Common use of Software Development Costs Clause in Contracts

Software Development Costs. We capitalize eligible computer software development costs, which include software enhancement costs, upon the establishment of technological feasibility, which occur upon the completion of a working model. Software development costs capitalized have not been significant. NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) Foreign Currency Translation and Foreign Exchange Contracts -- Prior to fiscal 1999, the functional currency of our foreign subsidiaries was the U.S. dollar. Accordingly, all monetary assets and liabilities were translated at the current exchange rate at the end of the year, nonmonetary assets and liabilities were translated at historical rates and net sales and expenses were translated at average exchange rates in effect during the period. Transaction gains and losses, which are included in other income (expense) in the accompanying consolidated statements of income, have not been significant. In fiscal 1999, we determined that the functional currencies of certain of our foreign subsidiaries had changed from the U.S. dollar to the local currencies. Accordingly, for fiscal 2000 and 1999, assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at the exchange rates in effect as of the balance sheet date, and results of operations for each subsidiary are translated using average rates in effect for the period presented. Translation adjustments have been included within shareholders' equity as part of cumulative other comprehensive loss. The effect of the change in functional currencies did not have a material impact on our consolidated financial position, results of operations or cash flows. Foreign currency transaction gains and losses, which are included in the consolidated statements of income, have not been material in any of the three years presented. We utilize forward exchange contracts to hedge against the short-term impact of foreign currency fluctuations on certain assets or liabilities denominated in foreign currencies. The gains or losses on these contracts are included in income as the exchange rates change. Management believes that these forward contracts do not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts are offset by losses and gains on the underlying assets and transactions being hedged. Certain Significant Risks and Uncertainties -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We are subject to certain risks, including without limitation, risks relating to fluctuating operating results, customer and market acceptance of new products, dependence on new products, rapid technological change, litigation, dependence on growth in the network attached data storage market, expansion of international operations, product concentration, changing product mix, competition, management of expanding operations, dependence on high-quality components, dependence on proprietary technology, intellectual property rights, dependence on key personnel, volatility of stock price, shares eligible for future sale, and effect of certain anti-takeover provisions and dilution. Concentration of Credit Risk -- Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. Cash, cash equivalents and short-term investments consist primarily of municipal securities, cash accounts held at various banks and a money market fund held at several financial institutions. We sell our products primarily to large organizations in different industries and geographies. Credit risk is further mitigated by our credit evaluation process and limited payment terms. We do not require collateral or other security to support accounts receivable. In addition, we maintain an allowance for estimated credit losses. In entering into forward foreign exchange contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. The counterparties to these contracts are major multinational commercial banks, and we do not expect any losses as a result of counterparty defaults. Comprehensive Income -- During fiscal 1999, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from nonowner sources. 31 NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) Comprehensive income for the years ended April 30, 2000, 1999 and 1998 has been disclosed within the consolidated statements of shareholders' equity and comprehensive income. Total comprehensive income was equal to net income for the year ended April 30, 1998. Net Income Per Share -- Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares subject to repurchase and common shares issuable upon exercise of stock options. All prior-period net income per-share amounts have been restated to reflect the two-for-one stock splits which were effective December 20, 1999 and March 22, 2000 (See Note 6). The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented: YEARS ENDED APRIL 30, 2000 1999 1998 NET INCOME (NUMERATOR): Net Income, basic and diluted.................... $ 73,792 $ 35,613 $ 20,965 ======== ======== ======== SHARES (DENOMINATOR): Weighted average common shares outstanding....... 299,554 275,060 265,600 Weighted average common shares outstanding subject to repurchase......................... (184) (1,320) (5,944) Shares used in basic computation................. 299,370 273,740 259,656 Weighted average common shares outstanding subject to repurchase......................... 184 1,320 5,944 Common shares issuable upon exercise of stock

Software Development Costs. We capitalize eligible computer software development costs, which include software enhancement costs, upon the establishment of technological feasibility, which occur occurs upon the completion of a working model. Software development costs capitalized have not been significant. NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) Foreign Currency Translation and Foreign Exchange Contracts -- Prior to fiscal 1999, the functional currency of our foreign subsidiaries was the U.S. dollar. Accordingly, all monetary assets and liabilities were translated at the current exchange rate at the end of the year, nonmonetary assets and liabilities were translated at historical rates and net sales and expenses were translated at average exchange rates in effect during the period. Transaction gains and losses, which are included in other income (expense) in the accompanying consolidated statements of income, have not been significant. In fiscal 1999, we determined that the functional currencies of certain of our foreign subsidiaries had changed from the U.S. dollar to the local currencies. Accordingly, for fiscal 2001, 2000 and 1999, assets and liabilities of our foreign subsidiaries are translated to in U.S. dollars at the exchange rates in effect as of the balance sheet date, and results of operations for each subsidiary are translated using average rates in effect for the period presented. Translation adjustments have been included within shareholders' equity as part of cumulative other comprehensive loss. The effect of the change in functional currencies did not have a material impact on our consolidated financial position, results of operations or cash flows. Foreign currency transaction gains and losses, which are included in the consolidated statements of income, have not been material in any of the three years presented. We utilize forward exchange contracts to hedge against the short-term impact of foreign currency fluctuations on certain assets or liabilities denominated in foreign currencies. The gains or losses on these contracts are included in income as the exchange rates change. Management believes that these forward contracts do not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts are offset by losses and gains on the underlying assets and transactions being hedged. Certain Significant Risks and Uncertainties -- The preparation of financial statements in conformity with accounting principles generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We are subject to certain risks, including without limitation, risks relating to fluctuating operating results, customer and market acceptance of new products, dependence on new products, rapid technological change, litigation, dependence on growth in the network attached data storage and content delivery market, expansion management of international operations, product concentration, changing product mix, competition, reliance on a limited number of suppliers, equity investments and acquisitions, management of expanding operationsour operations in light of reduced demand for our products, dependence on high-quality components, dependence on proprietary technology, intellectual property rights, dependence on key personnel, volatility of stock price, shares eligible for future sale, and effect of certain anti-takeover provisions and dilutiondilution and dependence on a continuous power supply. Concentration of Credit Risk -- Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. Cash, cash equivalents and short-term investments consist primarily of municipal securities, cash accounts held at various banks and a money market fund held at several financial institutions. We sell our products primarily to large 35 NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) organizations in different industries and geographies. Credit risk is further mitigated by our credit evaluation process and limited payment terms. We do not require collateral or other security to support accounts receivable. In addition, we maintain an allowance for estimated potential credit losses. In entering into forward foreign exchange contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. The counterparties to these contracts are major multinational commercial banks, and we do not expect any losses as a result of counterparty defaults. Comprehensive Income -- During fiscal 1999, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from nonowner sources. 31 NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) Comprehensive income for the years ended April 30, 20002001, 2000 and 1999 and 1998 has been disclosed within the consolidated statements of shareholders' equity and comprehensive income. Total comprehensive income was equal to net income for the year ended April 30, 1998. Net Income Per Share -- Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares subject to repurchase and common shares issuable upon exercise of stock options. All prior-period net income per-share amounts have been restated to reflect the two-for-one stock splits which were effective December 20, 1999 and March 22, 2000 (See Note 6). The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented: YEARS ENDED APRIL 30, 30 2001 2000 1999 1998 NET INCOME (NUMERATOR): Net Income, basic and diluted.................... income....................................... $ 74,886 $ 73,792 $ 35,613 $ 20,965 ======== ======== ======== SHARES (DENOMINATOR): Weighted average common shares outstanding....... 320,692 299,554 275,060 265,600 Weighted average common shares outstanding subject to repurchase......................... (257) (184) (1,320) (5,944) Shares used in basic computation................. 320,435 299,370 273,740 259,656 Weighted average common shares outstanding subject to repurchase......................... 257 184 1,320 5,944 Common shares issuable upon exercise of stockstock options....................................... 39,132 45,617 36,664 Shares used in diluted computation............... 359,824 345,171 311,724 ======== ======== ======== NET INCOME PER SHARE: Basic............................................ $ 0.23 $ 0.25 $ 0.13 ======== ======== ======== Diluted.......................................... $ 0.21 $ 0.21 $ 0.11 ======== ======== ======== At April 30, 2001, 2000 and 1999, 18,005 and 537 and 1,410 shares of common stock options with a weighted average exercise price of $59.45, $95.00 and $13.36 respectively, were excluded from the diluted net income per share computation as their exercise prices were greater than the average market price of the common shares for the periods. 36 NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) Statements of Cash Flows -- Supplemental cash flow and noncash investing and financing activities are as follows: YEARS ENDED APRIL 30 2001 2000 1999 SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid.................................. $ 6,688 $ 4,517 $ 7,985 NONCASH INVESTING AND FINANCING ACTIVITIES: Deferred stock compensation........................ 14,093 1,805 883 Income tax benefit from employee stock transactions.................................... 65,062 56,248 17,776 Conversion of evaluation inventory to fixed assets.......................................... 10,892 3,723 1,665 Common stock issued and options assumed for Conversion of equity securities to short-term Geographic Operating Information -- During fiscal 1999, we adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. We operate in one reportable segment (Note 8). Stock-Based Compensation -- We record stock compensation in accordance with provisions of APB No. 25, "Accounting for Stock Issued to Employees," and all of its interpretations for employee awards and in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for non-employee awards. Accordingly, we recognize the intrinsic value for employees and the fair value for non-employees as stock compensation expense over the vesting terms of the awards. Accounting for Intangible and Long-Lived Assets -- Intangible assets include goodwill and other intangible assets such as existing workforce and existing technology, which are amortized on a straight-line basis over their estimated useful life of three to five-year periods. We evaluate the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recently Issued Accounting Standards -- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. We will adopt SFAS 133 effective May 1, 2001 and do not expect that the adoption will have a significant impact on our financial position, results of operations or cash flows. 37 NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)