UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended September 30, 2003 | ||
OR | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-26041
F5 Networks, Inc.
WASHINGTON
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91-1714307 | |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
401 Elliott Ave West
(206) 272-5555
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
As of March 31, 2003, the aggregate market value of the Registrants Common Stock held by non-affiliates of the Registrant was $266,423,927 based on the closing sales price of the Registrants Common Stock on the Nasdaq National Market on that date.
As of October 28, 2003, the number of shares of the Registrants Common Stock outstanding was 27,554,905.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Report is incorporated by reference from the Registrants definitive proxy statement relating to the annual meeting of shareholders to be held in 2004, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this Report relates.
F5 NETWORKS, INC.
PART I
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Item 1.
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Business | 3 | ||||
Item 2.
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Properties | 13 | ||||
Item 3.
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Legal Proceedings | 14 | ||||
Item 4.
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Submission of Matters to a Vote of Securities Holders | 14 | ||||
PART II | ||||||
Item 5.
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Market For Registrants Common Equity and Related Shareholder Matters | 15 | ||||
Item 6.
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Selected Financial Data | 16 | ||||
Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
Item 7A.
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Quantitative and Qualitative Disclosure About Market Risk | 29 | ||||
Item 8.
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Financial Statements and Supplementary Data | 31 | ||||
Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 59 | ||||
Item 9A.
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Controls and Procedures | 59 | ||||
PART III | ||||||
Item 10.
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Directors and Executive Officers of the Registrant | 59 | ||||
Item 11.
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Executive Compensation | 62 | ||||
Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 65 | ||||
Item 13.
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Certain Relationships and Related Transactions | 68 | ||||
Item 14.
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Principal Accountant Fees and Services | 69 | ||||
PART IV | ||||||
Item 15.
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Exhibits, Financial Statement Schedules and Reports on Form 8-K | 69 | ||||
SIGNATURES | 72 |
2
Forward-Looking Statements
The statements contained in this report that are not purely historical are forward-looking statements. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies and intentions and are generally identified by the words expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading Risk Factors below and in other documents we file from time to time with the Securities and Exchange Commission. All forward-looking statements included in this report are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements.
PART I
Item 1. Business
General
We develop, manufacture and sell products and
services to help companies efficiently and securely manage their
Internet traffic, as well as the access and use of their
intranet-based software applications. Our application traffic
management products, including the BIG-IP Controller, 3-DNS
Controller and BIG-IP Link Controller, help manage Internet
traffic to servers and network devices in a way that maximizes
the availability, scalability and throughput of those network
components and the applications that run on them. Our recently
acquired FirePass family of network server appliances provides
secure user access to corporate networks and individual
applications through any standard Web browser. Our unique
iControl architecture enables our products to communicate with
one another in the network and ensure optimal throughput of
traffic, and also allows them to be integrated with third party
products, including enterprise applications. This facilitates
the automation of repetitive processes and allows the customer
to optimize applications on their networks, thereby saving them
time and money. As components of an integrated solution, our
products address many elements required for successful Internet
and intranet business applications, including high availability,
high performance, intelligent load balancing, streamlined
manageability, remote access to corporate networks, and network
and application security. Our solution for application traffic
management and security is software-based, which differentiates
us from our competitors whose solutions are largely
hardware-based. We believe this differentiation enables us to
offer our customers greater flexibility, cost-effectiveness and
adaptability in response to todays rapidly changing
environment.
Enterprise customers (Fortune 1000 or Business
Week Global 1000 companies) in financial services,
manufacturing, transportation and mobile telecommunications make
up the largest percentage of our customer base. We market and
sell our products primarily through indirect sales channels in
North America, Europe and the Asia Pacific region, and to some
direct customer accounts in North America. We have subsidiaries
or branch offices in Australia, Canada, China, France, Germany,
Hong Kong, Japan, The Netherlands, Singapore, South Korea,
Spain, Taiwan, Thailand and the United Kingdom.
In July 2003, we acquired substantially all of
the assets and assumed certain liabilities of uRoam, Inc., or
uRoam, for $25.0 million in cash. We also incurred
$2.4 million of direct transaction costs for a net purchase
price of $27.4 million. We hired substantially all of
uRoams 20 employees, consisting of product development,
sales and service personnel. uRoams family of FirePass
servers is a comprehensive remote access product set that
enables users to access applications in a secure fashion, using
technology based on the Secure Sockets Layer, or SSL, standard.
We believe FirePass provides a security solution that is easier
to manage and use, and is more secure, than existing Virtual
Private Network, or VPN, solutions, allowing customers to
realize significant cost savings for secure remote access to any
application. The acquisition of substantially all of the assets
of uRoam will allow us to quickly enter the SSL VPN market,
broaden our customer base and augment our existing product line.
3
We were incorporated on February 26, 1996 in
the State of Washington. Our headquarters is in Seattle,
Washington and our mailing address is 401 Elliott Avenue West,
Seattle, Washington 98119. The telephone number at our executive
offices is (206) 272-5555. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are
available free of charge on our website www.f5.com as soon as
reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission.
Industry Background
As a result of the Internets capabilities,
it has become a fundamental tool for commerce and
communications. Since the late 1990s, businesses have
responded to the power, flexibility and economy of the Internet
by deploying new Internet Protocol, or IP, based applications,
upgrading their client-server applications to new IP-enabled
versions, and enabling existing applications for use over the
Internet. IP is a communications language that is used for
transmitting data over the Internet. During the next several
years, we believe this process of deploying IP-enabled
applications will accelerate as Web services enable businesses
to build applications quickly and easily by integrating software
modules available from many different sources. Web services
allow businesses to combine functions of existing applications
and processes to create new applications and functionality
operating over the Internet and beyond the corporate firewall.
The purpose of Web services is to enable applications to
interact with each other more smoothly, reducing inefficiencies
associated with human intervention. A fully-integrated, Web
services-enabled computing network would allow personal
computers, servers, handheld devices, programs, applications and
network equipment to work together directly to generate more
efficient data flow and application development and use. In
addition, we believe that the growth of Internet usage will
continue to be driven by new applications such as Voice over IP,
or VoIP, increased penetration of broadband Internet access
enabling the remote use of more applications, and the increasing
popularity of mobile Internet access through wireless devices
such as cellular telephones, personal digital assistants and
notebook computers.
Current traffic management products are designed
primarily to manage Web traffic. However, few products are
equipped with the functionality and flexibility to securely
manage the full range of IP-enabled applications, such as Oracle
Financials, BEA Weblogic and Siebel Sales Force Automation.
Internet
Architecture
The Open Systems Interconnect Reference Model, or
OSI Model, is the framework that describes and defines how
networked systems communicate with one another. The OSI Model
divides network functions into seven layers and specifies how
the layers should interact to enable interoperability between
the various users. These interoperability standards have been
designed to allow all parts of the network to work together,
regardless of the different hardware and software components. IP
requires all data transmitted across the Internet to be divided
into packets prior to its transmission, and reassembled at its
destination. Prior to transmission, each packet of data is
automatically given a header that identifies the source and
destination of the packet. This header information is used in
the OSI Model for the purposes of identifying, routing and
sequencing data packets, and is stripped from the data upon
arrival at its destination.
Layer 4-7
Traffic Management
Layers 2 and 3 of the OSI Model primarily perform
standardized, repetitive tasks such as ensuring that packets of
information sent over the Internet arrive at the destination to
which they are addressed, and reassembling them in the correct
sequence. Unlike Layers 2 and 3, Layers 4-7 are
complex and variable and must support end-user applications and
processes on a wide variety of platforms and devices. For
example, Layer 7 (which encompasses the functions of
Layers 5 and 6) enables email, directory look-up and the
transfer of files between otherwise incompatible systems.
While traditional Layer 2/3 switching devices are
used primarily to ensure correct delivery of packets of
information, there is an increasing need for Layer 7 technology
that can read the entire contents of a packetized transmission
and make intelligent decisions based on a dynamic set of
business rules about how to
4
According to the Ethernet Switch
Report 5-Year Forecast prepared by
DellOro Group, the traditional Layer 4-7 traffic
management market is expected to grow from $432 million in
2002 to $870 million in 2007, representing a five-year
compounded annual growth rate of approximately 15%. Additional
emerging growth markets for Layer 4-7 traffic management include
blade servers, mobile IP and Web services. A blade server is a
thin, modular electronic circuit board intended for a single,
dedicated application (such as serving Web pages or server load
balancing) that can be easily inserted into a space-saving
chassis with many similar blade servers. Blade servers, loaded
into chassis, are designed to consume less energy and require
considerably less space than conventional servers.
Growth in
Demand for Secure Traffic Management
As Internet traffic and the use of IP-enabled
applications have increased, the demands placed on Layer 7 have
also increased and so has the demand for integrated, effective
Layer 7 traffic management solutions. Corporations are becoming
more reliant on highly sophisticated IP-enabled applications
both for their internal operations and for interactions with
external customers and partners. The need to guarantee the
security of electronic information and transactions has led to
the emergence of SSL encryption as the standard for secure
IP-enabled traffic. During the interaction between a user and a
financial application, for example, data sent from the user to
the server is typically encrypted by the users Web browser
and decrypted by the server, and this process is reversed for
data sent back to the user. The use of SSL has continued to grow
with the proliferation of Web-based applications that require
secure transactions. Increases in the number and sophistication
of Web attacks, and the damage caused by such attacks, are also
driving demand for more effective security solutions.
SSL is also the core of new technology that
addresses the growing need for corporations to provide secure
connectivity for the rapidly increasing number of users who
access corporate networks and applications from remote locations
using a variety of devices ranging from home personal computers
and laptops to cellular telephones and personal digital
assistants. Many companies currently provide remote access to
offsite users through VPNs based on the Internet Protocol
Security, or IPSec, framework, which allows remote users to
access corporate networks and applications by means of encrypted
tunnels through the Internet. VPNs are
cost-effective because they use the Internet for low-cost
transmission of information while providing remote users with a
highly secure connection. However, a key security risk
associated with IPSec VPNs is that once remote users are
connected, they have unrestricted access to all applications and
resources within the network.
During the past year, new VPN technology using
the SSL protocol has steadily gained acceptance as a more
cost-effective solution that is both simpler to deploy and
easier to manage than IPSec VPNs. Unlike IPSec VPNs, SSL VPNs do
not require customers to purchase and install client-side
software on every remote device that accesses the network.
Instead, they use the SSL capabilities resident in a remote
clients Internet browser to establish and maintain a
secure connection between the client and the VPN server. This
eliminates both the initial cost of distributing and
implementing client-side software and the recurring costs of
upgrading and maintaining it. In addition to providing secure
network access, SSL technology can also be used to selectively
limit access to certain applications and resources within the
network, depending on the identity of the user. Because of the
improved security and reduced overall costs, we believe
SSL-based solutions will become the dominant method for remote
access within the next few years.
According to Infonetics Researchs VPN
and Firewall Products Quarterly Worldwide Market Share and
Forecasts for 2Q03 report, the SSL VPN market is expected
to grow from $34 million in 2002 to $607 million by
2006, representing a four-year compounded annual growth rate of
approximately 105%.
5
The F5 Solution
We believe our products are superior to those of
our competitors in addressing the growing need among enterprises
for integrated, secure, application traffic management.
Software Based Products.
From our inception, we have been
committed to the belief that the complexity of Layer 7 traffic
management requires a software-based rather than a
hardware-based solution. We believe our software-based solution
for application traffic management and security using commodity
hardware provides greatly increased functionality. We also
believe our products are more cost-effective, flexible and
easily adaptable to todays constantly changing and
increasingly demanding environments than our competitors
solutions, which are primarily hardware-based. In addition, our
software can be easily ported to commodity hardware platforms
manufactured by third-party vendors, which has enabled us to
license the software to our original equipment manufacturer, or
OEM, partners who resell it installed on their own products. It
has also created an opportunity for us to sell versions of our
software that run on blade servers manufactured by third-party
vendors, thereby increasing the target market for our software.
Application
Awareness.
One of the most important
features of our software-based products is their
application awareness. Our products are designed
using a common architecture, called iControl, with a common
interface that allows them to communicate with one another and
with third-party software and devices. Through our unique, open,
iControl application programming interface, or API, third-party
applications and network devices can take an active role in
shaping IP network traffic, directing traffic based on exact
business requirements specified by our customers. For example,
our iControl API allows an organization running Oracle software,
which has help desks located in Bombay, San Francisco and
London, to cause that software to make a real-time request that
all email requests for help be directed to a single one of our
3-DNS devices that has been instructed to redirect the requests
to different help desks at different times of the day.
Similarly, our BIG-IP device managing traffic to an e-commerce
Web site could, for example, be directed to recognize
transmissions from preferred customers and route them to a
server that will expedite their transactions. This
application awareness capability is one of the most
important features of our software-based products and serves as
a further point of differentiation for our solution in
comparison with those offered by our competitors.
Another key benefit of our software-based
solution is that it allows the customer to incorporate specific
business rules and processes into the software. This capability,
which we call iRules, is a simple tool that can be used to
define how the user wants to direct, persist on, or filter
traffic based on the needs of each application.
Furthermore, our Universal Inspection Engine, the
core of our application traffic management technology, is unique
in its ability to inspect IP traffic down to the packet payload
level and can direct traffic according to flexible iRules
specified by the user. This deep packet inspection
technology enables powerful offloading, inspection and
processing of application-level transactions.
Integrated Traffic Management and Security
Solution.
Our application traffic
management technology is differentiated from other solutions
primarily by its ability to intercept, inspect and act on the
contents of traffic from virtually every type of IP-enabled
application. This deep packet inspection technology allows us to
offer an integrated traffic management and security solution
that can detect and prevent many network level attacks.
Our FirePass technology enables us to offer
secure, remote access through SSL VPNs. FirePass has components
that allow remote users to access any application or resource
connected to the network, including legacy hosts, desktops and
client-server applications. Over the course of the next twelve
months we intend to combine our SSL VPN technology with our
secure traffic management capabilities, providing significant
differentiation from our competitors. This capability will
enable our products to provide comprehensive application
security at multi-gigabit speeds.
Combined with the sophisticated inspection and
control capabilities of our application traffic management
technology, we believe that FirePass technology is an ideal
platform for the development of advanced application security
gateways that can control access to individual applications and
the data and resources they
6
Strategy
Our objective is to be the leading provider of
secure application traffic management solutions designed to
enhance and optimize server availability, security and
performance. Key components of our strategy include:
Offering a complete application security
solution and product set.
We plan to
utilize our core technologies from our BIG-IP and FirePass
products to deliver standalone and integrated systems that
protect applications from hostile and inadvertent threats,
including user-to-system application security and
system-to-system application security problems. We believe these
solutions will differentiate our products in the security market
and provide a unique solution to the problem of vulnerability of
mission-critical applications.
Increasing the addressable market for our
products.
In order to enable
significant growth over the next three years, we intend to
target logical extensions of our traditional traffic management
market, including the areas of blade server software; mobile IP
infrastructure, which is a mechanism for maintaining transparent
network connectivity to mobile hosts; Web services
infrastructure; and utility computing and data center
virtualization infrastructure, in which corporations pay only
for the computing resources they use. This allows their
information technology resources to be allocated on an as-needed
basis to meet rapidly changing business demands. In addition, we
plan to enter adjacent markets, such as the application security
market, with our first product offering being an SSL VPN
solution.
Investing in technology to continue to meet
customer needs.
We plan to continue to
invest in research and development to provide our customers with
complete secure application traffic management and secure remote
access solutions. Our software-based platforms are designed to
quickly and easily expand the features and functionalities of
our products, as well as enabling us to develop additional
products that address the complex and changing needs of our
customers. We will continue to use commodity hardware in order
to ensure performance and cost competitiveness. We also plan to
deliver specialized software modules that will allow our
customers to purchase software for our platforms as upgrades
with specific features based on specific requirements.
Enhancing the existing channel
model.
We are investing significant
resources in order to further develop our indirect sales
channels. We plan to expand our indirect sales channels through
leading industry resellers, OEMs, systems integrators, Internet
service providers and other channel partners. Also, we are
leveraging our existing channels by delivering application
security products, including FirePass SSL VPNs, making these
channels more productive.
Continuing to build and expand relationships
with strategic iControl partners.
We
plan to capitalize on our strategic relationships with
enterprise software vendors who have created interfaces to our
products through our iControl API. These vendors provide us
significant leverage in the selling process, because they
recommend our products to their customers. In order to
differentiate ourselves further from our competitors we plan to
explore opportunities to further embed iControl into existing
and new third party products and to jointly market and sell our
solutions to enterprise customers with these key partners.
Enhancing our brand.
We plan to continue building brand
awareness that positions us as one of the leading providers of
secure application traffic management solutions. Our goal is for
the F5 brand to be synonymous with superior performance,
high-quality customer service and ease of use.
Products
Our core technology is software for IP
application traffic management and secure remote access to IP
networks and applications. We also manufacture several types of
systems (which are software and hardware
7
BIG-IP
Software and Systems
Our flagship product is the BIG-IP Controller for
local-area application traffic management. BIG-IP software runs
on a variety of commodity hardware platforms, including IP
application switches and server appliances manufactured by us
and our OEM partners, as well as on blade servers manufactured
by server vendors such as Dell Inc., Fujitsu Siemens Computers
GmbH, Hewlett Packard Company, International Business Machines
Corporation and NEC Corporation. The core of BIG-IP is
sophisticated software that manages IP traffic at Layer 7, also
known as the application layer. Our BIG-IP application switches
also perform Layer 2/3 switching and, we believe,
industry-leading Layer 4 switching. But we believe it is the
superior performance and functionality of the BIG-IP Layer 7
traffic management software that distinguishes it from competing
products sold by Cisco Systems, Nortel Networks and others. In
addition, BIG-IP has a patented feature, known as cookie
persistence, which establishes a link between a user and a
specific server and enables the user to return to that server if
the connection is broken before a transaction is completed.
BIG-IP server appliances were our original
products and accounted for 16.9% of our product revenue for
fiscal year 2003. The BIG-IP 520 and 540 server appliances are
equipped with Intel processors for high-speed Layer 4-7
processing and are designed to accommodate easily-installed
upgrade cards that provide fast, integrated SSL encryption and
decryption. Integrated SSL processing has been an important
factor of system sales. By offloading SSL processing, which
requires significant server and computing power, from servers to
our traffic management systems, customers can free up valuable
server space for other applications.
In September 2001 we introduced our first IP
application switch, the BIG-IP 5000, in response to customer
demand for systems with an increased number of ports allowing
them to be connected to many different types of network devices,
integrated Layer 2/3 switching and SSL processing capability. We
currently offer the high-end BIG-IP 5100, the BIG-IP 2400
mid-range product with integrated Layer 4 switching on an
application-specific integrated circuit, or ASIC, developed by
our hardware team, and the BIG-IP 1000 entry-level switch.
3-DNS and
Link Controller
Our other traffic management products include
3-DNS Controller and BIG-IP Link Controller. 3-DNS allows
enterprises with geographically dispersed data centers to direct
traffic to a particular data center in accordance with
customized business rules or to redirect traffic to an available
data center if one of their sites becomes overloaded or is shut
down for any reason. Link Controller allows enterprises with
more than one Internet service provider to manage the use of
their available bandwidth to minimize costs while ensuring the
highest quality of service. 3-DNS and Link Controller are sold
separately on individual IP application switches and server
appliances, or bundled with BIG-IP on a single appliance or IP
application switch.
FirePass
FirePass systems provide SSL VPN access for
remote users of IP networks and any applications connected to
those networks from any standard Web browser on any device. The
components of FirePass include a dynamic policy engine, which
manages user authentication and authorization privileges, and
special components that enable corporations to give remote users
controlled access to the full array of applications and
resources within the network.
Our FirePass line of SSL VPN servers currently
includes the FirePass 1000 and the FirePass 4000, which support
100 and 1000 concurrent users, respectively. Both support the
complete range of FirePass software features and offer a
comprehensive solution for Web-based remote access to corporate
applications and desktops.
8
Enabling
Technologies
Our products also come equipped with our iControl
and iControl Services Manager, or iSM, functions, which are
designed to facilitate the broader use of our products. In early
2001, we recognized a growing need for traffic management
products that could not only communicate with one another, but
also with the increasing number and variety of IP-enabled
enterprise applications being deployed by large organizations.
At that time we published the iControl interface in a free
software development kit, or SDK, that allows customers and
independent software vendors to modify their programs to
communicate with our products. The use of iControl reduces or
eliminates the need for human involvement, significantly
reducing the cost of performing basic network functions and
dramatically reducing the likelihood of error. Adding this extra
functionality to their products is attractive to independent
software vendors, and since the introduction of our iControl
SDK, we have formed relationships with dozens of software
developers including Microsoft Corporation, Oracle Corporation,
BEA Systems, Inc., International Business Machines Corporation,
Hewlett Packard Company, Siebel Systems, Inc., and Mercury
Interactive Corporation. Although we do not derive revenue from
iControl itself, the sale of iControl-enabled independent
software vendor products helps promote and often leads directly
to the sale of our other products.
iControl Services Manager takes advantage of
iControl to provide a single, centralized management and
operational interface for our devices. This feature allows
customers with dozens or hundreds of our products to upgrade or
modify the software on those products simultaneously from a
single console. This lowers the cost and simplifies the task of
deploying, managing and maintaining our products and reduces the
likelihood of error when blanket changes are implemented.
Product Development
Our future success depends on our ability to
maintain technology leadership in secure application traffic
management by constantly improving our products and by
developing new products to meet the changing needs of our
customers. Our product development group, which is divided along
product lines, employs a standard process for the development,
documentation and quality control of software and systems that
is designed to meet these goals. We are currently focused on
developing enhancements to our existing traffic management and
SSL VPN products in order to deliver greater functionality and
performance. We are also developing an integrated application
security gateway, which will combine our security and traffic
management technologies in order to deliver a network device
that protects applications from hostile attacks. By ensuring
user-to-system application security and system-to-system
application security, the application security gateway will
provide comprehensive application security.
In order to advance our product development, we
also engage in technology partnerships with software and
component manufacturers that allow us to integrate
industry-standard technology with our own products. During the
past two years, we have had a close working relationship with
Broadcom Corporation, which manufactures the Layer 2/3 switch
chips and SSL processors used in our family of application
switches.
Our principal software engineering group, which
develops our application traffic management technology, is
located in our headquarters in Seattle, Washington. Our FirePass
product development team, which includes the original developers
of the technology, is located in San Jose, California. Our
hardware engineering group is located in Spokane, Washington.
Members of these teams collaborate closely with one another on
specific projects.
During the fiscal years ended September 30,
2003, 2002 and 2001, we had research and product development
expenses of $19.2 million, $18.0 million and
$17.4 million, respectively.
Customers
We have a globally diversified base of customers,
consisting primarily of large enterprises. Although we do not
target specific vertical markets, enterprise customers in
financial services, manufacturing, transportation and mobile
telecommunications currently make up the largest percentage of
our customer base. The other significant components of our
customer base are Internet service providers, Internet hosting
companies and
9
Prior to fiscal year 2001, our end-user customer
base was comprised primarily of Internet service providers,
Internet hosting companies and Internet startups engaged in
e-commerce. Starting in the first half of fiscal year 2001, as
demand from those customers weakened, we successfully refocused
our marketing and sales efforts on large enterprises, which
currently account for the majority of our revenue, without any
material adverse effect on our revenues. Consistent with our
goal of building a strong channel sales model, the majority of
our revenue is generated by sales though our distributors,
value-added resellers and systems integrators.
For fiscal year 2003, sales to Ingram Micro Inc.,
one of our distributors, represented 12.6% of our revenues. Our
agreement with Ingram Micro is a standard, non-exclusive
distribution agreement that renews automatically on an annual
basis and is terminable by either party with 30 days
prior written notice. The agreement grants Ingram Micro the
right to distribute our products to resellers in North America
and certain other territories internationally, with no minimum
purchase requirements.
Sales and Marketing
Sales
We sell our software, systems and services to
large enterprise customers through a variety of channels,
including OEMs, distributors, value-added resellers and systems
integrators. A substantial amount of our revenue for fiscal year
2003 was derived from these channel sales. We also sell our
products and services to major accounts through our own direct
sales force. In most cases, service contracts are negotiated
directly with the customer. Typically, our agreements with our
channel partners are not exclusive and do not prevent them from
selling competitive products. These agreements typically have
terms of one year with no obligation to renew, and typically do
not provide for exclusive sales territories or minimum purchase
requirements.
Direct sales.
Our
field sales personnel are located in major cities throughout
North America, Europe and the Asia Pacific region. The inside
sales team generates and qualifies leads for regional sales
managers and helps manage accounts by serving as a liaison
between the field and internal corporate resources. We sell our
products directly to a limited group of customers, primarily
OEMs, including Dell Inc., Fujitsu Siemens Computers GmbH,
Hewlett Packard Company, International Business Machines
Corporation and NEC Corporation, and certain large enterprise
end-users whose accounts are managed by our major account
services team. Field systems engineers also support our regional
sales managers by participating in joint sales calls and
providing pre-sale technical resources as needed. The majority
of our field sales personnel work closely with our channel
partners to assist them in selling our products to their
customers, as the bulk of our sales are made through
distributors or value-added resellers.
Distributor and value-added reseller
relationships.
We have established
relationships with large national and international
distributors, local and specialized distributors and value-added
resellers. The distributors sell our products, and the
value-added resellers not only sell our products, but also
assist their customers in network design, installation and
testing. Our primary distributor relationships include Ingram
Micro Inc. in North America and in certain territories
internationally, and our primary value-added reseller
relationships include Milestone Systems, Inc.
Systems integrators.
We also market our products through strategic relationships we
have with systems integrators, which design and install networks
that incorporate our systems. Systems integrators typically do
not purchase and resell equipment to their customers. Instead
they typically recommend equipment to their customers for use in
the systems they design and install. We currently have
relationships with a number of systems integrators, including
Electronic Data Systems Corporation.
Marketing
The cornerstone of our marketing strategy is the
establishment of strong partnerships with large, prominent
companies that are leaders in their respective industries. By
partnering with these firms, we have
10
iControl
partnerships.
We have established
relationships with various independent software vendors who have
adapted their applications to interact with our products via the
iControl interface. iControl enhances the functionality of third
party applications by enabling them to control the network in an
automated way, based on business policies and rules associated
with the application. As a result, customers who purchase
iControl-enabled applications have an incentive to purchase our
products in order to take advantage of the enhanced
functionality made possible through our technical cooperation.
Blade server
relationships.
We have relationships
with various system vendors (Dell Inc., Fujitsu Siemens
Computers GmbH, Hewlett Packard Company, International Business
Machines Corporation and NEC Corporation) to market our BIG-IP
Blade Controller software for use on their blade server systems.
Market focus and strategy are different for each relationship.
In some of these relationships, vendors or their channel
partners resell Blade Controller software to their customers.
OEM partnership with Dell
Inc.
We license our software to Dell,
which resells it on its own line of traffic management products.
In conjunction with this arrangement, we participate in joint
marketing programs with Dell.
We engage in a number of marketing programs and
initiatives aimed at promoting our brand and creating market
awareness of our technology and products. These include actively
participating in industry trade shows and briefing industry
analysts and members of the trade press on our latest products,
and on new business and technology partnerships. In addition, we
market our products to chief information officers and other
information technology professionals through targeted
advertising, direct mail and high-profile Web events.
Backlog
Our backlog represents orders confirmed with a
purchase order for products to be shipped generally within
90 days to customers with approved credit status. Orders
are subject to cancellation, rescheduling by customers or
product specification changes by the customers. Although we
believe that the backlog orders are firm, purchase orders may be
cancelled by the customer prior to shipment without significant
penalty. For this reason, we believe that our backlog at any
given date is not a reliable indicator of future revenues.
Customer Service and Technical
Support
Our ability to provide consistent, high-quality
customer service and technical support is a key factor in
attracting and retaining customers. Prior to the installation of
our products, our services personnel work with customers to
analyze their network needs and determine the best way to deploy
our products and configure product features and functions to
meet those needs. Our services personnel also provide on-site
installation and training services to help customers make
optimal use of product features and functions. Installation
generally occurs within 30 days of product shipment to the
customer.
At the time of purchase, customers typically
purchase a one-year maintenance contract, renewable annually,
which entitles them to an array of services provided by our
technical support team. Maintenance services provided under the
contract include online updates, software error correction
releases, Ask F5, described below, and remote support through a
24 hours a day, 7 days a week help desk, although not all
service contracts entitle a customer to round-the-clock call
center support. Updates to our software are only available to
customers with a current maintenance contract. Our technical
support team also offers seminars and training classes for
customers on the configuration and use of products, including
local and wide area network system administration and
management. In addition, we have a professional services team
able to provide a full range of fee-based consulting services,
including comprehensive network management, documentation and
performance analysis, and capacity planning to assist in
predicting future network requirements.
11
We also offer, as part of our maintenance
service, an online, automated, self-help customer support
function called Ask F5 that allows customers to answer many
commonly asked questions without having to call our support
desk. This allows the customer to rapidly address issues and
questions, while significantly reducing the number of calls to
our support desk. This enables us to provide comprehensive
customer support while keeping our support related expenses at a
manageable, consistent level.
Manufacturing
We outsource the manufacturing of our
pre-configured hardware platforms to a contract manufacturer,
Solectron Corporation, which assembles each product to our
specifications. Hardware platforms for our traffic management
products consist primarily of a commodity computing platform,
custom and commodity ASICs, a rack-mount enclosure system and a
custom-designed front panel. Solectron also installs our
application traffic management software onto these hardware
platforms and conducts functionality testing, quality assurance
and documentation control prior to shipping our products.
Our agreement with Solectron allows them to
procure component inventory on our behalf based upon a rolling
production forecast. Subcontractors supply Solectron with
standard parts and components for our products based on our
production forecast. We are contractually obligated to purchase
component inventory that our contract manufacturer procures in
accordance with the forecast, unless we give notice of order
cancellation in advance of applicable lead times. For any
completed product inventory carried by Solectron beyond 30 days,
Solectron will charge us a monthly carrying fee of 1.5%.
Alternatively, we have the option to purchase inventory held by
Solectron beyond 30 days to avoid incurring related
carrying charges. As protection against component shortages and
to provide replacement parts for our service teams, we also
stock limited supplies of certain key components for our
products.
In addition, we obtain all of the Layer 2/3
switch chips and the SSL processors used in our family of
application switches from Broadcom Corporation. We purchase
components from Broadcom on a purchase order basis, with pricing
updated at agreed upon intervals. Certain products purchased
from Broadcom were designed with our input, but are not
exclusive to us. We also designed a Layer 4 ASIC, which is
used in one of our products and is manufactured for us by a
contract semiconductor foundry.
Competition
Our principal competitors in the traffic
management market are Cisco Systems, Inc. and Nortel Networks
Corporation. Other competitors in this market include Foundry
Networks, Inc., NetScaler, Inc. and Radware Ltd.
Cisco Systems has a product set similar to ours
and holds the largest share of the market. Cisco has a longer
operating history and significantly greater financial,
technical, marketing and other resources than we do. Cisco also
has a more extensive customer base and broader customer
relationships, including relationships with many of our current
and potential customers. In addition, Cisco has large,
well-established, worldwide customer support and professional
services organizations and a more extensive direct sales force
and sales channels.
Like Cisco, Nortel has a product set similar to
ours and has a longer operating history, greater resources, a
larger customer base and a larger sales and service
organization. Whereas Cisco has historically focused on large
corporate enterprise customers, Nortel has primarily focused on
telecommunications and Internet service provider customers.
Because of our relatively smaller size, market
presence and resources, Cisco, Nortel and other larger
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements. There is also the possibility that these companies
may adopt aggressive pricing policies to gain market share. As a
result, our competitors pose a serious competitive threat that
could undermine our ability to win new customers and maintain
our existing customer base.
Our most prominent competitors in the SSL VPN
market are Aventail Corporation, Neoteris, Inc. and SafeWeb,
Inc. NetScreen Technologies, Inc. recently announced its
acquisition of Neoteris and Symantec
12
SSL VPNs are a potential replacement for IPSec
VPNs, the most widely deployed solution for secure remote access
today. The current leaders in the IPSec VPN market are Check
Point Software Technologies, Ltd. and NetScreen, both of which
are larger and better-known vendors than us.
Intellectual Property
We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
to protect our intellectual property rights. We have obtained
three patents in the United States and have applications pending
for various aspects of our technology. Our future success
depends in part on our ability to protect our proprietary rights
to the technologies used in our principal products. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use
trade secrets or other information that we regard as
proprietary. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of
the United States. We cannot assure you that any issued patent
will preserve our proprietary position, or that competitors or
others will not develop technologies similar to or superior to
our technology. Our failure to enforce and protect our
intellectual property rights could harm our business, operating
results and financial condition.
In addition to our own proprietary software, we
incorporate software licensed from several third-party sources
into our products. These licenses generally renew automatically
on an annual basis. We believe that alternative technologies for
this licensed software are available both domestically and
internationally.
F5, F5 Networks, Big-IP, 3-DNS, iControl,
iRules and FirePass are our trademarks or registered trademarks.
Oracle Financials, BEA Weblogic and Siebel Salesforce Automation
are trademarks of Oracle Corporation, BEA Systems, Inc. and
Siebel Systems, Inc., respectively.
Employees
As of September 30, 2003, we employed 507
full-time persons, including 145 in product development, 211 in
sales and marketing, 84 in professional services and technical
support and 67 in finance, administration and operations. None
of our employees is represented by a labor union. We have
experienced no work stoppages and believe that our employee
relations are good.
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Item 2. Properties
Our principal administrative, sales, marketing, research and development facilities are located in Seattle, Washington and consist of approximately 195,000 square feet. In April 2000, we amended and restated the lease agreement on two buildings for our corporate headquarters. The lease commenced in July 2000 on the first building; and the lease on the second building commenced in September 2000. The lease for both buildings expires in 2012 with an option for renewal. The lease for the second building has been fully subleased through 2012. We believe that our existing properties are in good condition and suitable for the conduct of our business. We also lease office space for our product development personnel in Spokane, Washington and San Jose, California and for our sales and support personnel in Washington DC, New York, Hong Kong, Singapore, Taiwan, Japan, Australia, Germany, France, and the United Kingdom. The lease for our Washington, DC office has been primarily subleased through 2007.
13
Item 3. Legal Proceedings
In July and August 2001, a series of putative securities class action lawsuits were filed in United States District Court, Southern District of New York against certain investment banking firms that underwrote the Companys initial and secondary public offerings, the Company and some of the Companys officers and directors. These cases, which have been consolidated under In re. F5 Networks, Inc. Initial Public Offering Securities Litigation, No. 01 CV 7055, assert that the registration statements for the Companys June 4, 1999 initial public offering and September 30, 1999 secondary offering failed to disclose certain alleged improper actions by the underwriters for the offerings. The consolidated, amended complaint alleges claims against the Company and those of our officers and directors named in the complaint under Sections 11 and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Other lawsuits have been filed making similar allegations regarding the public offerings of more than 300 other companies. All of these various consolidated cases have been coordinated for pretrial purposes as In re. Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. In October 2002, the directors and officers were dismissed without prejudice. The issuer defendants filed a coordinated motion to dismiss these lawsuits in July 2002, which the Court granted in part and denied in part in an order dated February 19, 2003. The Court declined to dismiss the Section 11 and Section 10(b) and Rule 10b-5 claims against the Company. In June 2003, a proposal was made for the settlement and release of claims against the issuer defendants, including us, and their directors and officers in exchange for a guaranteed recovery to be paid by the issuer defendants insurance carriers and an assignment of certain claims against the underwriters. The settlement is subject to a number of conditions, including approval by the proposed settling parties and the Court. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously. Securities class action litigation could result in substantial costs and divert our managements attention and resources. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation, and any unfavorable outcome could have a material adverse impact on our business, financial condition and operating results.
We are not aware of any additional pending legal proceedings against us that, individually or in the aggregate, would have a material adverse effect on our business, operating results, or financial condition. We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third-party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
Item 4. Submission of Matters to a Vote of Securities Holders
During the fourth quarter of the fiscal year ended September 30, 2003, no matters were submitted to a vote of the shareholders of the Company, either through the solicitation of proxies, or otherwise.
14
PART II
Market Prices of Common Stock
Our common stock is traded on the Nasdaq National
Market under the symbol FFIV. The following table
sets forth the high and low sales prices of our common stock as
reported on the Nasdaq National Market.
The last reported sales price of our common stock
on the Nasdaq National Market on October 29, 2003 was
$24.28.
As of October 28, 2003, there were
130 holders of record of our common stock. As many of our
shares of common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to
estimate the total number of beneficial holders of our common
stock represented by these record holders.
Dividend Policy
Our policy has been to retain cash to fund future
growth. Accordingly, we have not paid dividends and do not
anticipate declaring dividends on our common stock in the
foreseeable future.
Equity Compensation Plans
The information required by this item regarding
equity compensation plans is incorporated by reference to the
information set forth in Item 12 of this Annual Report on
Form 10-K.
15
The following consolidated selected historical
financial data are derived from our audited historical financial
statements. The consolidated balance sheet data as of
September 30, 2003 and 2002 and the consolidated statement
of operations data for the years ended September 30, 2003,
2002 and 2001 are derived from the audited historical financial
statements and related notes that are included elsewhere in this
report. The consolidated balance sheet data as of September 30,
2001, 2000 and 1999 and the consolidated statement of operations
for the year ended September 30, 2000 and 1999 are derived
from the audited historical financial statements and related
notes which are not included in this report. The information set
forth below should be read in conjunction with our historical
financial statements, including the notes thereto, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere in
this report.
16
The following discussion and analysis should be
read in conjunction with our consolidated financial statements
and related notes included elsewhere in this Annual Report on
Form 10-K.
Net Revenues.
Total net revenues increased 7.0%
in fiscal year 2003 from fiscal year ended September 30,
2002, or fiscal year 2002, compared to an increase of 0.8% in
fiscal year 2002 from fiscal year 2001. International revenues
represented 34.9%, 32.2% and 33.3% of net revenues in fiscal
years 2003, 2002 and 2001, respectively. We expect international
sales will continue to represent a significant portion of net
revenues, although we cannot provide assurance that
international revenues as a percentage of net revenues will
remain at current levels.
Net product revenues were $84.2 million for
fiscal year 2003 compared to $82.6 million for fiscal year
2002 and $78.6 million for fiscal year 2001. The 2.0%
increase in fiscal year 2003 was primarily the result of sales
in Asia Pacific and Europe. The 5.0% increase in fiscal year
2002 was primarily the result of strong sales in North America,
partially offset by decreased sales in the Asia Pacific region.
Sales of our BIG-IP products represented 82.8%,
84.1% and 78.9% of total product revenues in fiscal years 2003,
2002 and 2001, respectively. Our BIG-IP products consist of
server appliances and IP application switches. Our IP
application switch products, including BIG-IP 1000, BIG-IP 2400
and the BIG-IP 5100 were introduced in the first quarter of
fiscal year 2003 and represented 41.8% of product revenues in
fiscal year 2003. We expect to continue to derive a significant
portion of our product revenues from sales of BIG-IP in
17
Net service revenues were $31.7 million for
fiscal year 2003 compared to $25.7 million for fiscal year
2002 and $28.7 million for fiscal year 2001. Service
revenues increased by 23.3% in fiscal year 2003 primarily due to
an increase in the renewal of service and support contracts by
existing customers, as our installed base increased. The 10.6%
decrease in service revenues in fiscal year 2002 compared to
fiscal year 2001 was primarily due to changes in pricing and a
larger percentage of our resellers providing maintenance and
installation to end-users, partially offset by an increase in
the renewal of service and support contracts by existing
customers.
Ingram Micro Inc., one of our domestic
distributors, accounted for 12.6% of our total net revenues for
fiscal year 2003. Ingram Micro accounted for 17.8% of our
accounts receivable as of September 30, 2003. No individual
customer or distributor represented more than 10% of our total
net revenues or accounts receivable for fiscal years 2002 and
2001.
Cost of Net Product Revenues.
Cost of net product revenues
decreased to $17.8 million in fiscal year 2003 from
$20.2 million in fiscal year 2002 and $33.2 million in
fiscal year 2001. Cost of net product revenues decreased as a
percent of net product revenue to 21.2% in fiscal year 2003 from
24.5% in fiscal year 2002 and 42.3% in fiscal year 2001. The
decrease in fiscal year 2003 was primarily the result of lower
warranty, manufacturing and component costs. The decrease in
fiscal year 2002 was primarily the result of lower excess
inventory charges and manufacturing costs partially offset by
increased warranty costs. Further, in fiscal year 2002, we
unified our supply chain with a single contract manufacturer
and, as result, have improved our manufacturing efficiencies, as
well as realized lower component costs.
Cost of Net Service
Revenues.
Cost of net service
revenues decreased to $9.1 million in fiscal year 2003 from
$10.2 million in fiscal year 2002 and $12.3 million in
fiscal year 2001. Cost of net service revenues decreased as a
percent of net service revenues to 28.6% in fiscal year 2003
from 39.8% in fiscal year 2002 and 42.7% in fiscal year 2001.
The decrease in fiscal year 2003 was primarily due to a decrease
in personnel related costs associated with a decline in service
personnel headcount and related costs during the last quarter of
fiscal year 2002. This decrease in fiscal year 2002 was
primarily due to improved operational efficiencies and a
decrease in headcount and related costs.
18
Sales and
Marketing.
Sales and marketing
expenses consist primarily of the salaries, commissions and
related benefits of our sales and marketing staff, the costs of
our marketing programs, including public relations, advertising
and trade shows, and an allocation of our facilities and
depreciation expenses. Sales and marketing expenses increased
5.7% to $53.5 million in fiscal year 2003 from
$50.6 million in fiscal year 2002. The increase in fiscal
year 2003 related primarily to increased payroll and related
personnel costs, and travel related expenses. Sales and
marketing expenses decreased to $50.6 million in fiscal
year 2002 from $50.8 million in fiscal year 2001. The
decrease in fiscal year 2002, compared to fiscal year 2001, was
due to a decrease in trade show and promotional activities and
decreased business travel expenses, partially offset by
increased personnel costs as we continued to expand our
international operations. We expect to continue to increase
sales and marketing expenses in order to grow net revenues and
expand our brand awareness.
Research and Development.
Research and development expenses
consist primarily of the salaries and related benefits for our
product development personnel and an allocation of our
facilities and depreciation expenses. Research and development
expenses increased 7.0% to $19.2 million in fiscal year
2003, from $18.0 million in fiscal year 2002 and
$17.4 million in fiscal year 2001. The increase in fiscal
year 2003 was due to increased personnel related costs
associated with an increase in headcount to 145 from 127
primarily as a result of the acquisition of substantially all
the assets of uRoam and an increase in prototype expenses. The
increase in fiscal year 2002 was due to increased personnel
related costs and expenses related to the development of new
products. We expect to continue to increase research and
development expenses as our future success is dependent on the
continued enhancement of our current products and our ability to
develop new products that meet the changing needs of our
customers.
General and
Administrative.
General and
administrative expenses consist primarily of the salaries,
benefits and related costs of our executive, finance,
information technology, human resource and legal personnel,
third-party professional service fees, bad debt charges and an
allocation of our facilities and depreciation expenses. General
and administrative expenses decreased 20.1% to
$12.0 million in fiscal year 2003 from $15.0 million
in fiscal year 2002 and $18.8 million in fiscal year 2001.
The decrease in fiscal year 2003 is primarily due to a decrease
in professional services related to patent prosecution and other
activities related to our intellectual property and lower bad
debt charges. The decrease in fiscal year 2002 is primarily due
to lower bad debt charges and lower facilities expenses
resulting from the sublease of one of our buildings, partially
offset by an increase in professional services related to patent
prosecution and other activities related to our intellectual
property.
19
Restructuring Charges.
During the third quarter of fiscal
year 2002, we recorded a restructuring charge of
$2.8 million in connection with managements decision
to exit the cache appliance business. As a result of changes in
the business, we wrote down certain assets, consolidated
operations and terminated 47 employees throughout all
divisions of F5 Networks. In July 2002, all identified employees
had been notified and terminated resulting in an additional
charge of $0.5 million related to employee separation costs.
During the first fiscal quarter of 2001, we
recorded a restructuring charge totaling $1.1 million in
connection with our managements decision to bring
operating expenses in line with the business revenue growth
model. Accordingly, we terminated 96 employees throughout
all divisions of F5 Networks. By the end of January 2001, all
identified employees had been terminated. During the quarter
ended March 31, 2001, we reversed $96,000 of previous
estimates. As of September 30, 2001, substantially all of
the restructuring charges accrued during the first quarter of
2001 had been paid. See note 8 to our consolidated
financial statements included elsewhere in this annual report on
Form 10-K for a discussion of continuing restructuring
liabilities.
Amortization of Unearned Compensation.
We have recorded a total of
$8.3 million of stock compensation costs since our
inception through September 30, 2003. These charges
represent the difference, on the grant date, between the
exercise price and the deemed fair value of certain stock
options granted to our employees and outside directors. These
options generally vest ratably over a four-year period. We are
amortizing these costs using an accelerated method as prescribed
by Financial Accounting Standards Board, or FASB, interpretation
No. 28 (FIN No. 28) and recorded stock compensation
charges of $0.1 million, $0.4 million, and
$2.6 million for the fiscal years 2003, 2002 and 2001,
respectively. Unamortized stock-based compensation totaled
$10,000 at September 30, 2003.
Other Income, Net.
Other income, net, consists
primarily of investment income and foreign currency transaction
gains and losses. Other income, net, decreased 47.1% to
$0.8 million in fiscal year 2003 from $1.4 million in
fiscal year 2002 and $2.0 million in fiscal year 2001. The
decrease in fiscal year 2003 was primarily due to realized
losses on sales of investments, declining interest rates and
interest income, and an increase in foreign currency transaction
losses. The decrease in fiscal year 2002 was related to
declining interest rates and investment income.
Provision for Income
Taxes.
The provision for income
taxes was $0.9 million, $0.5 million and
$4.1 million for fiscal years 2003, 2002 and 2001,
respectively. The provision for income taxes represents foreign
taxes related to our international operation, with the exception
of fiscal year 2001, which includes a charge of
$3.4 million to provide a full valuation allowance against
the net deferred tax assets. No federal or state income taxes
were provided in fiscal years 2002 or 2003.
20
Liquidity and Capital Resources
We have funded our operations with our cash
balances, cash generated from operations and proceeds from
public offerings.
We consider all highly liquid investments with
maturities of three months or less to be cash equivalents. Cash
and cash equivalents totaled $10.4 million at the end of
fiscal year 2003, compared to $20.8 million at the end of
fiscal year 2002 and $18.3 million at the end of fiscal
year 2001.
Cash provided by operating activities during
fiscal year 2003 was $14.6 million compared to
$9.5 million in fiscal year 2002 and cash used in operating
activities was $11.8 million in fiscal year 2001. Cash
provided by operating activities in fiscal years 2003 and 2002
resulted primarily from cash generated from net income, after
adjusting for non-cash charges, changes in operating assets and
liabilities and an increase in deferred revenue due to an
increase in the renewal of service and support contracts by
existing customers. Cash used in operating activities in fiscal
year 2001 resulted primarily from operating losses, partially
offset by a decrease in net accounts receivable.
Cash used in investing activities was
$38.1 million for the fiscal year 2003, $12.7 million
for fiscal year 2002 and $24.7 million for fiscal year
2001. The cash used in investing activities in fiscal year 2003
was primarily the result of the $27.4 million used to
acquire substantially all the assets of uRoam and purchase of
investments and property and equipment partially offset by the
sale of investments. Cash used in each of fiscal years 2002 and
2001 were due primarily to the purchase of investments and
property and equipment, partially offset by the sale of
investments.
Cash provided by financing activities was
$12.8 million for fiscal year 2003 compared to
$5.5 million for fiscal year 2002 and $36.3 million
for the fiscal year 2001. In fiscal years 2003 and 2002, our
financing activities primarily related to cash received from the
exercise of employee stock options and the purchase of common
shares under our employee stock purchase plan. In fiscal year
2001, we also received $34.9 million related to the
issuance of common stock and warrants to Nokia Finance
International B.V. The warrants expired in January 2003 without
being exercised.
We expect that our existing cash balances and
cash from operations will be sufficient to meet our anticipated
working capital and capital expenditures for the foreseeable
future.
Contractual Obligations and Commercial
Commitments
As of September 30, 2003, our principal
commitments consisted of obligations outstanding under operating
leases. In April 2000, we amended and restated the lease
agreement relating to two buildings for our corporate
headquarters. The lease commenced in July 2000 on the first
building; and the lease on the second building commenced in
September 2000. The lease for both buildings expires in 2012
with an option for renewal. The lease for the second building
has been fully subleased through 2012. We established a
restricted escrow account in connection with this lease
agreement. Under the term of the lease, a $6.0 million
certificate of deposit is required through November 2012, unless
the lease is terminated before then. This amount has
21
Critical Accounting Policies
Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of our financial statements.
Revenue Recognition.
We recognize revenue in accordance
with the guidance provided under Statement of Position
(SOP) No. 97-2, Software Revenue
Recognition, and SOP No. 98-9 Modification of
SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. Statement of Financial Accounting
Standards (SFAS) No. 48, Revenue Recognition
When Right of Return Exists, and Securities and Exchange
Commission, or SEC, Staff Accounting Bulleting
(SAB) No. 101, Revenue Recognition in Financial
Statements.
We sell products through resellers, OEMs, and
other channel partners, as well as directly to end users, under
similar terms. We recognize product revenue upon shipment, net
of estimated returns, provided that collection is determined to
be probable and no significant obligations remain. Product
revenues from OEM agreements are recognized based on reporting
of sales from the OEM partner. Whenever a software license,
hardware, installation and post-contract customer support, or
PCS, elements are combined into a package with a single
bundled price, a portion of the sales price is
allocated to each element of the bundled elements based on their
respective fair values as determined when the individual
elements are sold separately. Revenues from the license of
software are recognized when the software has been shipped and
the customer is obligated to pay for the software. When rights
of return are present and we cannot estimate returns, we
recognize revenue when such rights of return lapse. Revenues for
PCS are recognized on a straight-line basis over the service
contract term. PCS includes rights to upgrades, when and if
available, a limited period of telephone support, updates, and
bug fixes. Installation revenue is recognized when the product
has been installed at the customers site. Consulting
services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
Our ordinary payment terms to our domestic
customers are net 30 days. Our ordinary payment terms to
our international customers are net 30 to 90 days based on
normal and customary trade practices in the individual markets.
We have offered extended payment terms beyond ordinary terms to
some customers. For these arrangements, revenue is recognized
when payments become due.
Reserve for Doubtful Accounts.
Estimates are used in determining
our allowance for doubtful accounts and are based on a
percentage of our accounts receivable by aging category. In
determining these percentages, we evaluate historical
write-offs, current trends in the credit quality of our customer
base, as well as changes in the credit policies. We perform
ongoing credit evaluations of our customers financial
condition and generally do not require any collateral. If there
is a deterioration of a major customers credit worthiness
or actual defaults are higher than our historical experience,
our allowance for doubtful accounts may not be insufficient.
22
Reserve for Product
Returns.
Product returns are
estimated based on historical experience by type of product and
are recorded at the time revenues are recognized. In some
instances, product revenue from distributors is subject to
agreements allowing rights of return. Accordingly, we reduce
recognized revenue for estimated future returns at the time
revenue is recorded. When rights of return are present and we
cannot estimate returns, revenue is recognized when such rights
lapse. The estimates for returns are adjusted periodically based
upon changes in historical rates of returns, inventory in the
distribution channel, and other related factors. It is possible
that these estimates will change in the future or that the
actual amounts could vary from our estimates and result in
reductions to recognized revenues.
Reserve for Excess or Obsolete Inventory.
We currently reserve for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated net realizable
value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than
those projected by management, additional inventory charges may
be required.
Reserve for Warranties.
A warranty reserve is established
based on our historical experience and an estimate of the
amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While we believe
that our warranty reserve is adequate and that the judgment
applied is appropriate, such amounts estimated to be due and
payable could differ materially from what will actually
transpire in the future.
Income Tax Valuation
Allowance.
The Company has net
deferred tax assets at September 30, 2003 totaling
approximately $30.7 million, which are fully offset by a
valuation allowance due to managements determination that
the criteria for recognition have not been met. In the event
management were to determine that the Company would be able to
realize its net deferred tax assets in the future, an adjustment
to the deferred tax assets would be made, increasing net income
(or decreasing net loss) in the period in which such a
determination was made.
As of September 30, 2003, approximately
$12.7 million of the valuation allowance related to the
Companys net operating loss carry forwards is derived from
the tax benefits of stock option deductions. At such time as the
valuation allowance related to their deductions is released, the
benefits will be credited to additional paid in capital.
Purchase Price
Allocation.
During 2003, the
Company acquired substantially all of the assets and assumed
certain liabilities of uRoam, Inc. for cash of $25 million.
The Company also incurred $2.4 million of direct
transaction costs for a total purchase price of
$27.4 million. The total purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed based on their estimated fair value. The excess of the
purchase price over the fair value was recorded as goodwill. The
fair value assigned to the tangible and intangible assets
acquired and liabilities assumed were based upon estimates and
assumptions developed by management and other information
compiled by management.
Recent Accounting Pronouncements
In May 2003, FASB issued Statement of Financial
Accounting Standard No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liability and
Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003.
The adoption of this standard did not have an impact on our
consolidated financial statements.
In April 2003, FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS
No. 149), which is generally effective for contracts
entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS
No. 149 clarifies under what circumstances a contract with
an initial net
23
In January 2003, FASB issued Interpretation
No. 46 (FIN No. 46), Consolidation of
Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities that
either: (1) do not have sufficient equity investment at
risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the
company will hold a significant variable interest in, or have
significant involvement with, an existing variable interest
entity. The adoption of this interpretation did not have an
impact on our consolidated financial statements.
In November 2002, FASB issued Interpretation
No. 45 (FIN No. 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which
addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees. FIN No. 45 also requires the
recognition of a liability by a guarantor at the inception of
certain guarantees that are entered into or modified after
December 31, 2002. The additional disclosures required by
FIN No. 45 have been included in the notes to our
consolidated financial statements.
Risk Factors
In addition to the other information in this
report, the following risk factors should be carefully
considered in evaluating our company and its business.
Our success depends on sales and continued
innovation of our BIG-IP product line
For the fiscal year ended September 30,
2003, we derived 82.8% of our product revenues from sales of our
BIG-IP product line. We expect to derive a significant portion
of our net revenues from sales of our BIG-IP products in the
future. Implementation of our strategy depends upon BIG-IP being
able to solve critical network availability and performance
problems of our customers. If BIG-IP is unable to solve these
problems for our customers, or if we are unable to sustain the
high levels of innovation in BIG-IPs product feature set
needed to maintain leadership in what will continue to be a
competitive market environment, our business and results of
operations will be harmed.
Our success depends on our timely development
of new products and features and proper management of the timing
of the life cycle of our products
We expect the secure application traffic
management market to be characterized by rapid technological
change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Our continued
success depends on our ability to identify and develop new
products and new features for our existing products to meet the
demands of these changes, and for those products and features to
be accepted by our existing and target customers. If we are
unable to identify, develop and deploy new products and new
product features on a timely basis, or if those products do not
gain market acceptance, our business and results of operations
may be harmed.
The current life cycle of our products is
typically 12 to 24 months. The introduction of new
products or product enhancements may shorten the life cycle of
our existing products, or replace sales of some of our current
products, thereby offsetting the benefit of even a successful
product introduction, and may cause customers to defer
purchasing our existing products in anticipation of the new
products. This could harm our operating results by decreasing
sales, increasing our inventory levels of older products and
exposing us to greater risk of product obsolescence. We have
also experienced, and may in the future experience, delays in
developing and releasing new products and product enhancements.
This has led to, and may in the future lead to, delayed sales,
increased expenses and lower quarterly revenue than anticipated.
Also, in the development of our products, we have experienced
delays in the prototyping of our products, which in turn has led
to delays in
24
We may not be able to compete effectively in
the emerging secure application traffic management
market
The markets we serve are new, rapidly evolving
and highly competitive, and we expect competition to persist and
intensify in the future. Our principal competitors in the secure
application traffic management market include Cisco Systems,
Inc., Nortel Networks Corporation, Foundry Networks, Inc.,
NetScaler, Inc., Radware Ltd. and NetScreen Technologies, Inc.
We expect to continue to face additional competition as new
participants enter the traffic management market. In addition,
larger companies with significant resources, brand recognition
and sales channels may form alliances with or acquire competing
traffic management solutions and emerge as significant
competitors. Potential competitors may bundle their products or
incorporate an Internet traffic management component into
existing products in a manner that discourages users from
purchasing our products. Potential customers may also choose to
purchase additional or larger servers instead of our products.
Our quarterly and annual operating results are
volatile and may cause our stock price to fluctuate
Our quarterly and annual operating results have
varied significantly in the past and will vary significantly in
the future, which makes it difficult for us to predict our
future operating results. In particular, we anticipate that the
size of customer orders may increase as we continue to focus on
larger business accounts. A delay in the recognition of revenue,
even from just one account, may have a significant negative
impact on our results of operations for a given period. In the
past, a majority of our sales have been realized near the end of
a quarter. Accordingly, a delay in an anticipated sale past the
end of a particular quarter may negatively impact our results of
operations for that quarter, or in some cases, that year.
Furthermore, we base our decisions regarding our operating
expenses on anticipated revenue trends and our expense levels
are relatively fixed. Consequently, if revenue levels fall below
our expectations, our net income will decrease because only a
small portion of our operating expenses vary with our revenues.
We believe that period-to-period comparisons of
our results of operations are not meaningful and should not be
relied upon as indicators of future performance. Our operating
results may be below the expectations of securities analysts and
investors in future quarters or years. Our failure to meet these
expectations will likely harm the market price of our common
stock.
We anticipate that the average selling prices of
our products will decrease in the future in response to
competitive pricing pressures, increased sales discounts, new
product introductions by us or our competitors or other factors.
Therefore, in order to maintain our gross profits, we must
develop and introduce new products and product enhancements on a
timely basis and continually reduce our product costs. Our
failure to do so will cause our net revenue and gross profits to
decline, which will harm our business and results of operations.
In addition, we may experience substantial period-to-period
fluctuations in future operating results due to the erosion of
our average selling prices.
Our products have a lengthy sales cycle, which is
difficult to predict. Historically, our sales cycle has ranged
from approximately two to three months and has tended to
lengthen as we have increasingly focused our sales efforts on
the enterprise market. Also, as our distribution strategy has
evolved into more of a channel model, utilizing value-added
resellers, distributors and systems integrators, the level of
variability in the length of sales cycle across transactions has
increased and made it more difficult to predict the timing of
many of our sales transactions. Sales of our BIG-IP and 3-DNS
products require us to educate potential customers in their use
and benefits. Sales of our products are subject to delays from
the lengthy internal budgeting, approval and
25
We rely on a third party contract manufacturer to
assemble our products. We outsource the manufacturing of our
hardware platforms to this contract manufacturer who assembles
these hardware platforms to our specifications. We have
experienced minor delays in shipments from contract
manufacturers in the past. However, if we experience major
delays in the future or other problems, such as inferior quality
and insufficient quantity of product, any one or a combination
of these factors may harm our business and results of
operations. The inability of our contract manufacturer to
provide us with adequate supplies of our products or the loss of
our contract manufacturer may cause a delay in our ability to
fulfill orders while we obtain a replacement manufacturer and
may harm our business and results of operations. In particular,
because we subcontract substantially all of our manufacturing to
a single contract manufacturer, with whom we do not have a
long-term contract, any termination, loss or impairment in our
arrangement with this single source of hardware assembly, or any
impairment of their facilities or operations, would harm our
business, financial condition and results of operation.
If the demand for our products grows, we will
need to increase our raw material and component purchases,
contract manufacturing capacity and internal test and quality
functions. Any disruptions in product flow may limit our
revenue, may harm our competitive position and may result in
additional costs or cancellation of orders by our customers.
We currently purchase several hardware components
used in the assembly of our products from a number of single or
limited sources. Lead times for these components vary
significantly. Any interruption or delay in the supply of any of
these hardware components, or the inability to procure a similar
component from alternate sources at acceptable prices within a
reasonable time, may delay assembly and sales of our products
and, hence, our revenues, and may harm our business and results
of operations.
We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
of confidential and proprietary information to protect our
intellectual property rights. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights
as fully as in the United States.
Our industry is characterized by the existence of
a large number of patents and frequent claims and related
litigation regarding patent and other intellectual property
rights. We are actively involved in disputes and licensing
discussions with others regarding their claimed proprietary
rights and cannot assure you that we will always successfully
defend ourselves against such claims. If we are found to
infringe the proprietary rights of others, or if we otherwise
settle such claims, we could be compelled to pay damages or
royalties and either obtain a license to those intellectual
property rights or alter our products so that they no longer
infringe upon such proprietary rights. Any license could be very
expensive to obtain or may not be available at all. Similarly,
changing our products or processes to avoid infringing the
rights of others may be costly or impractical. In addition, we
have initiated, and may in the future initiate, claims or
litigation against third parties for
26
A change in accounting policies can have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change is
effective. New pronouncements and varying interpretations of
pronouncements have occurred with frequency and may occur in the
future. Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business.
In particular, if we are required to record stock
option grants as compensation expense on our income statement,
our profitability may be reduced significantly. The current
methodology for expensing such stock options is based on, among
other things, the historical volatility of the underlying stock.
Our stock price has been historically volatile. Therefore, the
adoption of an accounting standard requiring companies to
expense stock options would negatively impact our profitability
and may adversely impact our stock price. In addition, the
adoption of such a standard could limit our ability to continue
to use stock options as an incentive and retention tool, which
could, in turn, hurt our ability to recruit employees and retain
existing employees.
Similarly, while we believe our current revenue
recognition policies and practices are consistent with
applicable accounting standards, current revenue recognition
accounting standards, and accounting guidance with respect to
such standards, are subject to change. Such changes could lead
to unanticipated changes in our current revenue accounting
practices, and such changes could significantly reduce our
future revenues and earnings, which would likely have a material
adverse effect on the price of our common stock.
We may not be able to sustain or develop new
distribution relationships and a reduction or delay in sales to
a significant distribution partner could hurt our
business
Our sales strategy requires that we establish and
maintain multiple distribution channels in the United States and
internationally through leading industry resellers, original
equipment manufacturers, or OEMs, systems integrators, Internet
service providers and other channel partners. We have a limited
number of agreements with companies in these channels, and we
may not be able to increase our number of distribution
relationships or maintain our existing relationships. If we are
unable to establish and maintain our indirect sales channels,
our business and results of operations will be harmed. In
addition, one distributor of our products accounted for 12.6% of
our net revenue for the fiscal year ended September 30,
2003. During the fiscal year ended September 30, 2002, no
single reseller or customer accounted for more than 10% of our
net revenue. A substantial reduction or delay in sales of our
products to this or any other key distribution partner could
harm our business, operating results and financial condition.
Undetected software errors may harm our
business and results of operations
Software products frequently contain undetected
errors when first introduced or as new versions are released. We
have experienced these errors in the past in connection with new
products and product upgrades. We expect that these errors will
be found from time to time in new or enhanced products after
commencement of commercial shipments. These problems may cause
us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product
development efforts and cause significant
27
Our products must successfully operate with
products from other vendors. As a result, when problems occur in
a network, it may be difficult to identify the source of the
problem. The occurrence of software errors, whether caused by
our products or another vendors products, may result in
the delay or loss of market acceptance of our products. The
occurrence of any of these problems may harm our business and
results of operations.
Our expansion into international markets may
not succeed
We intend to continue expanding into
international markets. International sales represented 34.9% of
our net revenues for the fiscal year ended September 30,
2003, 32.2% of our net revenues for the fiscal year ended
September 30, 2002 and 33.3% of our net revenues for the
fiscal year ended September 30, 2001. We have engaged sales
personnel throughout Europe and the Asia Pacific region. Our
continued growth will require further expansion of our
international operations in the European, Asia Pacific and other
markets. If we are unable to expand our international operations
successfully and in a timely manner, our business and results of
operations may be harmed. Such expansion may be more difficult
or take longer than we anticipate, and we may not be able to
successfully market, sell, deliver and support our products
internationally.
Our operating results are exposed to risks
associated with international commerce
As our international sales increase, our
operating results become more exposed to international operating
risks. These risks include risks related to potential recessions
in economies outside the United States, foreign currency
exchange rates, managing foreign sales offices, regulatory,
political, or economic conditions in specific countries,
military conflict or terrorist activities, changes in laws and
tariffs, inadequate protection of intellectual property rights
in foreign countries, foreign regulatory requirements, and
natural disasters. All of these factors could have a material
adverse effect on our business. In particular, in fiscal year
2003, we derived 13.8% of our total revenue from the Japanese
market and this revenue is dependent on a number of factors
outside our control, including the viability and success of our
resellers and the strength of the Japanese economy, which has
been weak in recent years.
Acquisitions, including our recent acquisition
of substantially all of the assets of uRoam, Inc., present many
risks and we may not realize the financial and strategic goals
that are contemplated at the time of the transaction
With respect to our July 2003 acquisition of
substantially all of the assets of uRoam, Inc., as well as any
other future acquisitions we may undertake, we may find that the
acquired assets do not further our business strategy as
expected, or that we paid more than what the assets are later
worth, or that economic conditions change, all of which may
generate future impairment charges. There may be difficulty
integrating the operations and personnel of the acquired
business, and we may have difficulty retaining the key personnel
of the acquired business. In the case of the assets acquired
from uRoam, Inc., because it was based in Northern California
and because the employees we hired in connection with the
acquisition were not relocated to Seattle, the above-mentioned
integration and personnel retention issues represent a
particular risk to us. We may have difficulty in incorporating
the acquired technologies or products with our existing product
lines. Our ongoing business and managements attention may
be disrupted or diverted by transition or integration issues and
the complexity of managing geographically and culturally diverse
locations. We may have difficulty maintaining uniform standards,
controls, procedures and policies across locations. We may
experience significant problems or liabilities associated with
the product quality, technology and other matters.
Our inability to successfully operate and
integrate newly-acquired businesses appropriately, effectively
and in a timely manner, or to retain key personnel of uRoam,
Inc. or any other acquired business, could have a material
adverse effect on our ability to take advantage of further
growth in demand for integrated traffic
28
Our success depends on our key personnel and
our ability to attract, train and retain qualified marketing and
sales, professional services and customer support
personnel
Our success depends to a significant degree upon
the continued contributions of our key management, product
development, sales, marketing and finance personnel, many of
which may be difficult to replace. The complexity of our secure
application traffic management products and their integration
into existing networks and ongoing support, as well as the
sophistication of our sales and marketing effort, requires us to
retain highly trained professional services, customer support
and sales personnel. In spite of the economic downturn,
competition for qualified professional services, customer
support and sales personnel in our industry is intense because
of the limited number of people available with the necessary
technical skills and understanding of our products. Our ability
to retain and hire these personnel may be adversely affected by
volatility or reductions in the price of our common stock, since
these employees are generally granted stock options. The loss of
services of any of our key personnel, the inability to retain
and attract qualified personnel in the future or delays in
hiring qualified personnel, may harm our business and results of
operations.
We face litigation risks
We are a party to lawsuits in the normal course
of our business. Litigation in general, and intellectual
property and securities litigation in particular, can be
expensive, lengthy and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. We believe that we have defenses in the lawsuits
pending against us and we are vigorously contesting these
allegations. Responding to the allegations has been, and
probably will be, expensive and time-consuming for us. An
unfavorable resolution of the lawsuits could adversely affect
our business, results of operations, or financial condition.
Anti-takeover provisions could make it more
difficult for a third party to acquire us
Our Board of Directors has the authority to issue
up to 10,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of
common stock may 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 may have
the effect of delaying, deferring or preventing a change of
control of our company without further action by our
stockholders and may adversely affect the voting and other
rights of the holders of common stock. Further, certain
provisions of our bylaws, including a provision limiting the
ability of stockholders to raise matters at a meeting of
stockholders without giving advance notice, may have the effect
of delaying or preventing changes in control or management of
our company, which could have an adverse effect on the market
price of our common stock. In addition, our articles of
incorporation provide for a staggered board, which may make it
more difficult for a third party to gain control of our board of
directors. Similarly, state anti-takeover laws in the State of
Washington related to corporate takeovers may prevent or delay a
change of control of our company.
Item 7A.
Quantitative and Qualitative
Disclosure About Market Risk
Interest Rate Risk.
Our cash equivalents consist of
high-quality securities, as specified in our investment policy
guidelines. The policy limits the amount of credit exposure to
any one issue or issuer to a maximum of 20% of the total
portfolio with the exception of treasury securities, commercial
paper and money market funds, which are exempt from size
limitation. The policy requires investments in securities that
mature in two years or less, with the average maturity being one
year or less. These securities are subject to interest rate risk
and will decrease in value if interest rates increase. A
decrease of one percent in the average interest would have
resulted in a decrease of approximately $0.7 million in our
interest income.
29
Foreign Currency Risk.
The majority of our sales and expenses
are denominated in U.S. dollars and as a result, we have not
experienced significant foreign currency transaction gains and
losses to date. While we have conducted some transactions in
foreign currencies during the fiscal year ended
September 30, 2003 and expect to continue to do so, we do
not anticipate that foreign currency transaction gains or losses
will be significant at our current level of operations. However,
as we continue to expand our operations internationally, they
may become significant in the future. We have not engaged in
foreign currency hedging to date. However, we may do so in the
future.
30
Item 8.
Consolidated Financial
Statements and Supplementary Data
F5 Networks, Inc.
Index to Consolidated Financial
Statements
31
Report of Independent Auditors
To the Board of Directors and Shareholders
In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of F5 Networks,
Inc. and its subsidiaries at September 30, 2003 and 2002,
and the results of their operations and their cash flows for
each of the three years in the period ended September 30,
2003 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
32
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of
these consolidated financial statements.
33
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
The accompanying notes are an integral part of
these consolidated financial statements.
34
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
The accompanying notes are an integral part of
these consolidated financial statements
35
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
The accompanying notes are an integral part of
these consolidated financial statements.
36
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Summary of
Significant Accounting Policies
The Company
F5 Networks, Inc. (the Company) provides
integrated products and services to manage, control and optimize
Internet traffic. Our core products, the BIG-IP Controller,
3-DNS Controller, and the BIG-IP Link Controller, help manage
traffic to servers and network devices in a way that maximizes
availability and throughput. Our FirePass family of network
server appliances provide secure user access to corporate
networks and individual applications via any standard Web
browser. Our unique iControl architecture integrates our
products and also allows our customers and other vendors to
integrate them with third party products, including enterprise
applications. As components of an integrated solution, our
products address many elements required for successful Internet
and intranet business applications, high availability, high
performance, intelligent load balancing, fault tolerance,
streamlined manageability, remote access to corporate networks,
and network and application security. By enhancing Internet
performance and availability, our solutions enable our customers
and partners to maximize the use of the Internet in their
business.
Certain Risks and Uncertainties
The Companys products and services are
concentrated in highly competitive markets characterized by
rapid technological advances, frequent changes in customer
requirements and evolving regulatory requirements and industry
standards. Failure to anticipate or respond adequately to
technological advances, changes in customer requirements and
changes in regulatory requirements or industry standards could
have a material adverse effect on the Companys business
and operating results. Additionally, certain other factors could
affect the Companys future operating results and cause
actual results to differ materially from expectations, including
but not limited to, dependence on a third party manufacturer,
difficulties in managing growth, difficulties in attracting and
retaining qualified personnel, dependence on key personnel,
enforcement of intellectual property rights, the lengthening of
sales cycles and an uneven pattern of quarterly results.
Accounting Principles
The Companys consolidated financial
statements and accompanying notes are prepared on the accrual
basis of accounting in accordance with generally accepted
accounting principles in the United States of America.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities as
of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Estimates are used in accounting for revenue recognition,
reserves for doubtful accounts, product returns, obsolete and
excess inventory, warranties, valuation allowance on deferred
tax assets and purchase price allocations. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with purchased maturities of three months or less to
be cash equivalents. The Company invests its cash and cash
equivalents in deposits with four major financial
37
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
institutions, which, at times, exceed federally
insured limits. The Company has not experienced any losses on
its cash and cash equivalents.
Investments
The Company classifies its investment securities
as available for sale. Investment securities, consisting of
corporate and municipal bonds and notes and United States
government securities, are reported at fair value with the
related unrealized gains and losses included as a component of
shareholders equity. Realized gains and losses and
declines in value of securities judged to be other than
temporary are included in other income (expense). The cost of
investments for purposes of computing realized and unrealized
gains and losses is based on the specific identification method.
Investments in securities with maturities of less than one year
or where managements intent is to use the investments to
fund current operations are classified as short-term
investments. Investments with maturities of greater than one
year are classified as long-term investments.
Concentration of Credit Risk
The Company extends credit to customers and is
therefore subject to credit risk. The Company performs initial
and ongoing credit evaluations of its customers financial
condition and does not require collateral. An allowance for
doubtful accounts, in an amount based on historical levels, is
recorded to account for potential bad debts. Estimates are used
in determining the allowance for doubtful accounts and are based
on a percentage of accounts receivable by aging category. In
determining these percentages, the Company evaluates historical
write-offs, and current trends in customer credit quality, as
well as changes in credit policies.
The Company maintains its cash and investment
balances with high credit quality financial institutions.
Fair Value of Financial Instruments
For certain financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, recorded amounts approximate fair market
value, due to the short maturities of these instruments.
Short-term and long-term investments are recorded
at fair value as the underlying securities are classified as
available for sale and marked-to-market at each reporting period.
Inventories
The Company outsources the manufacturing of its
pre-configured hardware platforms to a contract manufacturer,
who assembles each product to the Companys specifications.
As protection against component shortages and to provide
replacement parts for its service teams, the Company also stocks
limited supplies of certain key product components. Inventories
consist of hardware and related component parts and are recorded
at the lower of cost or market (as determined by the first-in,
first-out method).
Restricted Cash
Restricted cash represents an escrow account
established in connection with a lease agreement for the
Companys corporate headquarters. Under the terms of the
lease, a $6.0 million certificate of deposit is required
through November 2012, unless the lease is terminated prior to
that date.
Property and Equipment
Property and equipment is stated at cost.
Depreciation of property and equipment and amortization of
capital leases are provided using the straight-line method over
the estimated useful lives of the assets, ranging
38
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from two to five years. Leasehold improvements
are amortized over the lesser of the lease term or the estimated
useful life of the improvements. The cost of normal maintenance
and repairs is charged to expense as incurred and expenditures
for major improvements are capitalized at cost. Gains or losses
on the disposition of assets are reflected in the results of
operations at the time of disposal.
Other Assets
Other assets primarily consist of software
development costs and acquired technology.
Software development costs are charged to
research and development expense until technological feasibility
is established. Thereafter, until the product is released for
sale, software development costs are capitalized and reported at
the lower of unamortized cost or net realizable value of each
product. The establishment of technological feasibility and the
on-going assessment of recoverability of costs require
considerable judgment by the Company with respect to certain
internal and external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic
life and changes in hardware and software technology. The
Company amortizes capitalized software development costs using
the straight-line method over the estimated economic life of the
product, generally three years. During the years ended
September 30, 2003 and 2002, the Company capitalized
$474,000 and $392,000 of software development costs,
respectively. Related amortization costs of $298,000 and
$225,000 were recorded during the fiscal years 2003 and 2002,
respectively.
Acquired technology is recorded at cost and
amortized over its estimated useful life of five years. Acquired
technology of $3.0 million was recorded in connection with
the acquisition of uRoam, Inc. in July 2003. Amortization
expense totaled approximately $100,000 for the year ended
September 30, 2003.
Goodwill
Goodwill represents the excess purchase price
over the estimated fair value of net assets acquired as of the
acquisition date. The Company has adopted the requirements of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 142 requires
goodwill to be tested for impairment on an annual basis and
between annual tests in certain circumstances, and written down
when impaired. Goodwill of $24.2 million was recorded in
connection with the acquisition of uRoam, Inc. in July 2003.
There was no impairment of goodwill in fiscal year 2003.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived
assets whenever events or changes in business circumstances
indicate that the carrying amount of an asset may not be
recoverable. When such events occur, management determines
whether there has been impairment by comparing the anticipated
undiscounted net future cash flows to the related assets
carrying value. If impairment exists, the asset is written down
to its estimated fair value.
Revenue Recognition
The Company recognizes revenue in accordance with
the guidance provided under Statement of Position
(SOP) No. 97-2, Software Revenue
Recognition, and SOP No. 98-9 Modification
of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, Statement of Financial
Accounting Standards (SFAS) No. 48, Revenue
Recognition When Right of Return Exists, and SEC Staff
Accounting Bulleting (SAB) No. 101, Revenue
Recognition in Financial Statements.
The Company sells products through resellers,
original equipment manufacturers (OEMs) and other channel
partners, as well as directly to end users. The Company
recognizes product revenue upon shipment,
39
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net of estimated returns, provided that
collection is determined to be probable and no significant
obligations remain. Product revenues from OEM agreements are
recognized based on reporting of sales from the OEM partner.
Whenever a software license, hardware,
installation and post-contract customer support
(PCS) elements are combined into a package with a single
bundled price, a portion of the sales price is
allocated to each element of the bundled package based on their
respective fair values as determined when the individual
elements are sold separately. Revenues from the license of
software are recognized when the software has been shipped and
the customer is obligated to pay for the software. When rights
of return are present and we cannot estimate returns, we
recognize revenue when such rights of return lapse. Revenues for
PCS are recognized on a straight-line basis over the service
contract term. PCS includes rights to upgrades, when and if
available, a limited period of telephone support, updates, and
bug fixes. Installation revenue is recognized when the product
has been installed at the customers site. Consulting
services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
Payment terms to domestic customers are generally
net 30 days. Payment terms to international customers range
from net 30 to 90 days based on normal and customary trade
practices in the individual markets. The Company has offered
extended payment terms to certain customers, in which case,
revenue is recognized when payments become due.
Guarantees and Product Warranties
In the normal course of business to facilitate
sales of its products, the Company indemnifies other parties,
including customers, resellers, lessors, and parties to other
transactions with the Company, with respect to certain matters.
The Company has agreed to hold the other party harmless against
losses arising from a breach of representations or covenants, or
out of intellectual property infringement or other claims made
against certain parties. These agreements may limit the time
within which an indemnification claim can be made and the amount
of the claim. In addition, the Company has entered into
indemnification agreements with its officers and directors, and
the Companys bylaws contain similar indemnification
obligations to the Companys agents. It is not possible to
determine the maximum potential amount under these
indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances
involved in each particular agreement. Historically, payments
made by the Company under these agreements have not had a
material impact on the Companys operating results or
financial position.
The Company generally offers warranties of
90 days for hardware and one year for software, with the
option of purchasing additional warranty coverage in increments
of one year. The Company accrues for warranty costs as part of
its cost of sales based on associated material product costs and
technical support labor costs. During the years ended
September 30, 2003, 2002 and 2001 warranty expense was
$0.3 million, $1.6 million and $0.4 million,
respectively. The following table summarizes the activity
related to product warranties during fiscal years 2003 and 2002
(in thousands):
40
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research and Development
Research and development expenses consist of
salaries and related benefits of product development personnel
and an allocation of facilities and depreciation expense.
Research and development expenses are reflected in the statement
of operations as incurred.
Advertising
Advertising costs are expensed as incurred. The
Company incurred $1.0 million, $1.5 million and
$1.5 million in advertising costs during the fiscal years
2003, 2002 and 2001, respectively.
Income Taxes
The Company accounts for income taxes under the
liability method of accounting. Under the liability method,
deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities
at enacted tax rates in effect in the year in which the
differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
estimated amounts expected to be realized.
Foreign Currency
The financial statements of all majority-owned
subsidiaries have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 52 Foreign Currency Translation.
Accordingly, all assets and liabilities of the subsidiaries are
translated at year-end exchange rates and all revenues and
expenses are translated at the average exchange rate for the
period presented. Translation gains and losses are reported as
comprehensive income (loss) as a separate component of
shareholders equity.
Foreign currency transaction gains and losses are
a result of the effect of exchange rate changes on transactions
denominated in currencies other than the functional currency,
including US dollars. Gains and losses on those foreign
currency transactions are included in determining net income or
loss for the period of exchange. For the fiscal year ended
September 30, 2003, a transaction loss of $544,000 was
realized, with a transaction gain of $15,000 realized in fiscal
year 2002. A transaction loss of $139,000 was charged to
operations for the fiscal year ended September 30, 2001.
Segments
The Company complies with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosure about Segments of an Enterprise and Related
Information, which establishes annual and interim
reporting standards for an enterprises operating segments
and related disclosures about its products, services, geographic
areas and major customers. Management has determined that the
Company operates in one segment.
Stock-Based Compensation
The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to
Employees, FASB Interpretation No. 44
(FIN No. 44), Accounting for Certain
Transactions Involving Stock Compensation, and related
interpretations and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), Accounting for Stock-Based
Compensation. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of the grant,
between the deemed fair value of the Companys stock and
the exercise price of the option. The unearned compensation is
being amortized in accordance with Financial Accounting
Standards Board Interpretation No. 28 on an accelerated
basis over the vesting period of the individual options. The
Company accounts for
41
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and related
interpretations.
The pro forma effect on the Companys net
income (loss) and net income (loss) per share of applying SFAS
No. 123, utilizing the assumptions described in
note 10 Shareholders Equity, would have
been as follows (in thousands, except per share data):
Earnings per Share
Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of common and
dilutive common stock equivalent shares outstanding during the
period.
The following table sets forth the computation of
basic and diluted net income (loss) per share (in
thousands, except per share data).
Approximately 2.6 million of common shares
potentially issuable from stock options for the year ended
September 30, 2003 are excluded from the calculation of
diluted earnings per share because the effect was antidilutive.
For fiscal years 2002 and 2001, in which the Company incurred a
net loss, all common stock equivalent shares are excluded from
the calculation as their impact would have been antidilutive.
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent Accounting Pronouncements
In May 2003, FASB issued Statement of Financial
Accounting Standard No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liability and
Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003.
The adoption of this standard did not have an impact on our
consolidated financial statements.
In April 2003, FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS
No. 149), which is generally effective for contracts
entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS
No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a
derivative as discussed in Statement of Financial Accounting
Standards No. 133, when a derivative contains a financing
component, amends the definition of an underlying to
conform it to the language used in FASB interpretation
No. 45, Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and amends certain other existing
pronouncements. The adoption of this standard did not have an
impact on our consolidated financial statements.
In January 2003, FASB issued Interpretation
No. 46 (FIN No. 46), Consolidation of
Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities that
either: (1) do not have sufficient equity investment at
risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the
Company will hold a significant variable interest in, or have
significant involvement with, an existing variable interest
entity. The adoption of this interpretation did not have an
impact on our consolidated financial statements.
In November 2002, FASB issued Interpretation
No. 45 (FIN No. 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which
addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees. FIN No. 45 also requires the
recognition of a liability by a guarantor at the inception of
certain guarantees that are entered into or modified after
December 31, 2002. The additional disclosures required by
FIN No. 45 have been included in the notes to our
consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior
year balances to conform to the current year presentation. These
reclassifications had no impact on previously reported net loss,
shareholders equity or cash flows.
2. Short-Term and
Long-Term Investments
Short-term investments consist of the following
(in thousands):
43
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term investments consist of the following
(in thousands):
Fixed Maturity by Maturity Date
The cost or amortized cost and fair value of
fixed maturities at September 30, 2003, by contractual
years-to-maturity, are presented below (in thousands):
In December 2001, the Company purchased
approximately 16 million shares of common stock of Artel
Solutions Group Holdings Limited, or Artel, which represented an
approximate 1% ownership percentage of that company. The Company
sold its investment in Artel and recorded a loss on disposition
of $263,000 during the fourth quarter of fiscal year 2003.
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following (in
thousands):
The Company is contractually obligated to
purchase component inventory that its contract manufacturer
procures in accordance with a forecast, unless the Company gives
notice of order cancellation within applicable lead times. For
any completed product inventory carried by the contract
manufacturer beyond 30 days, the Company will be charged a
monthly carrying fee of 1.5%. Alternatively, the Company has the
option to purchase inventory held by the contractor manufacturer
beyond 30 days to avoid incurring related carrying charges.
As of September 30, 2003, the Company was committed to
purchase approximately $3.3 million of such inventory
within the following quarter.
Other current assets consist of the following (in
thousands):
Property and equipment consist of the following
(in thousands):
Depreciation and amortization expense totaled
approximately $4.7 million, $5.4 million, and
$5.3 million for the fiscal years ended September 30,
2003, 2002 and 2001, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 23, 2003, the Company acquired
substantially all of the assets and assumed certain liabilities
of uRoam, Inc. (uRoam) for cash of $25.0 million. The
Company also incurred $2.4 million of direct transaction
costs for a total purchase price of $27.4 million.
uRoams FirePass server is a comprehensive remote access
product that enables users to access applications in a secure
fashion using industry standard Secured Socket Layer (SSL)
technology. The acquisition of substantially all the assets of
uRoam is intended to allow the Company to quickly enter the
SSL Virtual Private Network market, broaden its customer
base and augment the existing product line. The Company has
hired substantially all of uRoams 20 employees, consisting
of product development, sales and service personnel.
The Company accounted for the acquisition under
the purchase method of accounting in accordance with SFAS
No. 141, Business Combinations. Under the
purchase method of accounting, the total purchase price was
allocated to the tangible and intangible assets acquired and the
liabilities assumed based on their estimated fair values. The
excess of the purchase price over those fair values was recorded
as goodwill. The fair value assigned to the tangible and
intangible assets acquired and liabilities assumed were based on
estimates and assumptions provided by management, and other
information compiled by management, including an independent
valuation, prepared by an independent valuation specialist that
utilized established valuation techniques appropriate for the
technology industry.
The purchase price allocation is as follows (in
thousands):
To determine the value of the developed
technology, a combination of cost and market approaches were
used. The cost approach required an estimation of the costs
required to reproduce the acquired technology. The market
approach measures the fair value of the technology through an
analysis of recent comparable transactions. The
$3.0 million allocated to developed technology is being
amortized using the straight-line method over an estimated
useful life of five years. The $24.2 million allocated to
goodwill will not be amortized but will be subject to at least
an annual impairment test under the requirements of Statement of
Financial Accounting Standards No. 142 Goodwill and
other Intangible Assets.
The following unaudited pro forma condensed
combined consolidated summary financial information has been
derived by the application of pro forma adjustments to the
historical consolidated financial statements of F5 Networks
and uRoam. Assumptions underlying the pro forma adjustments are
described in the accompanying notes, which should be read in
conjunction with these unaudited pro forma condensed combined
consolidated summary financial information.
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unaudited pro forma condensed combined
consolidated summary financial information combines the
consolidated statement of operations of F5 Networks for the
year ended September 30, 2003 with uRoams unaudited
statement of operations for the nine months ended June 30,
2003 and the unaudited statement of operations for the period
July 1, 2003 through July 23, 2003, the effective date
of the uRoam acquisition, as if the acquisition had been
completed at the beginning of the year.
Year ended September 30, 2003 (unaudited in
thousands):
Year ended September 30, 2002 (unaudited in
thousands):
The unaudited pro forma condensed combined
consolidated summary financial information for the year ended
September 30, 2002 combines the consolidated statement of
operations of F5 Networks for the fiscal year ended
September 30, 2002 with uRoams consolidated statement
of operations for the calendar year ended December 31, 2002.
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other assets consist of the following (in
thousands):
Amortization expense related to other assets was
approximately $412,000 and $231,000 for the fiscal years ended
September 30, 2003 and 2002, respectively. There was no
amortization expense related to other assets for the fiscal year
ended September 30, 2001.
Estimated amortization expense for the five
succeeding fiscal years is as follows (in thousands):
Accrued liabilities consist of the following (in
thousands):
During the third quarter of fiscal year 2002, the
Company recorded restructuring charges of approximately
$2.8 million in connection with managements decision
to exit the cache appliance business. As a result of
discontinuing this line of business and other changes in the
overall business, the Company wrote-down certain assets,
consolidated operations, and terminated 47 employees throughout
all divisions of the company. An additional charge of $503,000
related to employee separation costs was recorded in
July 2002, resulting in total restructuring charges of
$3.3 million for the fiscal year 2002. As of
September 30, 2002, total cash payments and write-offs of
approximately $2.2 million had been recorded.
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the movements in
the remaining restructuring charge liabilities (in thousands):
As part of the restructuring, excess facilities
costs were determined to be $1.0 million. These costs are
the result of the decision to exit a support facility in
Washington DC. The estimated facilities costs were based on
current comparable rates for leases in the respective market. In
April 2003, the excess facilities were subleased at the
then current market value through the term of the lease. The
difference between the lease payments and sublease income will
be applied against the restructuring liability until expiration
of the lease in 2007.
During the first fiscal quarter of 2001, the
Company recorded a restructuring charge totalling approximately
$1.1 million in connection with managements decision
to bring operating expenses in line with the business revenue
growth model. Accordingly, the Company terminated
96 employees throughout all divisions of the Company. By
the end of January 2001, all identified employees had been
terminated. During the quarter ended March 31, 2001, the
Company reversed $96,000 of the original accrual due to a
revision of previous estimates. As of September 30, 2001,
substantially all of the restructuring charge accrued for during
the first quarter of 2001 had been paid.
9. Income
Taxes
Income (loss) before income taxes consists of the
following (in thousands):
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes consists of the
following (in thousands):
The effective tax rate differs from the U.S.
federal statutory rate as follows (in thousands):
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of the temporary differences that
give rise to the deferred tax assets and liabilities are as
follows (in thousands):
As of September 30, 2003, approximately
$12.7 million of the valuation allowance related to the
Companys net operating loss carryforwards is derived from
the tax benefits of stock option deductions. At such time as the
valuation allowance related to these deductions is released, the
benefit will be credited to additional paid in capital.
The Companys deferred tax assets include
net operating loss carry forwards of approximately
$61.1 million; $52.5 million related to U.S.
operations and $8.6 million related to United Kingdom
operations. The United States net operating loss carry forwards
will begin to expire in fiscal year 2011 through 2023. The
United Kingdom net operating loss carries forward indefinitely.
The Company also has Research and Experimentation Credit carry
forwards which will begin to expire in fiscal year 2011 through
2023.
10. Shareholders
Equity
The Company has adopted a number of stock-based
compensation plans as discussed below. Options granted to
employees typically vest over a period of two to four years.
Options granted to directors typically vest over three years.
All options expire 10 years after the grant date.
The Amended and Restated 1996 Stock Option Plan,
or the 1996 Employee Plan, provides for discretionary grants of
non-qualified and incentive stock options for employees and
other service providers. A total of 2,600,000 shares of
common stock have been reserved for issuance under the 1996
Employee Plan. All outstanding, unvested options under the 1996
Employee Plan vest in full upon a change in control of the
Company. The Company does not intend to grant any additional
options under this plan. As of September 30, 2003, there
were options to purchase 394,538 shares outstanding and
33,430 shares available for awards under the 1996 Employee
Plan.
The Amended and Restated Directors
Nonqualified Stock Option Plan, or the Directors Plan,
provides for automatic grants of non-qualified stock options to
eligible non-employee directors. A total of 100,000 shares
of common stock were reserved for issuance under the
Directors Plan. All outstanding, unvested options under
the Directors Plan vest in full upon a change in control
of the Company. This plan was
51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
terminated in January 2003 providing that the
current outstanding options did not terminate. As of
September 30, 2003 there were options to purchase 5,000
shares outstanding and no shares available for awards under the
Directors plan.
In November 1998, the Company adopted the 1998
Equity Incentive Plan, or the 1998 Plan, which provides for
discretionary grants of non-qualified and incentive stock
options, stock purchase awards and stock bonuses for employees
and other service providers. Upon certain changes in control of
the Company, all outstanding and unvested options or stock
awards under the 1998 Plan will vest at the rate of 50%, unless
assumed or substituted by the acquiring entity. As of
September 30, 2003, there were options to purchase
3,954,149 shares outstanding and 650,687 shares
available for awards under the 1998 Plan.
In July 2000, the Company adopted the 2000
Employee Equity Incentive Plan, or the 2000 Plan, which provides
for discretionary grants of non-qualified stock options, stock
purchase awards and stock bonuses for non-executive employees
and other service providers. A total of 3,500,000 shares of
common stock have been reserved for issuance under the 2000
Plan. The Company has not granted any stock purchase awards or
stock bonuses under the 2000 Plan. Upon certain changes in
control of the Company, all outstanding and unvested options or
stock awards under the 2000 Plan will vest at the rate of 50%,
unless assumed or substituted by the acquiring entity. As of
September 30, 2003, there were options to purchase
2,514,142 shares outstanding and 484,616 shares
available for awards under the 2000 Plan.
In July 2000, the Company adopted two
nonqualified stock option plans, or the McAdam Plans, in
connection with hiring John McAdam, the Companys President
and Chief Executive Officer. The first McAdam Plan provided for
a grant of 645,000 non-qualified stock options for
Mr. McAdam. This grant was cancelled and the plan was
terminated in fiscal 2002. The second McAdam Plan provided for a
grant of 50,000 options. In fiscal year 2002, the options
were fully vested and 50,000 shares were issued under the
second McAdam Plan.
In October 2000, the Company adopted a
non-qualified stock option plan in connection with the hiring of
Jeff Pancottine, the Companys Senior Vice President of
Marketing and Business Development. This Plan provides for a
grant of 200,000 non-qualified stock options for
Mr. Pancottine. All options under this plan expire
10 years from the grant date. As of September 30,
2003, there were options to purchase 200,000 shares
outstanding and no shares available for awards under the Plan.
In May 2001, the Company adopted a non-qualified
stock option plan in connection with the hiring of Steve Coburn,
the Companys Senior Vice President of Finance and Chief
Financial Officer. This plan provides for a grant of 200,000
non-qualified stock options for Mr. Coburn. As of
September 30, 2003, there were options to purchase
200,000 shares outstanding and no shares available for
awards under the Plan.
In July 2003, the Company adopted the uRoam
Acquisition Equity Incentive Plan, or the uRoam Plan, in
connection with the hiring of the former employees of uRoam. A
total of 250,000 shares of common stock have been reserved for
issuance under the uRoam Plan. The plan provides for
discretionary grants of non-qualified and incentive stock
options, stock purchase awards and stock bonuses. The Company
has not granted any stock purchase awards or stock bonuses under
this plan. As of September 30, 2003 there were options to
purchase 240,000 shares outstanding and 10,000 shares
available for awards under the uRoam Plan.
In prior years, the Company issued stock options
with an exercise price less than the deemed fair value of the
Companys common stock at the date of grant. In fiscal
years 2003 and 2002, there were no options issued below fair
market value; accordingly no additional compensation costs were
recorded. Approximately $0.1 million of deferred
compensation was recorded during fiscal year 2001 and is being
amortized over the vesting period of the options. Amortization
of stock compensation costs of approximately $0.1 million,
$0.4 million, and $2.6 million has been recognized as
an expense for the fiscal years ended September 30, 2003,
2002 and 2001, respectively.
52
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity under all of
the Companys plans is as follows:
The weighted-average fair values and
weighted-average exercise prices per share at the date of grant
for options granted were as follows:
53
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about
options outstanding at September 30, 2003:
Pro forma information regarding net income
(loss) is required by SFAS No. 123 and has been
determined as if the Company had accounted for its stock options
under the minimum value method for all periods prior to the
Company becoming a public entity and the fair value method for
all periods subsequent to the Company becoming a public entity.
The fair value of each option is estimated at the date of grant
using the following weighted-average assumptions:
1999 Employee Stock Purchase Plan
In May 1999, the board of directors approved the
adoption of the 1999 Employee Stock Purchase Plan (the Employee
Stock Purchase Plan). A total of 1,000,000 shares of common
stock have been reserved for issuance under the Employee Stock
Purchase Plan. The Employee Stock Purchase Plan permits eligible
employees to acquire shares of the Companys common stock
through periodic payroll deductions of up to 15% of base
compensation. No employee may purchase more than $25,000 worth
of stock, determined at the fair market value of the shares at
the time such option is granted, in one calendar year. The
Employee Stock Purchase Plan has been implemented in a series of
offering periods, each 6 months in duration. The price at
which the common stock may be purchased is 85% of the lesser of
the fair market value of the Companys common stock on the
first day of the applicable offering period or on the last day
of the respective purchase period. As of September 30, 2003
there were 311,332 shares available for awards under the
Employee Stock Purchase Plan.
Operating Leases
In April 2000, the Company amended and restated
the lease agreement for its corporate headquarters in Seattle,
Washington. The lease expires in 2012 with an option for
renewal. The lease commenced in July 2000 on the first building;
and the lease on the second building commenced in September
2000. The second building has been fully subleased until 2012.
The Company also leases office space for product development
personnel in Spokane, Washington and San Jose, California and
for sales and support personnel in Washington
54
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DC, New York, Hong Kong, Singapore, Taiwan,
Japan, Australia, Germany, France, and the United Kingdom. The
lease for the Washington DC office has been primarily
subleased through 2007.
Future minimum operating lease payments, net of
sublease income, are as follows (in thousands):
Rent expense under non-cancelable operating
leases amounted to approximately $4.5 million,
$4.4 million, and $4.8 million for the fiscal years
ended September 30, 2003, 2002, and 2001, respectively.
Litigation
In July and August 2001, a series of putative
securities class action lawsuits were filed in United States
District Court, Southern District of New York against certain
investment banking firms that underwrote the Companys
initial and secondary public offerings, the Company and some of
the Companys officers and directors. These cases, which
have been consolidated under In re. F5 Networks, Inc.
Initial Public Offering Securities Litigation, No. 01
CV 7055, assert that the registration statements for the
Companys June 4, 1999 initial public offering and
September 30, 1999 secondary offering failed to disclose
certain alleged improper actions by the underwriters for the
offerings. The consolidated, amended complaint alleges claims
against the Company and those of our officers and directors
named in the complaint under Sections 11 and 15 of the
Securities Act of 1933, and under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. Other lawsuits have been
filed making similar allegations regarding the public offerings
of more than 300 other companies. All of these various
consolidated cases have been coordinated for pretrial purposes
as In re. Initial Public Offering Securities Litigation, Civil
Action No. 21-MC-92. In October 2002, the directors and
officers were dismissed without prejudice. The issuer defendants
filed a coordinated motion to dismiss these lawsuits in July
2002, which the Court granted in part and denied in part in an
order dated February 19, 2003. The Court declined to
dismiss the Section 11 and Section 10(b) and
Rule 10b-5 claims against the Company. In June 2003, a
proposal was made for the settlement and release of claims
against the issuer defendants and their directors and officers,
including us, in exchange for a guaranteed recovery to be paid
by the issuer defendants insurance carriers and an
assignment of certain claims against the underwriters. The
settlement is subject to a number of conditions, including
approval by the proposed settling parties and the Court. If the
settlement does not occur, and litigation against us continues,
we believe we have meritorious defenses and intend to defend the
case vigorously. Securities class action litigation could result
in substantial costs and divert our managements attention
and resources. Due to the inherent uncertainties of litigation,
we cannot accurately predict the ultimate outcome of the
litigation, and any unfavorable outcome could have a material
adverse impact on our business, financial condition and
operating results.
We are not aware of any additional pending legal
proceedings against us that, individually or in the aggregate,
would have a material adverse effect on our business, operating
results, or financial condition. We may in the future be party
to litigation arising in the course of our business, including
claims that we allegedly
55
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
infringe third-party trademarks and other
intellectual property rights. Such claims, even if not
meritorious, could result in the expenditure of significant
financial and managerial resources.
In October 2000, the Company extended a loan to
an executive officer and his wife, in the principal amount of
$350,000, in order to facilitate the purchase of a residence in
the Seattle area. On March 15, 2002, payments due under the
note were extended for a period of one year, as allowed per the
terms of the note. This loan is evidenced by a promissory note,
the principal of which is payable in three equal installments,
together with accrued interest, on March 31, 2002,
March 31, 2003, and March 31, 2004, or immediately
upon the sale of the residence or termination of the
officers employment. Interest accrues on the loan at the
rate of 6% per annum. The balance of the loan totaled $240,354
at September 30, 2003. The residence was sold in October
2003 and the loan was repaid in full on October 20, 2003.
The Company has a 401(k) savings plan whereby
eligible employees may voluntarily contribute a percentage of
their compensation. The Company may, at its discretion, match a
portion of the employees eligible contributions.
Contributions by the Company to the plan during the years ended
September 30, 2003, 2002, and 2001 were approximately
$852,000, $950,000, and $953,000, respectively. Contributions
made by the Company vest over four years.
The following presents revenues by geographic
region (in thousands):
The Companys customers are in diverse
industries and geographic locations. Net revenues from
international customers are primarily denominated in U.S.
Dollars and totaled approximately $40.5 million,
$34.8 million, and $35.0 million for the years ended
September 30, 2003, 2002 and 2001, respectively. One
domestic distributor accounted for 12.6% of total net revenue
for fiscal year 2003. This distributor accounted for 17.8% of
accounts receivable as of September 30, 2003. During the
years ended September 30, 2002 and 2001, no single reseller
or customer exceeded 10% of the Companys net revenue or
accounts receivable balance.
The following presents the Companys
unaudited quarterly results of operations for the eight quarters
ended September 30, 2003. The information should be read in
conjunction with the Companys financial statements and
related notes included elsewhere in this report. This unaudited
information has been prepared on the same basis as the audited
financial statements and includes all adjustments, consisting
only of normal
56
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recurring adjustments that were considered
necessary for a fair presentation of our operating results for
the quarters presented. The following presents quarterly results
of operations (unaudited and in thousands):
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
F5 NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
58
None.
As of September 30, 2003, we carried out an
evaluation, under the supervision and with the participation of
the Companys management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e).
Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that our disclosure controls
and procedures are effective to timely alert them to any
material information relating to the Company (including its
consolidated subsidiaries) that must be included in our periodic
SEC filings. There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect internal controls subsequent to their
evaluation.
We intend to review and evaluate the design and
effectiveness of our disclosure controls and procedures on an
ongoing basis and to improve our controls and procedures over
time and to correct any deficiencies that we may discover in the
future. Our goal is to ensure that our senior management has
timely access to all material financial and non-financial
information concerning our business. While we believe the
present design of our disclosure controls and procedures is
effective to achieve our goal, future events affecting our
business may cause us to modify our disclosure controls and
procedures.
Item 5.
Market for Registrants Common Equity
and Related Shareholder Matters
Fiscal Year 2003
Fiscal Year 2002
High
Low
High
Low
$
15.15
$
6.40
$
28.73
$
7.00
$
15.50
$
10.70
$
27.23
$
17.78
$
18.86
$
12.15
$
23.86
$
7.31
$
21.85
$
16.20
$
15.48
$
7.13
Table of Contents
Item 6.
Selected Consolidated Financial
Data
Years Ended September 30,
2003
2002
2001
2000
1999
(in thousands, except per share data)
$
84,197
$
82,566
$
78,628
$
87,980
$
23,420
31,698
25,700
28,739
20,665
4,405
115,895
108,266
107,367
108,645
27,825
17,837
20,241
33,240
24,660
5,582
9,068
10,238
12,265
7,911
1,618
26,905
30,479
45,505
32,571
7,200
88,990
77,787
61,862
76,074
20,625
53,458
50,581
50,767
36,890
13,505
19,246
17,985
17,435
14,478
5,642
12,014
15,045
18,776
9,727
3,869
3,274
975
83
443
2,625
2,127
2,487
84,801
87,328
90,578
63,222
25,503
4,189
(9,541
)
(28,716
)
12,852
(4,878
)
751
1,420
2,021
2,903
534
4,940
(8,121
)
(26,695
)
15,755
(4,344
)
853
489
4,095
2,105
$
4,087
$
(8,610
)
$
(30,790
)
$
13,650
$
(4,344
)
$
0.15
$
(0.34
)
$
(1.36
)
$
0.65
$
(0.42
)
26,453
25,323
22,644
21,137
10,238
$
0.14
$
(0.34
)
$
(1.36
)
$
0.59
$
(0.42
)
28,220
25,323
22,644
23,066
10,238
Table of Contents
Years Ended September 30,
2003
2002
2001
2000
1999
(in thousands, except per share data)
$
44,878
$
80,333
$
69,783
$
53,199
$
24,797
6,000
6,000
6,000
6,000
3,013
34,132
1,346
148,173
126,289
124,663
122,420
42,846
1,735
1,315
1,167
238
110,429
93,685
96,488
87,685
31,973
(1)
Restricted cash represents an escrow account
established in connection with a lease agreement for our
corporate headquarters. Under the terms of the lease, a
$6.0 million certificate of deposit is required through
November 2012, unless the lease is terminated prior to that date.
Item 7.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
Years Ended September 30,
2003
2002
2001
(in thousands, except for percentages)
$
84,197
$
82,566
$
78,628
31,698
25,700
28,739
$
115,895
$
108,266
$
107,367
72.6
%
76.3
%
73.2
%
27.4
23.7
26.8
100.0
%
100.0
%
100.0
%
Table of Contents
Years Ended September 30,
2003
2002
2001
(in thousands, except for
percentages)
$
17,837
$
20,241
$
33,240
9,068
10,238
12,265
26,905
30,479
45,505
$
88,990
$
77,787
$
61,862
21.2
%
24.5
%
42.3
%
28.6
39.8
42.7
23.2
28.2
42.4
76.8
%
71.8
%
57.6
%
Table of Contents
Years Ended September 30,
2003
2002
2001
(in thousands, except for
percentages)
$
53,458
$
50,581
$
50,767
19,246
17,985
17,435
12,014
15,045
18,776
3,274
975
83
443
2,625
$
84,801
$
87,328
$
90,578
46.1
%
46.7
%
47.3
%
16.6
16.6
16.2
10.4
13.9
17.5
3.0
0.9
0.1
0.5
2.5
73.2
%
80.7
%
84.4
%
Table of Contents
Years Ended September 30,
2003
2002
2001
(in thousands, except for
percentages)
$
4,189
$
(9,541
)
$
(28,716
)
751
1,420
2,021
4,940
(8,121
)
(26,695
)
853
489
4,095
$
4,087
$
(8,610
)
$
(30,790
)
3.6
%
(8.8
)%
(26.7
)%
0.7
1.3
1.9
4.3
(7.5
)
(24.9
)
0.8
0.5
3.8
3.5
%
(8.0
)%
(28.7
)%
Table of Contents
Years Ended September 30,
2003
2002
2001
(in thousands)
$
10,351
$
20,801
$
18,321
14,610
9,505
(11,833
)
(38,053
)
(12,663
)
(24,709
)
12,833
5,483
36,343
Table of Contents
Payments Due by Period
Less than
1-3
4-5
After 5
Obligations
Total
1 year
Years
Years
Years
(in thousands)
$
18,474
$
2,727
$
4,306
$
3,971
$
7,470
Table of Contents
Table of Contents
Table of Contents
The average selling price of our products may
decrease and our costs may increase, which may negatively impact
gross profits
It is difficult to predict our future
operating results because we have an unpredictable sales
cycle
Table of Contents
Our business may be harmed if our contract
manufacturer is not able to provide us with adequate supplies of
our products or if this single source of hardware assembly is
lost or impaired
Our business could suffer if there are any
interruptions or delays in the supply of hardware components
from our third-party sources
We may not adequately protect our intellectual
property and our products may infringe on the intellectual
property rights of third parties
Table of Contents
Future changes in financial accounting
standards or our revenue recognition policies may cause adverse
unexpected revenue fluctuations and affect our reported results
of operations
Table of Contents
Table of Contents
Table of Contents
Maturing in
Three months
Three months
Greater than
or less
to one year
one year
Total
Fair value
(in thousands, except for percentages)
$
3,972
$
$
$
3,972
$
3,972
1.1
%
$
29,409
$
5,118
$
$
34,527
$
34,527
1.6
%
2.1
%
$
$
$
34,132
$
34,132
$
34,132
2.0
%
$
3,582
$
$
$
3,582
$
3,582
1.9
%
$
$
41,591
$
17,941
$
59,532
$
59,532
2.2
%
3.3
%
$
8,169
$
$
$
8,169
$
8,169
4.1
%
$
$
33,500
$
17,294
$
50,794
$
51,462
4.6
%
3.4
%
Table of Contents
Page
32
33
34
35
36
37
58
Table of Contents
Table of Contents
September 30,
2003
2002
(In thousands)
ASSETS
$
10,351
$
20,801
34,527
59,532
19,325
20,404
762
349
4,779
4,713
69,744
105,799
6,000
6,000
10,079
12,211
34,132
1,346
24,188
4,030
933
$
148,173
$
126,289
LIABILITIES AND SHAREHOLDERS
EQUITY
$
3,714
$
3,685
13,148
13,546
19,147
14,058
36,009
31,289
1,584
1,315
151
1,735
1,315
141,709
128,876
(10
)
(93
)
195
454
(31,465
)
(35,552
)
110,429
93,685
$
148,173
$
126,289
Table of Contents
Years Ended September 30,
2003
2002
2001
(In thousands, except per share data)
$
84,197
$
82,566
$
78,628
31,698
25,700
28,739
115,895
108,266
107,367
17,837
20,241
33,240
9,068
10,238
12,265
26,905
30,479
45,505
88,990
77,787
61,862
53,458
50,581
50,767
19,246
17,985
17,435
12,014
15,045
18,776
3,274
975
83
443
2,625
84,801
87,328
90,578
4,189
(9,541
)
(28,716
)
751
1,420
2,021
4,940
(8,121
)
(26,695
)
853
489
4,095
$
4,087
$
(8,610
)
$
(30,790
)
$
0.15
$
(0.34
)
$
(1.36
)
26,453
25,323
22,644
$
0.14
$
(0.34
)
$
(1.36
)
28,220
25,323
22,644
Table of Contents
Notes
Accumulated
Common Stock
Receivable
Other
Total
From
Unearned
Comprehensive
Accumulated
Shareholders
Shares
Amount
Shareholders
Compensation
Income/(Loss)
Deficit
Equity
(In thousands)
21,613
$
87,419
$
(469
)
$
(3,061
)
$
(52
)
$
3,848
$
87,685
608
642
642
9
154
1,667
1,667
(30
)
(1,082
)
(1,082
)
2,466
34,928
34,928
188
188
(56
)
(281
)
281
100
(100
)
2,625
2,625
(30,790
)
(27
)
652
(30,165
)
24,764
123,393
(536
)
573
(26,942
)
96,488
765
3,752
3,752
201
1,731
1,731
443
443
(8,610
)
(285
)
166
(8,729
)
25,730
128,876
(93
)
454
(35,552
)
93,685
1,424
10,827
10,827
249
2,006
2,006
83
83
4,087
(161
)
(98
)
3,828
27,403
$
141,709
$
$
(10
)
$
195
$
(31,465
)
$
110,429
Table of Contents
Years Ended September 30,
2003
2002
2001
(In thousands)
$
4,087
$
(8,610
)
$
(30,790
)
2,771
975
1,090
345
325
4,019
(14
)
1
(92
)
232
74
111
83
443
2,625
1,148
6,181
15,310
5,162
5,612
5,348
3,398
354
(4,595
)
423
(408
)
1,899
790
(54
)
1,091
(5,422
)
(512
)
51
(728
)
(320
)
154
(3,018
)
4,852
3,018
(5,127
)
14,610
9,505
(11,833
)
(157,834
)
(104,975
)
(81,464
)
149,724
95,481
64,839
851
14
30
217
(27,373
)
(2,584
)
(3,199
)
(9,152
)
(38,053
)
(12,663
)
(24,709
)
34,928
12,833
5,483
2,309
188
(1,082
)
12,833
5,483
36,343
(10,610
)
2,325
(199
)
160
155
(16
)
20,801
18,321
18,536
$
10,351
$
20,801
$
18,321
$
$
$
(281
)
150
(50
)
290
903
167
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Years Ended
September 30,
2003
2002
$
650
$
200
291
1,600
(114
)
(1,150
)
$
827
$
650
Table of Contents
Table of Contents
Years Ended September 30,
2003
2002
2001
$
4,087
$
(8,610
)
$
(30,790
)
83
443
2,625
(23,371
)
(9,276
)
(77,408
)
$
(19,201
)
$
(17,443
)
$
(105,573
)
$
0.15
$
(0.34
)
$
(1.36
)
$
(0.73
)
$
(0.69
)
$
(4.66
)
$
0.14
$
(0.34
)
$
(1.36
)
$
(0.73
)
$
(0.69
)
$
(4.66
)
Years Ended September 30,
2003
2002
2001
$
4,087
$
(8,610
)
$
(30,790
)
26,453
25,323
22,644
1,767
28,220
25,323
22,644
$
0.15
$
(0.34
)
$
(1.36
)
$
0.14
$
(0.34
)
$
(1.36
)
Table of Contents
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
7,114
$
14
$
(1
)
$
7,127
27,399
1
27,400
$
34,513
$
15
$
(1
)
$
34,527
Table of Contents
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
33,500
$
123
$
$
33,623
16,900
16,900
9,000
9
9,009
$
59,400
$
132
$
$
59,532
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
13,575
$
60
$
(17
)
$
13,618
2,000
(15
)
1,985
18,500
34
(5
)
18,529
$
34,075
$
94
$
(37
)
$
34,132
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
1,310
$
36
$
$
1,346
$
1,310
$
36
$
$
1,346
Cost or
Amortized
Cost
Fair Value
$
34,513
$
34,527
34,075
34,132
$
68,588
$
68,659
Table of Contents
3.
Inventories
Years Ended
September 30,
2003
2002
$
408
$
324
354
25
$
762
$
349
4.
Other Current Assets
Years Ended
September 30,
2003
2002
$
776
$
300
731
670
380
445
517
713
241
391
2,134
2,194
$
4,779
$
4,713
5.
Property and Equipment
Years Ended
September 30,
2003
2002
$
14,248
$
11,692
5,170
5,276
7,364
7,417
26,782
24,385
(16,703
)
(12,174
)
$
10,079
$
12,211
Table of Contents
6.
Business Combinations
$
335
4
3,000
24,188
$
27,527
$
(29
)
(125
)
(154
)
$
27,373
Table of Contents
uRoam
F5 Networks
F5 Networks
Nine Months
Period from
Year Ended
Year Ended
Ended
July 1-July 23
Net Pro Forma
September 30, 2003
September 30, 2003
June 30, 2003
2003
Adjustments
Pro Forma
$
115,895
$
969
$
48
$
$
116,912
$
4,087
$
(4,896
)
$
(411
)
$
(576
)
$
(1,796
)
$
0.15
$
(0.07
)
26,453
26,453
$
0.14
$
(0.07
)
28,220
26,453
F5 Networks
F5 Networks
uRoam
uRoam, Inc.
Year Ended
Year Ended
Acquisition
(Formerly
Net Pro Forma
September 30, 2002
September 30, 2002
Corporation
Filanet)
Adjustments
Pro Forma
$
108,266
$
301
$
100
$
$
108,667
$
(8,610
)
$
(1,053
)
$
(2,035
)
$
(899
)
$
(12,597
)
$
(0.34
)
$
(0.50
)
25,323
25,323
Table of Contents
7.
Other Assets
Years Ended
September 30,
2003
2002
$
697
521
2,900
433
412
$
4,030
$
933
$
848
873
754
680
515
$
3,670
8.
Accrued Liabilities
Years Ended
September 30,
2003
2002
$
7,578
$
6,871
1,332
1,364
844
1,076
827
650
1,062
873
1,505
2,712
$
13,148
$
13,546
Table of Contents
Balance at
Cash Payments and
Balance at
September 30, 2002
Additional Charges
Write-offs
September 30, 2003
$
1,000
$
$
(218
)
$
782
76
(14
)
62
$
1,076
$
$
(232
)
$
844
Years Ended September 30,
2003
2002
2001
$
3,524
$
(7,413
)
$
(25,900
)
1,416
(708
)
(795
)
$
4,940
$
(8,121
)
$
(26,695
)
Table of Contents
Years Ended
September 30,
2003
2002
$
$
45
22
657
467
702
489
141
10
151
$
853
$
489
Years Ended September 30,
2003
2002
2001
$
1,729
$
(2,843
)
$
(9,343
)
36
(269
)
(526
)
91
259
105
(1,017
)
(1,099
)
(653
)
(60
)
80
(33
)
4,382
5,400
14,545
(4,308
)
(1,039
)
$
853
$
489
$
4,095
Table of Contents
Years Ended September 30,
2003
2002
2001
$
22,318
$
17,478
$
13,027
844
1,961
2,408
591
471
407
198
487
1,067
1,773
1,630
1,283
831
1,011
544
4,156
3,291
2,193
30,711
26,329
20,929
(30,711
)
(26,329
)
(20,929
)
(151
)
$
(151
)
$
$
Table of Contents
Table of Contents
Options Outstanding
Weighted
Shares
Number
Average
Available for
of
Exercise Price
Grant
Shares
Per Share
1,124,332
5,303,271
$
42.69
(4,662,574
)
4,662,574
12.59
(607,987
)
1.06
1,446,975
(1,446,975
)
50.05
2,400,000
308,733
7,910,883
27.02
(2,233,850
)
2,233,850
12.52
(764,504
)
4.91
2,139,379
(2,139,379
)
52.67
1,500,000
1,714,262
7,240,850
17.30
(2,195,300
)
2,195,300
15.24
(1,423,550
)
7.60
504,771
(504,771
)
25.65
1,155,000
1,178,733
7,507,829
$
17.92
Years Ended September 30,
2003
2002
2001
$
7.46
$
10.06
$
10.54
$
15.24
$
12.52
$
12.40
N/A
N/A
$
27.89
N/A
N/A
$
29.42
Table of Contents
Options Outstanding
Options Exercisable
Weighted Average
Remaining
Weighted Average
Weighted
Range of
Number of
Contractual Life
Exercise Price
Number of
Average Price
Exercise Prices
Shares
(in years)
Per Share
Shares
Per Share
361,689
5.36
$
2.36
345,145
$
2.24
2,944,684
7.95
$
9.48
2,370,675
$
9.20
1,783,742
9.23
$
14.17
429,352
$
13.69
1,568,350
8.25
$
22.92
656,849
$
26.95
849,364
6.68
$
52.48
698,248
$
53.51
7,507,829
8.05
$
17.92
4,500,269
$
18.56
Stock Option Plan
Years Ended September 30,
Years Ended September 30,
Employee Stock Purchase Plan
2003
2002
2001
2003
2002
2001
2.33
%
4.12
%
4.81
%
1.23
%
2.57
%
4.49
%
4.0 years
4.3 years
4.0 years
0.5 years
0.5 years
0.5 years
49.95
%
99.41
%
138.79
%
72.93
%
99.41
%
138.79
%
11.
Commitments and Contingencies
Table of Contents
Gross
Net
Lease
Sublease
Lease
Payments
Income
Payments
$
6,062
$
3,335
$
2,727
5,622
3,451
2,171
5,702
3,567
2,135
5,597
3,571
2,026
5,516
3,571
1,945
22,180
14,710
7,470
$
50,679
$
32,205
$
18,474
Table of Contents
12.
Related Party Transactions
13.
Employee Benefit Plans
14.
Geographic Sales and Significant
Customers
Years Ended September 30,
2003
2002
2001
$
75,409
$
73,458
$
72,406
16,880
13,990
10,004
23,606
20,818
24,957
$
115,895
$
108,266
$
107,367
15.
Quarterly Results of Operations
Table of Contents
Three Months Ended
Sept. 30,
June 30,
March 31,
Dec. 31,
Sept. 30,
June 30,
March 31,
Dec. 31,
2003
2003
2003
2002
2002
2002
2002
2001
$
23,048
$
21,310
$
20,338
$
19,501
$
20,376
$
20,750
$
20,782
$
20,658
8,585
7,879
7,679
7,555
6,699
6,315
6,319
6,367
31,633
29,189
28,017
27,056
27,075
27,065
27,101
27,025
5,086
4,491
4,203
4,057
4,046
5,081
5,151
5,963
2,342
2,290
2,275
2,161
2,360
2,504
2,680
2,694
7,428
6,781
6,478
6,218
6,406
7,585
7,831
8,657
24,205
22,408
21,539
20,838
20,669
19,480
19,270
18,368
14,045
13,593
13,061
12,759
13,062
13,256
11,823
12,440
5,155
4,810
4,886
4,395
4,312
4,785
4,751
4,137
2,964
2,800
2,900
3,350
3,427
3,049
4,524
4,045
503
2,771
6
6
5
66
90
106
114
133
22,170
21,209
20,852
20,570
21,394
23,967
21,212
20,755
2,035
1,199
687
268
(725
)
(4,487
)
(1,942
)
(2,387
)
(375
)
352
312
462
355
287
273
505
1,660
1,551
999
730
(370
)
(4,200
)
(1,669
)
(1,882
)
307
152
184
210
53
146
101
189
$
1,353
$
1,399
$
815
$
520
$
(423
)
$
(4,346
)
$
(1,770
)
$
(2,071
)
$
.05
$
.05
$
.03
$
.02
$
(.02
)
$
(.17
)
$
(.07
)
$
(.08
)
27,125
26,638
26,164
25,883
25,670
25,537
25,203
24,883
$
.05
$
.05
$
.03
$
.02
$
(.02
)
$
(.17
)
$
(.07
)
$
(.08
)
29,521
28,467
27,494
26,935
25,670
25,537
25,203
24,883
(1)
During the fourth quarter of fiscal year 2003,
the Company reversed a $250 reserve initially established for an
amount considered potentially uncollectible. The amount was
recovered pursuant to a settlement agreement and the reversal of
the reserve was recorded as a credit to general and
administrative expenses.
Table of Contents
Balance at
Charges to
Balance
beginning
costs and
Charges to
at end
Description
of period
expenses
other accounts
Deductions
of period
(in thousands)
$
3,836
$
(650
)
$
$
(1,662
)
$
1,524
$
1,616
$
347
$
745
$
(1,183
)
$
1,525
$
26,329
$
$
4,382
$
$
30,711
$
3,914
$
2,889
$
$
(2,967
)
$
3,836
$
2,331
$
3,792
$
384
$
(4,891
)
$
1,616
$
20,929
$
$
5,400
$
$
26,329
$
858
$
5,799
$
$
(2,743
)
$
3,914
$
808
$
9,511
$
277
$
(8,265
)
$
2,331
$
4,884
$
$
16,045
$
$
20,929
Table of Contents
Item 9.
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
PART III
Item 10. | Directors And Executive Officers of the Registrant |
The following table sets forth certain
information with respect to our executive officers and directors
as of October 29, 2003:
Name
Age
Position
52
President, Chief Executive Officer and Director
50
Senior Vice President of Finance and Chief
Financial Officer
45
Senior Vice President of Business Operations and
Vice President of Global Services
44
Senior Vice President of Worldwide Sales
43
Senior Vice President of Marketing and Business
Development
46
Vice President, General Counsel and Corporate
Secretary
43
Senior Vice President of Product Development
50
Director
43
Director
61
Chairman of the Board of Directors
56
Director
42
Director
55
Director
(1) | Member of the Audit Committee. |
(2) | Member of the Compensation Committee. |
(3) | Member of the Corporate Governance Committee. |
59
John McAdam has served as our President, Chief Executive Officer and a director since July 2000. Prior to joining us, Mr. McAdam served as General Manager of the Web server sales business at International Business Machines Corporation from September 1999 to July 2000. From January 1995 until August 1999, Mr. McAdam served as the President and Chief Operating Officer of Sequent Computer Systems, Inc., a manufacturer of high-end open systems, which was sold to International Business Machines Corporation in September 1999. Mr. McAdam holds a B.S. in Computer Science from the University of Glasgow, Scotland.
Steven B. Coburn has served as our Senior Vice President of Finance and Chief Financial Officer since May 2001. Prior to joining us, Mr. Coburn worked at TeleTech Holdings, Inc., a customer relationship management services company as Chief Financial Officer and Senior Vice-President from October 1995 until August 1999 where he oversaw the finance, business development, legal, and investor relations functions of the company. Mr. Coburn holds a B.A. in Accounting from Southern Illinois University.
Edward J. Eames has served as our Senior Vice President of Business Operations and Vice President of Global Services since January 2001 and as our Vice President of Professional Services from October 2000 to January 2001. From September 1999 to October 2000, Mr. Eames served as Vice President of e-Business Services for International Business Machines Corporation. From June 1992 to September 1999, Mr. Eames served as the European Services Director and the Worldwide Vice President of Customer Service for Sequent Computer Systems, Inc., a manufacturer of high-end open systems. Mr. Eames holds a Higher National Diploma in Business Studies from Bristol Polytechnic and in 1994 completed the Senior Executive Program at the London Business School.
M. Thomas Hull joined us as our Senior Vice President of Worldwide Sales on October 20, 2003. Prior to joining us, Mr. Hull serviced as President and Chief Executive Officer of Picture IQ Corporation from April 2001 to October 2003. From September 1998 through April 1999, he served as Vice President of Corporate Sales for Visio Corporation. From April 1999 to January 2000, he served as Senior Vice President of Worldwide Sales for Visio Corporation through its acquisition by Microsoft Corporation in January 2000. From January 2000 through July 2000, Mr. Hull continued to oversee sales of the Visio product set for Microsoft Corporation. He holds a B.S. in Electrical Engineering from the University of Washington.
Jeff Pancottine has served as our Senior Vice President of Marketing and Business Development since October 2000. Prior to joining us, Mr. Pancottine served as Senior Vice President of Sales and Marketing for the Media Systems Division of Real Networks, Inc., from April 2000 to October 2000. Prior to that, Mr. Pancottine was the Vice President of Business Marketing at Intel Corporation, from November 1999 to April 2000. From June 1997 to November 1999, Mr. Pancottine held the position of Vice President of Global Marketing at Sequent Computer Systems, Inc. Jeff holds a Master of Engineering in Computer Science from Cornell University, and a B.S. in Computer Science from the University of California at Riverside.
Joann M. Reiter has served as our Vice President and General Counsel since April 2000, and as General Counsel from April 1998 through April 2000. She has served as our Corporate Secretary since June 1999. Prior to joining us, Ms. Reiter served as Director of Operations for Excell Data Corporation, an information technology consulting and system integration services company from September 1997 through March 1998. From September 1992 through September 1997, she served as Director of Legal Services and Business Development for CellPro, Inc. a medical device manufacturer. She holds a J.D. from the University of Washington and is a member of the Washington State Bar Association.
Jeff Stockdale has served as our Senior Vice President of Product Development since June 2003 and as Vice President of Platform Technology from September 2001 to June 2003. Mr. Stockdale served as our Director of Platform Technology from May 1999 to September 2001. Prior to joining us, Mr. Stockdale served as Senior Engineering Manager for Adaptec Inc. (formerly Cogent Data Technologies Inc.), an Ethernet networking company, from 1993 to 1999. Mr. Stockdale holds a B.S. in Electrical Engineering from Washington State University.
Glenn T. Edens was appointed as one of our directors in August 2003. He is currently Vice President, Research at Sun Microsystems, Inc. From May 2001 to September 2002, Mr. Edens served as Vice President and Chief of Technology Strategy for the Hewlett Packard Company. From November 1998 to June 2001, he
60
Keith D. Grinstein has served as one of our directors since December 1999. He also serves as board chair for Coinstar, Inc., a coin counting machine company, and as lead outside director for Nextera, Inc. an economics-consulting firm. Mr. Grinstein is a partner of Second Avenue Partners, LLC, a venture capital fund. Mr. Grinsteins past experience includes serving as President, Chief Executive Officer and Vice Chair of Nextel International Inc., and as President and Chief Executive Officer of the Aviation Communications Division of AT&T Wireless Services Inc. Mr. Grinstein holds a B.A. from Yale University and a J.D. from Georgetown University.
Karl D. Guelich has served as Chairman of the Board of Directors since January 2003 and as one of our directors since June 1999. Mr. Guelich has been in private practice as a certified public accountant since his retirement from Ernst & Young LLP in 1993, where he served as the Area Managing Partner for the Pacific Northwest offices headquartered in Seattle from October 1986 to November 1992. Mr. Guelich holds a B.S. in Accounting from Arizona State University.
Alan J. Higginson has served as one of our directors since May 1996. Mr. Higginson has been the President and Chief Executive Officer of Hubspan, Inc., an e-business infrastructure provider, since August 2001. From November 1995 to November 1998, Mr. Higginson served as President of Atrieva Corporation, a provider of advanced data backup and retrieval technology. Mr. Higginson holds a B.S. in Commerce and an M.B.A. from the University of Santa Clara.
Jeffrey S. Hussey co-founded the Company in February 1996 and has served as one of our directors since that time. From February 1996 through August 2002, Mr. Hussey was also Chairman of the Board, and from February 1996 to July 2000, our Chief Executive Officer and President. He served as our Chief Strategist from July 2000 through October 2001 and as our treasurer from February 1996 to March 1999. Mr. Hussey holds a B.A. in Finance from Seattle Pacific University and an M.B.A. from the University of Washington.
Rich Malone was appointed as one of our directors in August 2003. Mr. Malone has been the Chief Information Officer of Edward Jones Investments Inc. since 1979, when he joined Edward Jones Investments as a General Principal. In 1985, he became a member of the management committee of Edward Jones Investments. Mr. Malone is currently a member of the BITS Advisory Group, the Xerox Executive Advisory Forum and serves on the Technology Advisory Committee at Arizona State University.
There are no family relationships among any of the Companys directors or executive officers.
Additional information called for by Item 10 of this Part III is included in our Proxy Statement relating to our annual meeting of shareholders and is incorporated herein by reference. The information appears in the Proxy Statement under the captions Board of Directors and Executive Compensation. Such Proxy Statement will be filed within 120 days of our last fiscal year ended September 30, 2003.
61
Item 11. | Executive Compensation |
The following tables and descriptive materials
set forth information concerning compensation earned for
services rendered to the Company by (a) the Chief Executive
Officer of the Company, the CEO, and (b) the Companys
four other most highly compensated executive officers who were
serving as executive officers of the Company at the end of
fiscal year 2003, and (c) one executive officer of the
Company who resigned during fiscal year 2003. We refer to these
executive officers and former executive officer collectively,
together with the CEO, as the Named Executive Officers.
Long Term
Annual Compensation
Compensation
Other Annual
Securities
All Other
Bonus(1)
Compensation
Underlying
Compensation(2)
Name and Principal Position
Year
Salary ($)
($)
($)
Options(#)
($)
2003
$
446,046
$
386,065
$
160,000
$
789
President, Chief
2002
$
424,000
$
320,473
$
200,000
$
789
Executive Officer
2001
$
400,000
$
196,693
$
1,102,629
(3)
745,000
$
151,860
2003
$
265,000
$
181,093
$
55,000
$
3,189
Senior VP and Chief
2002
$
229,455
$
162,525
$
70,000
$
189
Financial Officer
2001
$
77,596
$
50,000
$
200,000
$
79
2003
$
301,791
$
137,892
$
55,000
$
3,698
Senior VP of Sales
2002
$
222,600
$
243,215
$
70,000
$
3,789
and Services
2001
$
211,154
$
185,002
$
107,500
$
3,547
2003
$
292,300
$
202,525
$
55,000
$
3,789
Senior VP of Marketing
2002
$
212,000
$
235,014
$
70,000
$
3,789
and Business Development
2001
$
188,718
$
249,240
(5)
$
300,000
$
3,526
2003
$
222,600
$
154,426
$
55,000
$
3,789
Senior VP of Business
2002
$
212,000
$
128,189
$
70,000
$
6,695
Operations and VP of
2001
$
191,250
$
98,677
$
205,000
$
526
Global Services
2003
$
169,441
$
41,695
$
55,000
$
3,789
VP and General Counsel
2002
$
171,720
$
34,611
$
50,000
$
3,789
2001
$
154,000
$
11,425
$
40,000
$
3,547
(1) | Includes bonus amounts earned during the fiscal year. |
(2) | The amounts in this column for fiscal year 2003 include a $3,000 contribution by us to the 401(k) account of each of Messrs. Coburn, Goldman, Pancottine, Eames and Ms. Reiter and a premium payment toward a term life insurance policy of $189 for each of Messrs. McAdam, Coburn, Pancottine, Eames and Ms. Reiter, and of $173 for Mr. Goldman. A stipend of $600 for Internet service provider fees is also included for Messrs. McAdam, Pancottine, Eames and Ms. Reiter, and $525 for Mr. Goldman. The amounts in this column for fiscal year 2002 include a $3,000 contribution by us to the 401(k) account of each of Messrs. Goldman, Pancottine, Eames and Ms. Reiter and a premium payment toward a term life insurance policy of $189 for each of the named executive officers. A stipend of $600 for Internet service provider fees is also included for Messrs. McAdam, Goldman, Pancottine, Eames and Ms. Reiter. In addition, the amount shown for Mr. Eames includes a reimbursement of $2,906 for moving expenses. The amounts in this column for fiscal year 2001 include a $3,000 contribution by us to the 401(k) account of each of Messrs. Goldman, Pancottine, and Ms. Reiter and a premium payment toward a term life insurance policy of $247 for Messrs. McAdam, Goldman and Ms. Reiter, of $226 for Mr. Eames and Mr. Pancottine and of $79 for Mr. Coburn. A stipend of $300 for Internet service provider fees is also included for Messrs. McAdam, Goldman, Pancottine, Eames and Ms. Reiter. In addition, the amount listed for Mr. McAdam includes a reimbursement of $151,313 for moving expenses. |
(3) | Includes a reimbursement of $1,102,629 for taxes related to the exercise of a non-qualified stock option. |
(4) | Mr Goldman resigned from the Company in August of 2003. |
(5) | Includes a $50,000 signing bonus. |
62
Options Grants in Last Fiscal Year
The following table sets forth information
concerning the awards of options to purchase shares of our
common stock made to the Named Executive Officers during fiscal
year 2003:
Individual Grants
Potential Realizable Value at
Number of
Percent of
Assumed Annual Rates of
Securities
Total Options
Exercise
Stock Price Appreciation for
Underlying
Granted to
or Base
Option Term(2)
Options
Employees in
Price
Expiration
Name
Granted (#)
Fiscal Year(1)
($/Sh)
Date
5%($)
10%($)
160,000(3)
7.3%
$
14.64
5/8/2013
$
1,473,600
$
3,732,800
55,000(3)
2.5%
$
14.64
5/8/2013
$
506,550
$
1,283,150
55,000(3)
2.5%
$
14.64
5/8/2013
$
506,550
$
1,283,150
55,000(3)
2.5%
$
14.64
5/8/2013
$
506,550
$
1,283,150
55,000(3)
2.5%
$
14.64
5/8/2013
$
506,550
$
1,283,150
55,000(3)
2.5%
$
14.64
5/8/2013
$
506,550
$
1,283,150
(1) | A total of 2,195,300 stock options were granted in fiscal year 2003 by the Company to approximately 500 employees including options granted to executive officers. |
(2) | Potential gains are net of exercise price but before taxes associated with exercise. These assumed rates of appreciation are provided in order to comply with requirements of the SEC, and do not represent the Companys expectation as to the actual rate of appreciation of our common stock. The actual value of the options will depend on the performance of our common stock, and may be greater or less than the amounts shown. |
(3) | Options vest in equal monthly increments over the two years following the date of grant. |
(4) | Mr. Goldman resigned from the Company in August of 2003. |
Aggregate Exercise of Stock Options in Fiscal Year 2003 and Fiscal Year-End Option Values
The following table sets forth information concerning the exercise of stock options during fiscal year 2003 by each of the Named Executive Officers and the number and value of unexercised options held by those officers at the end of fiscal year 2003:
Number of Securities | Value of Unexercised | |||||||||||||||||||||||
Underlying Unexercised | In-the-Money | |||||||||||||||||||||||
Options at | Options at | |||||||||||||||||||||||
September 30, 2003 (#) | September 30, 2003 ($)(2) | |||||||||||||||||||||||
Shares | Value |
|
|
|||||||||||||||||||||
Acquired on | Realized | Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||||||||||||
Name | Exercise (#) | ($)(1) | (#) | (#) | ($) | ($) | ||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
John McAdam
|
300,000 | $ | 3,047,454 | 604,999 | 200,001 | $ | 6,549,878 | $ | 1,154,672 | |||||||||||||||
Steven Coburn
|
| | 172,498 | 152,502 | $ | 1,181,754 | $ | 943,646 | ||||||||||||||||
Jeff Pancottine
|
100,000 | $ | 734,768 | 201,665 | 123,335 | $ | 421,092 | $ | 400,308 | |||||||||||||||
Edward Eames
|
27,120 | $ | 276,849 | 194,752 | 88,128 | $ | 1,285,378 | $ | 400,308 | |||||||||||||||
Joann Reiter
|
| | 85,416 | 62,501 | $ | 785,215 | $ | 346,172 | ||||||||||||||||
Steven Goldman(3)
|
151,063 | $ | 1,797,813 | 52,395 | | $ | 489,600 | |
(1) | Based on the market value of our common stock at the exercise date, less the exercise price, multiplied by the number of shares acquired upon exercise. |
(2) | Based on the $19.24 per share market value of our common stock at September 30, 2003, less the exercise price, multiplied by the number of shares underlying the option. |
(3) | Mr. Goldman resigned from the Company in August 2003. |
63
Employment Contracts, Termination of Employment and Change in Control Arrangements
Each of the named executive officers was party to an individual compensation plan, which set forth the base salary and target bonus for each such individual for fiscal year 2003. The target bonuses were set at the percentage of base salary set forth below and were payable subject to achievement of certain individual and company-wide performance metrics during fiscal year 2003.
We list below a chart showing these
executives base salaries and target bonuses for fiscal
year 2003, assuming the specified performance goals were met.
Executive
Base Salary(1)
Target Bonus
$
445,200
75% of base salary
$
265,000
60% of base salary
$
292,300
60% of base salary
$
222,600
60% of base salary
$
180,306
20% of base salary
$
310,000
60% of base salary
(1) | Actual base salary earned in fiscal year 2003 is set forth above in this Item 11. |
(2) | Mr. Goldman resigned from the Company in August of 2003. |
Option Grant Change in Control Provisions
Under the terms of our stock incentive plans, stock option awards are generally subject to special provisions upon the occurrence of a defined change in control transaction. Under the plans, all or a certain portion of outstanding unvested stock options held by all participants under the plans, including our executive officers, will become fully vested upon a change in control of the Company.
Messrs. McAdam, Coburn, Pancottine and Eames and Ms. Reiter have unvested stock options under our 1998 Equity Incentive Plan, or the 1998 Plan, which provides that upon certain changes in control of the Company, 50% of all outstanding and unvested options under the 1998 Plan will accelerate and vest, unless assumed or substituted by the acquiring entity.
Mr. Coburn has unvested stock options under a non-qualified stock option plan, which provides that upon certain changes in control of the Company, all outstanding and unvested options under the plan will fully vest.
Mr. Pancottine has unvested stock options under a non-qualified stock option plan, which provides that upon certain changes in control of the Company, 50% of all outstanding and unvested options under the plan will accelerate and vest.
Mr. Eames has unvested stock options under our Amended and Restated 1996 Stock Option Plan and under our 2000 Employee Equity Incentive Plan. Mr. Eames options provide that upon a change in control of the Company, 50% of Mr. Eames outstanding and unvested options will accelerate and vest.
As of the date of his resignation from the Company, Mr. Goldman had unvested options under the 1998 Plan, which provides that upon certain changes in control of the Company, 50% of all outstanding and unvested options under the 1998 Plan will accelerate and vest, unless assumed or substituted by the acquiring entity. All of Mr. Goldmans unvested option were canceled on his resignation.
Compensation of Directors
Directors of the Company are paid $35,000 annually for their services as members of the Board of Directors. Members of the audit committee, compensation committee and Governance committee are paid an additional $8,000, $2,000 and $1,000, respectively for each year of service. The Chairman receives an
64
Beginning fiscal year 2001, all non-employee directors who also serve on a board committee receive options to purchase 15,000 shares of Common Stock on the day of the Companys annual meeting. These options are fully vested and exercisable on the date of grant, and have an exercise price equal to the closing price of the Company stock on the date of grant. Messrs. Higginson, Guelich, and Grinstein were each granted options to purchase 15,000 shares of common stock under the Companys 1998 Equity Incentive Plan (the 1998 Plan) in April 2001, May 2002 and February 2003 at exercise prices of $8.10, $11.12 and $12.79, respectively. Messrs. Edens and Malone were each granted options to purchase 15,000 shares of common stock under the 1998 plan in August 2003 at an Exercise Price of $17.92.
Additional information called for by Item 11 of this Part III is included in our Proxy Statement relating to our annual meeting of shareholders and is incorporated herein by reference. The information appears in the Proxy Statement under the captions Board of Directors and Executive Compensation. Such Proxy Statement will be filed within 120 days of our last fiscal year ended September 30, 2003.
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The following table sets forth information
regarding the beneficial ownership of our common stock as of
October 28, 2003 by (a) each person known to the
Company to own beneficially more than 5% of outstanding shares
of our common stock on October 28, 2003, (b) each
director and nominee for director of the Company, (c) the
Named Executive Officers and (d) all directors and
executive officers as a group. The information in this table is
based solely on statements in filings with the SEC or other
reliable information.
Number of
Shares of
Common Stock
Percent of
Beneficially
Common Stock
Name and Address(1)
Owned(2)
Outstanding(2)
1,747,681
6.3
%
One Mellon Center
Pittsburgh, Pennsylvania 15258
1,470,800
5.3
%
114 West 47th Street, Suite 1926
New York, NY 10036
705,610
2.6
%
196,457
*
229,790
*
215,642
*
107,979
*
34,255
*
42,500
*
2,209,560
8.0
%
121,500
*
58,500
*
15,000
*
15,000
*
4,041,987
14.7
%
* | less than 1%. |
(1) | Unless otherwise indicated, the address of each of the named individuals is c/o F5 Networks, Inc., 401 Elliott Avenue West, Seattle, Washington 98119. |
65
(2) | Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership within 60 days after October 28, 2003. Except as otherwise noted, each person or entity has sole voting and investment power with respect to the shares shown. | |
(3) | The holding shown is as reported by Mellon Financial Corporation in a Schedule 13G filed on January 21, 2003 as the aggregate amount beneficially owned by each reporting person. Mellon Financial Corporation has reported sole voting power over 1,428,381 shares, shared voting power over 305,500 shares, sole dispositive power over 1,440,281 shares, and shared dispositive power over 307,400 shares. | |
(4) | The holding shown is as reported by Kern Capital Management in a Schedule 13G/A filed on April 10, 2003. Kern Capital Management has reported sole voting and dispositive power over all 1,470,800 shares. | |
(5) | Includes 649,999 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. | |
(6) | Includes 196,457 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. | |
(7) | Includes 229,790 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. | |
(8) | Includes 214,753 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. | |
(9) | Includes 98,541 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(10) | Includes 32,395 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. Mr. Goldman resigned in August 2003. |
(11) | Includes 42,500 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(12) | Does not include 350,000 shares held by Brian Dixon as trustee of the Hussey Family Trust fbo Mr. Husseys minor child. Mr. Hussey disclaims any beneficial ownership of the shares held by the trust. Includes 92,166 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(13) | Includes 121,500 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(14) | Includes 52,500 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(15) | Includes 15,000 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(16) | Includes 15,000 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
(17) | Includes 1,847,517 shares issuable upon exercise of options exercisable within 60 days of October 28, 2003. |
66
Equity Compensation Plan Information
The following table provides information as of
September 30, 2003 with respect to the shares of the
Companys common stock that may be issued under the
Companys existing equity compensation plans.
Column C
Number of securities
Column A
remaining available for
Column B
future issuance under equity
Number of securities
compensation plans (total
to be issued upon
Weighted-average
securities authorized but
exercise of
exercise price of
unissued under the plans,
Plan Category
outstanding options
outstanding options
less Column A)
4,665,019
(2)
$
17.25
(2)
684,117
(2)
3,154,142
$
18.85
494,616
7,819,191
$
17.92
1,178,733
(1) | Consists of the Amended and Restated 1996 Stock Option Plan, 1998 Equity Incentive Plan, Non-Employee Director Stock Option Plan and the 1999 Employee Stock Purchase Plan. |
(2) | Does not include a weighted average purchase price for 1999 Employee Stock Purchase Plan. The number of shares and the purchase price for shares available for purchase under the 1999 Employee Stock Purchase Plan in the purchase period in progress on September 30, 2003 could not be determined as of September 30, 2003. |
(3) | Consists of the 2000 Employee Equity Incentive Plan, uRoam Acquisition Equity Incentive Plan and executive new hire grants. |
Description of Plans not Approved by Security Holders |
2000 Employee Equity Incentive Plan. In July 2000, the Companys board of directors adopted the 2000 Employee Equity Incentive Plan, or the 2000 Plan, which provides for discretionary grants of non-qualified stock options, stock purchase awards and stock bonuses for employees and other service providers. A total of 3,500,000 shares of common stock have been reserved for issuance under the 2000 Plan. As of September 30, 2003 there were options to purchase 2,514,142 shares outstanding and 484,616 shares available for awards under the 2000 plan.
All options under the 2000 Plan expire 10 years from the grant date and each option will have an exercise price of not less than the fair market value of the Companys stock on the date the option is granted. The options granted under the 2000 Plan may be exercisable immediately or may vest and become exercisable in periodic installments. In the event of the termination of an optionees employment with the Company, vesting of options will stop and the optionee may exercise vested options for a specified period of time after the termination. Upon certain changes in control of the Company, 50% of all outstanding and unvested options or stock awards under the 2000 Plan will vest and become immediately exercisable, unless assumed or substituted by the acquiring entity.
uRoam Plan. In July 2003, the Companys board of directors adopted the uRoam Acquisition Equity Incentive Plan, or uRoam Plan, in connection with the hiring of the former employees of uRoam, Inc. The plan provides for discretionary grants of non-qualified and incentive stock options, stock purchase awards and stock bonuses. The board of directors approved 250,000 shares of common stock to be reserved for issuance under the uRoam Plan. As of September 30, 2003 there were options to purchase 240,000 shares outstanding and 10,000 shares available for awards under the uRoam Plan.
All options under the uRoam Plan expire 10 years from the grant date. Incentive stock options will have an exercise price of not less than the fair market value of the Companys stock on the date the option is granted and non-qualified stock options will have an exercise price of not less than 85% of the fair market
67
The options granted under the uRoam Plan may be exercisable immediately or may vest and become exercisable in periodic installments. In the event of the termination of an optionees employment with the Company, vesting of options will stop and the optionee may exercise vested options for a specified period of time after the termination. Upon certain changes in control of the Company, 50% of all outstanding and unvested options or stock awards under the uRoam Plan will vest and become immediately exercisable, unless assumed or substituted by the acquiring entity.
New Hire Grants. In October 2000, the Companys board of directors adopted a non-qualified stock option plan, or the Pancottine Plan, in connection with the hiring of Jeff Pancottine, the Companys Senior Vice President of Marketing and Business Development. The Pancottine Plan provides for a grant of 200,000 non-qualified stock options for Mr. Pancottine. As of September 30, 2003, no remaining shares are available for grant under this plan.
In May 2001, the Companys board of directors adopted a non-qualified stock option plan, or the Coburn Plan, in connection with the hiring of Steve Coburn, the Companys Vice President of Finance and Chief Financial Officer. The Coburn Plan provides for a grant of 200,000 non-qualified stock options for Mr. Coburn. As of September 30, 2003, no remaining shares are available for grant under this plan.
All options under these plans expire 10 years from the grant date and each plan specifies the exercise price of options granted under the plan. The options granted under the plans vest and become exercisable in periodic installments over a period of up to 4 years from the grant date. In the event of the termination of an optionees employment with the Company, vesting of options will stop and the optionee may exercise vested options for a specified period of time after the termination. Upon certain changes in control of the Company, 100% of all outstanding and unvested options under the Coburn Plan, and 50% or all outstanding and unvested options under the Pancottine Plan, will vest and become immediately exercisable.
Item 13. | Certain Relationships and Related Party Transactions |
The Company has entered into indemnification agreements with the Companys directors and certain officers for the indemnification of and advancement of expenses to these persons to the fullest extent permitted by law. The Company also intends to enter into these agreements with the Companys future directors and certain future officers.
In October 2000, the Company extended a loan to an executive officer and his wife, in the principal amount of $350,000, in order to facilitate the purchase of a residence in the Seattle area. On March 15, 2002, payments due under the note were extended for a period of one year, as allowed per the terms of the note. This loan was evidenced by a promissory note, the principal of which was payable in three equal installments, together with accrued interest, on March 31, 2002, March 31, 2003, and March 31, 2004, or immediately upon the sale of the residence or termination of the officers employment. Interest accrued on the loan at the rate of 6% per annum. The balance of the loan totaled $240,354 at September 30, 2003. The residence was sold in October 2003 and the loan was repaid in full on October 20, 2003.
The Company believes that the foregoing agreements are in the Companys best interest and were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions between the Company and any of the Companys officers, directors or principal shareholders will be approved in advance by our Audit Committee.
68
Item 14. | Principal Accountant Fees and Services |
The following is a summary of the fees billed to
the Company by PricewaterhouseCoopers LLP for professional
services rendered for the fiscal years ended September 30,
2003 and 2002:
Years Ended September 30,
Fee Category
2003
2002
$
206,500
$
197,202
78,750
21,039
2,000
14,750
$
287,250
$
232,991
Audit Fees. Consists of fees billed for professional services rendered for the audit of the Companys consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Companys consolidated financial statements and are not reported under Audit Fees. These services include accounting consultations in connection with acquisitions, services related to registration statements, and consultations concerning financial accounting and reporting standards.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, customs and duties, mergers and acquisitions, and international tax planning.
PART IV
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) Documents filed as part of this report are as follows:
(1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements included under Item 8 in Part II of this Form 10-K.
(2) Exhibits:
Exhibit | ||||||
Number | Exhibit Description | |||||
|
|
|||||
3.1 | | Second Amended and Restated Articles of Incorporation of the Registration(1) | ||||
3.2 | | Amended and Restated Bylaws of the Registrant(1) | ||||
4.1 | | Specimen Common Stock Certificate(1) | ||||
4.2 | | Form of Senior Indenture(2) | ||||
4.3 | | Form of Subordinated Indenture(2) | ||||
10.1 | | Amended and Restated Office Lease Agreement dated April 3, 2000, between the Company and 401 Elliott West LLC(3) | ||||
10.2 | | Common Stock and Warrant Purchase Agreement dated June 26, 2001 between the Company and Nokia Finance International B.V.(4) | ||||
10.3 | | Investors Rights Agreement dated June 26, 2001 between the Company and Nokia Finance International B.V.(4) | ||||
10.4 | | Sublease Agreement dated March 30, 2001 between the Company and Cell Therapeutics, Inc.(4) |
69
Exhibit
Number
Exhibit Description
10.5
uRoam Acquisition Equity Incentive Plan(5)
10.6
Form of Indemnification Agreement between the
Registrant and each of its directors and certain of its
officers(1)
10.7
1998 Equity Incentive Plan, as amended on
February 13, 2003(6)
10.8
Form of Option Agreement under the 1998 Equity
Incentive Plan(1)
10.9
1999 Employee Stock Purchase Plan(1)
10.10
Amended and Restated Directors Nonqualified
Stock Option Plan(1)
10.11
Form of Option Agreement under the Amended and
Restated Directors Nonqualified Stock Option Plan(1)
10.12
Amended and Restated 1996 Stock Option Plan(1)
10.13
Form of Option Agreement under the Amended and
Restated 1996 Stock Option Plan(1)
10.14
1999 Non-Employee Directors Stock Option
Plan(1)
10.15
Form of Option Agreement under 1999 Non-Employee
Directors Stock Option Plan(1)
10.16
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000(7)
10.17
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000(7)
10.18
2000 Employee Equity Incentive Plan(8)
10.19
Form of Option Agreement under the 2000 Equity
Incentive Plan (9)
10.20
NonQualified Stock Option Agreement between Jeff
Pancottine and the Company dated October 23, 2000(8)
10.21
NonQualified Stock Option Agreement between Steve
Coburn and the Company dated May 29, 2001(9)
10.22*
2003 Compensation Plan Agreement between the
Company and John McAdam dated October 1, 2002
10.23*
2003 Compensation Plan Agreement between the
Company and Steven Coburn dated October 1, 2002
10.24*
2003 Compensation Plan Agreement between the
Company and Jeff Pancottine dated October 1, 2002
10.25*
2003 Compensation Plan Agreement between the
Company and Julian Eames dated October 1, 2002
10.26*
2003 Compensation Plan Agreement between the
Company and Joann Reiter dated October 1, 2002
10.27*
2003 Compensation Plan Agreement between the
Company and Steven Goldman dated October 1, 2002
10.28*
Employment Offer Letter by the Company to Julian
Eames dated November 2, 2000
12.1*
Ratio of Fixed Charges
21.1*
Subsidiaries of the Registrant
23.1*
Consent of PricewaterhouseCoopers LLP,
Independent Auditors
31.1*
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2*
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1*
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* | Filed herewith. |
(1) | Incorporated by reference from Registration Statement on Form S-1, File No. 333-75817. |
(2) | Incorporated by reference from Registration Statement on Form S-3, File No. 333-108826. |
70
(3) | Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. |
(4) | Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. |
(5) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-109895. |
(6) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-104169. |
(7) | Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2000. |
(8) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-51878. |
(9) | Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2001. |
(b) Reports on Form 8-K:
On September 15, 2003, the Company filed a Form 8-K/ A reporting under Item 2. Acquisition or Disposition of Assets, providing the financial statements of uRoam, Inc. and pro forma financial information.
On July 23, 2003, the Company filed quarterly earnings results for the quarter ending June 30, 2003 on Form 8-K, reporting under Item 9. Regulation FD Disclosure.
On July 23, 2003, the Company filed on Form 8-K a press release reporting under Item 2. Acquisition or Disposition of Assets, announcing our purchase of substantially all the assets of uRoam, Inc.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
F5 NETWORKS, INC. |
Dated: October 29, 2003
By: | /s/ JOHN MCADAM |
|
John McAdam | |
Chief Executive Officer and President |
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 Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
|
|
|
||||
By: |
/s/ JOHN MCADAM
John McAdam |
Chief Executive Officer, President, and Director (Principal Executive Officer) | October 29, 2003 | |||
By: |
/s/ STEVEN B. COBURN
Steven B. Coburn |
Senior Vice President, Chief Financial Officer (Principal Finance and Accounting Officer) | October 29, 2003 | |||
By: |
/s/ GLENN T. EDENS
Glenn T. Edens |
Director | October 29, 2003 | |||
By: |
/s/ KEITH D. GRINSTEIN
Keith D. Grinstein |
Director | October 29, 2003 | |||
By: |
/s/ KARL D. GUELICH
Karl D. Guelich |
Director | October 29, 2003 | |||
By: |
/s/ ALAN J. HIGGINSON
Alan J. Higginson |
Director | October 29, 2003 | |||
By: |
/s/ JEFFREY S. HUSSEY
Jeffrey S. Hussey |
Director | October 29, 2003 | |||
By: |
/s/ RICH MALONE
Rich Malone |
Director | October 29, 2003 |
72
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
3.1
Second Amended and Restated Articles of
Incorporation of the Registration(1)
3.2
Amended and Restated Bylaws of the Registrant(1)
4.1
Specimen Common Stock Certificate(1)
4.2
Form of Senior Indenture(2)
4.3
Form of Subordinated Indenture(2)
10.1
Amended and Restated Office Lease Agreement dated
April 3, 2000, between the Company and 401 Elliott West
LLC(3)
10.2
Common Stock and Warrant Purchase Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(4)
10.3
Investors Rights Agreement dated June 26,
2001 between the Company and Nokia Finance International B.V.(4)
10.4
Sublease Agreement dated March 30, 2001 between
the Company and Cell Therapeutics, Inc.(4)
10.5
uRoam Acquisition Equity Incentive Plan(5)
10.6
Form of Indemnification Agreement between the
Registrant and each of its directors and certain of its
officers(1)
10.7
1998 Equity Incentive Plan, as amended on
February 13, 2003(6)
10.8
Form of Option Agreement under the 1998 Equity
Incentive Plan(1)
10.9
1999 Employee Stock Purchase Plan(1)
10.10
Amended and Restated Directors Nonqualified
Stock Option Plan(1)
10.11
Form of Option Agreement under the Amended and
Restated Directors Nonqualified Stock Option Plan(1)
10.12
Amended and Restated 1996 Stock Option Plan(1)
10.13
Form of Option Agreement under the Amended and
Restated 1996 Stock Option Plan(1)
10.14
1999 Non-Employee Directors Stock Option
Plan(1)
10.15
Form of Option Agreement under 1999 Non-Employee
Directors Stock Option Plan(1)
10.16
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000(7)
10.17
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000(7)
10.18
2000 Employee Equity Incentive Plan(8)
10.19
Form of Option Agreement under the 2000 Equity
Incentive Plan (9)
10.20
NonQualified Stock Option Agreement between Jeff
Pancottine and the Company dated October 23, 2000(8)
10.21
NonQualified Stock Option Agreement between Steve
Coburn and the Company dated May 29, 2001(9)
10.22*
2003 Compensation Plan Agreement between the
Company and John McAdam dated October 1, 2002
10.23*
2003 Compensation Plan Agreement between the
Company and Steven Coburn dated October 1, 2002
10.24*
2003 Compensation Plan Agreement between the
Company and Jeff Pancottine dated October 1, 2002
10.25*
2003 Compensation Plan Agreement between the
Company and Julian Eames dated October 1, 2002
10.26*
2003 Compensation Plan Agreement between the
Company and Joann Reiter dated October 1, 2002
73
Exhibit
Number
Exhibit Description
10.27*
2003 Compensation Plan Agreement between the
Company and Steven Goldman dated October 1, 2002
10.28*
Employment Offer Letter by the Company to Julian
Eames dated November 2, 2000
12.1*
Ratio of Fixed Charges
21.1*
Subsidiaries of the Registrant
23.1*
Consent of PricewaterhouseCoopers LLP,
Independent Auditors
31.1*
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2*
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1*
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* | Filed herewith. |
(1) | Incorporated by reference from Registration Statement on Form S-1, File No. 333-75817. |
(2) | Incorporated by reference from Registration Statement on Form S-3, File No. 333-108826. |
(3) | Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. |
(4) | Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. |
(5) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-109895. |
(6) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-104169. |
(7) | Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2000. |
(8) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-51878. |
(9) | Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2001. |
74
Exhibit 10.22
F5 NETWORKS, INC.
JOHN MCADAM
PRESIDENT & CEO
2003 COMPENSATION PLAN
COMPENSATION CATEGORIES
The total compensation package is designed to provide the President & CEO $779,100 in annual income, plus upside earnings potential, according to the following categories:
1. ANNUAL BASE SALARY: Compensation for managing the efforts of the Executive team. $445,200 payable bi-weekly in arrears.
2. INCENTIVE COMPENSATION: Offered to the President & CEO for leading his team to meet their objectives. 50% of the incentive compensation will be based on successfully achieving each quarterly revenue goal. The other 50% of the incentive compensation will be based on achieving each quarterly EBITDA goal. Target annual income from incentive compensation is $333,900 at plan (75% of base salary), plus significant upside for exceeding goals.
PAYMENT TERMS
The incentive compensation will be paid linearly above 80% of targeted goals. (i.e.: 80% of the possible incentive compensation will be paid for revenues at 80% of goal, 90% is paid for revenues at 90% of goal.) There is no limit, however both goals must hit 100% for the accelerator to apply. No incentive compensation will be paid for results less than 80% of goals. If earned, payments will be made quarterly.
EFFECTIVE DATE AND TERM
This plan shall take effect on October 1, 2002 and shall remain in effect until September 30, 2003.
TERMINATION
If the President & CEO's employment terminates prior to the end of the fiscal 2003, he will be eligible to receive incentive compensation payments only through the end of the last full quarter employed.
NOTICES
F5 Networks reserves the right to change, alter or cancel any provision contained within this plan upon written notice to the President & CEO. Nothing in this plan is intended to grant a right to employment for any specific term.
AMIGUITIES AND INCONSISTENCIES
This plan has been carefully considered and is meant to be reasonable and complete. When circumstances occur which require special interpretation, however, it shall be the responsibility of the Compensation Committee to determine the intent of the plan and to render a judgment, which is fair to both the President & CEO, and the company.
ACCEPTANCE OF PLAN AND CONDITIONS
/s/ Karl D. Guelich /s/ John McAdam ------------------------ ------------------------ F5 Networks, Inc. John McAdam President & CEO November 12, 2002 November 12, 2002 ------------------------ ------------------------ Date Date |
Exhibit 10.23
F5 NETWORKS, INC.
STEVE COBURN
SR. VP OF FINANCE & CFO
2003 COMPENSATION PLAN
COMPENSATION CATEGORIES
The total compensation package is designed to provide the Sr. VP of Finance & CFO $421,624 in annual income, plus upside earnings potential, according to the following categories:
1. ANNUAL BASE SALARY: Compensation for managing the efforts of the Finance and Administration teams. $265,000 payable bi-weekly in arrears.
2. INCENTIVE COMPENSATION: Offered to the Sr. VP of Finance & CFO for leading his team to meet their objectives. 50% of the incentive compensation will be based on successfully achieving each quarterly revenue goal. The other 50% of the incentive compensation will be based on achieving each quarterly EBITDA goal. Target annual income from incentive compensation is $156,624 at plan (~60% of base salary), plus significant upside for exceeding goals.
PAYMENT TERMS
The incentive compensation will be paid linearly above 80% of targeted goals. (i.e.: 80% of the possible incentive compensation will be paid for revenues at 80% of goal, 90% is paid for revenues at 90% of goal.) There is no limit, however both goals must hit 100% for the accelerator to apply. No incentive compensation will be paid for results less than 80% of goals. If earned, payments will be made quarterly.
EFFECTIVE DATE AND TERM
This plan shall take effect on October 1, 2002 and shall remain in effect until September 30, 2003.
TERMINATION
If the Sr. VP of Finance & CFO's employment terminates prior to the end of the fiscal 2003, he will be eligible to receive incentive compensation payments only through the end of the last full quarter employed.
NOTICES
F5 Networks reserves the right to change, alter or cancel any provision contained within this plan upon written notice to the Sr. VP of Finance & CFO. Nothing in this plan is intended to grant a right to employment for any specific term.
AMIGUITIES AND INCONSISTENCIES
This plan has been carefully considered and is meant to be reasonable and complete. When circumstances occur which require special interpretation, however, it shall be the responsibility of the CEO and the Compensation Committee to determine the intent of the plan and to render a judgment, which is fair to both the Sr. VP of Finance & CFO, and the company.
ACCEPTANCE OF PLAN AND CONDITIONS
/s/ John McAdam /s/Steve Coburn ------------------------ ------------------------ John McAdam Steve Coburn CEO and President Sr. VP of Finance & CFO November 12, 2002 November 12, 2002 ------------------------ ------------------------ Date Date |
Exhibit 10.24
F5 NETWORKS, INC.
JEFF PANCOTTINE
SR. VP OF MARKETING & BUSINESS DEVELOPMENT
2003 COMPENSATION PLAN
COMPENSATION CATEGORIES
The total compensation package is designed to provide the SR. VP of Marketing & Business Development $467,460 in annual income, plus upside earnings potential, according to the following categories:
1. ANNUAL BASE SALARY: Compensation for managing the efforts of the Marketing and Business Development teams. $292,300 payable bi-weekly in arrears.
2. INCENTIVE COMPENSATION: Offered to the Sr. VP of Marketing & Business Development for leading his team to meet their objectives. 50% of the incentive compensation will be based on successfully achieving each quarterly revenue goal. The other 50% of the incentive compensation will be based on achieving each quarterly EBITDA goal. Target annual income from incentive compensation is $175,160 at plan (60% of base salary), plus significant upside for exceeding goals.
PAYMENT TERMS
The incentive compensation will be paid linearly above 80% of targeted goals. (i.e.: 80% of the possible incentive compensation will be paid for revenues at 80% of goal, 90% is paid for revenues at 90% of goal.) There is no limit, however both goals must hit 100% for the accelerator to apply. No incentive compensation will be paid for results less than 80% of goals. If earned, payments will be made quarterly.
EFFECTIVE DATE AND TERM
This plan shall take effect on October 1, 2002 and shall remain in effect until September 30, 2003.
TERMINATION
If the Sr. VP of Marketing & Business Development's employment terminates prior to the end of the fiscal 2003, he will be eligible to receive incentive compensation payments only through the end of the last full quarter employed.
NOTICES
F5 Networks reserves the right to change, alter or cancel any provision contained within this plan upon written notice to the Sr. VP of Marketing & Business Development. Nothing in this plan is intended to grant a right to employment for any specific term.
AMIGUITIES AND INCONSISTENCIES
This plan has been carefully considered and is meant to be reasonable and complete. When circumstances occur which require special interpretation, however, it shall be the responsibility of the CEO and the Compensation Committee to determine the intent of the plan and to render a judgment, which is fair to both the Sr. VP of Marketing & Business Development, and the company.
ACCEPTANCE OF PLAN AND CONDITIONS
/s/ John McAdam /s/ Jeff Pancottine ------------------------ ------------------------ John McAdam Jeff Pancottine CEO and President Sr. VP of Marketing & Business Development November 12, 2002 November 12, 2002 ------------------------ ------------------------ Date Date |
Exhibit 10.25
F5 NETWORKS, INC.
JULIAN EAMES
SR. VP OF BUSINESS OPERATIONS
2003 COMPENSATION PLAN
COMPENSATION CATEGORIES
The total compensation package is designed to provide the Sr. VP of Business Operations $356,160 in annual income, plus upside earnings potential, according to the following categories:
1. ANNUAL BASE SALARY: Compensation for managing the efforts of the Operations' teams. $222,600 payable bi-weekly in arrears.
2. INCENTIVE COMPENSATION: Offered to the Sr. VP of Business Operations for leading his team to meet their objectives. 50% of the incentive compensation will be based on successfully achieving each quarterly revenue goal. The other 50% of the incentive compensation will be based on achieving each quarterly EBITDA goal. Target annual income from incentive compensation is $133,560 at plan (60% of base salary), plus significant upside for exceeding goals.
PAYMENT TERMS
The incentive compensation will be paid linearly above 80% of targeted goals. (i.e.: 80% of the possible incentive compensation will be paid for revenues at 80% of goal, 90% is paid for revenues at 90% of goal.) There is no limit, however both goals must hit 100% for the accelerator to apply. No incentive compensation will be paid for results less than 80% of goals. If earned, payments will be made quarterly.
EFFECTIVE DATE AND TERM
This plan shall take effect on October 1, 2002 and shall remain in effect until September 30, 2003.
TERMINATION
If the Sr. VP of Business Operations' employment terminates prior to the end of the fiscal 2003, he will be eligible to receive incentive compensation payments only through the end of the last full quarter employed.
NOTICES
F5 Networks reserves the right to change, alter or cancel any provision contained within this plan upon written notice to the Sr. VP of Business Operations. Nothing in this plan is intended to grant a right to employment for any specific term.
AMIGUITIES AND INCONSISTENCIES
This plan has been carefully considered and is meant to be reasonable and complete. When circumstances occur which require special interpretation, however, it shall be the responsibility of the CEO and the Compensation Committee to determine the intent of the plan and to render a judgment, which is fair to both the Sr. VP of Business Operations, and the company.
ACCEPTANCE OF PLAN AND CONDITIONS
/s/ John McAdam /s/ Julian Eames ------------------------ ------------------------ John McAdam Julian Eames CEO and President Sr. VP of Business Operations November 12, 2002 November 12, 2002 ------------------------ ------------------------ Date Date |
Exhibit 10.26
F5 NETWORKS, INC.
JOANN REITER
VP, GENERAL COUNSEL
2003 COMPENSATION PLAN
COMPENSATION CATEGORIES
The total compensation package is designed to provide the VP, General Counsel $216,367 in annual income, plus upside earnings potential, according to the following categories:
1. ANNUAL BASE SALARY: Compensation for managing the efforts of Legal team. $180,306 payable bi-weekly in arrears.
2. INCENTIVE COMPENSATION: Offered to the VP, General Counsel for leading her team to meet their objectives. 50% of the incentive compensation will be based on successfully achieving each quarterly revenue goal. The other 50% of the incentive compensation will be based on achieving each quarterly EBITDA goal. Target annual income from incentive compensation is $36,061 at plan (20% of base salary), plus significant upside for exceeding goals.
PAYMENT TERMS
The incentive compensation will be paid linearly above 80% of targeted goals. (i.e.: 80% of the possible incentive compensation will be paid for revenues at 80% of goal, 90% is paid for revenues at 90% of goal.) There is no limit, however both goals must hit 100% for the accelerator to apply. No incentive compensation will be paid for results less than 80% of goals. If earned, payments will be made quarterly.
EFFECTIVE DATE AND TERM
This plan shall take effect on October 1, 2002 and shall remain in effect until September 30, 2003.
TERMINATION
If the VP, General Counsel's employment terminates prior to the end of the fiscal 2003, she will be eligible to receive incentive compensation payments only through the end of the last full quarter employed.
NOTICES
F5 Networks reserves the right to change, alter or cancel any provision contained within this plan upon written notice to the VP, General Counsel. Nothing in this plan is intended to grant a right to employment for any specific term.
AMIGUITIES AND INCONSISTENCIES
This plan has been carefully considered and is meant to be reasonable and complete. When circumstances occur which require special interpretation, however, it shall be the responsibility of the CEO and the Compensation Committee to determine the intent of the plan and to render a judgment, which is fair to both the VP, General Counsel, and the company.
ACCEPTANCE OF PLAN AND CONDITIONS
/s/John McAdam /s/Joann Reiter -------------------------- -------------------------- John McAdam Joann Reiter CEO and President VP, General Counsel November 12, 2002 November 12, 2002 -------------------------- -------------------------- Date Date |
Exhibit 10.27
F5 NETWORKS, INC.
STEVE GOLDMAN
SR. VP, SALES & SERVICES
2003 COMPENSATION PLAN
COMPENSATION CATEGORIES
The total compensation package is designed to provide the Sr. VP, Sales & Services $490,833 in annual income, plus upside earnings potential, according to the following categories:
1. ANNUAL BASE SALARY: Compensation for managing the efforts of the Sales and Services teams. $310,000 payable bi-weekly in arrears.
2. INCENTIVE COMPENSATION: Offered to the Sr. VP, Sales & Services for leading his team to meet their objectives. 50% of the incentive compensation will be based on successfully achieving each quarterly revenue goal. The other 50% of the incentive compensation will be based on achieving each quarterly EBITDA goal. Target annual income from incentive compensation is $180,833 at plan (~60% of base salary), plus significant upside for exceeding goals.
PAYMENT TERMS
The incentive compensation will be paid linearly above 80% of targeted goals. (i.e.: 80% of the possible incentive compensation will be paid for revenues at 80% of goal, 90% is paid for revenues at 90% of goal.) There is no limit, however both goals must hit 100% for the accelerator to apply. No incentive compensation will be paid for results less than 80% of goals. If earned, payments will be made quarterly.
EFFECTIVE DATE AND TERM
This plan shall take effect on October 1, 2002 and shall remain in effect until September 30, 2003.
TERMINATION
If the Sr. VP, Sales & Services', employment terminates prior to the end of the fiscal 2003, he will be eligible to receive incentive compensation payments only through the end of the last full quarter employed.
NOTICES
F5 Networks reserves the right to change, alter or cancel any provision contained within this plan upon written notice to the Sr. VP, Sales & Services. Nothing in this plan is intended to grant a right to employment for any specific term.
AMIGUITIES AND INCONSISTENCIES
This plan has been carefully considered and is meant to be reasonable and complete. When circumstances occur which require special interpretation, however, it shall be the responsibility of the CEO and the Compensation Committee to determine the intent of the plan and to render a judgment, which is fair to both the Sr. VP, Sales & Services, and the company.
ACCEPTANCE OF PLAN AND CONDITIONS
/s/ John McAdam /s/ Steve Goldman ------------------------ ---------------------------- John McAdam Steve Goldman CEO and President Sr. VP, Sales & Services November 12, 2002 November 12, 2002 ------------------------ ---------------------------- Date Date |
Exhibit 10.28
(F5 NETWORKS LETTERHEAD)
November 02, 2000
Julian Eames
15450 SW Koll Parkway
Beaverton, OR 97006-606
Dear Julian:
I am very pleased to extend to you this offer of employment with F5 Networks. The terms of the offer are as follows:
(1) POSITION
Vice President of Professional Services, reporting to Steve Goldman. In this position you will be responsible for building and managing F5's global professional and managed services business.
(2) SALARY
Your base salary will be $200,000 annually, pro-rated for the period of your employment with F5 during the calendar year. Salary will be paid twice per month.
(3) BONUS
You will be eligible for a performance bonus, payable quarterly, targeted at $120,000 annually, mutually agreed to revenue and profitability objectives.
(4) EQUITY-OPTION GRANT
You will be granted options to purchase 70,000 shares of F5 common stock on your start date. These options will be granted under the Company's Stock Option Plan, contingent upon satisfactory completion of all employee contracts and other employee documentation as required by F5. These options will have an exercise price equal to the closing price of F5's stock on the date of grant, and will vest over a four-year period. If there is a change of control of the company, 50% of your unvested options will vest immediately.
(5) RELOCATION EXPENSES
You will be reimbursed for all reasonable and customary expenses associated with your relocation from Portland to the Seattle area.
(6) BENEFITS
You will be eligible to participate in all F5 benefit plans. F5 Network's plan pays 100% of the medical, dental and vision insurance costs for employees and 80% of the costs of dependent coverage. Your benefits will start on the first day of the month following your hire date. A 401(k) plan is also provided to full-time F5 Networks employees. You may enroll in the 401(k) plan at any time prior to the 1st of the month following your hire date or during any subsequent open enrollment period beginning on January 1 or July 1 of each year. Enclosed is a brief description of these plans in addition to some of the other benefits F5 Networks offers its employees.
November 02, 2000
Your employment with F5 Networks is "at will," entered into voluntarily for an indefinite period of time, and can be terminated at any time for any reason at the discretion of either you or F5, so long as there is no violation of applicable United States federal or state law. Nothing that is said or written anyplace, including this letter, will be construed as a promise of permanent employment or of employment for any particular length of time.
This offer is contingent upon your signing this letter and the attached employee agreement. Please respond to this offer by faxing these signed documents to me at (206) 272-6625.
I am really excited at the prospect of you joining F5. I look forward to you helping us lead the company in a solid growth mode that is certain to result in the enhancement of shareholder value and the reaping of tremendous rewards for you and your family.
Sincerely,
/s/ Jeffrey S. Hussey Jeffrey S. Hussey Chairman |
Acceptance and Acknowledgment
I accept the offer on the terms outlined in this letter to me from F5 Networks Inc., and acknowledge and agree that there are no other oral or implied understandings regarding my employment by F5 Networks.
/s/ Julian Eames Nov 2nd 2000 ---------------------- ------------- Julian Eames Date |
.
.
.
Exhibit 12.1
RATIO OF FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO DATA)
YEARS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------- -------------- ------------ ------------ ------------ Income (loss) before income taxes............. $4,940 $(8,121) $(26,695) $15,755 $(4,344) Fixed Charges : Interest portion of rental expense......... 1,497 1,451 1,592 623 155 ------ ------- -------- ------- ------- Earnings (loss) before fixed charges.......... $6,437 $(6,670) $ (25,103) $16,378 $(4,189) ====== ======== ========== ======= ======== Ratio of earnings to fixed charges (1) 4.30 N/A N/A 26.29 N/A Deficiency of earnings to fixed charges (2)Total N/A $(8,121) $(26,695) N/A $(4,344) |
(1) Ratio of earnings to fixed charges represents the ratio of net income
(loss), before fixed charges and income taxes, to fixed charges and income
taxes, to fixed charges are an allocation of rental charges to approximate
equivalent interest.
(2) Due to the loss we incurred in 1998, 1999, 2001 and 2002, the ratio coverage is less than 1:1. We would have had to have generated additional earnings in the amounts indicated to achieve a ratio of 1:1.
.
.
.
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION OF ORGANIZATION ---------------------------------------- -------------------------------------------------- F5 Networks Australia Pty. Limited Australia F5 Networks SARL France F5 Networks GmbH Germany F5 Networks Hong Kong Limited Hong Kong F5 Networks, Japan K.K. Japan F5 Networks Korea Ltd. Korea F5 Networks Singapore Pte Ltd Singapore F5 Networks Limited United Kingdom |
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos.333-80177, 333-82249, 333-34570, 333-51878, 333-76272, 333-87618, 333-102434, 333-104169, and 333-109895) and in the Registration Statement on Form S-3 (File No. 333-108826) of F5 Networks, Inc., of our report dated October 24, 2003 relating to the consolidated financial statements and financial statement schedule, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Seattle, Washington
October 30, 2003
Exhibit 31.1
CERTIFICATIONS
I, John McAdam, certify that:
1) I have reviewed this annual report on Form 10-K of F5 Networks, Inc.
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: October 29, 2003 /s/ John McAdam ----------------------------------- John McAdam Chief Executive Officer and President |
Exhibit 31.2
CERTIFICATIONS
I, Steven B. Coburn, certify that:
1) I have reviewed this annual report on Form 10-K of F5 Networks, Inc.
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: October 29, 2003 /s/ Steven B. Coburn ---------------------------------- Steven B. Coburn Senior Vice President, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of F5 Networks, Inc. (the "Company") on
Form 10-K for the period ending September 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, John McAdam,
President and Chief Executive Officer and Steven Coburn, Senior Vice President
and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: October 29, 2003 /s/ John McAdam ---------------------------------- John McAdam /s/ Steven B. Coburn ---------------------------------- Steven B. Coburn |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to F5 Networks, Inc., and will be retained by F5 Networks, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.