01—Abstract
Summary
Summary of the 10-K filed July 23, 1997. Cited figures are marked; the original filing is the authoritative source.
Network Appliance, Inc. filed its Form 10-K for the fiscal year ended April 25, 1997 (financial statements presented as of April 30, 1997).
Net sales rose to $93.3 milliona from $46.6 million in fiscal 1996, with gross margin improving to 59.2% from 55.9%. However, the company recorded a $10.5 million one-time charge related to the March 1997 acquisition of Internet Middleware Corporation (IMC), consisting of purchased in-process technology and a related compensation charge, plus a $4.3 million litigation settlement (the Whipsaw litigation). As a result, income from operations fell to $3.1 million from $6.0 million, and net income dropped to $250 thousand, or $.01 per share, compared with $6.6 million, or $.42 per share, in fiscal 1996.
The company's product strategy centered on its filers, which combine proprietary software (including the WAFL architecture and Data ONTAP) with industry standard hardware to serve NFS, CIFS and HTTP markets. During fiscal 1997 it introduced multiprotocol capabilities, the Web Filer and NetCache proxy-caching software, and in May 1997 it launched four new filers (NetApp F210, F230, F520 and F630). Research and development expenses rose to $9.0 millionb from $4.8 million, and sales and marketing expenses rose to $24.3 million from $12.7 million, reflecting expansion of the direct sales force.
Foreign subsidiaries accounted for approximately 11% of net sales in fiscal 1997. At year end, the company held $21.5 millionc in cash and cash equivalents and $6.9 million in short-term investments, with shareholders' equity of $54.0 million and total assets of $68.9 million. Operating activities provided $6.3 million in cash in fiscal 1997, and management stated its liquidity is sufficient for at least the next twelve months.
The company reported an accumulated deficit of $624 thousandd and has never paid cash dividends. The filing also notes that no customer accounted for 10% or more of net sales in fiscal 1997 or 1996, and that the company generally does not maintain a firm backlog.
02—Key points
Key Highlights
- Net sales of $93.3 million in fiscal 1997, up from $46.6 million in fiscal 1996.
- Gross margin improved to 59.2% from 55.9%, attributed to higher volume, lower component costs and manufacturing efficiencies.
- Net income fell to $250 thousand ($.01 per share) from $6.6 million ($.42 per share), due to a $10.5 million IMC acquisition charge and a $4.3 million litigation settlement.
- Income from operations was $3.1 million, down from $6.0 million in fiscal 1996.
- Research and development expense rose to $9.0 million from $4.8 million; sales and marketing expense rose to $24.3 million from $12.7 million.
- Year-end cash and cash equivalents of $21.5 million plus short-term investments of $6.9 million; shareholders' equity of $54.0 million.
- Acquired Internet Middleware Corporation in March 1997 for $7.35 million in common stock and options, adding NetCache proxy-caching software.
03—Questions
Frequently Asked Questions
Why did net income decline so sharply in fiscal 1997 despite higher sales?
Net sales doubled to $93.3 million and gross margin improved, but operating expenses rose to 55.9% of net sales. The main drivers were a $10.5 million one-time charge for purchased in-process technology and related compensation from the IMC acquisition, and a $4.3 million charge to settle the Whipsaw litigation. The filing also notes the IMC charge was not deductible for tax purposes, which raised the effective tax rate to 93.8%.
What products did Network Appliance introduce during fiscal 1997?
The company shipped Data ONTAP Release 4.0 with multiprotocol support for NFS, CIFS and HTTP, released the Web Filer software and FilerView administration tool, and released NetCache proxy-caching software in April 1997. In May 1997 it launched the NetApp F210, F230, F520 and F630 filers, with list prices for filers ranging from approximately $15,000 to $400,000.
How concentrated are the company's customers and sales channels?
No customer accounted for 10% or more of net sales in fiscal 1997 or 1996, although in fiscal 1995 sales to ITOCHU and MTI each represented about 10%. The company relies primarily on indirect sales in the Pacific Rim and parts of Europe, while selling directly in North America. Foreign subsidiaries accounted for approximately 11% of net sales in fiscal 1997. The company has no long-term volume purchase contracts with most customers or resellers.
Is the company's liquidity sufficient to fund operations?
Management stated that existing liquidity and capital resources are sufficient to fund operations for at least the next twelve months. At April 30, 1997, the company had $21.5 million in cash and cash equivalents and $6.9 million in short-term investments. Operating activities provided $6.3 million in fiscal 1997, and the company had no significant capital commitments beyond operating and capital leases.
What risks does the filing highlight for investors?
The filing cites dependence on the network file server market and on new product acceptance, intense competition from companies with greater resources, reliance on a limited number of component suppliers (notably disk drives from Digital Equipment Corporation), quarterly fluctuations in results, limited order backlog, potential intellectual property claims, and dependence on key personnel, none of whom has an employment agreement. The company also has a limited operating history and an accumulated deficit of $624 thousand.
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