1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K <TABLE> <C> <S> (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED APRIL 26, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM --------------- TO --------------- </TABLE> COMMISSION FILE NUMBER 0-27130 NETWORK APPLIANCE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> CALIFORNIA 77-0307520 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) </TABLE> 319 NORTH BERNARDO AVENUE MOUNTAIN VIEW, CALIFORNIA 94043 (Address of principal executive office, including Zip Code) (415) 428-5100 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE <TABLE> <S> <C> TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED none none </TABLE> SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock (no par value) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate 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. [ X ] The aggregate market value of voting stock held by non-affiliates of the Registrant, as of May 31, 1996 was approximately $228,170,000 (based on the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market System for the last trading 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 31, 1996 approximately 16,156,000 shares of the Registrant's Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Annual Report to Shareholders are incorporated by reference into Part II; such portions of the Annual Report to Shareholders incorporated by reference are filed as Exhibit 13.1 hereof.
2 This Annual Report on Form 10-K contains forward looking statements that are accompanied by cautionary statements that identify important factors that could cause actual results to differ materially from those in the forward looking statements. PART I ITEM 1. BUSINESS OVERVIEW Network Appliance, Inc. (the "Company" or "Network Appliance") designs, manufactures, markets and supports high performance network data storage devices which provide fast, simple, reliable and cost effective file service for data-intensive network environments. The Company pioneered the concept of the "network appliance," an extension of the industry trend towards dedicated, specialized devices which perform a single function in the network, similar to the adoption of the router for network communications management. The Company's filer products combine specialized proprietary software and state-of-the-art industry standard hardware to provide a unique solution for the NFS server market. INDUSTRY BACKGROUND In response to competitive pressures, businesses and other organizations are increasingly investing in information systems to shorten product development cycles, enhance customer responsiveness, lower costs, and improve the quality of their products and services. Networked computing offers these organizations the ability to increase productivity through the distribution of computing power across their enterprises, providing large numbers of users with access to applications, information and data. In this environment, it has become important for organizations to manage the storage of and access to large volumes of data, which increasingly represent critical information resources. Data-Intensive Network Environment Network computing environments that require large volumes of data, perform intensive processing or computation of data, or involve frequent user access to data can be characterized as "data-intensive." Increasingly, organizations are deploying data-intensive applications and services as core business resources. In addition, Internet and on-line service related businesses have grown significantly. The data-intensity of the network environment is expected to continue to increase substantially due to the development of new applications and services and the more prevalent use of stored digital graphics, voice and video, requiring dramatically more data capacity than equivalent alphanumeric information. Examples of data-intensive applications and services include: Data-Intensive Applications. Data-intensive applications have become increasingly prevalent in a variety of industries. Computer-aided design, manufacturing and engineering ("CAD/CAM/CAE") are data-intensive applications in which teams of engineers collaborate on a common design for a product such as a semiconductor device, computer system, aircraft or automobile. Software development is also inherently data-intensive, involving the creation and compilation by teams of developers of hundreds of thousands of lines of software code which must be continuously tested, revised and recompiled. Energy, seismic and satellite-related applications also involve the storage and manipulation of large quantities of graphics and imaging data. Within the securities industry, large volumes of trading and other market data need to be compiled and rapidly processed in order to support trading decisions. Airline reservation systems also involve the access to and processing of large quantities of data related to flight schedules, equipment configurations, passenger information and seat availability. Data-Intensive Services. Internet and public on-line services have become increasingly data intensive. Organizations are also providing internal on-line data repositories that can be accessed internally as well as by outside users. As these services have proliferated, they have become "information utilities" where increasing amounts of data are stored for broad availability to large numbers of distributed users. 2
3 Issues in Data Management and Network Computing. Organizations utilizing data-intensive applications and services in network computing environments generally share a common set of requirements in order to derive the benefits that they are designed to provide. In this context, data management has become increasingly complex and challenging. Specifically, three significant problem areas have emerged: (i) data access performance; (ii) data administration; and (iii) data availability and reliability. Data Access Performance. Traditionally, management information systems ("MIS") managers and network providers improved performance on a network by increasing CPU performance or increasing the underlying network bandwidth. In today's data-intensive network environment, performance of applications and services is increasingly limited by the time to read or write to hard disk drives. Improvements in performance for most applications and services have been limited by disk input/output ("I/O") performance, which because of the mechanical nature of disk drives, has not improved as rapidly as central processing unit ("CPU") performance or network bandwidth. Data Administration. A key requirement in data administration is the management of hardware and software systems that store the data. In the data-intensive network environment, data management is difficult and complex due to the large number of users accessing the data, the multiple servers storing the data and the large volume of data. Furthermore, because data may be widely distributed throughout the network, administrative functions such as back-up or expansion of the file system become substantially more difficult. Finally, the budgetary constraints of most organizations require that this increasingly complex administration be accomplished cost-effectively, without increased staffing. Data Availability and Reliability. As the data-intensive network environment grows, data availability becomes critical to the organization's productivity, time-to-market and responsiveness to customers. Achieving a high level of data availability is particularly difficult because hard disk drives are mechanical devices, which are prone to failure over extended periods of intensive use. An organization may experience costly down-time or loss of data from the failure of a single low-cost, network-attached disk drive. This is particularly important to network service providers whose business is providing network-stored data to their users. Therefore, it is imperative that systems which are repositories of network-based data and services have low failure rates, rapid recovery times and the ability to provide uninterrupted service in the event of failure of a disk drive. File Servers The requirements of the data-intensive network environment have contributed to the growing importance of the network file service function, the process of reading and writing files to and from shared data storage over the network. Until recently, the file service function had been performed exclusively by larger, general purpose computer systems which also executed other tasks such as print serving, application processing and communications functions. As networks evolved, network managers increasingly dedicated general purpose systems specifically to the file service task in order to enhance performance, simplify administration and reduce vulnerability to other application-related failures. These dedicated systems became known as "file servers." Systems vendors have offered a variety of specially configured and add-on solutions for general purpose systems deployed as file servers. Selected vendors have also introduced highly specialized, hardware-intensive systems architected to exclusively perform the file service task. These approaches, such as the use of hardware accelerators and the introduction of specialized hardware architectures, were generally optimized for throughput (the number of I/O requests processed by the CPU). Although these file server approaches addressed throughput issues, they were not designed to address the specific problem of response time (the speed at which an I/O request is satisfied) which is critical in the data intensive network environment. In addition, because these approaches lack the flexibility to easily integrate additional network, file system and/or disk interfaces or protocols associated with today's heterogeneous networks, these approaches do not directly address the reliability issues associated with data storage on a network. Consequently, users are searching for cost-effective, flexible solutions to address data access performance, data administration and data availability and reliability issues in the data-intensive network environment. 3
4 THE NETWORK APPLIANCE SOLUTION Network Appliance pioneered the concept of a "network appliance," a fast, simple, reliable and cost-effective device designed to perform a specific network data management function. The network appliance concept is part of the trend towards the specialization of network devices, including the development of routers, dedicated devices that manage network communications functions previously performed by general purpose computer systems. The Company's first network appliance product line consists of network data storage appliances or "filers," developed to address the specific market requirements of data-intensive network environments. These products utilize an efficient software kernel optimized to exclusively perform the file service task. Unlike previous file server approaches, these products are not burdened by a general purpose operating system or file system overhead. By using a proprietary software architecture, Network Appliance is able to use industry standard hardware components rather than specialized hardware. The core elements of the Network Appliance solution are: Fast Response Time. Network Appliance uses its proprietary Write Anywhere File Layout ("WAFL") software architecture and a sophisticated caching scheme coupled with industry standard processor architectures and I/O buses to achieve response time over the network substantially faster than competing products. Faster response times result in faster execution of applications and services in data-intensive network environments. The filer's response time is significantly faster than either general purpose computers or specialized hardware-centric file servers. In addition, the Company's products are characterized by less variation in response times under increasing aggregate loads than competing products. Network Appliance believes its approach enables its customers to meet the performance needs of future data-intensive applications and services. The Company's technology has allowed it to achieve substantial improvements in response time by adopting faster industry standard microprocessors, while competitive solutions have been generally limited by disk access time. For example, successive releases of Network Appliance software on the Intel 486-based platform, in addition to supporting incremental functionality, have succeeded in reducing response times. Ease of Administration. Network Appliance products are easy to use and install. Installation by a systems administrator typically requires less than an hour. Administration requires knowledge of less than 40 system commands, versus the hundreds of commands typical of alternative products. Network Appliance's Snapshot feature allows on-line back-up of an active file system without interrupting users. This feature also allows users online access to earlier versions of their data without involving the systems administrator. Together, these features simplify administration, permit more efficient use of personnel resources and increase data availability. High Levels of Data Availability and Reliability. Network Appliance products are designed to provide high levels of data availability. Traditional servers do not have an integrated facility to efficiently and reliably maintain the availability of data upon disk drive failure. The approach to provide increased data-availability for these systems has been to incrementally add RAID (redundant array of independent disks) devices which are costly and are often performance-limiting. Network Appliance's unique software integration of RAID provides a solution at no incremental cost that yields more reliable data with no performance penalties. In the event of a disk drive failure, the Network Appliance filer will reconstruct the failed data on a spare drive which may be hot-swapped with the failed drive on the NetApp F220 or NetApp F330 without any interruption of data availability to client users. Upon disruption of the system, Network Appliance servers automatically reboot (with full data availability) at a speed of approximately one minute regardless of storage capacity (versus alternative systems that may take up to one minute per gigabyte to reboot with full data availability). The Network Appliance architecture allows system administrators to add storage capacity or replace a failed disk drive without service interruption or loss of data. Scalability. The architecture of Network Appliance products is designed to be scalable so that throughput and storage capacity can cost effectively grow on an incremental basis. Adding an additional server to a network under this architecture is as simple as adding an additional disk drive to many other systems. The system can be easily expanded to terabytes of data, while maintaining a relatively consistent response time. 4
5 Compatibility with Networking Environment. Network Appliance products are compatible with major network and peripheral interfaces and protocols. This is accomplished through the use of industry standard bus architectures, providing compatibility with common network interfaces and protocols and disk interconnects. Network Appliance's software is designed to be extendable to additional network environments and interface standards, as appropriate. Cost-Effectiveness. By combining Network Appliance's software-centric architecture with state of-the-art industry standard microprocessors and hard disk products, Network Appliance is able to achieve fast response times at a low cost per unit of storage. STRATEGIES Network Appliance's goal is to be a leader in the network data storage appliance market, building on the initial success of its NFS filers. The Company seeks to achieve this goal by employing the following core strategies: Focus on Software Differentiation. Network Appliance seeks to continue to differentiate its products by focusing on the development of specialized proprietary software. Network Appliance believes this approach allows it to cost-effectively integrate desirable features such as intelligent caching, the WAFL architecture, software integrated RAID and automated on-line backup through its Snapshot feature. Embrace Industry Standards. Network Appliance will continue to integrate its specialized software solutions with state-of-the-art industry standard hardware components and software interfaces. Industry standard hardware is generally less expensive and more readily available than proprietary hardware. For instance, since its first product introduction, successive generations of Network Appliance products have migrated from industry standard architecture ("ISA") to peripheral connect interchange ("PCI")-bus. Network Appliance believes this approach allows more rapid and cost-effective development and the delivery of high performance products at attractive prices. Utilizing industry standard interfaces enables Network Appliance products to be adaptable to a variety of network environments. Broaden Penetration Into NFS Market. Network Appliance's initial focus has been on providing NFS file servers for departmental and enterprise applications. The Company is seeking to expand its product offerings to include a wider range of price, performance and storage capacities. Develop New Markets. Network Appliance is developing a multi-protocol file server capable of providing simultaneous NFS and System Management Block ("SMB") file service, the standard file service protocol for Microsoft Windows products. This product is being designed to meet file server requirements for the emerging Windows NT market. The Windows NT market is expected to be driven by trends toward the distributing and downsizing of centralized data-intensive applications, the consolidation of smaller, independent PC-based LANs, and the emergence of multi-media as a significant corporate communications and training tool. Expand Distribution. Network Appliance seeks to market and distribute its products and technology globally. In North America, the Company employs a multi-tiered distribution strategy which focuses on product sales to end-users through a direct sales force, as well as selected value-added resellers in certain geographies. In the Pacific Rim and in Europe, Network Appliance products are sold through resellers, which are supported by Network Appliance channel managers and technical support personnel. In addition, the Company seeks to distribute its products through original equipment manufacturers ("OEMs") and, where appropriate, through licensing arrangements with computer systems companies. SALES AND MARKETING Network Appliance has established multiple distribution channels to accelerate market penetration of its products. The Company initially marketed its products primarily through indirect sales channels both domestically and internationally. In fiscal 1995, the Company shifted its emphasis domestically to direct sales and significantly expanded its direct sales force. The Company continues to rely primarily on indirect sales internationally. Network Appliance has established several domestic selling locations, including in Colorado, 5
6 California, Massachusetts, Maryland, Michigan, Minnesota, New Jersey, New York, Oregon, Texas, Virginia and Washington, D.C. Additionally, the Company has international offices in London and Paris. Network Appliance's sales personnel are responsible for the overall sales functions of the Company, including prospecting, lead processing, account strategies and development, distribution channels and other activities. The Company's marketing department is responsible for product planning, positioning, pricing, customer and sales force training, and overall promotion of Network Appliance products through press, direct mail, seminars, trade shows and advertising. Network Appliance expects to continue to increase its sales and marketing activities. No customers accounted for 10% or more of the Company's net sales in fiscal 1996. In fiscal 1995, sales to ITOCHU and MTI each accounted for approximately 10% of net sales. In fiscal 1994, sales to ITOCHU accounted for approximately 20% of net sales. The Company has entered into a Distributor Agreement with ITOCHU under which the Company granted ITOCHU a nonexclusive, nontransferable license to, among other things, market and distribute certain of the Company's products in Japan, with payments to the Company in U.S. dollars and a term that is automatically renewed each year. The Distributor Agreement had an initial term through March 31, 1994, which is automatically renewed for additional one year terms unless terminated 45 days prior to the end of a term. The agreement may also be terminated with or without cause upon 90 days written notice by either party and upon certain events of default by either party. The Company generally has not entered into long-term volume purchase contracts with its other end user customers or resellers. The Company terminated its relationship with MTI in the second quarter of fiscal 1996. PRODUCTS Network Appliance currently markets three filer products: the NetApp F220, the NetApp F330 and the NetApp F540. All filers are based on a PCI-bus architecture and come packaged in rack mountable enclosures. The NetApp F220 and F330 filers are based on Pentium processors. The NetApp F540 is based on a Digital Alpha processor and is the Company's first RISC-based NFS filer. Network Appliance recently began shipments of Release 3.1, which is based on the Company's specialized proprietary software architecture. Release 3.1 is standard on all new filer products shipped as of February 1996. Installed base customers running previous versions of the software can upgrade to Release 3.1 at no charge if they are on the Company's Software Subscription Program, or by paying a per-incident upgrade price. Some customers are eligible for a free upgrade depending on the date of their filer purchase. Release 3.1 contains all of the core functionality available on prior releases and includes improvements in NFS throughput and NFS response time, as well as additional functionality, relative to prior releases of the software. The current base list price for Network Appliance filers is $28,440 for the NetApp F220, $45,440 for the NetApp F330 and $66,135 for the NetApp F540 with four 4-gigabyte disk drive package. Network Appliance's discounting policy varies based primarily on volume purchases, sales geography and channels of distribution. CUSTOMER SERVICE AND SUPPORT Network Appliance's customer service and support organization provides customers with technical support, education and training. Network Appliance believes that providing a high level of customer service and technical support is critical to customer satisfaction and the Company's success. In providing service and support to customers, the Company uses its own products extensively. Warranty coverage includes 24 hour telephone support plus next business day hardware repair. For an additional charge, the Company also offers upgraded service during the warranty period, providing for faster on-site hardware repair. Post-warranty service programs include: telephone support only; cooperative maintenance where the customer purchases spares and performs self-maintenance tasks, and full-service programs (standard, premium and ultra) involving various combinations of telephone-based support and on-site repair. The 6
7 Company charges for service programs on an annual subscription basis, with discounts to sites with multiple filers. MANUFACTURING Network Appliance's manufacturing operations, located in Mountain View, California, consist of procurement of materials, product assembly, product assurance, quality control and final test. Network Appliance relies on many suppliers for the procurement of materials, as well as several key subcontractors for the production of certain board level assemblies. The Company's manufacturing strategy has been to develop close relationships with its suppliers, exchanging critical information and implementing joint quality training programs. This manufacturing strategy minimizes capital investment and overhead expenditures and creates flexibility by providing the capacity for rapid expansion. The Company relies upon a limited number of suppliers of several key components utilized in the assembly of the Company's products. The Company purchases disk drives and enclosures from Digital Equipment Corporation. The Company's reliance on its suppliers involves several risks, including a potential inability to obtain an adequate supply of required components, price increases, timely delivery and component quality. This risk is particularly significant with respect to suppliers of disk drives because in order to meet product performance requirements, the Company must obtain disk drives with extremely high quality and capacity. In addition, there is currently a significant market demand for disk drives and for semiconductor memory components, which could result in component shortages, selective supply allocations and increased prices of such components. Although to date the Company has been able to purchase its requirements of such components, there is no assurance that the Company will be able to obtain its full requirements of such components in the future or that prices of such components will not increase. In addition, there can be no assurance that problems with respect to yield and quality of such components and timeliness of deliveries will not occur. Disruption or termination of the supply of these components could delay shipments of the Company's products and could have a material adverse effect of on the Company's business, operating results and financial condition. Such delays could also damage relationships with current and prospective customers. The Company's resellers often purchase minimally configured systems from the Company and source additional disk drives and memory components from other vendors. In addition, certain end-users also purchase disk drives and memories from other suppliers. Since these components do not undergo the Company's rigorous sourcing and testing procedures, they may experience more failures when deployed in the Company's products. Any such higher failure rate could negatively impact the Company's reputation and, as a result, could materially adversely affect its business, operating results and financial condition. RESEARCH AND DEVELOPMENT Since its inception, Network Appliance has made substantial investments in research and development. Network Appliance believes that its future performance will depend in large part on its ability to maintain and enhance its current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. The Company intends to expand its existing product offerings and to introduce new products for the network file server market. As part of the Company's ongoing development process, the Company introduced the NetApp F330 in September 1995 and the Netapp F220 in January 1996, and announced the NetApp F540 in May 1996. In addition, the Company has under development new network file servers that it anticipates announcing in fiscal 1997. The Company's future growth depends upon the success of these and other new products, however there can be no assurance that these or other new products will attain market acceptance. Due to the complexity of network file servers and the difficulty in gauging the engineering effort required to produce new products, new products are subject to significant technical risks. There can be no assurance that new products will be introduced on a timely basis or at all. In the past, the Company has experienced delays in the shipments of its new products principally due to an inability to qualify component parts from disk drive and other suppliers, resulting in delay or loss of product sales. The Company has currently qualified disk drives manufactured by Seagate Technology Inc. If new products are delayed or do not achieve market acceptance, the Company's 7
8 business, operating results and financial condition will be materially adversely affected. In addition, there can be no assurance that customers will not defer orders in anticipation of new product introductions by the Company or its competitors. The network file server market is characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. The Company's future success will depend upon its ability to develop and introduce new products (including new software releases and enhancements) on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing new products that respond to technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products, or that its new products will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is 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, the Company's business, operating results and financial condition will be materially adversely affected. Network file server products like those offered by the Company may contain undetected software errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company's total expenses for research and development for fiscal years 1996, 1995 and 1994 were $4.8 million, $2.6 million and $780,000, respectively. The Company anticipates that research and development expenses will increase in absolute dollars in future periods, however, the amount of such increases cannot be accurately determined. COMPETITION The network file server market is intensely competitive and characterized by rapidly changing technology. The Company experiences substantial competition from specialized network file server companies, such as Auspex Systems, Inc. ("Auspex"), as well as from traditional suppliers of UNIX systems and PC products that are used as network file servers such as Sun Microsystems, Digital Equipment Corporation, Hewlett-Packard Company, Silicon Graphics Inc. and IBM Corporation, among others. In addition, certain of these large traditional suppliers of general purpose computers may in the future offer specialized file server products which are more directly competitive with those of the Company. The Company also expects new and emerging competition in the network file server market, including competition from manufacturers of PC-based file servers based upon Windows NT and other emerging standards. While the Company believes that the price-performance characteristics of its products are currently competitive, increased competition is likely to result in price reductions, reduced gross margin and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and support of their products than the Company. 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. In addition, the Company derives a significant portion of its sales from the resale of disk drives as components of its filers and therefore experiences competition from disk drive resellers. The market for the resale of disk drives is highly competitive and subject to intense price pressures. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive 8
9 pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. The Company believes that the principal competitive factors affecting its market include product features such as response time, scalability and ease of use, price and customer service and support. Although the Company believes that its products currently compete favorably with respect to these factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. PROPRIETARY RIGHTS Network Appliance's success depends significantly upon its proprietary technology. The Company currently relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company has registered its FAServer trademark and will continue to evaluate the registration of additional trademarks as appropriate. The Company generally enters into confidentiality agreements with its employees and with its resellers and customers. The Company currently has three U.S. patent applications pending and three corresponding international patent applications pending. There can be no assurance that the pending applications will be approved, or that if issued, such patents will not be challenged, and if such challenges are brought, that such patents will not be invalidated. There can be no assurance that the Company will develop proprietary products or technologies that are patentable, that any issued patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's ability to do business. Litigation may be necessary to protect the Company's proprietary technology. Any such litigation may be time-consuming and costly. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards 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. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around patents issued to the Company or other intellectual property rights of the Company. There have also been substantial amounts of litigation in the computer industry regarding intellectual property rights. The Company is currently involved in litigation related to the alleged infringement of third party rights and other claims, which resulted not only in the Company incurring significant legal fees and related costs but also in a substantial diversion of management attention. In addition, the Company has from time to time received claims that it is infringing third parties' intellectual property rights, and there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, trademarks or other proprietary rights. The Company expects that companies in the file server market will increasingly be subject to infringement claims as the number of products and competitors in the Company's 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 the Company to redesign its products or require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect upon the Company's business, operating results and financial condition. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. In July 1992, the Company received a letter from counsel to Auspex Systems, Inc. ("Auspex") expressing concern over the potential for misuse of Auspex trade secrets, infringement of Auspex copyrighted material, and infringement of Auspex patents. In March 1993, the Company filed suit against Auspex seeking a ruling that the Company had not taken Auspex trade secrets and damages based upon Auspex assertions, which was settled in December 1993 on terms mutually acceptable to Auspex and the Company. In October and November 1994, the Company received letters from counsel to Auspex requesting that the Company enter into negotiations regarding a license under a continuation in-part of a previously issued patent granted to 9
10 Auspex in October 1994. Based upon an opinion of D'Alessandro & Ritchie, the Company believes that it does not infringe any valid claims under the October 1994 patent. Although Auspex has not contacted the Company since late 1994 regarding this patent, there can be no assurance that Auspex will not bring a legal action against the Company on this patent and if Auspex does commence a lawsuit with regard to this patent, there can be no assurance that the outcome of any such litigation will not have a material adverse effect on the Company's business, operating results and financial condition. In addition, any claims or litigation against the Company could result in substantial expense and significant diversions of management attention. EMPLOYEES As of April 26, 1996, Network Appliance had a total of 145 employees. Of the total, 61 were in sales and marketing, 9 in customer support, 37 in research and development, 17 in finance and administration and 21 in operations. The Company's future performance also depends in significant part upon the continued service of its key technical and senior management personnel, none of whom is bound by an employment agreement. The loss of the services of one or more of the Company's officers or other key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical and management personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical and management employees or that it can attract, assimilate or retain other highly qualified technical and management personnel in the future. The Company has not experienced any work stoppages and considers its relations with its employees to be good. OTHER FACTORS AFFECTING THE COMPANY History of Operating Losses; Potential Fluctuations in Quarterly Results. The Company was organized in April 1992 and first shipped products in June 1993. The Company had an accumulated deficit of $874,000 as of April 26, 1996. While the Company generated net income in fiscal 1996, it incurred significant losses in fiscal 1995 and in each of its prior fiscal years. There can be no assurance that the Company will remain profitable on a quarterly or annual basis. The Company's quarterly operating results have in the past varied and may in the future vary significantly depending on a number of factors, including the level of competition; the size and timing of significant orders; product configuration and mix; market acceptance of new products and product enhancements; new product announcements or introductions by the Company or its competitors; deferrals of customer orders in anticipation of new products or product enhancements; changes in pricing by the Company or its competitors; the ability of the Company to develop, introduce and market new products and product enhancements on a timely basis; hardware component costs; supply constraints; the Company's success in expanding its sales and marketing programs; technological changes in the network file server market; the mix of sales among the Company's sales channels; levels of expenditure on research and development; changes in Company strategy; personnel changes; general economic trends and other factors. Although the Company has not experienced seasonality in the past, because of the significant seasonal effects experienced within the industry and the Company's goal to expand international sales, there can be no assurance that the Company's future operating results will not be adversely affected by seasonality. Sales for any future quarter are not predictable with any significant degree of certainty. The Company generally operates with limited order backlog because its products typically are shipped shortly after orders are received. As a result, product sales in any quarter are generally dependent on orders booked and shipped in that quarter. Product sales are also difficult to forecast because the network file server market is rapidly evolving and the Company's sales cycle varies substantially from customer to customer. A significant portion of the Company's revenues in any quarter may be derived from sales to a limited number of customers. Any significant deferral of these sales could have a material adverse effect on the Company's results of operations in any particular quarter; and to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. The Company's expense levels are based, in part, on its expectations as to future sales. As a result, if sales levels are below expectations, net income may be disproportionately affected. Although the Company has experienced significant revenue growth in recent 10
11 periods, the Company does not believe such growth is indicative of future operating results. The Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indicator of future performance. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Dependence on Growth in the Network File Server Market. All of the Company's products address the network file server market. The Company's future financial performance will depend in large part on continued growth in the network file server market and on emerging standards in this market. There can be no assurance that the market for network file servers will continue to grow or that emerging standards in the network file server market, such as Windows NT, will not adversely affect the growth of the NFS server market on which the Company has focused to date. If the network file server market fails to grow, grows more slowly than anticipated, or if network file servers based on emerging standards other than those adopted by the Company become increasingly accepted by the market, the Company's business, operating results and financial condition would be materially adversely affected. During recent years, segments of the computer industry have experienced significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns and layoffs. The Company's operations may in the future experience substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers and other factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on the Company's business, operating results and financial condition. Expansion of International Operations. The Company believes that its continued growth and profitability will require successful expansion of its international operations and sales and therefore the Company has committed significant resources to such expansion. International sales represented approximately 20%, 16% and 36% of the Company's net sales in fiscal 1996, 1995 and fiscal 1994, respectively. In order to successfully expand international sales in fiscal 1997 and subsequent periods, the Company must establish foreign operations, hire additional personnel and recruit additional international distributors and resellers. This will require significant management attention and financial resources and could materially adversely affect the Company's business, operating results and financial condition. To the extent that the Company is unable to effect these additions in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for the Company's products. The Company currently sells a significant portion of its products internationally through resellers, most significantly, ITOCHU, which in fiscal 1995, accounted for approximately 10% of the Company's net sales. There can be no assurance that ITOCHU or any of the Company's international resellers or customers will continue to distribute or purchase the Company's products. The Company's international sales are principally denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. As the Company expands its foreign operations, it expects that it will face increasing pressure to denominate product sales in local currencies, which will subject the Company to risks associated with currency fluctuations. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, if any, in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. The Company has not received ISO 9000 certification which in the future could impact its ability to sell its products in international markets. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's business, operating results and financial condition. Product Concentration; Changing Product Mix . The Company derives substantially all of its revenues from the sale of its network filer product line. As a result, a reduction in the demand for filer products due to increased competition, a general decline in the market for network file servers or other factors would have a 11
12 material adverse effect on the Company's business, operating results and financial condition. Prior to fiscal 1996, the Company derived substantially all of its revenue from the sale of its FAServer 450 and 1400 products. The mix of products sold by the Company has changed substantially with the introduction of the NetApp F220, NetApp F330 and NetApp F540. Additional product introductions in fiscal 1997 are expected to impact the sales of existing products. If the Company is unable to introduce these new products in a timely manner, effectively manage the introduction of new products and any related inventory transitions or if such products do not achieve market acceptance, the Company's business, operating results and financial condition could be materially adversely affected. Concentration of Sales. Historically, a significant portion of the Company's sales have been made to a limited number of end user customers and resellers. In fiscal 1996, no customers accounted for 10% or more of net sales. In fiscal 1995, sales to resellers ITOCHU Corporation ("ITOCHU") and MTI Technology Corporation ("MTI") each accounted for approximately 10% of net sales. In fiscal 1994, ITOCHU accounted for approximately 20% of net sales. The Company's relationship with MTI terminated in the second quarter of fiscal 1996. The Company generally has not entered into long term volume purchase contracts with its end user customers or resellers, and such end user customers or resellers may have certain rights to extend or delay the shipment of their orders. The loss of a major end user customer or reseller, the reduction, delay or cancellation of orders or a delay in shipment of the Company's products to such end user customer or reseller could materially adversely affect the Company's business, operating results and financial condition. In addition, should one or more of these resellers choose to promote products competitive with the Company's products, the Company's business, operating results and financial condition could be materially adversely affected. Recent Management Additions and Management of Expanding Operations. Certain of the Company's senior management joined the Company during the last year. The Company's Chief Financial Officer/Vice President of Operations joined in May 1995, its Vice President of Engineering joined in September 1995 and its Vice President of Marketing joined in May 1996. The Company is in the process of implementing a number of new financial and management controls, reporting systems and procedures. In addition to its senior management, the Company has recently hired a significant number of employees, including sales staff, and plans to further increase its total employee base. The Company also plans to expand the geographic scope of its customer base and operations. This expansion has resulted and will continue to result in substantial demands on the Company's management systems and resources. The Company's ability to compete effectively and to manage future expansion of its operations, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and effectively expand, train and manage its work force. If the Company's efforts are not successful, the Company's business, operating results and financial condition could be materially adversely affected. Possible Volatility of Stock Price. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to a number of factors, including quarterly variations in operating results, announcements of technological innovations or new products, applications or product enhancements by the Company or its competitors, changes in financial estimates by securities analysts and other events. In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Concentration of Stock Ownership. The present directors, executive officers and principal shareholders of the Company and their affiliates will beneficially own approximately 43% of the outstanding Common Stock. Upon the anticipated elimination of cumulative voting rights currently held by the Company's shareholders, the foregoing shareholders will be able to control all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. Effect of Certain Charter Provisions; Anti-takeover Effects of Provisions of the Bylaws. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the 12
13 price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Further, certain provisions of the Company's Bylaws pertaining to the future elimination of cumulative voting and shareholder action by written consent, and the requirement that shareholders may call a special meeting of shareholders only upon a request of shareholders owning at least 50% of the Company's Common Stock, could delay or make more difficult a proxy contest involving the Company, which could adversely affect the market price of the Company's Common Stock. ITEM 2. PROPERTIES Network Appliance's principal administrative, sales, marketing, manufacturing and research and development facility is located in approximately 51,000 square feet of space in Mountain View, California. This facility is leased through October 1999. The Company leases other sales offices throughout the U.S. and in Europe. The Company believes that the existing facilities are adequate for its current needs and that additional space will be available as needed. ITEM 3. LEGAL PROCEEDINGS WHIPSAW LITIGATION In July 1994, the Whipsaw Group, Robert and Ellen Cousins, and certain other individuals filed suit alleging breach of contract, breach of fiduciary duty, fraud, misappropriation of trade secrets and other related claims against the Company, Michael Malcolm (a former officer), Owen Brown and Migration Software Systems, Ltd. (the "Whipsaw Litigation"). The plaintiffs allege that they disclosed trade secrets and proprietary information to Messrs. Brown and Malcolm under written and/or oral confidentiality agreements, that Messrs. Brown and Malcolm misappropriated those trade secrets and that Network Appliance is based entirely on the trade secrets and proprietary information misappropriated from the Whipsaw Group. These allegations are based upon contacts from September through November 1991 between Mr. Cousins and other members of the Whipsaw Group and Messrs. Malcolm and Brown. During November 1991, Messrs. Malcolm and Brown reviewed a business plan prepared by the Whipsaw Group and had various discussions with Mr. Cousins and other members of the Whipsaw Group relating to the formation and funding of a company to develop low cost network file servers. Although Mr. Malcolm had written an unpublished paper in 1988 on a similar file server concept, he did not actively pursue the formation and funding of a company based upon the concept until after his meetings with the Whipsaw Group. In December 1991, Mr. Malcolm initiated contact with Messrs. Hitz and Lau which ultimately led to the formation of Network Appliance. Mr. Brown was an early investor in the Company and Migration Software Systems, Ltd. is a company with which he is affiliated. Plaintiffs are seeking an injunction against further use of their trade secrets and confidential information, unspecified damages and the imposition of a constructive trust on the things of value defendants are alleged to have obtained by their use of the plaintiffs' alleged trade secrets and proprietary information. While the damages are unspecified, based upon settlement demands made by the plaintiffs to date, the Company believes that any demand for damages at trial would be substantial and could include a one-time or ongoing payments. The trial is currently scheduled to commence on August 5, 1996 in Santa Clara County Superior Court. The Company believes that it has meritorious defenses to such claims and intends to defend the litigation vigorously. However, due to the nature of the litigation, the Company cannot determine the total expense or possible loss, if any, that may ultimately be incurred either in the context of a trial or as a result of a negotiated settlement. Regardless of the ultimate outcome of the Whipsaw Litigation, it could result in significant diversion of time by the Company's technical and managerial personnel. While after consideration of the nature of the claims and facts relating to the litigation, including the results of preliminary discovery, and after consultation with legal counsel, management believes that the resolution of this matter will not have a material adverse effect on the Company's business, operating results and financial condition, the results of these proceedings, including any potential settlement, are uncertain and there can be no assurance that they will not have a material adverse effect on the Company's business, operating results and financial condition. In 13
14 connection with Mr. Malcolm's termination of services with the Company, the Company entered into a settlement and release agreement with Mr. Malcolm under which the Company may be required to indemnify and defend Mr. Malcolm in connection with the Whipsaw Litigation, and therefore, the costs incurred by the Company could be increased. Mr. Malcolm's employment relationship with the Company terminated for reasons unrelated to the Whipsaw Litigation. The Company does not have any agreement with Mr. Brown or Migration Software Systems, Ltd. regarding the Whipsaw Litigation. Mr. Brown settled with the plaintiffs in May 1996 and is no longer a defendant in this matter. 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. EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of April 26, 1996, are as follows: <TABLE> <CAPTION> NAME AGE POSITION - - - --------------------------- ---- ---------------------------------------------------- <S> <C> <C> Daniel J. Warmenhoven...... 45 President, Chief Executive Officer and Director Donald T. Valentine........ 63 Chairman of the Board and Director M. Helen Bradley........... 41 Vice President, Engineering Michael J. McCloskey....... 38 Vice President, Finance and Operations, Chief Financial Officer, and Secretary Thomas F. Mendoza.......... 44 Vice President, North American Sales Michael E. Paul............ 54 Vice President, International Sales Charles E. Simmons......... 47 Vice President, Marketing Carol A. Bartz(1).......... 47 Director Michael R. Hallman(2)...... 50 Director Kurt R. Jaggers(2)......... 37 Director Robert T. Wall(1).......... 50 Director </TABLE> - - - --------------- (1) Member of Compensation Committee (2) Member of Audit Committee 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. 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. Mr. Warmenhoven presently serves on the Board of Directors of Brooktree Corporation, a semiconductor company. Mr. Warmenhoven holds a B.S. degree in electrical engineering from Princeton University. Donald T. Valentine has been a director of the Company and Chairman of the Board of Directors since September 1994. Mr. Valentine has been a general partner of Sequoia Capital, a venture capital firm, since 1972. He is also Chairman of the Board of C-Cube Microsystems Inc., a semiconductor video compression company, and Elantec Semiconductor, Inc., an analog integrated circuit company, Vice Chairman of Cisco Systems, Inc., an internetworking communications company, and a director of Sierra Semiconductor, Inc., a communications semiconductor company. M. Helen Bradley joined the Company as Vice President, Engineering in September 1995. Prior to that, Ms. Bradley owned a management consulting business from January 1995 to September 1995. She also served as Senior Vice President, Technology Development at Openvision, a client-server applications company, from May 1994 to January 1995. From August 1990 to April 1994, Ms. Bradley was the Vice President, Systems Software at Sun Microsystems. Ms. Bradley holds a B.S. degree in mathematics from the Massachusetts Institute of Technology and an M.S. degree in computer science from the Georgia Institute of Technology. 14
15 Michael J. McCloskey joined the Company in May 1995 as Vice President, Finance and Operations, Chief Financial Officer and Secretary. From September 1993 to May 1995, Mr. McCloskey served as Executive Vice President and Chief Financial Officer at Digital Microwave Corporation, a telecommunications company. From September 1991 to September 1993, Mr. McCloskey was the Chief Operating Officer and a member of the Board of Directors of Wavefront Technologies, a 3-D graphics visualization software development company. From September 1986 to September 1991, he served as Chief Financial Officer at Everex Systems, Inc., a PC and PC peripherals company. Mr. McCloskey received his B.S. degree in business from Santa Clara University. Thomas F. Mendoza joined the Company in May 1994 as Vice President, North American Sales. From November 1993 to April 1994, Mr. Mendoza served in various capacities including Vice President, Sales at Work Group Technology, a product data management company. Prior to that, Mr. Mendoza served in various capacities including Vice President of North American Sales at Auspex, a UNIX-based network file server company, from November 1990 to October 1993. Mr. Mendoza was previously Vice President of Western Operations at Stratus Computer, a vendor of fault tolerant computers, from May 1982 to October 1990. Mr. Mendoza holds a B.A. degree from the University of Notre Dame. Michael E. Paul joined the Company as Vice President, International Sales in July 1994. Prior to that, Mr. Paul served as Vice President of World Wide Sales at Trade, Inc., an international trade statistics data-base company, from December 1993 to June 1994. In March 1991, Mr. Paul joined Ultra Network Technologies, a network company, as Vice President of Sales and was named President and Chief Executive Officer in March 1991 and served in that capacity until July 1993. Mr. Paul served as Vice President of North American Sales at MIPS Computer Systems, a RISC technology company, from April 1988 to February 1991. Mr. Paul holds a B.S. degree in electrical and mechanical engineering and naval science from the U.S. Naval Academy. Charles E. Simmons joined the Company in May 1996 as Vice President, Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner & Associates, a consulting firm, from January 1995 to May 1995. From February 1994 to October 1994, Mr. Simmons served as Vice President of Marketing at Voyant Corporation, a developer of videoconferencing equipment. Prior to that, Mr. Simmons was with Sun Microsystems Computer Company, a subsidiary of Sun Microsystems, Inc., from November 1984 to February 1994, most recently as Director of Business Strategy and Technology Marketing. Mr. Simmons received a B.S. degree in electrical engineering from Washington University, an M.S. degree in electrical engineering from the Massachusetts Institute of Technology and an MBA from Santa Clara University. Carol A. Bartz has been a member of the Board of Directors since September 1995. Since April 1992, Ms. Bartz has been Chairman of the Board, President and Chief Executive Officer of Autodesk, Inc., a PC software company and supplier of design software. Prior to that, Ms. Bartz was with Sun Microsystems from September 1983 to April 1992, most recently as Vice President of Worldwide Field Operations. Ms. Bartz also currently serves on the Board of Directors of Airtouch Communications, Cadence Design Systems, Inc. and BEA Systems, Inc. Ms. Bartz received a B.A. degree in computer science from the University of Wisconsin. Michael R. Hallman has been a member of the Board of Directors since August 1994. Mr. Hallman is the President of The Hallman Group, a management consulting firm, which he founded in June 1992. Prior to that, he served as President and Chief Operating Officer of Microsoft Corporation, a microcomputer software company, from March 1990 to March 1992. He presently serves on the Board of Directors of Amdahl Corporation, a manufacturer of mainframe computers and peripherals, InFocus Systems, a computer peripherals company, Intuit, a microcomputer software company, Keytronics Corporation, an input device company, and Timeline, a developer of financial reporting software. Mr. Hallman holds B.B.A. and M.B.A. degrees from the University of Michigan. Kurt R. Jaggers has been a member of the Board of Directors since August 1993. Mr. Jaggers has been at TA Associates, an equity investment firm, since August 1990 and has been a Principal there since January 1993. Mr. Jaggers presently serves on the Board of Directors of JDA Software Group, Inc. Mr. Jaggers received B.S. and M.S. degrees in electrical engineering and an M.B.A. degree from Stanford University. 15
16 Robert T. Wall has been a member of the Board of Directors since January 1993. Mr. Wall has been the Chairman of the Board, President and Chief Executive Officer of Theatrix Interactive, Inc., a consumer educational software publisher, since April 1994. From June 1989 to December 1990, Mr. Wall served as Co-Head of Investment and Merchant Banking at Cowen & Company, an investment banking firm. In August 1984, he founded On Point Developments Inc., a venture management and investment banking company, where he has served as President since its formation. He received an A.B. degree in economics from De Pauw University and an M.B.A. degree from Harvard Business School. 16
17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock commenced trading on the Nasdaq National Market on November 21, 1995 and is traded under the symbol "NTAP." As of May 31, 1996 there were approximately 260 holders of record of the Common Stock. The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock as reported on the Nasdaq National Market. <TABLE> <CAPTION> FISCAL 1996 HIGH LOW ------------------------------------------------------------------- ------ ------ <S> <C> <C> Third Quarter...................................................... $41.12 $13.50 Fourth Quarter..................................................... $38.75 $27.00 </TABLE> The Company has never paid cash dividends on its capital stock. The Company currently anticipates that it will retain all available funds for use in its business and does not anticipate paying any cash dividends. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information required by this item is included under the caption "Selected Consolidated Financial Data" in the Company's Annual Report to Shareholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included under the captions "Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statement of Operations," "Consolidated Statements of Shareholders' Equity (Deficit)," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" in the Company's Annual Report to Shareholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In January 1995, the Company's Board of Directors retained Deloitte & Touche LLP as its independent auditors and dismissed the Company's former auditors, Coopers & Lybrand LLP. The decision to change independent auditors was approved by resolution of the Board of Directors. The former independent auditors' report on the Company's financial statements for the years ended March 31, 1993 and 1994 did not contain an adverse opinion, a disclaimer of opinion or any qualifications or modifications related to uncertainty, limitation of audit scope or application of accounting principles. In addition, the former independent auditors' report does not cover any of the consolidated financial statements of the Company incorporated by reference in this Annual Report on Form 10-K. Coopers & Lybrand LLP was not engaged to audit the Company's financial statements for any other period. There were no disagreements with the former auditors on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure with respect to the Company's consolidated financial statements up through the time of dismissal which, if not resolved to the former auditors' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report. Prior to retaining Deloitte & Touche LLP, the Company had not consulted with Deloitte & Touche LLP regarding accounting principles. 17
18 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information required by this item relating to the Company's directors, executive officers and key employees is included under the caption "Executive Officers and Directors" in Part I of this Annual Report on Form 10-K. Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent (10%) of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent (10%) shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based upon (i) the copies of Section 16(a) reports which the Company received from such persons for their 1996 fiscal year transactions in the Common Stock and their Common Stock holdings, and (ii) the written representations received from one or more of such persons that no annual Form 5 reports were required to be filed by them for the 1996 fiscal year, the Company believes that all executive officers and Board members complied with all their reporting requirements under Section 16(a) for such fiscal year. ITEM 11. EXECUTIVE COMPENSATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following Summary Compensation Table sets forth the compensation earned by the Company's Chief Executive Officer and the four other most highly compensated executive officers for the 1996 fiscal year for services rendered in all capacities to the Company and its subsidiaries for the 1996 and 1995 fiscal years. The listed individuals shall be hereinafter referred to as the "Named Officers." 18
19 SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> LONG-TERM COMPENSATION AWARDS ------------- ANNUAL COMPENSATION SECURITIES -------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEARS SALARY($) BONUS OPTIONS(#)(1) COMPENSATION(2) - - - -------------------------------- ----- --------- -------- ------------- --------------- <S> <C> <C> <C> <C> <C> Daniel J. Warmenhoven........... 1996 $ 190,615 $147,000 100,000 $ 1,306 President and Chief 1995 96,230 -- 700,000 -- Executive Officer Michael J. McCloskey(3)......... 1996 148,269 85,000 200,000 391 Vice President, Finance 1995 -- -- -- -- and Operations, Chief Financial Officer, and Secretary Thomas F. Mendoza............... 1996 120,000 186,539 -- 835 Vice President, 1995 117,694 60,077 200,000 -- North American Sales Michael E. Paul................. 1996 120,000 43,179 -- 1,383 Vice President, 1995 90,923 26,191 125,000 -- International Sales M. Helen Bradley(4)............. 1996 86,538(5) 55,000(6) 100,000 353 Vice President, Engineering 1995 -- -- -- -- </TABLE> - - - --------------- (1) The options listed in the table were granted under the Company's 1993 Stock Option/Stock Issuance Plan. The options were incorporated into the Company's 1995 Stock Incentive Plan at the time of the Company's initial public offering, but will continue to be governed by their existing terms. (2) Represents the cost of term life insurance. (3) Mr. McCloskey joined the Company in May of 1995. (4) Ms. Bradley joined the Company in September of 1995. (5) Ms. Bradley's salary on an annual basis is $150,000. (6) Includes a $10,000 signing bonus. STOCK OPTIONS The following table contains information concerning the stock option grants made to each of the Named Officers for the 1996 fiscal year. No stock appreciation rights were granted to those individuals during such year. <TABLE> <CAPTION> POTENTIAL REALIZABLE INDIVIDUAL GRANT VALUE AT ASSUMED ---------------------------------------- ANNUAL PERCENT OF RATES OF STOCK NUMBER OF TOTAL PRICE APPRECIATION SECURITIES OPTIONS FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM (1) OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------- NAME GRANTED(2) FISCAL YEAR ($/SHARE)(3) DATE 5% 10% - - - ----------------------------- ---------- ------------ ------------ ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Daniel J. Warmenhoven........ 100,000 7.7% $ 8.10 10/30/05 $509,404 $1,290,930 Michael J. McCloskey......... 200,000 15.3% .28 05/24/05 35,218 89,250 Thomas F. Mendoza............ -- -- -- -- -- -- Michael E. Paul.............. -- -- -- -- -- -- M. Helen Bradley............. 100,000 7.7% 7.20 09/25/05 452,804 1,147,495 </TABLE> - - - --------------- (1) There is no assurance provided to the option holder or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the 5% and 10% assumed annual rates of compounded stock price appreciation. (2) The options were granted under the Company's 1993 Stock Option/Stock Issuance Plan on the following dates: Mr. Warmenhoven, November 1, 1995; Mr. McCloskey, May 25, 1995, and Ms. Bradley, September 26, 1995. Each option has a maximum term of 10 years measured from the grant date, subject 19
20 to earlier termination upon the optionee's cessation of service with the Company. Mr. Warmenhoven's option is immediately exercisable for 87,655 shares and exercisable for the remaining 12,345 shares on January 3, 1996. Each of the other granted options is immediately exercisable for all the option shares. However, any shares purchased under the options are subject to repurchase by the Company at the option exercise price paid per share, should the optionee leave the Company prior to vesting in the shares. With respect to the option granted to Mr. Warmenhoven, the option will vest as to ten percent (10%) of the shares on the first anniversary of the date of grant; another twenty percent (20%) of the shares in equal monthly installments over the twenty-four (24) month period starting from the first anniversary of the grant date; another thirty percent (30%) of the shares in equal monthly installments over the twelve-month period starting from the third anniversary of the grant date; and the remaining forty percent (40%) of the shares in equal monthly installments over the twelve-month period starting from the fourth anniversary of the grant date. With respect to the options granted to Mr. McCloskey and Ms. Bradley, the options will vest as to twenty-five percent (25%) of the shares upon the optionee's completion of one year of service measured from May 25, 1995 and September 8, 1995, respectively, and with respect to the balance of the shares in a series of equal monthly installments over the thirty-six (36) months of service thereafter. Full and immediate vesting of Messrs. Warmenhoven's and McCloskey's options will occur in the event the Company is acquired by merger or asset sale. Full and immediate vesting of Ms. Bradley's option will occur in the event the Company is acquired by merger or asset sale, unless the option is assumed by the acquiring company. (3) The exercise price may be paid in cash, in shares of Common Stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares and the Federal and state income and employment tax liability incurred by the optionee in connection with such exercise. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning option exercises and option holdings for the 1996 fiscal year by each of the Named Officers. No stock appreciation rights were exercised during such year or were outstanding at the end of the year. <TABLE> <CAPTION> NUMBER OF SECURITIES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FY-END AT FY-END(2) ACQUIRED ON VALUE ----------------------------- --------------------------- NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - - ------------------------- ----------- ----------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> Daniel E. Warmenhoven.... -- $ -- 100,000(3) -- $ 2,615,000 -- Michael J. McCloskey..... 200,000 -- -- -- -- -- Thomas F. Mendoza........ 200,000 30,000 -- -- -- -- Michael E. Paul.......... 125,000 18,750 -- -- -- -- M. Helen Bradley......... -- -- 100,000(3) -- 2,705,000 -- </TABLE> - - - --------------- (1) Based on the fair market value (as determined by the Board of Directors) of the purchased option shares at the time of exercise less the option exercise price paid for those shares. (2) Based on the fair market value of the shares at the end of the 1996 fiscal year ($34.25 per share) less the option exercise price payable for those shares. (3) The options are fully exercisable as of the fiscal year end, but any shares purchased thereunder will be subject to repurchase by the Company at the original option exercise price paid per share should the optionee leave the Company prior to vesting in the shares. As of April 26, 1996, Mr. Warmenhoven and Ms. Bradley had not vested in any shares. 20
21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of May 31, 1996 by (i) each person who is known by the Company to own beneficially more than five percent of the Company's Common Stock, (ii) each of the Company's directors and Named Officers and (iii) all current executive officers and directors as a group. <TABLE> <CAPTION> SHARES BENEFICIALLY OWNED(1) 5% SHAREHOLDERS, NAMED OFFICERS, DIRECTORS AND --------------------- EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP NUMBER PERCENT - - - ------------------------------------------------------------------------- --------- ------- <S> <C> <C> TA Associates Group(2)................................................... 2,135,263 13.2% 435 Tasso St., Suite 200 Palo Alto, CA 94301 Entities Affiliated with Sequoia Capital(3).............................. 1,768,353 11.0% 3000 Sand Hill Road Bldg. 4, Suite 280 Menlo Park, CA 94025 Michael A. Malcolm....................................................... 884,868 5.5% 48 South Avalon Drive Los Altos, CA 94022 David Hitz............................................................... 827,500 5.1% 319 North Bernardo Avenue Mountain View, CA 94043 Daniel J. Warmenhoven(4)................................................. 457,000 2.8% Michael J. McCloskey..................................................... 200,500 1.2% Thomas F. Mendoza(5)..................................................... 200,000 1.2% Michael E. Paul.......................................................... 126,000 * M. Helen Bradley(6)...................................................... 100,000 * Donald T. Valentine(3)................................................... 1,768,353 10.9% Robert T. Wall(7)........................................................ 197,857 1.2% Michael R. Hallman(8).................................................... 133,478 * Carol A. Bartz(9)........................................................ 81,423 * Kurt R. Jaggers(10)...................................................... 55,737 * All directors and executive officers as a group (10 persons)(11)....................................................... 7,142,242 43.5% </TABLE> - - - --------------- * Less than 1% (1) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock. (2) Includes 1,835,226 shares held by Advent VII L.P., 378,818 shares held by Advent Atlantic and Pacific II Limited Partnership, 183,456 shares held by Advent New York L.P., 136,540 shares held by Advent Industrial II L.P. and 27,518 shares held by TA Venture Investors, L.P. Advent VII L.P., Advent Atlantic and Pacific II Limited Partnership, Advent Industrial II Limited Partnership, Advent New York L.P., and TA Venture Investors, L.P. are part of an affiliated group of investment partnerships referred to, collectively, as the TA Associates Group. The general partner of Advent VII L.P. is TA Associates VII L.P. The general partner of each of Advent New York L.P. and Advent Industrial II L.P. is TA Associates VI, L.P. The general partner of Advent Atlantic and Pacific II Limited Partnership is TA Associates AAP II Partners, L.P. The general partner of each of TA Associates VII, L.P., TA Associates VI, L.P. and TA Associates AAP II Partners, L.P. is TA Associates, Inc. In such capacity, TA Associates, Inc. exercises sole voting and investment power with respect to all of the shares held of record by the named investment partnerships, with the exception of those shares held by TA Venture Investors, L.P.; individually no stockholder, director or officer of TA Associates, Inc. is deemed to have or share such voting or investment power. Principals and employees of TA Associates, Inc. (including Mr. Jaggers, a director of the Company) comprise the general partners of TA Venture 21
22 Investors, L.P. In such capacity, Mr. Jaggers may be deemed to share voting and investment power with respect to the 27,518 shares held of record by TA Venture Investors, L.P. Mr. Jaggers disclaims beneficial ownership of such shares, except to the extent of the 5,860 shares as to which he holds a pecuniary interest. (3) Includes 999,566 shares held by Sequoia Capital Growth Fund, 641,539 shares held by Sequoia Capital VI, 63,801 shares held by Sequoia Technology Partners III, 35,248 shares held by Sequoia Technology Partners VI and 28,199 shares held by Sequoia XXIV. Mr. Valentine, the Chairman of the Company's Board of Directors, is an affiliate of the foregoing entities and may be deemed to share voting and investment power with respect to such shares. Mr. Valentine disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest in such shares arising from his interests in the entities referred to above. (4) Includes 457,000 shares held by Daniel J. Warmenhoven & Charmaine A. Warmenhoven, trustees to The Warmenhoven 1987 Revocable Trust UTA dated 12/16/87, as amended, of which Mr. Warmenhoven is a trustee and shares voting and investment powers. Excludes 8,500 shares held by Charmaine A. Warmenhoven, Mr. Warmenhoven's spouse, as separate property. Also excludes 200,000 shares held by Richard A. Andre, trustee to The Warmenhoven 1995 Children's Trust, under trust agreement dated 5/1/95, and 9,000 shares held by Richard A. Andre, trustee to the Daniel J. Warmenhoven 1991 Children's Trust, as Mr. Warmenhoven disclaims beneficial ownership over the shares held by such trusts. (5) Does not include 16,000 shares held by Mr. Mendoza's spouse. (6) Includes 100,000 shares of Common Stock issuable upon exercise of a currently exercisable option granted under the 1993 Plan. (7) Includes 40,000 shares of Common Stock issuable upon exercise of a currently exercisable option granted under the 1993 Plan. Some of these shares are subject to a repurchase right of the Company. In addition, includes 17,857 shares held by Wampum Partners II. Mr. Wall, a director of the Company, is the Managing Joint Venturer of Wampum Partners II, an investment joint venture. In such capacity, Mr. Wall exercises sole voting and investment power with respect to all of the shares held of record by Wampum Partners II. Mr. Wall disclaims beneficial ownership of such shares held by Wampum Partners II, except to the extent of his pecuniary interest in 3,657 of such shares. Also includes 1,000 shares held by Mr. Wall as custodian for each of his two adult children and 1,000 shares held by Mr. Wall as trustee of a trust for the benefit of his children. Mr. Wall disclaims beneficial ownership of these 3,000 shares. (8) Includes 80,000 shares of Common Stock issuable upon exercise of a currently exercisable option granted under the 1993 Plan. (9) Includes 30,000 shares of Common Stock issuable upon exercise of a currently exercisable option granted under the 1993 Plan. In addition, includes 51,423 shares held by the Carol Ann Bartz Trust UAD 10/14/87. (10) Includes 30,000 shares of Common Stock issuable upon exercise of a currently exercisable option granted under the 1993 Plan. In addition, includes 27,518 shares held by TA Venture Investors, L.P., all of which shares are included in the 2,041,933 shares described in footnote (2) above. Mr. Jaggers disclaims beneficial ownership to such shares, except to the extent of the 5,860 shares as to which he holds a pecuniary interest. Does not include any shares beneficially owned by Advent VII L.P., Advent Atlantic and Pacific II Limited Partnership, Advent Industrial II L.P. or Advent New York L.P., of which Mr. Jaggers disclaims beneficial ownership. (11) Includes a total of 280,000 shares of Common Stock issuable upon the exercise of options exercisable within 60 days of May 31, 1996. Also, includes all shares held by TA Associates Group and entities affiliated with Sequoia Capital. Mr. Jaggers disclaims beneficial ownership of the shares held by TA Associates Group except to the extent of his pecuniary interest in TA Venture Investors, L.P., and Mr. Valentine disclaims beneficial ownership of the shares held by entities affiliated by Sequoia Capital except to the extent of his pecuniary interest in such entities. 22
23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In June 1995, the Company and Mr. Michael Malcolm, a greater than five percent shareholder and former director and executive officer of the Company, entered into a Settlement Agreement and General Release (the "Settlement Agreement") relating to Mr. Malcolm's termination of services with the Company. Under the material terms of the Settlement Agreement, Mr. Malcolm and the Company release each other of any claims, damages, and causes of action that they might have against each other arising out of Mr. Malcolm's employment with the Company. The Company also agreed to pay Mr. Malcolm the lump sum of $220,000 and a monthly consulting fee, which terminated in November 1995, of $15,000. In addition, the Company agreed to indemnify and defend Mr. Malcolm under certain circumstances in connection with the Whipsaw Litigation. The Company has also granted options to certain of its directors and executive officers. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal shareholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will continue to be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 23
24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Annual Report on Form 10-K. 1. The following consolidated financial statements of Network Appliance, Inc. are incorporated by reference into Part II, Item 8 of this Report on Form 10-K from the Company's Annual Report to Shareholders filed as Exhibit 13.1 hereof: Independent Auditors' Report Consolidated Balance Sheets -- April 30, 1996 and 1995 Consolidated Statements of Operations for the years ended April 30, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended April 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended April 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The following financial statement schedule of the Company is filed in Part IV, Item 14(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. 3. Exhibits. <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - - - ----------- ------------------------------------------------------------------------------ <S> <C> <C> 3.1 -- Restated Articles of Incorporation of the Company 3.2(1) -- Bylaws of the Company 4.1(1) -- Reference is made to Exhibits 3.1 and 3.2 4.2(1) -- Specimen Common Stock certificate 4.3(1) -- Amended and Restated Investors' Rights Agreement, dated September 23, 1994, among the Company and the investors and the founders named therein, as amended 4.4(1) -- Amended and Restated Shareholders Agreement, dated September 23, 1994, among the Company and the employee holders and the Preferred Stock investors named therein 4.5(1) -- Forms of Warrants to Purchase Shares of Series A and Series C Preferred Stock 10.1(1)(2) -- Distributor Agreement, dated June 1, 1993, by and among the Company, ITOCHU Corporation and CTC Supply Sales 10.2(1) -- Forms of Indemnification Agreements entered into between the Company and its directors and officers 10.3(1) -- The Company's 1993 Stock Option/Stock Issuance Plan 10.4(1) -- The Company's 1993 Stock Incentive Plan 10.5(1) -- The Company's Employee Stock Purchase Plan 10.6(1) -- Series C Preferred Stock and Common Stock and Warrant to Purchase Series C Preferred Stock Purchase Agreement, dated September 23, 1994, among the Company and the purchasers named therein 10.7(1) -- Office Lease dated October 21, 1993, between Company and Vanni Business Park General Partnership ("Vani") and Office Lease Amendment, dated October 20, 1994, between Company and Vani </TABLE> 24
25 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - - - ----------- ------------------------------------------------------------------------------ <S> <C> <C> 10.8(1) -- Agreement dated June 19, 1995, between Company and Imperial Bank, as amended, Promissory Note issued thereunder and ancillary documents 10.9(1) -- Settlement Agreement and General Release, dated June 28, 1995, between the Company and Michael Malcolm 10.10(1) -- Security and Loan Agreement, Credit Terms and Conditions and General Security Agreement between Company and Imperial Bank, dated August 31, 1994, as amended 13.1 -- The Company's Annual Report to Shareholders, portions of which are incorporated by reference into this Annual Report on Form 10-K and only such portions are deemed filed as part of this Annual Report on Form 10-K 16.1(1) -- Letter Regarding Change in Independent Auditors 23.1 -- Independent Auditors' Consent and Report on Schedule (see page 28) 24.1 -- Power of Attorney (see signature page) 27.1 -- Financial Data Schedule </TABLE> - - - --------------- (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-97864). (2) Confidential treatment requested as to certain portions of these exhibits. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Annual Report on Form 10-K. 25
26 SIGNATURES 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 25, 1996. NETWORK APPLIANCE, INC. By: DANIEL J. WARMENHOVEN ------------------------------------ Daniel J. Warmenhoven President and Chief Executive Officer 26
27 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel J. Warmenhoven and Michael J. McCloskey, 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 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 substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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. <TABLE> <CAPTION> SIGNATURE TITLE DATE - - - ---------------------------------------- ------------------------------------ -------------- <C> <S> <C> DANIEL J. WARMENHOVEN President and Chief Executive July 25, 1996 - - - ---------------------------------------- Officer (Principal Executive (Daniel J. Warmenhoven) Officer) DONALD T. VALENTINE Chairman of the Board, Director July 25, 1996 - - - ---------------------------------------- (Donald T. Valentine) MICHAEL J. MCCLOSKEY Vice President, Finance and July 25, 1996 - - - ---------------------------------------- Operations, Chief Financial Officer (Michael J. McCloskey) and Secretary (Principal Financial and Accounting Officer) CAROL A. BARTZ Director July 25, 1996 - - - ---------------------------------------- (Carol A. Bartz) MICHAEL R. HALLMAN Director July 25, 1996 - - - ---------------------------------------- (Michael R. Hallman) KURT R. JAGGERS Director July 25, 1996 - - - ---------------------------------------- (Kurt R. Jaggers) ROBERT T. WALL Director July 25, 1996 - - - ---------------------------------------- (Robert T. Wall) </TABLE> 27
28 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Shareholders of Network Appliance, Inc. We consent to the incorporation by reference in Registration Statement No. 33-99638 on Form S-8 of our report dated May 10, 1996, incorporated by reference in this Annual Report on Form 10-K of Network Appliance, Inc. for the year ended April 30, 1996. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of Network Appliance, Inc., listed in Item 14.(a)2. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELIOTTE & TOUCHE LLP San Jose, California July 23, 1996 28
29 SCHEDULE II NETWORK APPLIANCE, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED APRIL 30, 1996, 1995 AND 1994 (IN THOUSANDS) <TABLE> <CAPTION> BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD ------------ ---------- ---------- ---------- <S> <C> <C> <C> <C> Allowance for doubtful accounts: 1996..................................... $220 $110 $ -- $ 330 1995..................................... 10 210 -- 220 1994..................................... -- 10 -- 10 Excess and obsolescence inventory reserve: 1996..................................... $345 $698 $ -- $1,043 1995..................................... 45 300 -- 345 1994..................................... -- 45 -- 45 </TABLE> 29