2005, pursuant to the
provisions of our Stock Option plans, we allowed optionees to
satisfy withholding tax obligations by electing to have us
withhold from the shares to be issued upon exercise of a
restricted stock the equivalent shares having a fair market
value equal to $1.1 million withholding taxes to cover for
federal, state, and local withholding taxes.
The change in cash flow from financing was primarily due to the
effects of higher common stock repurchases partially offset by
proceeds from issuance of common stock under employee programs
compared to the same period in the prior year. Net proceeds from
the issuance of common stock related to employee participation
in employee stock programs have historically been a significant
component of our liquidity. The extent to which our employees
participate in these programs generally increases or decreases
based upon changes in the market price of our common stock. As a
result, our cash flow resulting from the issuance of common
stock related to employee participation in employee stock
programs will vary.
Stock Repurchase Program
In fiscal 2005, our Board of Directors approved an increase in
shares authorized to be repurchased from $150.0 million to
$350.0 million in common shares. On May 24, 2005, the
Board authorized an expansion of the program to purchase an
additional $300.0 million of outstanding common stock. The
duration of the repurchase program is open-ended, and the
program may be suspended or discontinued at any time. Share
repurchase activities for fiscal 2005 and 2004, were as follows
(in thousands):
Fiscal Year
2005
2004
Shares repurchased
7,713
6,853
Cost of shares repurchased
$
192,903
$
136,171
Average price per share
$
25.01
$
19.87
Since the inception of the stock repurchase program through
April 30, 2005, we have purchased a total of
14.6 million shares of our common stock at an average price
of $22.59 per share for an aggregate purchase price of
$329.1 million. At April 30, 2005, $20.9 million
in shares remained authorized for repurchases under the plan.
Other Sources and Uses of Cash and Tax
Opportunities
The American Jobs Creation Act of 2004 (“the Jobs
Act”) creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85% dividend-received deduction for
certain dividends from certain non-U.S. subsidiaries. The
deduction is subject to a number of limitations, and we are
currently considering recently issued Treasury and IRS guidance
on the application of the deduction. We are not yet in a
position to decide whether, and to what extent, foreign earnings
that have not yet been remitted to the U.S. might be
repatriated. Based on the analysis to date, however, it is
reasonably possible that as much as $355.0 million might be
repatriated, with a respective tax liability of up to
$15.0 million. We expect to be in a position to finalize
our analysis during our third quarter of fiscal 2006.
For fiscal 2005, 2004, and 2003, we recorded tax benefits, in
the form of reduced payments, of $27.8 million,
$49.5 million, and $18.5 million, respectively,
associated with disqualifying dispositions of employee stock
options. If stock option exercise patterns change, we may
receive less cash from stock option
exercises and may not receive the same level of tax benefits in
the future, which could cause our cash payments for income taxes
to increase.
Contractual Cash Obligations and Other Commercial
Commitments
The following summarizes our contractual cash obligations and
commercial commitments at April 30, 2005, and the effect
such obligations are expected to have on our liquidity and cash
flow in future periods, (in thousands):
2006
2007
2008
2009
2010
Thereafter
Total
Contractual Obligations:
Rent operating lease payments(1)
$
13,057
$
8,798
$
8,382
$
8,644
$
6,616
$
22,634
$
68,131
Equipment operating lease payments
3,766
2,835
1,362
241
1
—
8,205
Venture capital funding commitments(2)
548
548
536
523
511
534
3,200
Purchase commitments and other(3)
758
606
6
—
—
—
1,370
Capital expenditures(4)
19,564
—
—
—
—
—
19,564
Communications & maintenance(5)
4,608
910
347
67
—
—
5,932
Restructuring charges(6)
756
832
836
818
792
469
4,503
Total Contractual Cash Obligations
$
43,057
$
14,529
$
11,469
$
10,293
$
7,920
$
23,637
$
110,905
For purposes of the above table, contractual obligations for the
purchase of goods and services are defined as agreements that
are enforceable, legally binding on us, and subject us to
penalties if we cancel the agreement. Some of the figures we
include in this table are based on management’s estimates
and assumptions about these obligations, including their
duration, the possibility of renewal or termination, anticipated
actions by third parties, and other factors. Because these
estimates and assumptions are necessarily subjective, the
enforceable and legally binding obligations we will actually pay
in future periods may vary from those reflected in the table.
2006
2007
2008
2009
2010
Thereafter
Total
(In thousands)
Other Commercial Commitments:
Letters of credit(7)
$
1,483
$
—
$
—
$
—
$
—
$
337
$
1,820
Restricted cash(8)
1,699
1,693
483
105
—
79
4,059
Total Commercial Commitments
$
3,182
$
1,693
$
483
$
105
$
—
$
416
$
5,879
(1)
We enter into operating leases in the normal course of business.
We lease sales offices, research and development facilities, and
other property and equipment under operating leases throughout
the U.S. and internationally, which expire through fiscal 2015.
Substantially all lease agreements have fixed payment terms
based on the passage of time and contain escalation clauses.
Some lease agreements provide us with the option to renew the
lease or to terminate the lease. Our future operating lease
obligations would change if we were to exercise these options
and if we were to enter into additional operating lease
agreements. Sublease income of $0.2 million has been
included as a reduction of the payment amounts shown in the
table. Facilities operating lease payments exclude the leases
impacted by the restructurings. The amounts for the leases
impacted by the restructurings are included in
subparagraph (6) below.
(2)
Venture capital funding commitments includes a quarterly
committed management fee based on a percentage of our committed
funding to be payable through June 2011.
(3)
Purchase commitments and other represent agreements to purchase
component inventory from our suppliers and/or contract
manufacturers that are enforceable and legally binding against
us. Other examples include minimum cash commitments related to
facilities and utilities. Purchase commitments and other
excludes (a) purchases of good and services we expect to
consume in the ordinary course of business in the next
12 months; (b) open purchase orders which represent an
authorization to purchase
rather than binding agreements; (c) agreements that are
cancelable without penalty and costs that are not reasonably
estimable at this time.
(4)
Capital expenditures include worldwide contractual commitments
to purchase equipment and to construct building and leasehold
improvements, which will be recorded as Property and Equipment.
(5)
Under certain communication contracts with major
telecommunication companies as well as maintenance contracts
with multiple vendors, we are required to pay based on a minimum
volume. Such obligations expire through January 2009.
(6)
These amounts are included on our Consolidated Balance Sheets
under Long-term Obligations and Other Accrued Liabilities, which
is comprised of committed lease payments and operating expenses
net of committed and estimated sublease income. The
restructuring estimated sublease income included various
assumptions such as the time period over which the facilities
will be vacant, expected sublease terms, and expected sublease
rates. The actual amount paid, if the facility is not subleased,
would be increased by $1.8 million to be payable through
November 2010.
(7)
The amounts outstanding under these letters of credit relate to
workers’ compensation, a customs guarantee, a corporate
credit card program, and a foreign lease.
(8)
Restricted cash arrangements relate to facility lease
requirements, service performance guarantees, customs and duties
guarantees, and VAT requirements, and are included under Prepaid
Expenses and Other and Other Assets on our Consolidated Balance
Sheets.
Capital Expenditure Requirements
We expect capital expenditures to increase in the future
consistent with the growth in our business, as we continue to
invest in people, land, buildings, capital equipment and
enhancements to our worldwide infrastructure. We expect that our
existing facilities and those being developed in Sunnyvale,
California; RTP, North Carolina; and worldwide are adequate for
our requirements over at least the next two years and that
additional space will be available as needed. During the first
quarter of fiscal 2005, we purchased three buildings in RTP,
North Carolina, for $24.1 million. We expect to finance
these construction projects, including our commitments under
facilities and equipment operating leases, and any required
capital expenditures over the next few years through cash from
operations and existing cash, cash equivalents and investments.
Off-Balance Sheet Arrangements
As of April 30, 2005, our financial guarantees of
$1.8 million that were not recorded on our balance sheet
consisted of standby letters of credit related to workers’
compensation, a customs guarantee, a corporate credit card
program, and a foreign lease.
As of April 30, 2005, our notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$211.1 million. We do not believe that these derivatives
present significant credit risks because the counterparties to
the derivatives consist of major financial institutions, and we
manage the notional amount of contracts entered into with any
one counterparty. We do not enter into derivative financial
instruments for speculative or trading purposes. Other than the
risk associated with the financial condition of the
counterparties, our maximum exposure related to foreign currency
forward and option contracts is limited to the premiums paid.
We offer both recourse and nonrecourse lease financing
arrangements to our customers. Under the terms of recourse
leases, which are generally three years or less, we remain
liable for the aggregate unpaid remaining lease payments to the
third-party leasing company in the event that any customers were
to default. We initially defer 100% of the recourse lease
receivable and recognize revenue over the term of the lease as
the lease payments become due. As of April 30, 2005, and
2004, the maximum recourse exposure under such leases totaled
approximately $7,047 and $6,755, respectively. Under the terms
of the nonrecourse leases we do not have any continuing
obligations or liabilities. To date, we have not experienced
significant losses under this lease financing program.
We have entered into indemnification agreements with third
parties in the ordinary course of business. Generally, these
indemnification agreements require us to reimburse losses
suffered by the third party due to various events, such as
lawsuits arising from patent or copyright infringement. These
indemnification obligations are considered off-balance sheet
arrangements in accordance with FASB, Interpretation 45, of
FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.”See “Guarantees” in
footnote 14 for further discussion of these indemnification
agreements.
As of April 30, 2005, except for operating leases and other
contractual obligations outlined under the “Contractual
Cash Obligations” table, we do not have any off-balance
sheet financing arrangements or liabilities, retained or
contingent interests in transferred assets, or any obligation
arising out of a material variable interest in an unconsolidated
entity. We also do not have any majority-owned subsidiaries that
are not included in the consolidated financial statements.
Additionally, we do not have any interest in or relationship
with, any special purpose entities.
Liquidity and Capital Resource Requirements
Key factors affecting our cash flows include our ability to
effectively manage our working capital, in particular, accounts
receivable and inventories and future demand for our products
and related pricing. We expect to incur higher capital
expenditures in the near future to expand our operations. We
will from time to time acquire products and businesses
complementary to our business. In the future, we may continue to
repurchase our common stock, which would reduce cash, cash
equivalents, and/or short-term investments available to fund
future operations and meet other liquidity requirements. Based
on past performance and current expectations, we believe that
our cash and cash equivalents, short-term investments, and cash
generated from operations will satisfy our working capital
needs, capital expenditures, stock repurchases, contractual
obligations, and other liquidity requirements associated with
our operations through at least the next 12 months.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to market risk related to fluctuations in
interest rates and foreign currency exchange rates. We use
certain derivative financial instruments to manage these risks.
We do not use derivative financial instruments for speculative
or trading purposes. All financial instruments are used in
accordance with management-approved policies.
Market Interest and Interest Income Risk
Interest and Investment Income — As of
April 30, 2005, we had short-term investments of
$976.4 million. Our investment portfolio primarily consists
of highly liquid investments with original maturities at the
date of purchase of greater than three months, which are
classified as available for sale. These highly liquid
investments, consisting primarily of government, municipal,
corporate debt, and auction-rate securities, are subject to
interest rate and interest income risk and will decrease in
value if market interest rates increase. A hypothetical 10%
increase in market interest rates from levels at April 30,2005, would cause the fair value of these short-term investments
to decline by approximately $2.7 million. Because we have
the ability to hold these investments until maturity, we would
not expect any significant decline in value of our investments
caused by market interest rate changes. Declines in interest
rates over time will, however, reduce our interest income. We do
not use derivative financial instruments in our investment
portfolio.
Foreign Currency Exchange Rate Risk and Foreign Exchange
Forward Contracts
We hedge risks associated with foreign currency transactions to
minimize the impact of changes in foreign currency exchange
rates on earnings. We utilize forward and option contracts to
hedge against the short-term impact of foreign currency
fluctuations on certain assets and liabilities denominated in
foreign currencies. All balance sheet hedges are marked to
market through earnings every period. We also use foreign
exchange forward contracts to hedge foreign currency forecasted
transactions related to certain sales and
operating expenses. These derivatives are designated as cash
flow hedges under SFAS No. 133. For cash flow hedges
outstanding at April 30, 2005, the gains or losses were
included in other comprehensive income.
We do not enter into foreign exchange contracts for speculative
or trading purposes. In entering into forward and option foreign
exchange contracts, we have assumed the risk that might arise
from the possible inability of counterparties to meet the terms
of their contracts. We attempt to limit our exposure to credit
risk by executing foreign exchange contracts with creditworthy
multinational commercial banks. All contracts have a maturity of
less than one year.
The following table provides information about our foreign
exchange forward contracts and currency options contracts
outstanding on April 30, 2005 (in thousands):
The following table provides information about our foreign
exchange forward contracts and currency options contracts
outstanding on April 30, 2004 (in thousands):
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of
Network Appliance, Inc. and its subsidiaries (the
“Company”) as of April 30, 2005 and 2004, and the
related consolidated statements of income, stockholders’
equity and comprehensive income (loss) and cash flows for each
of the three years in the period ended April 30, 2005. Our
audits also included the consolidated financial statement
schedule listed in Item 15(a)(2). These financial
statements and the financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial
statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Network Appliance, Inc. and its subsidiaries as of
April 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in
the period ended April 30, 2005 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the consolidated financial
statement schedule listed in Item 15(a)(2), when considered
in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of April 30, 2005, based on the
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
July 7, 2005 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Based in Sunnyvale, California, Network Appliance was
incorporated in California in April 1992 and reincorporated in
Delaware in November 2001. Network Appliance, Inc. is a leading
supplier of enterprise storage and data management software and
hardware products and services. Our solutions help global
enterprises meet major information technology challenges such as
managing storage growth, assuring secure and timely information
access, protecting data and controlling costs by providing
innovative solutions that simplify the complexity associated
with managing corporate data. Network Appliance solutions are
the data management and storage foundation for many of the
world’s leading corporations and government agencies.
2.
Significant Accounting Policies
Fiscal Year — We operate on a 52-week or
53-week year ending on the last Friday in April. For
presentation purposes we have indicated in the accompanying
consolidated financial statements that our fiscal year end is
April 30. Fiscal 2005 and 2003 were 52-week fiscal years.
Fiscal 2004 was 53-week fiscal year.
Basis of Presentation — The consolidated
financial statements include the Company and its wholly-owned
subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Risk and Uncertainties — There are no
concentrations of business transacted with a particular customer
nor concentrations of sales from a particular market or
geographic area that would severely impact our business in the
near term. However, we currently rely on a limited number of
suppliers for certain key components and several key contract
manufacturers to manufacture most of our products; any
disruption or termination of these arrangements could materially
adversely affect our operating results.
Reclassifications — Certain reclassifications
have been made to prior year balances in order to conform to the
current year presentation.
Cash and Cash Equivalents — We consider all
highly liquid debt investments with original maturities of three
months or less to be cash equivalents.
Short-Term Investments — Available-for-sale
investments with original maturities of greater than three
months are classified as short-term investments as these
investments generally consist of highly marketable securities
that are intended to be available to meet current cash
requirements. All of our investments are classified as
available-for-sale, are carried at fair market value, and
unrealized gains or losses are recorded, net of taxes in
accumulated other comprehensive income (loss), which is a
separate component of stockholders’ equity. Any gains or
losses on sales of investments are computed based upon specific
identification. For all periods presented, realized gains and
losses on available-for-sale investments were not material.
Management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates the
classification at each reporting date.
Available-for-sale investments are reviewed for evidence of
reductions in market value that are other-than-temporary. We
monitor our investments for impairment on a quarterly basis and
determine whether a decline in fair value is
other-than-temporary by considering factors such as current
economic and market conditions, the credit rating of the
security’s issuer, the length of time an investment’s
fair value has been below our carrying value, and our ability
and intent to hold investments to maturity. If an
investment’s decline in fair value, caused by factors other
than changes in interest rates, is deemed to be
other-than-temporary, we would reduce its carrying value to its
estimated fair value, as determined based on quoted market
prices or liquidation values. Declines in value judged to be
other-than-temporary, if any, are recorded in operations as
incurred.
Beginning in January 2005, our investment in auction rate
securities have been classified as short-term investments on the
Consolidated Balance Sheets rather than as cash equivalents (see
Note 3 Balance Sheet
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
Components). Reclassifications are reflected in our prior
years’ Consolidated Balance Sheets and Statements of Cash
Flows as appropriate. None of these reclassifications had an
impact on our Consolidated Statements of Income for any year
presented.
Investments in Nonpublic Companies — We have
certain investments in nonpublicly traded companies in which we
have less than 20% of the voting rights and in which we do not
exercise significant influence and accordingly, we account for
these investments under the cost method. As of April 30,2005 and 2004, $1,837 and $1,593 of these investments are
included in other long-term assets on the balance sheet and are
carried at cost. We perform periodic reviews of our investments
for impairment. Our investments in nonpublicly traded companies
are considered impaired when a review of the investees”
operations and other indicators of impairment indicate that the
carrying value of the investment is not likely to be
recoverable. Such indicators include, but are not limited to,
limited capital resources, limited prospects of receiving
additional financing, and limited prospects for liquidity of the
related securities.
Inventories — Inventories are stated at the
lower of cost (first-in, first-out basis) or market. Cost
components include materials, labor, and manufacturing overhead
costs. We write down inventory and record purchase commitment
liabilities for excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated fair
value based upon assumptions about future demand and market
conditions.
Property and Equipment — Property and equipment
are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, which generally range from three to five years. The land
at the Sunnyvale headquarters site and Research Triangle Park
(RTP), North Carolina are not depreciated but are reviewed for
impairment as discussed below. Leasehold improvements are
amortized over the shorter of the estimated useful lives of the
assets or the remaining term of the lease. Building improvements
are amortized over the estimated lives of the assets, which
generally range from 10 to 40 years. Construction in
progress will be amortized over the estimated useful lives of
the respective assets when they are ready for their intended use.
We review the carrying values of long-lived assets whenever
events and circumstances indicate that the net book value of an
asset may not be recovered through expected future cash flows
from its use and eventual disposition. The amount of impairment
loss, if any, is measured as the difference between the net book
value and the estimated fair value of the asset.
Goodwill and Purchased Intangible Assets —
Goodwill and identifiable intangibles are accounted for in
accordance with SFAS No. 141 “Business
Combinations”and SFAS No. 142
“Goodwill and Other Intangible Assets”. We
recorded goodwill and identifiable intangibles related to the
acquisitions of Orca, WebManage and Spinnaker and evaluate these
items for impairment on an annual basis, or sooner if events or
changes in circumstances indicate that carrying values may not
be recoverable. If an evaluation is required, the estimated
future undiscounted cash flows associated with these assets
would be compared to their carrying amount to determine if a
write-down to fair market value or discounted cash flow value is
required. We performed an annual impairment test of goodwill on
February 25, 2005, and February 27, 2004,
respectively, and found no impairment.
Purchased intangible assets include patents, trademarks,
tradenames, customer contracts/relationships and covenants not
to compete, which are carried at cost less accumulated
amortization. Amortization of purchased intangible assets is
computed using the straight-line method over estimated useful
lives of the assets, which generally range from 18 months
to five years. See Note 13 “Goodwill and Purchased
Intangible Assets.”
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
Revenue Recognition and Allowance — We apply
the provisions of Statement of Position (“SOP”)
No. 97-2, “Software Revenue Recognition,” and
related interpretations to all revenue transactions. We
recognize revenue when:
•
Persuasive Evidence of an Arrangement Exists. It is our
customary practice to have a purchase order and/or contract
prior to recognizing revenue on an arrangement from our end
users, customers, value-added resellers, or distributors.
•
Delivery has Occurred. Our product is physically
delivered to our customers, generally with standard transfer
terms such as FOB origin or EXWorks point of origin. We
typically do not allow for restocking rights with any of our
value-added resellers or distributors. Products shipped with
acceptance criteria or return rights are not recognized as
revenue until all criteria are achieved. If undelivered products
or services exist that are essential to the functionality of the
delivered product in an arrangement, delivery is not considered
to have occurred.
•
The Fee is Fixed or Determinable. Arrangements with
payment terms extending beyond our standard terms and conditions
practices are not considered to be fixed or determinable.
Revenue from such arrangements is recognized as the fees become
due and payable. We typically do not allow for price-protection
rights with any of our value-added resellers or distributors.
•
Collection is Probable. Probability of collection is
assessed on a customer-by-customer basis. Customers are
subjected to a credit review process that evaluates the
customers’ financial position and ultimately their ability
to pay. If it is determined from the outset of an arrangement
that collection is not probable based upon our review process,
revenue is recognized upon cash receipt.
For arrangements with multiple elements, we allocate revenue to
each element using the residual method based on vendor specific
objective evidence of fair value of the undelivered items. We
defer the portion of the arrangement fee equal to the vendor
specific objective evidence of fair value of the undelivered
elements until they are delivered. Vendor specific objective
evidence of fair value is based on the price charged when the
element is sold separately.
A typical arrangement includes product, software subscription,
and maintenance. Some arrangements include training and
consulting. Software subscriptions include unspecified product
upgrades and enhancements on a when-and-if-available basis, bug
fixes, and patch releases, and are included in product revenues.
Service maintenance includes contracts for technical support and
hardware maintenance. Revenue from software subscriptions and
service maintenance is recognized ratably over the contractual
term, generally one to three years. Revenue from training and
consulting is recognized as the services are performed.
The following table presents the components of revenues, stated
as a percentage of total revenues:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
We record reductions to revenue for estimated sales returns at
the time of shipment. These estimates are based on historical
sales returns, changes in customer demand, and other factors. If
actual future returns and allowances differ from past
experience, additional allowances may be required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of our accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of
our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Software Development Costs — The costs for the
development of new software products and substantial
enhancements to existing software products are expensed as
incurred until technological feasibility has been established,
at which time any additional costs would be capitalized in
accordance with SFAS No. 86, “Accounting for
the Costs of Software to Be Sold, Leased, or Otherwise
Marketed.”Because we believe our current process for
developing software is essentially completed concurrently with
the establishment of technological feasibility, which occurs
upon the completion of a working model, no costs have been
capitalized for any of the periods presented. In accordance with
SOP No. 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,”the
cost of internally developed software is capitalized and
included in property and equipment at the point at which the
conceptual formulation, design, and testing of possible software
project alternatives have been completed and management
authorizes and commits to funding the project. Pilot projects
and projects where expected future economic benefits are less
than probable are not capitalized. Internally developed software
costs include the cost of software tools and licenses used in
the development of our systems, as well as consulting costs.
Completed projects are transferred to property and equipment at
cost and are amortized on a straight-line basis over their
estimated useful lives, generally three years.
Income Taxes — Deferred income tax assets and
liabilities are provided for temporary differences that will
result in future tax deductions or income in future periods, as
well as the future benefit of tax credit carryforwards. A
valuation allowance reduces tax assets to their estimated
realizable value. U.S. income taxes are not provided on
that portion of unremitted earnings of foreign subsidiaries
expected to be reinvested indefinitely.
Foreign Currency Translation — For subsidiaries
whose functional currency is the local currency, gains and
losses resulting from translation of these foreign currency
financial statements into U.S. dollars are recorded within
stockholders’ equity as part of accumulated other
comprehensive income (loss). For subsidiaries where the
functional currency is the U.S. dollar, gains and losses
resulting from the process of remeasuring foreign currency
financial statements into U.S. dollars are included in
other income (expenses), net.
Derivative Instruments — We follow
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”as amended by
SFAS No. 149, “Amendment of
SFAS No. 133 on Derivative Instruments and Hedging
Activities.”Derivatives that are not designated as
hedges are adjusted to fair value through earnings. If the
derivative is designated as a hedge, depending on the nature of
the exposure being hedged, changes in fair value will either be
offset against the change in fair value of the hedged asset or
liability through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The
ineffective portion of the hedge is recognized in earnings
immediately.
As a result of our significant international operations, we are
subject to risks associated with fluctuating exchange rates. We
use derivative financial instruments, principally currency
forward contracts and currency options, to attempt to minimize
the impact of exchange rate movements on our balance sheet and
operating
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
results. Factors that could have an impact on the effectiveness
of our hedging program include the accuracy of forecasts and the
volatility of foreign currency markets. These programs reduce,
but do not always entirely eliminate, the impact of currency
exchange movements. The maturities of these instruments are
generally less than one year.
Currently, we do not enter into any foreign exchange forward
contracts to hedge exposures related to firm commitments or
equity investments. Our major foreign currency exchange
exposures and related hedging programs are described below:
Balance Sheet. We utilize foreign currency forward and
options contracts to hedge exchange rate fluctuations related to
certain foreign assets and liabilities. Gains and losses on
these derivatives offset gains and losses on the assets and
liabilities being hedged and the net amount is included in
earnings. In fiscal 2005, net gains generated by hedged assets
and liabilities totaled $4,312, which were offset by losses on
the related derivative instruments of $5,933. In fiscal 2004,
net gains generated by hedged assets and liabilities totaled
$7,265, which were offset by losses on the related derivative
instruments of $10,115. In fiscal 2003, net gains generated by
hedged assets and liabilities totaled $9,910, which were offset
by losses on the related derivative instruments of $10,932.
The premiums paid on the foreign currency option contracts are
recognized as a reduction to other income when the contract is
entered into. Other than the risk associated with the financial
condition of the counterparties, our maximum exposure related to
foreign currency options is limited to the premiums paid.
Forecasted Transactions. We use currency forward
contracts to hedge exposures related to forecasted sales and
operating expenses denominated in certain foreign currencies.
These contracts are designated as cash flow hedges and in
general closely match the underlying forecasted transactions in
duration. The contracts are carried on the balance sheet at fair
value and the effective portion of the contracts’ gains and
losses is recorded as other comprehensive income until the
forecasted transaction occurs.
If the underlying forecasted transactions do not occur, or it
becomes probable that they will not occur, the gain or loss on
the related cash flow hedge is recognized immediately in
earnings. For fiscal years 2005, 2004 and 2003, we did not
record any gains or losses related to forecasted transactions
that did not occur or became improbable.
We measure the effectiveness of hedges of forecasted
transactions on at least a quarterly basis by comparing the fair
values of the designated currency forward contracts with the
fair values of the forecasted transactions. No ineffectiveness
was recognized in earnings during fiscal 2005, 2004 and 2003. As
of April 30, 2005 the notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$211,064.
We do not believe that these derivatives present significant
credit risks, because the counterparties to the derivatives
consist of major financial institutions, and we manage the
notional amount of contracts entered into with any one
counterparty. We do not enter into derivative financial
instruments for speculative or trading purposes.
Use of Estimates — The preparation of the
consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the
United States of America requires management to establish
accounting policies which contain estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
Concentration of Credit Risk — Financial
instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents, short-term
investments, and accounts receivable. Cash, cash equivalents,
and short-term investments consist primarily of
U.S. government agencies, corporate bonds, auction-rate
securities and municipal bonds, cash accounts held at various
banks, and money market funds held at several financial
institutions. We sell our products primarily to large
organizations in different industries and geographies. Credit
risk is mitigated by our credit evaluation process and limited
payment terms. We do not require collateral or other security to
support accounts receivable. In addition, we maintain an
allowance for potential credit losses. In entering into forward
foreign exchange contracts, we have assumed the risk that might
arise from the possible inability of counterparties to meet the
terms of their contracts. The counterparties to these contracts
are major multinational commercial banks, and we do not expect
any losses as a result of counterparty defaults.
Comprehensive Income — Comprehensive income is
defined as the change in equity during a period from nonowner
sources. Comprehensive income for the years ending
April 30, 2005, 2004, and 2003 has been disclosed within
the consolidated statement of stockholders’ equity and
comprehensive income (loss).
The components of accumulated other comprehensive income (loss)
net of related tax effects at April 30, were as follows:
2005
2004
2003
Accumulated translation adjustments
$
1,283
$
1,202
$
(1,238
)
Accumulated unrealized gain (loss) on derivatives
111
312
(29
)
Accumulated unrealized gain (loss) on available-for-sale
investments, net
(5,444
)
(892
)
1,171
Total accumulated other comprehensive income (loss)
$
(4,050
)
$
622
$
(96
)
Net Income per Share — Basic net income per
share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for that period. Diluted net income per share is
computed giving effect to all dilutive potential shares that
were outstanding during the period. Dilutive potential common
shares consist of incremental common shares subject to
repurchase, common shares issuable upon exercise of stock
options and restricted stock awards.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
Years Ended April 30
2005
2004
2003
Net Income
$
225,754
$
152,087
$
76,472
Shares (Denominator):
Weighted average common shares outstanding
361,514
347,134
337,709
Weighted average common shares outstanding subject to repurchase
(505
)
(169
)
(62
)
Shares used in basic computation
361,009
346,965
337,647
Weighted average common shares outstanding subject to repurchase
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
At April 30, 2005, 2004, and 2003, 15,994, 19,794, and
44,582 shares of common stock options with a weighted
average exercise price of $52.81, $47.16, and $30.98
respectively, were excluded from the diluted net income per
share computation, as their exercise prices were greater than
the average market price of the common shares for the periods
presented and would therefore be antidilutive.
Stock-Based Compensation — We account for
stock-based compensation in accordance with the provisions of
APB No. 25, “Accounting for Stock Issued to
Employees,”and comply with the disclosure provisions
of SFAS No. 123 as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosures.”Deferred compensation
recognized under APB No. 25 is amortized ratably to expense
over the vesting periods. We account for stock options issued to
nonemployees in accordance with the provisions of
SFAS No. 123 and EITF No. 96-18
“Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”under the fair-value-based
method.
We adopted the disclosure-only provisions of
SFAS No. 123, and accordingly, no expense has been
recognized for options granted to employees under the various
option plans described under Note 6. We amortize deferred
stock-based compensation ratably over the vesting periods of the
applicable stock purchase rights, restricted stocks, and stock
options, generally four years. Deferred stock compensation under
APB No. 25 and pro forma net income (loss) under the
provisions of SFAS No. 123 are adjusted to reflect
cancellations and forfeitures due to employee terminations as
they occur.
Had compensation expense been determined based on the fair value
at the grant date for awards, consistent with the provisions of
SFAS No. 123, our pro forma net income (loss) and pro
forma net income (loss) per share would be as follows:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
The fair values of each option grant and shares purchased were
estimated on the date of grant using the Black-Scholes option
pricing model and were not remeasured as a result of subsequent
stock price fluctuations. The following assumptions were used:
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective
assumptions, including the expected stock price volatility. We
use projected volatility rates, which are based upon historical
volatility rates since our initial public offering trended into
future years.
Statements of Cash Flows — Supplemental cash
flow and noncash investing and financing activities are as
follows:
Years Ended April 30
2005
2004
2003
Supplemental Cash Flow Information:
Income taxes paid
$
13,284
$
14,566
$
7,952
Income tax refund
12,399
13,812
89
Noncash Investing and Financing Activities:
Deferred stock compensation, net of reversals
154
25,382
(441
)
Income tax benefit from employee stock transactions
27,829
49,535
18,458
Conversion of evaluation inventory to equipment
10,122
7,892
9,340
Common stock issued and options assumed for acquired business
—
302,612
—
Milestone shares issued
—
—
921
Release of escrow shares
—
—
1,210
Recently Issued Accounting Standards — In
November 2004, the FASB issued SFAS No. 151
“Inventory Costs”(SFAS No. 151).
This statement amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, “Inventory
Pricing,”to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS No. 151 requires that
those items be recognized as current-period charges. In
addition, this statement requires that allocation of fixed
production overheads to costs of conversion be based upon the
normal capacity of the production facilities. The provisions of
SFAS No. 151 are effective for inventory costs
incurred in fiscal years beginning after June 15, 2005. As
such, we are required to adopt these provisions at the beginning
of fiscal 2007. We do not expect the adoption of
SFAS No. 151 to have a material impact on our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment”(FAS 123R) that addresses the accounting for
share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of
the enterprise or liabilities that are based on the fair value
of the enterprise’s equity instruments or that may be
settled by the issuance of such
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
equity instruments. The statement eliminates the ability to
account for share-based compensation transactions using the
intrinsic value method as prescribed by Accounting Principles
Board, or APB, Opinion No. 25, “Accounting for Stock
Issued to Employees,” and generally requires that such
transactions be accounted for using a fair-value-based method
and recognized as expenses in our consolidated statement of
income. The statement requires companies to assess the most
appropriate model to calculate the value of the options. We
currently use the Black-Scholes option pricing model to value
options and are currently assessing which model we may use in
the future under the statement and may deem an alternative model
to be the most appropriate. The use of a different model to
value options may result in a different fair value than the use
of the Black-Scholes option pricing model. In addition, there
are a number of other requirements under the new standard that
will result in differing accounting treatment than currently
required. These differences include, but are not limited to, the
accounting for the tax benefit on employee stock options and for
stock issued under our employee stock purchase plan. In addition
to the appropriate fair value model to be used for valuing
share-based payments, we will also be required to determine the
transition method to be used at date of adoption. The allowed
transition methods include prospective and retroactive adoption
methods. Under the retroactive methods, prior periods may be
restated either as of the beginning of the year of adoption or
for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of
adoption of FAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. The
effective date of the new standard for our consolidated
financial statements is the first quarter of fiscal 2007, which
begins on May 1, 2006.
Upon adoption, this statement will have a significant impact on
our consolidated financial statements because we will be
required to expense the fair value of our stock option grants
and stock purchases under our employee stock purchase plan
rather than disclose the impact on our consolidated net income
within our footnotes as is our current practice (see Note 2
of the Notes to Consolidated Financial Statements contained
herein). The amounts disclosed within our footnotes are not
necessarily indicative of the amounts that will be expensed upon
the adoption of FAS 123R. Compensation expense calculated
under FAS 123R may differ from amounts currently disclosed
within our footnotes based on changes in the fair value of our
common stock, changes in the number of options granted or the
terms of such options, the treatment of tax benefits and changes
in interest rates or other factors. In addition, upon adoption
of FAS 123R we may choose to use a different valuation
model to value the compensation expense associated with employee
stock options.
In March 2005, the SEC issued SAB 107. SAB 107
includes interpretive guidance for the initial implementation of
FAS 123R. We will apply the principles of SAB 107 in
conjunction with our adoption of FAS 123R.
In January 2005, the FASB issued FASB Staff Position
(“FSP”) No. FAS 109-1, “Application
of SFAS No. 109 to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004”. This FSP provides guidance for the accounting
of a deduction provided to U.S. manufacturing companies and
is effective immediately. We believe the adoption of this
position currently will not have a material effect on our
financial position or results of operations. However, there is
no assurance that there will not be a material impact in the
future.
In December 2004, the FASB issued FASB Staff Position
(“FSP”) No. 109-2, “Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004.”The American Jobs Creation Act introduces a special one-time
dividends received deduction on the repatriation of certain
foreign earnings to U.S. companies, provided certain
criteria are met. FSP No. 109-2 provides accounting and
disclosure guidance on the impact of the repatriation provision
on a company’s income tax expense and deferred tax
liability. We are currently studying the impact of the one-time
favorable foreign dividend provision and intend to complete the
analysis during the third quarter of fiscal 2006.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
Accordingly, we have not adjusted our income tax expense or
deferred tax liability to reflect the tax impact of any
repatriation of non-U.S. earnings.
3.
Balance Sheet Components
Short-term investments
The following is a summary of investments at April 30, 2005:
Gross Unrealized
Amortized
Estimated
Cost
Gains
Losses
Fair Value
Auction rate securities
$
145,803
$
—
$
—
$
145,803
Municipal bonds
22,280
—
64
22,216
Corporate securities
29
21
—
50
Corporate bonds
441,484
25
4,119
437,390
U.S. government agencies
354,108
17
3,124
351,001
U.S. Treasuries
20,187
—
224
19,963
Money market funds
125,762
—
—
125,762
Total debt and equity securities
1,109,653
63
7,531
1,102,185
Less cash equivalents
125,762
—
—
125,762
Short-term investments
$
983,891
$
63
$
7,531
$
976,423
The following is a summary of investments at April 30, 2004:
Gross Unrealized
Amortized
Estimated
Cost
Gains
Losses
Fair Value
Auction rate securities(1)
$
148,821
$
—
$
—
$
148,821
Municipal bonds
16,261
—
63
16,198
Corporate securities
12,897
—
12
12,885
Corporate bonds
276,390
235
780
275,845
U.S. government agencies
248,373
237
899
247,711
Certificate of deposit
2,036
3
—
2,039
U.S. Treasuries
12,174
—
36
12,138
Money market funds
39,984
—
—
39,984
Total debt and equity securities
756,936
475
1,790
755,621
Less cash equivalents
39,984
—
—
39,984
Short-term investments
$
716,952
$
475
$
1,790
$
715,637
(1)
Prior to fiscal 2005, we classified our investment in auction
rate securities as cash equivalents on the Consolidated Balance
Sheets. In fiscal 2005, we have classified all investments in
auction rate securities as short-term investments. To conform to
current year presentation, we have reclassified $148,821 of
auction rate securities from cash equivalents to short-term
investments for fiscal 2004. The impact on the Consolidated
Statements of Cash Flows was a decrease in cash used for
investing activities of $43,473 for fiscal 2004 and an increase
in cash used for investing activities of $110,025 for fiscal
2003. The reclassification had no impact on the Consolidated
Statements of Income for any of the periods presented.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
We record net unrealized gains or losses on available-for-sale
securities in stockholders’ equity. Realized gains or
losses are reflected in income which have not been material for
all years presented. In accordance with EITF 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,”the following
table shows the gross unrealized losses and fair values of our
investments, aggregated by investment category and length of
time that individual securities have been in a continuous
unrealized loss position, at April 30, 2005.
Less than 12 Months
12 Months or Greater
Total
Unrealized
Unrealized
Unrealized
Fair Value
Loss
Fair Value
Loss
Fair Value
Loss
Municipal bonds
$
13,013
$
(44
)
$
9,203
$
(20
)
$
22,216
$
(64
)
Corporate bonds
267,546
(2,242
)
169,844
(1,877
)
437,390
(4,119
)
U.S. government agencies
142,750
(948
)
208,251
(2,176
)
351,001
(3,124
)
US Treasury
14,972
(137
)
4,991
(87
)
19,963
(224
)
Total
$
438,281
$
(3,371
)
$
392,289
$
(4,160
)
$
830,570
$
(7,531
)
The unrealized losses on these investments were primarily due to
interest rate fluctuations. We have the ability and intent to
hold these investments until recovery of their carrying values.
We also believe that we will be able to collect all principal
and interest amounts due to us at maturity given the high credit
quality of these investments. Accordingly, we do not consider
these investments to be other-than-temporarily impaired at
April 30, 2005.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
During the first quarter of fiscal 2005, as part of our
expansion efforts, we purchased three buildings in RTP, North
Carolina, for $24,095 which are included in Land and
Construction-in-progress at April 30, 2005.
4.
Commitments and Contingencies
The following summarizes our commitments and contingencies at
April 30, 2005, and the effect such obligations may have on
our future periods:
2006
2007
2008
2009
2010
Thereafter
Total
Contractual Obligations:
Rent operating lease payments(1)
$
13,057
$
8,798
$
8,382
$
8,644
$
6,616
$
22,634
$
68,131
Equipment operating lease payments
3,766
2,835
1,362
241
1
—
8,205
Venture capital funding commitments(2)
548
548
536
523
511
534
3,200
Purchase commitments and other(3)
758
606
6
—
—
—
1,370
Capital expenditures(4)
19,564
—
—
—
—
—
19,564
Communications and maintenance(5)
4,608
910
347
67
—
—
5,932
Estimated contingent lease payments(6)
68
316
327
370
430
251
1,762
Total Contractual Cash Obligations
$
42,369
$
14,013
$
10,960
$
9,845
$
7,558
$
23,419
$
108,164
Other Commercial Commitments:
Letters of credit(7)
$
1,483
$
—
$
—
$
—
$
—
$
337
$
1,820
Restricted cash(8)
1,699
1,693
483
105
—
79
4,059
Total Commercial Commitments
$
3,182
$
1,693
$
483
$
105
$
—
$
416
$
5,879
(1)
We lease sales offices and research and development facilities
throughout the U.S. and internationally. These sales offices are
also leased under operating leases which expire through fiscal
2015. We are responsible for certain maintenance costs, taxes,
and insurance under these leases. Substantially all lease
agreements have fixed payment terms based on the passage of
time. Some lease agreements provide us with the option to renew
or terminate the lease. Our future operating lease obligations
would change if we were to exercise these options and if we were
to enter into additional operating lease agreements. Sublease
income of $158 has been included as a reduction of the payment
amounts shown in the table. Rent operating lease payments in the
table exclude lease payments which are accrued as part of our
2002 restructurings and include only rent lease commitments that
are over one year. Total rent expense for all facilities was
$18,595, $15,405, and $12,609 for the years ended April 30,2005, 2004, and 2003, respectively. Rent expense under certain
of our facility leases is recognized on a straight-line basis
over the term of the lease. The difference between the amounts
paid and the amounts expensed is classified as long-term
obligations in the accompanying consolidated balance sheets.
(2)
Venture capital funding commitments includes a quarterly
committed management fee based on a percentage of our committed
funding to be payable through June 2011.
(3)
Purchase commitments and other represent agreements to purchase
component inventory from our suppliers and/or contract
manufacturers that are enforceable and legally binding against
us. Other examples include minimum cash commitment relating to
facilities and utilities. Purchase commitments and other
excludes (a) purchases of good and services we expect to
consume in the ordinary course of
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
business in the next 12 months; (b) open purchase
orders, which represent an authorization to purchase rather than
binding agreements; (c) agreements that are cancelable
without penalty and costs that are not reasonably estimable at
this time.
(4)
Capital expenditures include worldwide contractual commitments
to purchase equipment and to construct building and leasehold
improvements, which will be recorded as Property and Equipment.
(5)
Under certain communications contracts with major telephone
companies as well as maintenance contracts with multiple
vendors, we are required to pay based on a minimum volume. Such
obligations expire in January 2009.
(6)
As a result of headcount reductions and a restructuring in
fiscal 2002, we have exited office space under noncancellable
leases in one location. If we are unable to successfully
sublease our vacated and unoccupied office space under operating
leases, we would be obligated to pay $1,762 in excess of the
liability recorded in our restructuring reserves. See
Note 12, “Restructuring Charges.”
(7)
The amounts outstanding under these letters of credit relate to
workers’ compensation, a customs guarantee, a corporate
credit card program, and a foreign lease.
(8)
Restricted cash arrangements relate to facility lease
requirements, service performance guarantees, customs and duties
guarantees, and VAT requirements, and are included under Prepaid
Expenses and Other and Other Assets on our Consolidated Balance
Sheets.
Under the split dollar insurance arrangement with our CEO Daniel
J. Warmenhoven entered in May 2000, we paid a total premium
on several insurance policies over five years, which totaled
$10,227 on the life of the survivor of Mr. Warmenhoven and
his wife. Under the arrangement, we were reimbursed for all
premium payments made on those policies in April 2005.
From time to time, we have committed to purchase various key
components used in the manufacture of our products. We establish
accruals for estimated losses on purchased components for which
we believe it is probable that they will not be utilized in
future operations. To the extent that such forecasts are not
achieved, our commitments and associated accruals may change.
We are subject to various legal proceedings and claims which may
arise in the normal course of business. While the outcome of
these legal matters is currently not determinable, we do not
believe that any current litigation or claims will have a
material adverse effect on our business, cash flow, operating
results, or financial condition.
5.
Line of Credit
In July 1998, we negotiated a $5,000 unsecured revolving credit
facility with a domestic commercial bank. Under terms of the
credit facility, which expires in December 2005, we must
maintain various financial covenants. Any borrowings under this
agreement bear interest at either LIBOR plus 1% or at the
lender’s “prime” lending rate, such rate
determined at our discretion. As of April 30, 2005, the
amounts drawn under the various letters of credit amounted to
$1,483 relating primarily to workers’ compensation and a
foreign lease.
We also have foreign exchange facilities used for hedging
arrangements with several banks that allow us to enter into
foreign exchange contracts of up to $185,000, of which $27,015
was available at April 30, 2005.
6.
Stockholders’ Equity
Preferred Stock — Our Board of Directors has
the authority to issue up to 5,000 shares of preferred
stock and to determine the price, rights, preferences,
privileges, and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
Stock Option Plans — In September 1995, we
adopted the 1995 Stock Incentive Plan (the 1995 Plan). All
outstanding options issued under a previous option plan were
incorporated into the 1995 Plan upon the effectiveness of our
initial public offering.
Under the 1995 Plan, the Board of Directors may grant to
employees, directors, and consultants options to purchase shares
of our common stock. The 1995 Plan comprises three separate
equity incentive programs: (i) the Discretionary Option
Program under which options may be granted to eligible
individuals at a fixed price per share; (ii) the Salary
Investment Option Grant Program under which the company’s
officers and other highly compensated employees may elect to
have a portion of their base salary reduced in return for stock
options and (iii) the Stock Issuance Program under which
eligible persons may be issued shares of Common Stock directly.
Options granted under the 1995 Plan generally vest at a rate of
25% on the first anniversary of the vesting commencement date
and then ratably over the following 36 months. Options
expire as determined by the Board of Directors, but not more
than 10 years after the date of grant.
In April 1997, the Board of Directors adopted the Special
Nonofficer Stock Option Plan (the Nonofficer Plan) which
provides for the grant of options and the issuance of common
stock under terms substantially the same as those provided under
the 1995 Plan, except that the Nonofficer Plan allows only for
the issuance of nonqualified options to nonofficer employees.
In August 1999, the Board of Directors adopted the 1999 Stock
Option Plan (the 1999 Plan), which comprises five separate
equity incentive programs: (i) the Discretionary Option
Grant Program under which options may be granted to eligible
individuals during the service period at a fixed price per
share, (ii) the Stock Appreciation Rights Program under
which eligible persons may be granted stock appreciation rights
that allow individuals to receive the appreciation in Fair
Market Value of the shares, (iii) the Stock Issuance
Program under which eligible individuals may be issued shares of
Common Stock directly; (iv) the Performance Share and
Performance Unit Program under which eligible persons may be
granted performance shares and performance units which result in
payment to the participant only if performance goals or other
vesting criteria are achieved; and (v) the Automatic Option
Grant Program under which nonemployee board members
automatically receive option grants at designated intervals over
their period of board service.
The 1999 Plan supplements the existing 1995 Plan and Nonofficer
Plan, and those plans will continue to remain in full force and
effect until all available shares have been issued under each
such plan. However, an Automatic Option Grant Program previously
in effect under the 1995 Plan terminated as of October 26,1999, and all automatic option grants made to nonemployee board
members on or after that date will be made under the 1999 Plan.
Under the 1999 Plan, the Board of Directors may grant to
employees, directors, and consultants and other independent
advisors options to purchase shares of our common stock during
their period of service with us. The exercise price for an
incentive stock option and a nonstatutory option cannot be less
than 100% of the fair market value of the common stock on the
grant date. Options granted under the 1999 Plan generally vest
over a four-year period. Options will have a term of
10 years after the date of grant, subject to earlier
termination upon the occurrence of certain events. In fiscal
2003, the 1999 Plan was amended to increase the share reserve by
an additional 14,000 shares of common stock and effect
certain changes to the Automatic Option Grant Program in effect
for the nonemployee members of the Board of Directors. In fiscal
2004, the 1999 Plan was amended to create the Stock Issuance
Program, whereby eligible individuals may be issued shares of
common stock directly, either through the issuance or immediate
purchase of these shares or as a bonus for services rendered. In
fiscal 2005, the 1999 Plan was amended to increase the share
reserve by an additional 10,200 shares of common stock; to
create the Stock Appreciation Right Program under which eligible
persons may be granted stock appreciation rights that allow
individuals to receive the appreciation in Fair Market Value of
the shares; to create the Performance Share and Performance Unit
Program under which eligible persons may be granted performance
shares and performance units that result in payment to the
participant
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
only if performance goals or other vesting criteria are
achieved; and to prohibit the repricing of any outstanding stock
option or stock appreciation right after it has been granted or
to cancel any outstanding stock option or stock appreciation
right and immediately replace it with a new stock option or
stock appreciation right with a lower exercise price unless
approved by stockholders.
There have been no repricings to date under any of the plans.
In fiscal 2001, we assumed various stock option plans in
connection with our Orca and WebManage acquisitions. Pursuant to
the provisions of the merger agreements, outstanding shares were
exchanged under certain exchange ratios in effect at the time of
each merger. Options granted under these plans generally vest at
a rate of 25% on the first anniversary of the vesting
commencement date and then ratably over the following
36 months. Options expire as determined by the Board of
Directors, but not more than 10 years after the date of
grant.
In fiscal 2003, we reached a final settlement of the escrow fund
arrangement under the WebManage acquisition agreement. We have
determined the total amount of our losses under the settlement
arrangement and 11 restricted shares were released from the
escrow and delivered to Network Appliance, valued in the
aggregate at $1,210 based on the fair market value of our common
stock as of the date of the acquisition. Accordingly, an
adjustment was made to the cost of the WebManage acquisition.
The balance of the escrow shares has been distributed to former
shareholders of WebManage in proportion to their share ownership
in WebManage, as provided in the original merger agreement.
In fiscal 2004, under terms of the Spinnaker merger agreement we
acquired Spinnaker and assumed options and restricted stock
units to purchase 1,721 shares of common stock in
connection with the Spinnaker 2000 Stock Plan. The Spinnaker
2000 Stock Plan has a total of 2,942 authorized shares.
Outstanding options and restricted stock units were exchanged
pursuant to the terms of the merger agreement. The options and
restricted stock units granted under this plan generally vest at
a rate of 25% on the first anniversary of the vesting
commencement date and then ratably over the following
36 months. The options expire not more than 10 years
from the date of grant.
Employee Stock Purchase Plan — Under the
Employee Stock Purchase Plan (ESPP), employees are entitled to
purchase shares of our common stock at 85% of the fair market
value at certain specified dates over a two-year period. In
fiscal 2005 and 2004, the plan was amended to increase the share
reserve by an additional 1,300 and 1,000 shares of common
stock, respectively. Of the 15,900 shares authorized to be
issued under this plan, 4,373 shares were available for
issuance at April 30, 2005; 1,598, 1,486, and
1,414 shares were issued in fiscal 2005, 2004, and 2003,
respectively, at a weighted average price of $13.30, $10.62, and
$10.74 respectively.
Stock Repurchase Program — Through
April 30, 2005, the Board of Directors had authorized the
repurchase of up to $350,000 in shares of our outstanding common
stock. At April 30, 2005, $20,925 remained available for
future repurchases. On May 24, 2005, our Board approved a
new, incremental stock repurchase program in which up to
$300,000 of additional shares of its outstanding common stock
may be purchased. The stock repurchase program may be suspended
or discontinued at any time.
During fiscal 2004, we repurchased 6,853 shares of our
common stock at an aggregate cost of $136,172. During fiscal
2005, we repurchased 7,713 shares of our common stock at an
aggregate cost of $192,903. The repurchases were recorded as
treasury stock and resulted in a reduction of stockholders’
equity.
Deferred Stock Compensation — Deferred stock
compensation is recorded for the grant of stock awards or shares
of restricted stock to employees at exercise prices deemed to be
less than the fair value of our common stock on the grant date.
Deferred stock compensation is also recorded for retention
escrow shares withheld in accordance with the merger agreement;
see Note 11. Deferred stock compensation is adjusted to
reflect cancellations and forfeitures due to employee
terminations as they occur. We recorded $1,401, $28,617, and
$1,171 of deferred stock compensation in fiscal 2005, 2004 and
2003, respectively, primarily related to unvested options
assumed and retention escrow shares withheld in the Spinnaker
acquisition, restricted stock awards to certain employees, and
the grant of stock options below fair value to certain highly
compensated employees. The fiscal 2004 deferred stock
compensation was higher due to unvested options assumed and
retention escrow shares withheld in the Spinnaker acquisition
totaling $25,892. We reversed $1,247, $3,235
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
and $1,612 of deferred compensation in fiscal 2005, 2004, and
2003, respectively, due to employee terminations. The reversals
were primarily related to the forfeiture of unvested options
assumed in the WebManage and Spinnaker acquisitions as a result
of employee terminations.
Under terms of the 1995 Plan, highly compensated employees as
defined by our management are eligible to contribute between $15
and $75 in annual salary for the rights to be granted
nonqualified stock options. The exercise price discount from
fair market value, which is equal to the amount of salary
contributed, has been recorded as deferred stock compensation
expense. The deferred stock compensation expense is amortized
ratably over a one-year period. Additionally, under the 1995
Stock Issuance Program, certain eligible persons may be issued
shares of common stock directly. During fiscal 2005 and 2004, 10
and 120 shares, respectively, of restricted stock awards
were issued to certain employees. The exercise price discount
from fair market value of these shares has been recorded as
deferred stock compensation expense, which was being amortized
ratably over its respective vesting periods, between three to
four years. During fiscal 2005, 5 shares of restricted
stock and 3 shares of Spinnaker restricted stock units were
repurchased and canceled pursuant to employee terminations
Under terms of the acquisition agreement with Orca, we released
shares of common stock to former Orca shareholders upon
Orca’s meeting certain performance criteria. The fair
market values of these shares were measured on the date the
performance criteria were met and were recognized as stock
compensation. During fiscal 2003, we released an additional
99 shares of common stock, valued in the aggregate at $921.
There are no additional performance milestones remaining.
We recorded $428, $498, and $748 in compensation expense in
fiscal 2005, 2004, and 2003, respectively, for the fair value of
options granted to a member of the Board of Directors in
recognition for services performed outside of the normal
capacity of a board member. During fiscal 2002, 100 common
shares under the 1995 Plan were granted at an exercise price of
$15.32 per share, the fair market value per share on the
grant date. The option has a term of 10 years measured from
the grant date, subject to earlier termination following his
cessation of board service, and will vest in a series of 48
successive equal monthly installments upon his completion of
each month of board service over the 48-month period measured
from the grant date.
We recorded $7,720, $3,397 and $1,973 in compensation expense
for fiscal 2005, 2004, and 2003, respectively, primarily related
to the amortization of deferred stock compensation from unvested
options assumed in the WebManage and Spinnaker acquisitions, the
retention escrow shares relative to Spinnaker, the grant of
stock options to certain highly compensated employees below fair
value at the date of grant and the award of restricted stock to
certain employees. Based on deferred stock compensation recorded
at April 30, 2005, estimated future deferred stock
compensation amortization for fiscal 2006, 2007, and 2008 are
expected to be $6,765, $5,292, and $3,727 respectively, and none
thereafter.
The income tax benefit associated with dispositions from
employee stock transactions of $27,829, $49,535 and $18,458,
respectively, for fiscal 2005, 2004, and 2003, were recognized
as additional paid-in capital.
Current net deferred tax assets are $37,584 and $24,163 as of
fiscal 2005 and 2004, respectively. Noncurrent net deferred tax
assets for fiscal 2005 and 2004 are $54,252 and $73,631,
respectively, and are included in other assets within the
accompanying consolidated balance sheets.
Subsequent to our fiscal 2005 year end, our Netherlands
subsidiary received a second favorable tax ruling from the Dutch
tax authorities effective April 30, 2005. The primary
difference between this ruling and our first ruling is the
scheduled expiration date. This new ruling is scheduled to
expire on April 30, 2010. During fiscal 2004, our
Netherlands subsidiary received its first favorable tax ruling
from the Dutch tax authorities. The original ruling was
retroactive to May 1, 2000, and expired with the start of
the newly received ruling. During fiscal 2004, we recognized and
reported a substantial tax benefit of $16,831 that related to
the retroactive application of the original ruling.
As of April 30, 2005, the federal and state net operating
loss carryforwards for income tax purposes were approximately
$850,257 and $213,083, respectively. The federal net operating
loss carryforwards will begin to expire in fiscal 2011, and the
state net operating loss carryforwards will begin to expire in
fiscal 2006. As of April 30, 2005, we had federal and state
credit carryforwards of approximately $43,295 and $39,023,
respectively, available to offset future taxable income. The
federal and state credit carryforwards will begin to expire in
fiscal 2008.
During fiscal 2005, we established a valuation allowance against
certain capital loss carryforwards of approximately $3,468 based
upon our belief that we will not be able to utilize this
attribute before expiration starting in fiscal 2007.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
During fiscal 2004, as part of our acquisition of Spinnaker, we
acquired approximately $52,000 and $12,000 of federal and state
net operating losses, respectively, and $2,700 of federal
credits that were realized as deferred tax assets upon
acquisition. We also established a valuation reserve of $2,400
against a portion of the state net operating loss carryforwards
of Spinnaker. If utilized, these attributes will be treated as a
reduction in acquired goodwill.
We have provided a valuation allowance on certain of our
deferred tax assets related to net operating losses and credit
carryforwards attributable to the exercise of employee stock
options because of uncertainty regarding their realizability of
approximately $359,901 and $307,368 at the end of fiscal 2005
and 2004, respectively. If recognized, the tax benefit of these
credits and losses will be accounted for as a credit to
stockholders’ equity rather than as a reduction of the
income tax provision. During fiscal 2004, we utilized
approximately $31,069 of previously recorded valuation
allowances with a corresponding increase to stockholders’
equity.
U.S. income taxes are not provided on a cumulative total of
approximately $355,000 of undistributed earnings for
non-U.S. subsidiaries. We currently intend to reinvest
these earnings in operations outside the U.S. The American
Jobs Creation Act of 2004 (the Jobs Act) creates a temporary
incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividend-received
deduction for certain dividends from certain
non-U.S. subsidiaries. The deduction is subject to a number
of limitations, and we are currently considering recently issued
Treasury and IRS guidance on the application of the deduction.
We are not yet in a position to decide whether, and to what
extent, foreign earnings that have not yet been remitted to the
U.S. might be repatriated. Based on the analysis to date,
however, it is reasonably possible that as much as $355,000
might be repatriated, with a respective tax liability of up to
$15,000. We expect to be in a position to finalize our analysis
during the third quarter of fiscal 2006.
8.
Segment, Geographic, and Customer Information
Under SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information,”we
operate in one reportable industry segment: the design,
manufacturing, marketing, and technical support of
high-performance networked storage solutions. We market our
products in the United States and in foreign countries through
our sales personnel and our subsidiaries. The Chief Executive
Officer is our Chief Operating Decision Maker (CODM), as defined
by SFAS No. 131. The CODM evaluates resource
allocation decisions and operational performance based upon
revenue by geographic regions. Under SFAS No. 131, we
have one reportable segment as all the geographic operating
segments identified can be aggregated into one reportable
segment. For the years ended April 30, 2005, 2004, and
2003, we recorded revenue from customers throughout the U.S. and
Canada, Europe, Latin America, Australia, and Asia Pacific.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
The following presents total revenues for the years ended
April 30, 2005, 2004, and 2003 by geographic area and
long-lived assets as of April 30, 2005, and 2004 by
geographic area.
Total revenues above are attributed to regions based on
customers’ shipment locations.
International sales include export sales primarily to the United
Kingdom, Germany, Japan, France, the Netherlands, Switzerland,
Canada, and Australia. No single foreign country accounted for
10% or more of total revenues in fiscal 2005, 2004, and 2003.
No customer accounted for 10% or more of total revenues in
fiscal 2005, 2004, or 2003.
9.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, short-term
investments, and restricted cash reported in the consolidated
balance sheets approximate their carrying value. The fair value
of short-term investments and foreign exchange contracts are
carried at fair value is based on quoted market prices. Other
investments in equity securities are included in other assets at
April 30, 2005, with total carrying value of $1,837 and
$1,593, which approximates their fair values.
We do not use derivative financial instruments for speculative
or trading purposes. We enter into forward foreign exchange and
currency option contracts to hedge trade and intercompany
receivables and payables as well as future sales and operating
expenses against future movement in foreign exchange rates.
Foreign currency forward contracts obligate us to buy or sell
foreign currencies at a specified future date. Option contracts
give us the right to buy or sell foreign currencies and are
exercised only when economically beneficial. As of
April 30, 2005, we had $211,020 of outstanding foreign
exchange contracts (including $11,877 of option contracts) in
Australian Dollars, British Pounds, Canadian Dollars, Danish
Krone, European Currency Units, Israeli New Shekel, South
African Rand, Swedish Krona, and Swiss Francs, that all had
remaining maturities of five months or less. As of
April 30, 2004, we had $160,875 of outstanding foreign
exchange contracts (including $8,178 of option contracts) in
Australian Dollars, British Pounds, Canadian Dollars, Danish
Krone, European Currency Units, South African Rand, and Swiss
Francs, that all had remaining maturities of four months or
less. For the balance sheet hedges, these contracts are adjusted
to fair value at the end of each month and are included in
earnings. The premiums paid on the foreign currency option
contracts are recognized as a reduction to other income when the
contract is entered into. For cash flow hedges, the related
gains or losses are included in other comprehensive income.
Gains and losses on these foreign exchange contracts are offset
by losses and gains on the underlying assets and liabilities. At
April 30, 2005, and 2004, the estimated notional fair
values of forward foreign exchange contracts were $211,064 and
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
$160,976, respectively. The fair value of foreign exchange
contracts is based on prevailing financial market information.
10.
Employee Benefit Plan
We have established a 401(k) tax-deferred savings plan (Savings
Plan). Employees meeting the eligibility requirements, as
defined, may contribute specified percentages of their salaries.
We contributed $1,701, $1,326, and $1,315 for fiscal 2005, 2004,
and 2003, respectively to the Savings Plan.
11.
Business Combination
On February 18, 2004, we acquired Spinnaker for
approximately $305,523 (including transaction costs of $2,985)
in an all-stock transaction, through the merger of Nagano Sub,
Inc., a wholly owned subsidiary of Network Appliance, with and
into Spinnaker (the Merger).
Spinnaker provides scalable system architectures, distributed
file systems, next-generation clustering technologies, and
virtualization. The combination of NetApp unified storage and
data management solutions with advanced distributed storage
technologies acquired from Spinnaker will further our strategy
to deliver Storage Grid solutions as the foundation for data
infrastructures of the future. In the near term, the Spinnaker
acquisition will allow us to target markets with customers who
are already deploying such grid like architecture with
large-scale Linux farms for high performance computing
applications in industry markets such as Energy, Entertainment
and Federal Government.
The acquisition was accounted for as a purchase transaction.
Under terms of the merger agreement, we acquired Spinnaker for
12,377 shares of common stock and assumed options to
purchase 2,942 shares of common stock pursuant to the
Spinnaker 2000 Stock Plan. Of the 2,942 Spinnaker options
assumed, 1,721 options were granted on the acquisition
date. We also advanced $5,000 as a bridge loan, incurred certain
transaction costs of $2,985 and assumed certain operating assets
and liabilities. There was no contingent consideration provision
under the terms of the Spinnaker merger agreement.
In accordance with the merger agreement, 1,229 indemnity escrow
shares (the number of merger shares multiplied by 10%) were
withheld in escrow relative to the Spinnaker acquisition. The
indemnity escrow indemnifies any claims in connection with the
breach of any warranty, representation, covenant, or agreement
pursuant to the merger agreement. These shares held in escrow
pending resolution of representation and warranty provisions are
included in the purchase price consideration. Such
representation and warranty provisions lapse within
18 months following the close date.
In accordance with the merger agreement, 362 retention escrow
shares (the number of shares issued to certain core employees
shares multiplied by 20%) were withheld in escrow relative to
the Spinnaker acquisition. The 20% core employees retention
shares are subject to continued employment and restriction. We
accounted for the core employees escrow in accordance with EITF
No. 95-8 “Accounting for Contingent Consideration
Paid to Shareholders of an Acquired Enterprise in a Purchase
Business Combination,”and recorded the intrinsic value
of the retention escrow shares as deferred stock compensation.
Such deferred stock compensation of $8,550 is amortized over the
expected service period of three years.
The purchase price of the transaction was allocated to the
acquired assets and liabilities based on their estimated fair
values as of the date of the acquisition, including identifiable
intangible assets, with the remaining amount being classified as
goodwill.
Approximately $4,940 was allocated to acquired in-process
research and development (IPR&D) and charged to operations
because the acquired technology had not reached technological
feasibility and had no alternative uses. The value was
determined by estimating the costs to develop the acquired
IPR&D into
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
commercially viable products, estimating the resulting after-tax
net cash flows (free cash flow) from such projects, and
discounting the free cash flows back to their present value. The
discount rate included a factor that took into account the
uncertainty surrounding the successful development of the
acquired IPR&D. These estimates are subject to change, given
the uncertainties of the development process, and no assurance
can be given that deviations from these estimates will not
occur. Following the acquisition, costs incurred prior to
establishment of technological feasibility are charged to
research and development expense.
The total purchase price and allocation among the fair value of
tangible and intangible assets and liabilities acquired in the
Spinnaker transaction (including purchased in-process
technology) are summarized as follows (in thousands):
In accordance with FASB interpretation No. 44,
“Accounting for Certain Transactions Involving Stock
Compensation,”we recorded the intrinsic value,
measured as the difference between the grant price and fair
market value on the acquisition consummation date, of unvested
options, restricted stock, and core employees retention escrow
shares assumed in the Spinnaker acquisition as deferred stock
compensation. Such deferred stock compensation, which aggregated
to $25,892 is recorded in a separate component of
stockholders’ equity in the accompanying condensed
consolidated balance sheet and is being amortized over the
vesting term of the related options and restricted stock/shares.
In November 2000, we completed the acquisition of WebManage, a
software developer of content management, distribution, and
analysis solutions based in Chelmsford, Massachusetts. WebManage
develops software that intelligently distributes content between
various points on the Internet and enables organizations to
plan, manage, and deliver Internet/intranet services. The
acquisition was accounted for as a purchase
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
transaction. Under terms of the agreement, we acquired WebManage
for $59,371 comprised of common stock, assumed options, and
cash. We also had an obligation to provide shares of common
stock to be valued at $3,000 if WebManage achieved certain
performance criteria. WebManage met these performance criteria
in March 2001 and as such, the contingent consideration was
recorded as stock compensation in the fourth quarter of 2001. We
also paid certain transaction costs and assumed certain
operating assets and liabilities. In fiscal 2003, we reached a
final settlement of the escrow arrangement under the WebManage
acquisition agreement. We have determined the total amount of
our losses under the settlement arrangement and
11 restricted shares were released from the escrow and
delivered to Network Appliance, valued in the aggregate at
$1,210 based on the fair market value of our common stock as of
the date of the acquisition. Accordingly, an adjustment was made
to the cost of the WebManage acquisition. The balance of the
escrow shares has been distributed to former shareholders of
WebManage in proportion to their share ownership in WebManage,
as provided in the original merger agreement.
In June 2000, we completed the acquisition of Orca, a Waltham,
Massachusetts-based developer of high performance Virtual
Interface (VI) Architecture software for
enterprise-class UNIX and Windows systems. The acquisition
was accounted for as a purchase transaction. Under terms of the
agreement, we acquired Orca for $50,037 comprised of common
stock, assumed options and cash, with an obligation to provide
up to 264 shares of common stock relative to milestones
achievement. Orca met certain performance criteria and as such,
we issued and recorded during fiscal 2003 and 2002 an additional
99 and 165 shares of common stock. The fair market value of
such shares of $921 and $3,015, respectively, was measured on
the date Orca met the performance criteria and was recognized as
stock compensation in fiscal 2003 and 2002. There are no
additional performance milestones remaining.
The operating results of Spinnaker have been included in the
condensed consolidated statements of income since its
acquisition date. The following unaudited pro forma consolidated
amounts give effect to this acquisition as if it had occurred on
May 1, 2003, and May 1, 2002, respectively, by
consolidating the results of operations of Spinnaker with our
results for the years ended April 30, 2004, and 2003.
The pro forma results of operations give effect to certain
adjustments, including amortization of purchased intangibles,
stock compensation, contingently issuable shares, common stock,
assumed options, and restricted stocks/shares in connection with
the acquisitions. In addition, a benefit for taxes was recorded
to reflect the impact of the pro forma adjustments and assumed
utilization of Spinnaker’s net operating losses by Network
Appliance using the federal and state tax rates. The $4,940
charge for purchased in-process research and development from
Spinnaker has been excluded from the pro forma results, as it is
a material nonrecurring charge.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
The pro forma basic earnings per share is based on (1) the
historical weighted average number of shares of Network
Appliance outstanding, plus (2) approximately 12,377 new
Network Appliance shares issued to former stockholders of
Spinnaker upon the consummation of the transaction. The basic
calculation gives effect to shares issued as if the transaction
took place at the beginning of the periods presented.
The pro forma diluted earnings per share was based on the pro
forma basic earnings calculations for each of Network Appliance
and Spinnaker, adjusted for the dilutive common stock
equivalents outstanding during the period using the treasury
stock method. The dilution for the options and restricted stock
assumed from Spinnaker was calculated using the treasury method
and was based on the number of stock options and the exercise
price assumed by Network Appliance and adjusted by the option
exchange ratio of 0.1471 for Spinnaker option and restricted
stock holders. In addition, the remaining unearned deferred
compensation recorded as a result of the Spinnaker acquisition
was considered as proceeds for the purposes of the treasury
stock method, which resulted in a lower number of dilutive share
equivalents. The pro forma basic and diluted earnings per share
are not indicative of future earnings per share results.
12.
Restructuring Charges
Fiscal 2002 Second Quarter Restructuring Plan
In August 2001, we implemented a restructuring plan, which
included a reduction in workforce of approximately 200 employees
and a consolidation of facilities. The action was required to
properly align and manage the business commensurate with our
then current revenue levels. All functional areas of the Company
were affected by the reduction. We completed our actions during
the second quarter of fiscal 2002. As a result of this
restructuring, we incurred a charge of $7,980. The restructuring
charge included $4,796 of severance-related amounts, $2,656 of
committed excess facilities and facility closure expenses, and
$528 in fixed assets write-offs.
During fiscal 2005, we paid $577 pursuant to final resolution of
certain severance-related restructuring accruals. As of
April 30, 2005, we have no outstanding balance in our
restructuring liability for the second quarter fiscal 2002
restructuring.
The following analysis sets forth the significant components of
the restructuring reserve at April 30, 2005, 2004 and 2003:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
Fiscal 2002 Fourth Quarter Restructuring Plan
In April 2002, we announced and substantially completed a
restructuring related to the closure of an engineering facility
and consolidation of resources to the Sunnyvale headquarters,
which included a headcount reduction of 34 employees. As a
result of this restructuring, we incurred a charge of $5,850.
The restructuring charge included $813 of severance-related
amounts, $4,564 of committed excess facilities and facility
closure expenses, and $473 in fixed assets write-off.
In fiscal 2003 and 2004, we updated our assumptions and
estimates based on certain triggering events, which resulted in
an additional net charge of $923 and $1,327, primarily relating
to sublease assumptions for our engineering facility. The
restructuring liability will be fully paid through November
2010. In the event that the engineering facility is not
subleased as anticipated, we will be obligated for additional
total lease payments of $1,762 as of April 30, 2005 to be
payable through November 2010.
The following analysis sets forth the significant components of
the restructuring reserve at April 30, 2005, 2004 and 2003:
Of the reserve balances at April 30, 2005 and 2004, $756
and $667, respectively, were included in other accrued
liabilities and the remaining $3,747 and $4,541, respectively,
were classified as long-term obligations.
13.
Goodwill and Purchased Intangible Assets
We adopted SFAS No. 142, “Goodwill and Other
Intangible Assets”effective May 1, 2002. Upon
adoption of SFAS No. 142, we discontinued the
amortization of our recorded goodwill and assembled workforce of
$49,422 as of that date, identified our reporting units based on
our current segment reporting structure, and allocated all
recorded goodwill, as well as other assets and liabilities, to
the reporting units. We concluded that our reporting units are
the same as our operating segments. Under
SFAS No. 142, goodwill attributable to each of our
reporting units is required to be tested for impairment by
comparing the fair value of each reporting unit with its
carrying value. As of May 1, 2002, this evaluation
indicated that the fair value for each of our reporting units
exceeded the reporting unit’s carrying amount and no
impairment was recognized. On an ongoing basis, goodwill is
reviewed annually for impairment (or more frequently if
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
indicators of impairment arise). As of April 30, 2005, and
2004, respectively, there had been no impairment of goodwill and
intangible assets.
In fiscal 2003, we reached a final settlement of the escrow
arrangement under the WebManage acquisition agreement. We have
determined the total amount of our losses under the settlement
arrangement and 11 restricted shares were released from the
escrow and delivered to Network Appliance, valued in the
aggregate at $1,210 based on the fair market value of our common
stock as of the date of the acquisition. Accordingly, an
adjustment was made to goodwill relating to the WebManage
acquisition. The balance of the escrow shares has been
distributed to former shareholders of WebManage in proportion to
their share ownership in WebManage, as provided in the original
merger agreement.
During fiscal 2004, we acquired Spinnaker and recorded goodwill
of $243,604 resulting from the allocation of the purchase price.
See Note 11, “Business Combination.”
Intangible assets balances are summarized as follows:
Amortization expense for identified intangibles is summarized
below:
Fiscal 2005
Fiscal 2004
Fiscal 2003
Patents
$
1,833
$
1,503
$
—
Existing technology
3,432
3,669
5,478
Other identified intangibles
5,900
1,229
—
$
11,165
$
6,401
$
5,478
During fiscal 2005 and 2004, we acquired additional patents of
$895 and $9,015, respectively, intended to enhance our
technology base to build next-generation network-attached
storage, storage area network, and fabric-attached storage
systems for the benefit of our enterprise customers. The costs
of such patents for use in research and development activities
that have alternative future uses have been capitalized and
amortized as intangible assets in accordance with APB Opinion
No. 17 “Intangible Assets.” Capitalized patents
are amortized over an estimated useful life of five years as
research and development expenses.
During fiscal 2004, we acquired Spinnaker and recorded goodwill
and identifiable intangible assets resulting from the allocation
of the purchase price. Intangible assets include acquired
existing technology of $17,160, trademarks/tradenames of $280,
customer contracts/relationships of $1,110, and covenants not to
compete for $7,610.
Existing technology is amortized as cost of product revenue.
Trademarks and tradenames are amortized over an estimated useful
life of three years in sales and marketing expenses. Customer
contracts and
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
relationships are amortized over an estimated useful life of
18 months in sales and marketing expenses. Covenants not to
compete are amortized over an estimated useful life of
18 months in general and administrative expenses.
Based on the identified intangible assets (including patents)
recorded at April 30, 2005, the future amortization expense
of identified intangibles for the next five fiscal years is as
follows:
Year Ending April,
Amount
(In thousands)
2006
$
7,201
2007
5,488
2008
5,414
2009
3,196
2010
149
Thereafter
—
Total
$
21,448
14.
Guarantees
As of April 30, 2005, our financial guarantees consisted of
standby letters of credit outstanding, bank guarantee, and
restricted cash, which were related to facility lease
requirements, service performance guarantees, customs and duties
guarantees, VAT requirements, and workers’ compensation
plans. The maximum amount of potential future payments under
these arrangements was $5,881 and $4,338 as of April 30,2005, and 2004, respectively. Of this maximum exposure, $4,061
and $2,736 of restricted cash was classified under Prepaid
Expense and Other Assets on our balance sheet at April 30,2005, and 2004, respectively. We have not recorded any liability
at April 30, 2005, and 2004, respectively, related to these
guarantees.
As of April 30, 2005, our notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$211,064. We do not believe that these derivatives present
significant credit risks, because the counterparties to the
derivatives consist of major financial institutions, and we
manage the notional amount of contracts entered into with any
one counterparty. We do not enter into derivative financial
instruments for speculative or trading purposes. Other than the
risk associated with the financial condition of the
counterparties, our maximum exposure related to foreign currency
forward and option contracts is limited to the premiums paid.
We offer both recourse and nonrecourse lease financing
arrangements to our customers. Under the terms of recourse
leases, which are generally three years or less, we remain
liable for the aggregate unpaid remaining lease payments to the
third-party leasing company in the event that any customers
default. We defer 100% of the recourse lease obligation and
recognize revenue over the term of the lease as the lease
payments become due. As of April 30, 2005, and 2004, the
maximum recourse exposure under such leases totaled
approximately $7,047 and $6,755, respectively. Under the terms
of the nonrecourse leases we do not have any continuing
obligations or liabilities. To date, we have not experienced
significant losses under this lease financing program.
We do not maintain a general warranty reserve for estimated
costs of product warranties at the time revenue is recognized
due to our extensive product quality program and processes and
because our global customer service inventories utilized to
correct product failures are expensed when issued to field
support.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Dollar and share amounts in thousands, except per-share
data)
We enter into standard indemnification agreements in the
ordinary course of business. Pursuant to these agreements, we
agree to defend and indemnify the other party —
primarily our customers or business partners or
subcontractors — for damages and reasonable costs
incurred in any suit or claim brought against them alleging that
our products sold to them infringe any U.S. patent,
copyright, trade secret, or similar right. If a product becomes
the subject of an infringement claim, we may, at our option:
(i) replace the product with another noninfringing product
that provides substantially similar performance;
(ii) modify the infringing product so that it no longer
infringes but remains functionally equivalent; (iii) obtain
the right for the customer to continue using the product at our
expense and for the reseller to continue selling the product;
(iv) take back the infringing product and refund to
customer the purchase price paid less depreciation amortized on
a straight line basis. We have not been required to make
material payments pursuant to these provisions historically. We
have not identified any losses that are probable under these
provisions and, accordingly, we have not recorded a liability
related to these indemnification provisions.
15.
Subsequent Events
On April 7, 2005, Network Appliance entered into a
definitive agreement to acquire Alacritus, Inc., a privately
held company based in Pleasanton, California, that develops and
sells disk-based data protection software solutions, for
approximately $11,000 in an all-cash transaction. The
transaction closed on May 2, 2005. The historical operating
impact of Alacritus is not significant.
On June 15, 2005, Network Appliance entered into a
definitive agreement to purchase Decru, Inc., a privately held
company based in Redwood City, California, that develops and
sells encryption software and appliances to secure network data
storage, for an aggregate of approximately $265,000 (which
amount is subject to settlement at the effective time based on
certain expense and balance sheet items as set forth in
Decru’s financial statements immediately prior to the
effective time), 80% of which will be paid in the form of our
common stock and 20% of which will be paid in the form of cash.
The number of common shares to be issued will be determined
using our average stock price based on a period immediately
preceding the close date, which is expected to be in October
2005 subject to various regulatory approvals.
Subsequent to our fiscal 2005 year end, our Netherlands
subsidiary received a second favorable tax ruling from the Dutch
tax authorities effective April 30, 2005. This new ruling
is scheduled to expire on April 30, 2010. During fiscal
2004, our Netherlands subsidiary received its first favorable
tax ruling from the Dutch tax authorities. The original ruling
was retroactive to May 1, 2000, and expired with the start
of the newly received ruling.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
Disclosure Controls are procedures designed to ensure that
information required to be disclosed in our reports filed under
the Exchange Act, such as this Annual Report, is recorded,
processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange
Commission’s rules and forms. Disclosure Controls are also
designed to ensure that such information is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the
“Evaluation Date”). Based on this evaluation, our
principal executive officer and principal financial officer
concluded as of the Evaluation Date that our disclosure controls
and procedures were effective such that the information relating
to Network Appliance, including our consolidated subsidiaries,
required to be disclosed in our Securities and Exchange
Commission (“SEC”) reports (i) is recorded,
processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated
and communicated to Network Appliance’s management,
including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
(b)
Management’s Report on Internal Control Over
Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Our internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the criteria established in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, our management concluded that, as of
April 30, 2005, our internal control over financial
reporting was effective based on those criteria.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of April 30,2005 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in
their report which is included herein.
(c)
Changes in Internal Control Over Financial
Reporting
There were no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange
Act) identified in connection with management’s evaluation
during our last fiscal quarter that have materially effected, or
are reasonably likely to materially effect, our internal control
over financial reporting.
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders of
Network Appliance, Inc.:
Sunnyvale, California
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting, that Network Appliance, Inc. and its
subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of April 30,2005, based on the criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment, and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of April 30, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of April 30, 2005, based on the criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and consolidated financial
statement schedule as of and for the year ended April 30,2005 of the Company and our report dated July 7, 2005
expressed an unqualified opinion on those financial statements
and the financial statement schedule.
The information required by this Item with respect to the
Company’s executive officers is incorporated herein by
reference from the information under Item 1 of Part I
of this Annual Report on Form 10-K under the section
entitled “Executive Officers.” The information
required by this Item with respect to the Company’s
directors is incorporated herein by reference from the
information provided under the heading “Election of
Directors” in the Proxy Statement for the 2005 Annual
Meeting of Stockholders which will be filed with the Commission.
The information required by Item 405 of Regulation S-K
is incorporated herein by reference from the information
provided under the heading “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement for
the 2005 Annual Meeting of Stockholders.
We have adopted a written code of ethics that applies to our
Board of Directors and all of our employees, including our
principal executive officer, principal financial officer and
principal accounting officer. A copy of the code is available on
our website at http://www.netapp.com.
Item 11.
Executive Compensation
Information regarding the compensation of executive officers and
directors of the Company is incorporated by reference from the
information under the heading “Executive Compensation and
Related Information” in our Proxy Statement for the 2005
Annual Meeting of Stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of certain beneficial
owners and management is incorporated by reference from the
information under the heading “Security Ownership of
Certain Beneficial Owners and Management” in our Proxy
Statement for the 2005 Annual Meeting of Stockholders.
Item 13.
Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions is incorporated by reference from the information
under the caption “Employment Contracts, Termination of
Employment and Change-In-Control Agreements” in our Proxy
Statement for the 2005 Annual Meeting of Stockholders.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated by
reference from [the information under the caption “Audit
Fees”] in our Proxy Statement for the 2005 Annual Meeting
of Stockholders.
With the exception of the information incorporated in
Items 10, 11, 12, 13, and 14 of this Annual
Report of Form 10-K, Network Appliance’s Proxy
Statement is not deemed “filed” as part of this Annual
Report on Form 10-K.
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss) for the years ended April 30,2005, 2004, and 2003
Consolidated Statements of Cash Flows for the years ended
April 30, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
The following financial statement schedule of the Company is
filed in Part IV, Item 15(d) of this Annual Report on
Form 10-K:
Schedule II — Valuation and Qualifying Accounts
All other schedules have been omitted since the required
information is not present in amounts sufficient to require
submission of the schedule or because the information required
is included in the consolidated financial statements or notes
thereto.
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1995 Stock Option Plan.
10
.22
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1995 Stock Option Plan
(Chairman of the Board or any Board Committee Chairperson).
10
.23
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1995 Stock Option Plan
(Restricted Stock Agreement).
10
.24
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Restricted Stock Unit Agreement).
10
.25
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan.
10
.26
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Change of Control).
10
.27
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(China).
10
.28
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Non-Employee Director Automatic Stock Option —
Annual).
10
.29
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Non-Employee Director Automatic Stock Option —
Initial).
10
.30
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(France).
10
.31
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(India).
10
.32
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(United Kingdom).
Specified portions of this agreement have been omitted and have
been filed separately with the Commission pursuant to a request
for confidential treatment.
*
Identifies management plan or compensatory plan or arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on July 8, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Daniel J. Warmenhoven and
Steven J. Gomo, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated:
Signature
Title
Date
/s/ Daniel J.
Warmenhoven
Daniel
J. Warmenhoven
Chief Executive Officer, Director (Principal Executive Officer)
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1995 Stock Option Plan.
10
.22
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1995 Stock Option Plan
(Chairman of the Board or any Board Committee Chairperson).
10
.23
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1995 Stock Option Plan
(Restricted Stock Agreement).
10
.24
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Restricted Stock Unit Agreement).
10
.25
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan.
10
.26
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Change of Control).
10
.27
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(China).
10
.28
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Non-Employee Director Automatic Stock Option —
Annual).
10
.29
Form of Stock Option Agreement approved for use under the
Company’s amended and restated 1999 Stock Option Plan
(Non-Employee Director Automatic Stock Option —
Initial).
Specified portions of this agreement have been omitted and have
been filed separately with the Commission pursuant to a request
for confidential treatment.
*
Identifies management plan or compensatory plan or arrangement.
104
Dates Referenced Herein and Documents Incorporated by Reference