UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended September 30,
2001
or |
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o
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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
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(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:
Securities registered pursuant to Section 12(g) 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. o
As of December 24, 2001, the aggregate market value of the Registrants Common Stock held by non-affiliates of the Registrant was $419,815,413 based on the closing sales price of the Registrants Common Stock on the Nasdaq National Market.
As of December 24, 2001, the number of shares of the Registrants Common Stock outstanding was 24,992,055.
Portions of the Registrants definitive proxy statement relating to its 2002 annual meeting of shareholders, to be held on March 7, 2002, are incorporated by reference into Part III hereof.
Page 1 of Pages
F5 NETWORKS, INC.
FISCAL YEAR 2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I. | ||||||
Item 1.
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Business | 2 | ||||
Item 2.
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Properties | 13 | ||||
Item 3.
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Legal Proceedings | 13 | ||||
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 Stock and Related Shareholder Matters | 14 | ||||
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 | 30 | ||||
PART III. | ||||||
Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 52 | ||||
Item 10.
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Directors and Executive Officers of the Registrant | 52 | ||||
Item 11.
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Executive Compensation | 52 | ||||
Item 12.
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Security Ownership of Certain Beneficial Owners and Management | 52 | ||||
Item 13.
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Certain Relationships and Related Transactions | 52 | ||||
PART IV. | ||||||
Item 14.
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Exhibits, Financial Statement Schedules and Reports on Form 8-K | 52 | ||||
SIGNATURES | 55 |
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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.
Description of Business
F5 Networks provides integrated products and services to manage, control and optimize Internet traffic and content. Our five core products, the BIG-IP® IP Application Switch & Controller, 3-DNS® Controller, GLOBAL-SITE Controller, EDGE-FX® Cache, and the SEE-IT Network Manager, help manage traffic and content to servers and network devices in a way that maximizes availability and throughput. Our unique iControl Architecture integrates our products together and also allows our customers to integrate them with other third party products. Our solutions address many elements required for successful Internet and Intranet business applications, including high availability, high performance, intelligent load balancing, fault tolerance, security, streamlined manageability, and global data management and content control. By enhancing Internet performance availability and content distribution, our solutions enable our customers and partners to maximize the use of the Internet in their business.
Industry Background
Significant growth in the number of Internet users coupled with the increased availability of powerful new tools and equipment that enable the development, processing and distribution of data across the Internet, has led to a proliferation of Internet-based applications and services, such as e-commerce, e-mail, electronic file transfers and online interactive applications. Recently, increases in the number of Internet users, the use of broadband service, the number of Web sites using sophisticated business applications and the richness of Internet content itself, together with unpredictable traffic, have increased the complexity of Internet service delivery and strained network infrastructures.
An increasing number of businesses rely on the Internet as a fundamental commerce and communication tool. Failure of these businesses to deliver expected availability and performance for their Internet-based applications can result in a significant cost to the organization.
To support the dramatic increases in Internet traffic and complexity, many organizations have aggressively expanded network server capacity. In this environment, organizations often deploy multiple servers in a group, or array, which contains individual application-specific servers or redundant servers that operate together as a virtual large server. Server arrays can reduce single points of failure and be a cost-effective way to increase the potential capacity of the system by providing the flexibility to add additional servers to the array as needed. The practice of deploying server arrays in geographically dispersed sites to help prevent system failure and direct traffic more efficiently is also a growing trend.
Along with their benefits, server arrays and geographically dispersed sites have increased the need for intelligent traffic and content management devices to optimize server availability and performance. Intelligent traffic management devices identify which server, whether local or remote, is best able to handle user requests. They also read and interpret user requests and route those requests to the most responsive server or to servers
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Currently, many available Internet traffic and content management products are extensions of hardware-based switches, which lack the robust functionality required to manage the increasing complexity of requests and responses that characterize business activity on the Internet. These products are typically not designed to address application availability, nor do they meet the manageability and scalability required by organizations that depend on the Internet as a fundamental commerce and communications tool. As a result, we believe they do not measure up to the demands of todays rapidly changing Internet environment.
F5 Solution
F5 is a leading innovator for Internet and e-Business optimization and automation. We believe our products deliver the secure and high-performance Internet traffic and content infrastructure businesses need to succeed.
Our intelligent traffic management products monitor and manage locally and geographically dispersed servers, and intelligently direct traffic to the server best able to handle the user request. Our content management products help ensure new and updated content is replicated uniformly across all servers and is readily accessible to all users. As components of our integrated iControl Architecture, our solutions ensure Internet quality control by providing the following key benefits:
High system availability. Our integrated suite of products works with servers deployed in a redundant server array over a local or wide area network to enhance network performance and reduce single points of failure. Our traffic management products continuously monitor network performance to enable real-time detection of server, application and content degradation or failure. Based on this information, our solutions automatically direct user requests to functioning servers and applications. Our products also enable network administrators to deploy new servers and take individual servers offline for routine maintenance without disrupting service to end users.
Increased performance. Our products provide a significant performance improvement over other current approaches. Our traffic and content management products monitor server and application response time and verify content. This information is used to intelligently direct user requests to the server with the fastest response time. They also read and interpret individual requests and can direct those requests to specific servers, arrays or sites based on predetermined rules defined by network managers. As a complement to these products, our cache servers improve performance by capturing and storing content at points between network servers and end-users, where content can be accessed more quickly. By intelligently directing traffic throughout the network, our solutions reduce server overload conditions that may cause performance degradation.
Cost-effective scalability. Our solutions enable more efficient utilization of existing server capacity by intelligently directing traffic among servers. This capability allows organizations to optimize the capacity of existing servers and, as traffic volume dictates, cost-effectively expand server capacity through incremental additions of relatively low cost servers rather than upgrading to larger, more expensive servers. Our solutions can be used with multiple heterogeneous hardware platforms, allowing organizations to protect their investments in their legacy hardware installations as well as integrate future hardware investments. In addition, strategic deployment of our cache products can reduce the load on network servers and minimize the need to add more expensive production server capacity.
Easier network manageability. Our products collect information that can be used to facilitate network management and planning from a central location. Leveraging our products strategic location in the network, our solutions collect data that is crucial for traffic analysis and apply proprietary trend and analysis tools that synthesize this data so that network managers can forecast network requirements more accurately. In addition,
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Enhanced network control. Our solutions enable organizations to prioritize and arrange network traffic based on specific rules defined by network managers. For example, our products may be configured to direct traffic over the most cost-efficient communication links or, alternatively, to deliver the most rapid response to requests.
Strategy
Our objective is to be the leading provider of integrated Internet traffic and content management solutions designed to optimize network availability and performance. Key components of our strategy to achieve this objective include:
Offer complete secure Internet traffic and content management solutions. We plan to continue expanding our existing suite of products to provide complete Internet traffic and content management solutions. We also intend to continue investing in our professional services group to provide the installation, training and support services required to help our customers optimize their use of our integrated traffic and content management products.
Invest in technology to continue to meet customer needs. Our current technology platform has been designed to quickly and easily expand the features and functionalities of our suite of products and support the development of additional products that address the complex and changing needs of our customers. We intend to maintain our level of investment in research and development to provide our customers with complete secure Internet traffic and content management solutions that meet their needs.
Expand sales channels and geographic scope of sales. We plan to continue to invest in the expansion of our sales channels. In addition to maintaining a strong direct sales force, we intend to further expand our indirect sales channels through leading industry resellers, original equipment manufacturers, systems integrators, Internet service providers and other channel partners. We are also seeking to aggressively develope our international sales capabilities, particularly in selected countries in the European and Asia Pacific markets.
Build and expand relationships with strategic partners. We capitalize on products, technologies and channels that may be available through partners. We currently have OEM relationships with Dell Computer Corporation, Nokia and Enterasys Networks. In addition, we have created significant go-to-market relationships with key independent software vendors (ISVs) such as Microsoft, Oracle, and BEA through our iControl Architecture which enables these partners to incorporate programmatic interfaces to our Internet and content management products in their software programs. We plan to continue to seek relationships with partners that will enable us to increase the market opportunity for our products and technologies.
Leverage our market leadership to continue to build the F5 brand. We intend to continue building brand awareness that positions us as one of the leading providers of intelligent Internet traffic and content management solutions. Our goal is for the F5 brand to be synonymous with superior network performance, high quality customer service and ease of use. To achieve these objectives, we plan to continue using a broad range of marketing programs, including active tradeshow participation, advertising in print publications, direct marketing, high-profile Web events, our Internet site and joint partner marketing programs.
Products and Technology
We have developed the BIG-IP® IP Application Switch & Controller, 3-DNS®, GLOBAL-SITE, the EDGE-FX Cache and the SEE-IT Network Manager as an integrated suite of Internet traffic and content management products that facilitate high performance, high availability and scalable access to network server arrays located at a single site or across multiple, geographically dispersed sites. Our unique iControl Architecture integrates our traffic and content management products, provides an interface between third party solutions and our suite of Internet traffic and content management products through an Application Programming Interface (API), and enables total integration and control of Internet Infrastructure.
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Our traffic management products, the BIG-IP and 3-DNS Controllers run on one of two platforms, our existing Internet protocol (IP) server appliance or our new IP application switch, the BIG-IP 5000. Our content management products, EDGE-FX and GLOBAL-SITE, continue to be delivered on our existing IP server appliances. SEE-IT is a stand-alone software application.
BIG-IP® 5000 is an IP application switch uniquely designed to manage traffic for current and next generation Web services and applications. The BIG-IP 5000 combines the benefits of BIG-IPs performance-leading Layer 7 software capabilities, integrated secure sockets layer (SSL) processing, and high port density (4 gigabit and 24 fast ethernet ports) for scale and economy. The BIG-IP 5000 enables the network infrastructure to accommodate the increasing demands placed upon the network to support complex Web applications, data/ voice/ video convergence, and mobile computing, with vastly simplified management and complete security. The BIG-IP 5000® provides all-in-one Internet traffic management, combining: load balancing, content switching, traffic management, gigabit ethernet switching, SSL acceleration/ Web acceleration and wide area load balancing into a single device that dramatically lowers total cost of ownership and reduces management complexities for enterprises and service providers.
Our ongoing investment in technology is focused
on achieving continuous performance enhancements, increased
functionality, enhanced ease of use and increased product
integration. The following table describes of our current
traffic and content management products.
Product Name
Description
Introduction Date
API (application program interface) for the
distribution, delivery, and control of traffic, content and
applications
June 2001
High performance cache server for fast delivery
of Internet content
August 2000
File replication and synchronization controller
for managing content across geographically dispersed Internet
sites
October 1999
Traffic analysis and network management software
application for BIG-IP and 3-DNS
April 1999
Intelligent load balancer for wide area networks
June 1998
Intelligent load balancer for local area networks
July 1997
IControl API. IControl is an API (application program interface) that offers a complete and cohesive architectural solution for the distribution, delivery, and control of both content and applications. All of our products are designed to be iControl enabled. IControl integrates our products together and also allows integration with third party products. This architecture allows network managers to configure all components in a network infrastructure through a single policy that can be centrally managed. Our most recent version supports two different transport protocols (COBRA and SOAP) to meet the needs of different types of businesses.
EDGE-FX Cache. EDGE-FX is a leading Internet cache server that can be deployed as a standalone device or integrated with our other products. EDGE-FX consists of software loaded on a pre-configured, industry standard hardware platform. EDGE-FX accelerates access to Web content by storing frequently requested data at strategic points in a computer network, making it quickly available to Internet users. As a standalone device, EDGE-FX may be installed in virtually any network infrastructure. Integrated with our
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EDGE-FX also supports a streaming media extention option, which enables support for Real Networks, Microsoft Windows Media or Apple/ Quicktime media types. This option enables the device to provide live or on-demand serving of streaming media. As a media enabled cache product, EDGE-FX is a strategic component in the roll out of private content distribution networks to enterprise customers. EDGE-FX helps enable applications such as corporate communications, travel-less training and other content based uses of the network.
EDGE-FX supports several flexible deployment options to conserve bandwidth and server resources while accelerating content to Internet users.
| Forward Proxy or Transparent Proxy. EDGE-FX can be deployed in front of Web browsers for internal user access. EDGE-FX can be positioned as a forward proxy cache, making it valuable for enterprise Intranets. Instead of sending requests for Web content directly to the origin server, browsers are configured to send requests directly to the cache thereby reducing bandwidth utilization costs. | |
| Reverse Proxy. When deployed in front of Web servers for external user access, EDGE-FX offloads client requests from the Web server, eliminating the danger of server traffic surges and reducing the number or size of servers required. |
Designed for massive scalability, multiple EDGE-FX caches can be managed with the BIG-IP Cache Controller to enable cache farm load balancing, replication of content across multiple caches, and Layer 7 management of cached objects. |
GLOBAL-SITE Controller. GLOBAL-SITE, a content delivery appliance, has been designed to help organizations automate the distribution and synchronization of content and applications to local and geographically dispersed sites. GLOBAL-SITE was developed to work with our other products to intelligently deploy both program and data files to arrays of heterogeneous servers as well as the EDGE-FX Cache. GLOBAL-SITE consists of our proprietary software which is loaded on a pre-configured, industry-standard hardware platform. GLOBAL-SITEs configuration database allows administrators to define standard rules for content deployment as well as accommodate unique content distribution events as needed.
SEE-IT Network Manager. SEE-IT is a software application based on F5s iControl that communicates with F5 products to help improve the management and functionality of an organizations network, thereby driving down the total cost of ownership. SEE-IT uses data collected by F5 products to perform monitoring of the F5 appliances, as well as crucial traffic analysis management functions. By reviewing historical patterns, network administrators can build predictive models and forecast usage, which helps them to intelligently plan and budget for additional server and bandwidth capacity. SEE-IT consists of the following capabilities:
| Real-time monitoring that displays key data on network traffic in easy-to-read graphical illustrations, thereby enabling network administrators to quickly obtain information regarding network and server performance, including data about server status and traffic, number of connections, active and inactive IP addresses and the availability of individual applications. | |
| Forward-looking trend and analysis tools that use the information generated by F5s products to project future network and server needs. Network managers and system administrators can use these |
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tools to create what if? scenarios to help forecast the need for additional servers, interface upgrades and other network capacity requirements. | ||
| Configuration management allows users to assure that configurations and policies are implemented on each of the F5 devices. Users can simply and confidently deploy configuration or policy updates to respond to the data obtained through the monitoring capabilities. | |
| Application level views simplifies the task of understanding the purpose of each piece of networking gear that is deployed. SEE-IT allows users to organize the F5 gear to view the network based on the application they are meant to support. |
3-DNS Controller. 3-DNS is an intelligent wide area traffic management appliance that manages and distributes user requests across wide area networks. 3-DNS consists of our proprietary software, which we load on a pre-configured, industry-standard hardware platform. Like BIG-IP, 3-DNS functions with multiple heterogeneous hardware platforms and supports a wide variety of network protocols, including Web, e-mail, audio, video, database and file transfer protocol, and manages traffic for network devices such as firewalls, cache servers and multimedia servers.
When an end-user request is received from a local domain name server or DNS, 3-DNS collects network information and communicates with each site in the network to determine the site with the fastest response time. 3-DNS, integrated with BIG-IP, sends the request to the BIG-IP at the site. BIG-IP then directs the request to the individual server best able to handle it. Although organizations can deploy a single 3-DNS in their network configuration, multiple 3-DNS Controllers are often deployed within the network to provide redundancy to help ensure network availability and performance for end users. Additional 3-DNS features include:
| Dynamic load balancing optimizes use of available network resources across wide area networks. | |
| User-defined production rules allow organizations to pre-configure traffic distribution decisions according to their specific user requirements. | |
| Secure server protection offers security features for wide area networks similar to those BIG-IP provides for local area networks. |
BIG-IP Controller. BIG-IP is an intelligent local traffic management appliance consisting of our proprietary software on a pre-configured, industry-standard hardware platform. Situated between a networks routers and server array, BIG-IP continuously monitors the array of local servers to ensure application availability and performance and automatically directs user requests to the server best able to handle these requests. By quickly detecting application and server failures, and directing service toward those servers and applications that are functioning properly, BIG-IP is designed to shield users from system failures and provide timely responses to user requests and data flow. BIG-IP offers a comprehensive selection of load balancing algorithms that lets network managers choose a load balancing configuration that best suits their organizations particular needs. In addition, BIG-IP actively queries and checks content received from applications. If a server and application are responding to users requests with incorrect content, BIG-IP redirects requests to those servers and applications that are responding properly, thereby helping to ensure the quality of content.
BIG-IP is compatible with any system that uses the standard Internet communication protocol or IP, and can operate with multiple, heterogeneous hardware platforms. This enables organizations to leverage their existing infrastructure without limiting their options to meet future network needs. BIG-IP supports a wide variety of network protocols, including Web, e-mail, audio, video, database and file transfer protocol. BIG-IP also manages traffic for network devices such as firewalls that prevent unauthorized access to a network system, cache servers that store frequently accessed Web content and multimedia servers. BIG-IPs ability to intelligently distribute traffic across server arrays reduces the need for increasingly larger and more expensive servers to accommodate increases in network traffic. This configuration also reduces the single point of failure inherent with a single large server and allows for the orderly addition of new servers or the routine maintenance or upgrades of servers without disrupting service to the end user.
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BIG-IPs unique Layer 7 switching capability enables the successful delivery of business-critical applications with 24/7 availability, scalability, and high performance. Examining traffic at Layer 7 allows intelligent quality of service (QoS) through routing and management decisions made based on application information. BIG-IP enables the use of all of its Layer 7 features simultaneously without imposing limitations on the length of the URL, cookie, or location of the cookie providing intelligent, granular management of web sites without performance degradation. Additional BIG-IP features include:
| Infrastructure Security BIG-IP provides an additional layer of security protecting against unauthorized access of the network. | |
| Application Security BIG-IP can be configured to deny any file-based attack like codered in a matter of seconds, limiting exposure to an attack. | |
| Web Acceleration BIG-IP enables servers to support more user requests, thus helping businesses cost effectively scale their Web infrastructure. | |
| Secure Application Acceleration Secure sockets layer (SSL) as a means for securing applications has moved off the Web server and onto BIG-IP as a standard deployment practice. F5 will soon offer a higher level of security via its BIG-IP FIPS. | |
| BIG-IP FIPS hardware option and Controller products extend SSL processing capabilities into a specific niche of customers that are either required by law (government agencies) or have adopted on their own accord (financial and health care institutions) FIPS-based products. BIG-IP is the only Internet traffic management product that supports an integrated FIPS 140-1 Level 3 solution. | |
| Session Persistence enables server arrays to support e-commerce and other applications by allowing users to re-establish a secure connection with a specific server to complete an unfinished transaction. | |
| Quality of Service Rate shaping allows priority levels to be assigned to specific types of traffic ensuring a quality user experience. | |
| Packet filtering enables content providers to direct network traffic to servers based on criteria set by network managers to ensure networks are being used efficiently. |
Product Development
We believe that our future success depends on our ability to build upon our current technology platform, expand the features and functionalities of our suite of Internet traffic and content management products and develop additional products that maintain our technological competitiveness. Our product development group, which is divided along product lines, employs a standard process for the design, development, documentation and quality control of our Internet traffic and content management solutions. Each product line is headed by a lead architect, who is responsible for developing the technology behind the product. To help develop the technology, the lead architects work closely with our customers to better understand their requirements. Software engineers who help design and build the products, and technicians, who perform test engineering, configuration management, quality assurance and documentation functions, complete our product development teams. The test engineering team evaluates the overall quality of our products. The overall product team determines whether they are ready for release.
Our product development expenses for fiscal 2001, 2000 and 1999 were $17.4 million, $14.5 million, and $5.6 million, respectively. Going forward, we expect our product development expenses to remain consistent with fiscal 2001.
Customers
Our target customers include the Global 1000 corporate enterprises, large e-commerce sites, Internet service providers and high-traffic Internet or intranet Web sites. During fiscal 2001 no single reseller or customer exceeded 10% of our net revenue or our accounts receivable balance. During fiscal 2000 and 1999,
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Sales and Marketing
We market and sell our Internet traffic and content management solutions on a global basis through direct sales and channel partners. We plan to continue investing significant resources to expand our direct sales force and further develop our indirect sales channels by developing relationships with leading industry resellers, original equipment manufacturers, systems integrators, Internet service providers and other channel partners. Typically, our agreements with our channel partners are not exclusive and do not prevent our channel partners 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.
We continue to seek channel partners for our products in the United States and selected countries in the European, Asia Pacific and South American markets.
Our field sales people are located in major cities throughout the United States, Europe, and Asia. The inside sales team generates and qualifies leads for our regional sales managers and help manage accounts by serving as a liaison between our field and internal corporate resources. Our field systems engineers also support our regional sales managers by participating in joint sales calls and providing pre-sale technical resources as needed.
Our marketing programs are focused on creating awareness of our Internet traffic and content management solutions targeted at information technology professionals such as chief information officers. We plan to continue building strong brand awareness to leverage the value of our Internet traffic and content management products and professional services in the marketplace. We believe brand visibility is a key factor in increasing customer awareness, and our goal is for the F5 brand to be synonymous with superior performance, high quality customer service and ease of use. We market our products and services through a broad range of marketing programs, including active tradeshow participation, advertising in print publications, direct marketing, high-profile Web events and our Internet site.
Professional Services and Technical Support
We believe that our ability to consistently provide high-quality customer service and support will be a key factor in attracting and retaining customers. Prior to the installation of our Internet traffic and content management solutions, our professional services team works with organizations to analyze and understand their special network needs. They also make recommendations on how to integrate our solutions to best utilize our product features and functionality to support their unique network environment. Once our customers purchase our products, we offer on-site installation and training services to help our customers make use of the functionality built into our products. The installation process generally occurs within 30 days of product shipment to the customer.
Our technical support team assists our customers with online updates and upgrades and provides remote support through a 24x7 help desk. We also offer seminars and training classes for our customers on the configuration and use of our products, including local and wide area network system administration and management. In addition, we provide a full range of consulting services to our customers, including comprehensive network management, documentation and performance analysis and capacity planning to assist in predicting future network requirements.
Manufacturing
We outsource the manufacturing of our pre-configured, industry-standard hardware platforms to several contract manufacturers, who assemble these hardware platforms to our specifications. These platforms consist primarily of an Intel-based computing platform, rack-mounted enclosure system and custom-designed front panel. We install our proprietary software onto the hardware platforms and conduct functionality testing,
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Competition
Our markets are new, rapidly evolving and highly competitive, and we expect this competition to persist and intensify in the future. We compete in the Internet traffic and content management market primarily on the basis of product price/performance, features, service, and warranty. Our principal competitors in the Internet traffic and content management market include CacheFlow, Cisco Systems, Extreme Networks, Foundry Networks, Network Appliance, Nortel Networks and Radware.
Cisco Systems has a product offering similar to ours and holds the dominant 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 that could be leveraged. In addition, Cisco has large, well established, worldwide customer support and professional services organizations and a more extensive direct sales force and sales channels than we do. Cisco and our other competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. There is also the possibility that these companies may adopt aggressive pricing policies to gain market share. As a result, these companies pose a serious competitive threat that could undermine our ability to win new customers and maintain our existing customer base. Nevertheless, we believe these threats are mitigated by differences between the functionality, performance and integration of our products and those of our competitors, including Cisco.
Intellectual Property
We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We currently do not have any issued patents but have nine applications pending for various aspects of our technology. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to, and distribution of, our software, documentation and other proprietary information. However, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology.
We incorporate software that is 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.
Employees
As of September 30, 2001, we employed 490 full-time persons, including 122 in product development, 165 in sales and marketing, 121 in professional services and technical support and 82 in finance, administration and operations.
None of our employees are represented by a labor union. We have experienced no work stoppages and believe that our employee relations are good.
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Directors and Executive Officers of the
Registrant
The following table sets forth certain
information with respect to our executive officers and directors
as of September 30, 2001:
Directors are divided into three classes, with
each class as nearly equal in number as possible with one class
elected at each annual meeting to serve for a three-year term.
John McAdam
has
served as our President, Chief Executive Officer and a director
since July 2000. Prior to joining F5 Networks, Mr. McAdam
served as General Manager of the Web server sales business at
IBM 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 IBM in
September 1999. Mr. McAdam holds a B.Sc. in Computer
Science from the University of Glasgow, Scotland.
Steven B. Coburn
has
served as our Vice President of Finance and Chief Financial
Officer since May 2001. Prior to joining F5 Networks,
Mr. Coburn worked at Teletech Holdings, a customer
relationship management (CRM) 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. From 1985 until October 1995, he worked at US West/
Media One, a telecommunications company, where he held various
senior financial positions, including Director and CFO of the
Interactive Services Group, a developer of interactive broadband
applications. During that period, he was the Finance Director at
US West Direct Yellow Page Publishing. Mr. Coburn received
his B.A. in Accounting from Southern Illinois University.
Steven Goldman
has
served as our Senior Vice President of Sales and Services since
July 1999 and our Vice President of Sales, Marketing and
Services from July 1997 to July 1999. From December 1996 to
February 1997, Mr. Goldman served as Vice President,
Enterprise Sales and Services, for Microtest, Inc., a network
test equipment and CD ROM server company, after its acquisition
of Logicraft. From March 1995 to December 1996, Mr. Goldman
served as Executive Vice President, North American Operations,
for
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Brett L. Helsel
has
served as our Senior Vice President of Product Development since
February 2000 and as our Vice President of Product Development
and Chief Technology Officer from May 1998 to February 2000.
From April to May 1998, Mr. Helsel served as our Vice
President of Advanced Product Architecture. From March 1997 to
March 1998, Mr. Helsel served as Vice President, Product
Development, for Cybersafe, Inc., a provider of enterprise-wide
network security solutions. From April 1994 to October 1997,
Mr. Helsel served as Site Development Manager for Wall
Data, a host connectivity software company. Mr. Helsel
holds a B.S. in Geophysics and Oceanography from the Florida
Institute of Technology.
Jeff Pancottine
has
served as our Senior Vice-President of Marketing and Business
Development since October 2000. He joined F5 Networks from
RealNetworks, a consumer software and Internet content
aggregation company, where he served as Senior Vice-President of
Sales and Marketing for the Companys Media Systems
Division 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.
Mr. Pancottine has had more than 15 years of worldwide
systems marketing experience with a variety of server companies,
including Sequent Computer Systems, where he held the position
of Vice-President of Global Marketing. He also led the server
and storage marketing organization while at Sun Microsystems
from October 1996 to June 1997, where he introduced the highly
successful UE10000 Starfire server. Jeff holds a Master of
Engineering in Computer Science from Cornell University, and a
Bachelor of Science in Computer Science from the University of
California at Riverside.
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 IBM. 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, which was sold to
IBM in September 1999. From November 1987 to June 1992,
Mr. Eames served as the Regional Service Manager in the UK
for Sun Micro 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.
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. From
September 1997 through March 1998 Ms. Reiter served as
Director of Operations for Excell Data Corporation, an
information technology consulting and system integration
services company. From September 1992 through September 1997 she
served as Director of Legal Services and Business Development
for CellPro, Inc. a medical device manufacturer. Prior to that
time Ms. Reiter was employed at the law firm of Perkins
Coie. She holds a JD from the University of Washington and is a
member of the Washington State Bar Association.
Jeffrey S. Hussey
co-founded F5 in February 1996 and has been our Chairman since
that time. He served as our Chief Strategist from July 2000 to
September 2001. From February 1996 to July 2000, Mr. Hussey
served as our Chief Executive Officer and President. From
February 1996 to March 1999, Mr. Hussey also served as our
Treasurer. From June 1995 to February 1996, Mr. Hussey
served as Vice President of Alexander Hutton Capital L.L.C., an
investment banking firm. From September 1993 to July 1995,
Mr. Hussey served as President of Pacific Comlink, an
inter-exchange carrier providing frame relay and Internet access
services to the Pacific Rim, which he founded in September 1993.
Mr. Hussey holds a B.A. in Finance from Seattle Pacific
University and an M.B.A. from the University of Washington.
Alan J. Higginson
has served as one of our directors since May 1996. From November
1995 to November 1998, Mr. Higginson served as President of
Atrieva Corporation, a provider of advanced data backup and
retrieval technology. From May 1990 to November 1995,
Mr. Higginson served as Executive Vice President of
Worldwide Sales and Marketing for Sierra On-line, a developer of
multimedia software for the home personal
12
Karl D. Guelich
has
served 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 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. degree in Accounting from
Arizona State University.
Keith D. Grinstein
has served as one of our directors since December 1999.
Mr. Grinstein has been the Vice Chairman of Nextel
International, Inc. since September 1999
.
From January
1996 to February 1999, Mr. Grinstein served as President,
Chief Executive Officer and as a director of Nextel
International, Inc, an international cellular service subsidiary
of Nextel Communication. From January 1991 to December 1995,
Mr. Grinstein was President and Chief Executive Officer of
the aviation communications division of AT&T Wireless
Services, Inc, a cellular phone services subsidiary of AT&T.
Mr. Grinstein had a number of positions at McCaw Cellular
and its subsidiaries, include Vice President, General Counsel
and Secretary of LIN Broadcasting Company, a subsidiary of McCaw
Cellular, and Vice President and Assistant General Counsel of
McCaw Cellular. He is currently on the board of directors for
the Ackerley Group, a media and entertainment company.
Mr. Grinstein received a BA from Yale University and a JD
from Georgetown University.
Kenny J. Frerichs
has served as one of our directors since July 2001.
Mr. Frerichs has been the Vice President, Business
Development for Nokia Internet Communications, a network
security and virtual private network solutions provider, since
July 2001 and Nokias General Manager of VPN products from
March 2000 to July 2001. From March 1998 to March 2000,
Mr. Frerichs served as President and CEO for Network
Alchemy, a Santa Cruz based startup that developed clustered
Virtual Private Networks solutions, which was acquired by Nokia
in March 2000. From January 1997 to March 1998,
Mr. Frerichs served as Vice President of Worldwide Sales
for Wallop Software, an intranet-based business application
software company. From January 1994 to January 1997,
Mr. Frerichs served as Vice President, North American Sales
for TGV Software, a supplier of Internet software products,
which was acquired by Cisco Systems. Mr. Frerichs holds a
B.S. in Computer Science from Texas A&M University.
Name
Age
Position
50
President, Chief Executive Officer and Director
48
Senior Vice President of Finance and Chief
Financial Officer
41
Senior Vice President of Sales and Services
41
Senior Vice President of Product Development and
Chief Technology Officer
41
Senior Vice President of Marketing and Business
Development
43
Senior Vice President of Business Operations and
Vice President of Global Services
44
Vice President, General Counsel and Corporate
Secretary
40
Chairman of the Board
54
Director
59
Director
41
Director
41
Director
(1)
Member of Audit Committee.
(2)
Member of Compensation Committee.
Table of Contents
Table of Contents
Item 2. Properties.
Our principal administrative, sales, marketing and research development facilities are located in Seattle, Washington and consist of two buildings totaling approximately 195,000 square feet. In April 2000, we entered into a lease agreement for the buildings. The lease commenced in July 2000 on the first building; and the lease on the second building commenced in October 2000. The leases for both buildings expire in 2012 with an option for renewal. We also lease office space for our field personnel in Eastern Washington, California, New Jersey, Washington DC, Virginia, Hong Kong, Singapore, Thailand, Taiwan, Japan, Korea, Australia, India and the United Kingdom. We currently have surplus office space of approximately 14,000 square feet which we have subleased until 2003 and approximately 110,000 square feet which we have subleased until 2012.
Item 3. Legal Proceedings.
On August 8, 2001 a putative securities class action, captioned Atlas v. F5 Networks, Inc. et al., Civil Action No. 01-CV-7342, was filed in the United States District Court for the Southern District of New York against the firms that underwrote our initial public offering, F5 Networks, and several of our officers and directors. The complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of 1934 by F5 Networks and its officers and directors, and seeks unspecified damages on behalf of a purported class that purchased F5 Networks common stock between June 4, 1999 and December 6, 2000.
On August 15, 2001 a similar complaint, captioned Lee v. F5 Networks, Inc. et al., Civil Action No. 01-CV-7625, was filed in the United States District Court for the Southern District of New York. The
13
Various plaintiffs have filed similar actions in the United States District Court for the Southern District of New York asserting virtually identical allegations against more than 200 other issuers. These cases have all been assigned to the Hon. Shira A. Scheindlin for coordination and decisions on pretrial motions, discovery, and related matters other than trial. We believe that we have meritorious defenses to the lawsuits and will defend ourselves vigorously in the litigation. An unfavorable resolution of the actions could have a material, adverse effect on our business, results of operations or financial condition.
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.
No matters were submitted to a vote of shareholders during the fourth quarter of our fiscal year.
PART II
Item 5.
Market
for Registrants Common Stock and Related Shareholder
Matters.
Market Prices and Dividends on Common
Stock
Our common stock is traded on the Nasdaq National
Market (symbol: FFIV) and has been traded on Nasdaq since
our initial public offering in June of 1999. The following table
sets forth the high and low sales prices of our common stock as
reported on Nasdaq.
High
Low
Fiscal Year Ended September 30, 2000
$
160.50
$
66.94
$
142.12
$
62.12
$
76.50
$
28.37
$
61.50
$
33.00
High
Low
Fiscal Year Ended September 30, 2001
$
40.94
$
9.50
$
17.81
$
5.00
$
19.20
$
3.75
$
18.50
$
8.51
As of December 27, 2001 there were 117 holders of record of our common stock, although we believe the number of beneficial holders of our common stock to be substantially greater.
Our policy has been to reinvest earnings to fund future growth. Accordingly, we have not paid dividends and do not anticipate declaring dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
On June 26, 2001, we entered into a Common Stock and Warrant Purchase Agreement with Nokia Finance International B.V. (NFI). Under this Agreement, we issued and sold to NFI (i) 2,466,421 shares of common stock and (ii) warrants (the Warrants) to purchase additional shares of common stock. We received total proceeds of $34.9 million, net of $1.8 million in estimated issuance costs from the sale of these shares and the Warrants. The Warrants allow NFI to purchase additional shares of common stock to increase
14
15
Item 6. Selected Financial Data.
The following selected financial data are derived
from our historical financial statements. The information set
forth below should be read in conjunction with our financial
statements, including the notes thereto, and
Managements Discussion and Analysis of Financial
Condition and Results of Operation (in thousands, except
per share data).
Fiscal Year Ended September 30
2001
2000
1999
1998
1997
$
78,628
$
87,980
$
23,420
$
4,119
$
229
28,739
20,665
4,405
770
107,367
108,645
27,825
4,889
229
33,240
24,660
5,582
1,091
71
12,265
7,911
1,618
314
45,505
32,571
7,200
1,405
71
61,862
76,074
20,625
3,484
158
50,767
36,890
13,505
3,881
565
17,435
14,478
5,642
1,810
569
18,776
9,727
3,869
1,041
383
975
2,625
2,127
2,487
420
69
90,578
63,222
25,503
7,152
1,586
(28,716
)
12,852
(4,878
)
(3,668
)
(1,428
)
2,021
2,903
534
(4
)
(28
)
(26,695
)
15,755
(4,344
)
(3,672
)
(1,456
)
4,095
2,105
$
(30,790
)
$
13,650
$
(4,344
)
$
(3,672
)
$
(1,456
)
$
(1.36
)
$
0.65
$
(0.42
)
$
(0.60
)
$
(0.24
)
22,644
21,137
10,238
6,086
6,000
$
(1.36
)
$
0.59
$
(0.42
)
$
(0.60
)
$
(0.24
)
22,644
23,066
10,238
6,086
6,000
$
69,783
$
53,199
$
24,797
$
6,206
$
143
74,407
65,898
25,876
6,763
(317
)
124,663
122,420
42,846
9,432
919
1,167
238
216
7,688
96,488
87,685
31,973
(80
)
(231
)
16
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following Managements Discussion and
Analysis of Financial Condition and Results of Operations should
be read in conjunction with our Financial Statements and
Notes
Results of Operations
Overview
Total net revenues declined 1% in fiscal 2001
from fiscal 2000, compared to an increase of 290% in fiscal 2000
from fiscal 1999. The decrease in fiscal 2001 was primarily due
to lower product sales as a result of a downturn in the US
economy in fiscal 2001. Our reduced product sales were partially
offset by an increase in service revenues resulting from
maintenance renewals for our installed base of products. The
increase in fiscal 2000 revenues was due to an expansion of
indirect sales programs and an increase in our installed base
service revenues.
International revenues represented 33%, 19%, and
8% of total sales in fiscal 2001, 2000, and 1999, respectively.
Fiscal 2001 was the first complete fiscal year for which we had
subsidiaries in the Asia Pacific region which contributed to the
increase in our international sales. We plan to continue to make
significant investments in our international operations,
particularly in the European and Asia Pacific markets.
International revenues are expected to continue to represent a
significant portion of our net revenues, although we cannot be
assured that these revenues as a percentage of net revenues will
remain at their current levels.
Revenues from the sale of our products and
software licenses are recognized, net of allowances for
estimated returns, when the product has been shipped and the
customer is obligated to pay for the product. Estimated sales
returns are based on historical experience by product and are
recorded at the time revenues are recognized. Services revenue
for installation is recognized when the product has been
installed at the customers site. Revenues for customer
support are recognized on a straight-line basis over the service
contract term. Consulting services are customarily billed at
fixed rates, plus out-of-pocket expenses, and revenues from
consulting services are recognized at the end of the quarter in
which they are performed.
Sales of BIG-IP represented 64%, 62%, and 73% of
total net revenues in fiscal 2001, 2000, and 1999, respectively,
and we expect to derive a significant portion of our net
revenues from sales of BIG-IP in the future. During fiscal 2001
no single reseller or customer exceeded 10% of net revenue or
our accounts receivable balance. During fiscal 2000 and 1999,
one of our resellers, Exodus Communications, accounted for 14%
and 22% of net revenue and 8% and 16% of our accounts receivable
balance, respectively. In association with Exodus filing
Chapter 11 bankruptcy, we recorded a non-recurring
adjustment to our bad-debt expense of $1.75 million and a
charge of $226,000 in cost of goods sold related to anticipated
inventory lease payments not received by Exodus during fiscal
2001.
Total cost of net revenues, as a percentage of
total revenues, increased to 42.4% in fiscal 2001 from 30.0% in
fiscal 2000 and 25.9% in fiscal 1999. The increase in fiscal
2001, compared to the prior year, relates to a non-recurring
inventory reserve charge, costs associated with platform
changes, a decrease in average selling price as a result of a
change in product mix and an increase in personnel costs. The
increase in fiscal 2000 was the result of higher production
costs associated with hardware configuration enhancements and
increased personnel costs, including training and consulting.
Total operating expenses were $90.6 million,
$63.2 million, and $25.5 million in fiscal 2001, 2000,
and 1999, respectively. The 43.3% increase in total operating
expense in fiscal 2001, compared to the prior year, is primarily
the result of our continued investment in international
operations, additional personnel costs, facilities costs, an
increase in bad debt as a result of our relationship with Exodus
and non-recurring restructuring charges. The 147.9% increase in
operating expense in fiscal 2000, compared to the prior year, is
primarily a result of an increase in total headcount to 496 from
187 at the end of fiscal 1999.
17
Revenues
(in thousands):
Net revenues.
Net
revenues consist of sales of our products, which include
software licenses, and services. Services include revenue from
installation, service and support agreements provided as part of
the initial product sale, sales of extended service and support
contracts, and training.
Product revenues.
Product revenues were
$78.6 million for the fiscal year ended September 30,
2001 compared to $88.0 million for the year ended
September 30, 2000 and $23.4 million for the year
ended September 30, 1999. The 10.6% decrease in fiscal year
2001 was primarily the result of reduced demand for our products
in the US due to a general slow down in the US economy. Product
revenues for fiscal year 2000 increased 275.7% from the prior
year as a result of an expansion in indirect sales programs and
a higher volume of unit sales from the direct sales force.
Service revenues.
Service revenues were
$28.7 million for the fiscal year ended September 30,
2001 compared to $20.7 million for the year ended
September 30, 2000 and $4.4 million for the year ended
September 30, 1999. Service revenues increased by 39.1% in
fiscal year 2001 and 369.1% in fiscal year 2000. These increases
primarily resulted from an increase in the installed base of our
products and the renewal of service and support contracts by our
current customers.
Customers who purchase our products can utilize
our installation services and an initial customer support
contract, typically covering a 12-month period. We generally
combine the software license, installation, and customer support
elements of our products into a package with a single price. We
allocate a portion of the sales price to each element of the
bundled package based on their respective fair values when the
individual elements are sold separately. Customers may also
purchase consulting services and renew their initial customer
support contract.
18
Gross Margin (in
thousands):
Cost of net revenues.
Cost of net revenues consists
primarily of outsourced hardware components and manufacturing
costs, fees for third-party software products integrated into
our products, service and support personnel and an allocation of
our facilities and depreciation expenses.
Cost of product revenues.
Cost of product revenues increased
34.8% to $33.2 million for the year ended September 30,
2001 from $24.7 million for the year ended
September 30, 2000. The cost of product revenues for fiscal
2000 represents a 341.8% increase over cost of product revenues
of $5.6 million for the year ended September 30, 1999.
Cost of product revenues increased as a percent of net product
revenue to 42.3% for fiscal year 2001 from 28.0% for fiscal year
2000 and 23.8% for fiscal year 1999. The increase in fiscal 2001
was the result of costs associated with platform changes and an
increase in personnel costs. The increase in fiscal 2000 was the
result of higher production costs associated with hardware
configuration enhancements and also changes related to obsolete
inventory and purchase commitments. The cost of raw materials
may fluctuate in the future, which could have a negative impact
on our gross margin.
Cost of service
revenues.
Cost of service revenues
increased to $12.3 million for fiscal 2001 from $7.9 for
fiscal 2000 and $1.6 million for fiscal 1999. Cost of
service revenues increased as a percent of net service revenues
to 42.7% for fiscal year 2001 from 38.3% for fiscal year 2000
and 36.7% for fiscal year 1999. The increase in cost of service
revenue in fiscal 2001 and 2000, compared to the prior years, is
due to an increase in customer base and an increase in personnel
and the related costs.
Provision for excess inventory.
Due to changes in current market
conditions and a revision of our sales forecast, a review was
made of our inventory needs and an assessment of our future
purchase commitments during fiscal 2001. As a result, we
determined two provisions for excess inventory and future
purchase commitments would be recorded. The first provision for
excess inventory was charged to cost of revenues in the amount
of $3.9 million, which consisted of a $3.1 million
inventory valuation allowance and approximately $800,000 of
future purchase commitments. As of September 30, 2001,
$1.5 million of this reserve had been utilized. The second
provision for excess inventory was in the amount of $1.0
million. This charge is associated with charge is associated
with the changes in the configuration of our EDGE-FX Cache
product, which will increase the functionality of the product.
These costs are associated with updating both existing inventory
and product previously sold to customers, as well as costs to
fulfill existing purchase commitments and have been included in
cost of revenues for the for the fiscal year ended
September 30, 2001. As of September 30, 2001, $232,000
of this reserve had been utilized.
19
Operating
expenses (in thousands):
Sales and marketing.
Sales and marketing expenses consist primarily of salaries,
commissions and related benefits of our sales and marketing
staff, 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 by 37.6% to $50.8 million in fiscal 2001
from $36.9 million in fiscal year 2000. In fiscal 2000,
sales and marketing expenses increased by 173% from
$13.5 million in fiscal 1999. The increase in fiscal 2001,
compared to the prior year, was due to an increase in headcount
and the related costs, an increase in advertising and
promotional activities including activities related to new
product launches. The increase in fiscal 2000 was primarily due
to a significant increase in headcount from the prior year. We
expect to continue increasing 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 salaries and related benefits for our
product development personnel and an allocation of our
facilities and depreciation expenses. Research and development
expenses increased by 20.4% to $17.4 million in fiscal 2001
from $14.5 million, and in fiscal 2000 by 156% from
$5.6 million in fiscal 1999. The increase in fiscal year
2001 relates primarily to personnel related costs and an
increase in facilities cost related to the new Spokane office.
The increase in fiscal 2000, compared to the prior period, is
also due to a significant increase in headcount. Our future
success is dependent, in large part on the continued enhancement
of our current products and our ability to develop new,
technologically advanced products that meet the sophisticated
needs of our customers. We expect research and development
expenses to remain at a consistent level with fiscal 2001.
General and
administrative.
General and
administrative expenses consist primarily of salaries, benefits
and related costs of our executive, finance, human resource and
legal personnel, third-party professional service fees, and an
allocation of our facilities and depreciation expenses. General
and administrative expenses increased by 93.0% in fiscal 2001 to
$18.8 million from $9.7 in fiscal year 2000. These expenses
increased in fiscal year 2000 by 151.4% from $3.9 million
for fiscal year 1999. The increases in fiscal 2001 were due to
an increase in bad debt expense due to the relationship with
Exodus Communications and an increase in headcount and other
payroll related costs. The fiscal 2000 increase was primarily
due to increases in the general and administrative headcount.
Restructuring
charge.
During the first fiscal
quarter of 2001, we recorded a restructuring charge of
$1.1 million in connection with management decision to
bring operating expenses in line with the business
20
Unearned compensation.
We have recorded a total of
$8.3 million of stock compensation costs since our
inception through September 30, 2001. These charges
represent the difference 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 FASB interpretation
No. 28 (FIN No. 28) and have recorded
stock compensation charges of $2.6 million,
$2.1 million and $2.5 million for the years ended
September 30, 2001, 2000 and 1999, respectively.
We expect to recognize amortization expense
related to unearned compensation of approximately $443,000 and
$83,000 during the years ended September 30, 2002 and 2003,
respectively. We cannot guarantee, however, that we will not
accrue additional stock compensation costs in the future or that
our current estimate of these costs will prove accurate.
Other
Income and Taxes (in thousands):
Other income, net.
Other income consists primarily of
earnings on our cash and cash equivalent balances and short-term
investments. Other income decreased 30.0% to $2.0 million
in fiscal year 2001 from $2.9 million in fiscal year 2000.
Other income increased by 444.0% in fiscal 2000 from
$0.6 million in fiscal year 1999. These fluctuations
primarily relate to interest income of $2.6 million for
fiscal year 2001, $3.2 million for the fiscal year 2000 and
$0.5 million for the fiscal year 1999.
Income taxes.
The
income tax provision increased to $4.1 million in fiscal
2001 from $2.1 million in fiscal 2000 and zero in fiscal
1999. The increase in the provision for income taxes was caused
by our decision to provide for a full valuation allowance
against its deferred tax assets in fiscal year 2001. FASB
Statement 109 provides for the recognition of deferred tax
assets if it is more likely than not that those deferred tax
assets will be realized. Based on the available evidence at the
time, the valuation allowance was partially reversed in fiscal
year 2000 for the assets we considered realizable. In fiscal
year 2001, the changes in the current economic environment
caused us reevaluate the need to provide for a full valuation
allowance. Based on the weight of all the available positive and
negative evidence, we determined that a full valuation allowance
should be provided to completely offset the net deferred tax
assets.
Quarterly Results of Operations
(unaudited)
The following tables present our unaudited
quarterly results of operations for the eight quarters ended
September 30, 2001 in dollars and as a percentage of net
revenues. You should read the following tables in
21
22
Our quarterly operating results have fluctuated
significantly and we expect that future operating results will
be subject to similar fluctuations for a variety of factors,
many of which are substantially outside our control. See
Risk Factors-Our quarterly operating results are volatile
and may cause our stock price to fluctuate.
Liquidity and Capital Resources (in
thousands)
From our inception through May 1999, we financed
our operations and capital expenditures primarily through the
sale of approximately $12.4 million in equity securities.
In June 1999, we completed an initial public offering of
2,860,000 shares of common stock and raised approximately
$25.5 million, net of offering costs. In October 1999, we
completed a secondary public offering of 500,000 shares of
common stock and raised approximately $31.4 million, net of
offering costs.
On June 26, 2001, we entered into a Common
Stock and Warrant Purchase Agreement with Nokia Finance
International B.V. (NFI). Under this agreement, we
issued and sold to NFI (i) 2,466,421 shares of common stock
and (ii) warrants (the Warrants) to purchase
additional shares of common stock. We received total proceeds of
$34.9 million, net of $1.8 million in estimated
issuance costs from the sale of these shares and the Warrants.
The Warrants allow NFI to purchase additional shares of common
stock to increase its ownership percentage in the company (up to
a maximum of one share less than 20%) during three ten business
day periods beginning on December 31, 2001, June 30,
2002 and December 31, 2002, at an exercise price equal to
the average 10-day closing price before the start of each period.
We recorded the issuance of the common stock and
Warrants by allocating the net proceeds to the Common Stock and
the Warrants, based upon their relative fair values at the date
of issuance. The fair value allocated to the Warrants was
$1.7 million based on an independent valuation. Based upon
the relative fair value at the date of issuance, the amount of
net proceeds allocated to the Warrants and included as a
component of common stock was $1.6 million. The amount
allocated to the common stock was $33.3 million.
Cash used in operating activities during fiscal
2001 was $11.7 million, compared to cash provided by
operating activities of $9.8 million in fiscal 2000 and
cash used in operating activities of $2.0 million in fiscal
1999. Cash used in operating activities in fiscal 2001 resulted
primarily from operating losses, partially offset by a decrease
in net accounts receivable. Cash used for operating expenses in
fiscal 1999 resulted from increases in accounts receivable due
to increased sales and other current assets, which were
partially offset by increases in accounts payable, accrued
liabilities and deferred revenues.
23
Cash used in investing activities was
$8.1 million for the year ended September 30, 2001,
$16.3 million for the year ended September 30, 2000
and $5.6 million for the year ended September 30,
1999. The $8.1 million used in fiscal 2001 includes
$9.2 million used to purchase property and equipment,
partially offset by a construction refund. The cash used for
investing activities in fiscal 2000 was the result of
$13.3 million used to purchase property and equipment and
$3.0 million used to invest in restricted cash in order to
obtain an irrevocable standby letter of credit to secure our
commitment to lease office space. In fiscal 1999, the
$5.6 million cash used in investing activities was the
result of $2.6 million used to purchase property and
equipment and $3.0 million used to invest in restricted cash
related to the lease.
As of September 30, 2001, our principal
commitments consisted of obligations outstanding under operating
leases. In April 2000, we entered into a lease agreement on two
buildings for a new corporate headquarters. The lease commenced
in July 2000 on the first building; and the lease on the second
building commenced in October 2000. The lease for both buildings
expires in 2012 with an option for renewal. We established a
restricted escrow account in connection with this lease
agreement. Under the term of the lease, a $6.0 million
irrevocable standby letter of credit is required through
November 2012, unless the lease is terminated before then. This
amount has been included on our balance sheet as of
September 30, 2001 as a component of restricted cash.
Although we have no other material commitments, we anticipate an
increase in our capital expenditures and lease commitments
consistent with our anticipated growth in our operations,
infrastructure and personnel. In the future we may also require
a larger inventory of products in order to provide better
availability to customers and achieve purchasing efficiencies.
Any such increase can be expected to reduce cash, cash
equivalents and short-term investments. 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.
Recent Accounting Pronouncements
In July of 2001 the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 141
Business Combinations which is effective for all
business combinations initiated after July 1, 2001. SFAS
No. 141, supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for
Pre-acquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for using
the purchase method of accounting. Further, SFAS No. 141
requires certain intangibles to be recognized as assets apart
from goodwill if they meet certain criteria and also requires
expanded disclosures regarding the primary reasons for
consummation of the combination and the allocation of the
purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. We do not believe the
standard will have a significant impact on our financial
position.
In July of 2001, the FASB issued SFAS
No. 142 Goodwill and Other Intangible Assets
which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets, and addresses financial
accounting and reporting for intangible assets acquired
individually or with a group of other assets and the accounting
and reporting for goodwill and other intangible assets
subsequent to their acquisition. Under the model set forth in
SFAS No. 142, goodwill is no longer amortized to earnings,
but instead be subject to periodic testing for impairment. We do
not believe the standard will have a significant impact on our
financial position.
In July 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations.
FASB 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It
applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development, and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The
provisions of FAS 143 will be effective for fiscal years
beginning after June 15, 2002, however early application is
permitted. We do not believe FAS 143 will have a
significant impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of
24
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 quarterly
operating results are volatile and may cause our stock price to
fluctuate.
Our quarterly 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
significant portion 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. 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
expenses vary with our revenues. See Item 7 of Part
II Managements Discussion and Analysis
of Financial Condition and Results of Operations.
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 some future quarter or quarters. Our failure to
meet these expectations will likely seriously harm the market
price of our common stock.
Our business
may be harmed by economic and market conditions.
Our business is subject to the effects of general
economic conditions in the United States and globally and market
conditions in the Internet and technology sectors in particular.
Unfavorable economic conditions and reduced capital spending has
contributed to a decline in our product sales during the fourth
quarter of fiscal 2001. A continued downturn in the economic
conditions or economic uncertainty could adversely impact
potential customers ability and willingness to purchase
our products, which would cause a further decline in our sales
and operating results.
Our success
depends on sales of our
BIG-IP®
.
We currently derive approximately 64% of our net
revenues from sales of our BIG-IP product line. In addition, we
expect to derive a significant portion of our net revenues from
sales of BIG-IP 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, our
business and results of operations will be seriously harmed.
Our success
depends on our timely development of new products and
features.
We expect the Internet traffic and content
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
25
Our markets are new, rapidly evolving and highly
competitive, and we expect competition to persist and intensify
in the future. Our principal competitors in the Internet traffic
and content management market include Cisco Systems, CacheFlow,
Foundry Networks, Inktomi, Network Appliances, Extreme Networks,
Nortel Networks and RadWare. We expect to continue to face
additional competition as new participants enter the Internet
traffic and content management market. In addition, larger
companies with significant resources, brand recognition and
sales channels may form alliances with or acquire competing
Internet traffic and content management solutions and emerge as
significant competitors. Potential competitors may bundle their
products or incorporate an Internet traffic and content
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. See Item 1 of
Part I Business
Competition.
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 seriously 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. Sales of BIG-IP, 3-DNS,
GLOBAL-SITE, SEE-IT, and EDGE-FX require us to educate potential
customers in their use and benefits. The sale of our products is
subject to delays from the lengthy internal budgeting, approval
and competitive evaluation processes that large corporations and
governmental entities may require. For example, customers
frequently begin by evaluating our products on a limited basis
and devote time and resources to testing our products before
they decide whether or not to purchase. Customers may also defer
orders as a result of anticipated releases of new products or
enhancements by us or our competitors. As a result, our products
have an unpredictable sales cycle that contributes to the
uncertainty of our future operating results.
Our sales strategy requires that we establish
multiple and maintain distribution channels in the United States
and internationally through leading industry resellers, original
equipment manufacturers, 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. During fiscal 2001 no
single reseller or customer exceeded 10% of net revenue or our
accounts receivable balance. If we are unable to establish and
maintain our indirect sales channels, our business and results
of operations will be seriously harmed.
26
We intend to continue expanding into
international markets. We have limited experience in marketing,
selling and supporting our products internationally.
International sales represented 33% of our net revenues for the
year ended September 30, 2001, 19% of our net revenues for
the year ended September 30, 2000 and 7.7% of our net
revenues for the year ended September 30, 1999. We have
engaged sales personnel in Australia, Europe, and Asia Pacific.
Our continued growth will require further expansion of our
international operations in selected countries in the European
and Asia Pacific markets. If we are unable to expand our
international operations successfully and in a timely manner,
our business and results of operations may be seriously 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.
As our international sales increase, our
operating results become more exposed to international operating
risks. These risks include risks related to foreign currency
exchange rates, managing foreign sales offices, regulatory,
political, or economic conditions in specific countries, 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.
Our success depends to a significant degree upon
the continued contributions of our key management, product
development, sales, marketing and finance personnel, many of
whom will be difficult to replace. The complexity of our
Internet traffic and content 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 our stock price, 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 seriously harm our business and
results of operations.
We rely on third party contract manufacturers to
assemble our products. We outsource the manufacturing of our
pre-configured, industry-standard hardware platforms to three
contract manufacturers who assemble these hardware platforms to
our specifications. We have experienced minor delays in
shipments from these contract manufacturers in the past which
have not had a material impact on our results of operations. We
may experience delays in the future or other problems, such as
inferior quality and insufficient quantity of product, any of
which may seriously harm our business and results of operations.
The inability of our contract manufacturers to provide us with
adequate supplies of our products or the loss of our contract
manufacturers may cause a delay in our ability to fulfill orders
while we obtain a replacement manufacturer and may seriously
harm our business and results of operations.
If the demand for our products grows, we will
need to increase our material purchases, contract manufacturing
capacity and internal test and quality functions. Any
disruptions in product flow may limit our revenue, may seriously
harm our competitive position and may result in additional costs
or cancellation of orders by our customers. See Item 1 of
Part I Business
Manufacturing.
27
We currently purchase several hardware components
used in the assembly of our products from 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, will
seriously harm our business and results of operations. See
Item 1 of Part I
Business Manufacturing.
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 customer relations
problems. We may also be subject to liability claims for damages
related to product errors. While we carry insurance policies
covering this type of liability, these policies may not provide
sufficient protection should a claim be asserted. A material
product liability claim may seriously harm our business and
results of operations.
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 seriously harm our
business and results of operations.
We rely on a combination of 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. In addition, we have not
entered into non-competition agreements with several of our
former employees.
From time to time, third parties may assert
exclusive patent, copyright, trademark and other intellectual
property rights claims or initiate litigation against us or our
contract manufacturers, suppliers or customers with respect to
existing or future products. Our license agreements typically
require us to indemnify our customers for infringement actions
related to our technology, which could cause us to become
involved in infringement claims against our customers. We may in
the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the
scope and validity of our proprietary rights or those of our
competitors. Any of these claims, with or without merit, may be
time-consuming, result in costly litigation and diversion of
technical and management personnel or require us to cease using
infringing technology, develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on
acceptable terms, if at all. In the event of a successful claim
of infringement and our failure or inability to develop
non-infringing technology or license the infringed or similar
technology on a timely basis, our business and results of
operations may be seriously harmed.
Our stock price has historically experienced
substantial volatility. In addition, the stock market and
technology stocks in particular, have experienced extreme price
and volume fluctuations that often have been
28
Table of Contents
Year Ended September 30
2001
2000
1999
$
78,628
$
87,980
$
23,420
28,739
20,665
4,405
$
107,367
$
108,645
$
27,825
73.2
%
81.0
%
84.2
%
26.8
19.0
15.8
100.0
%
100.0
%
100.0
%
Table of Contents
Year Ended September 30
2001
2000
1999
$
33,240
$
24,660
$
5,582
12,265
7,911
1,618
45,505
32,571
7,200
$
61,862
$
76,074
$
20,625
42.3
%
28.0
%
23.8
%
42.7
38.3
36.7
42.4
30.0
25.9
57.6
%
70.0
%
74.1
%
Table of Contents
Year Ended September 30
2001
2000
1999
$
50,767
$
36,890
$
13,505
17,435
14,478
5,642
18,776
9,727
3,869
975
2,625
2,127
2,487
$
90,578
$
63,222
$
25,503
47.3
%
34.0
%
48.5
%
16.2
13.3
20.3
17.5
9.0
13.9
0.9
2.4
2.0
8.9
84.4
%
58.2
%
91.6
%
Table of Contents
Year Ended September 30
2001
2000
1999
$
(28,716
)
$
12,852
$
(4,878
)
2,021
2,903
534
(26,695
)
15,755
(4,344
)
4,095
2,105
$
(30,790
)
$
13,650
$
(4,344
)
(26.7
)%
11.8
%
(17.5
)%
1.9
2.7
1.9
(24.9
)
14.5
(15.6
)
3.8
1.9
(28.7
)%
12.6
%
(15.6
)%
Table of Contents
Three Months Ended
Sept. 30,
June 30,
March 31,
Dec. 31,
Sept. 30,
June 30,
March 31,
Dec. 31,
2001
2001
2001
2000
2000
2000
2000
1999
$
19,825
$
21,298
$
19,772
$
17,733
$
29,259
$
23,834
$
18,532
$
16,282
6,741
7,703
7,295
7,000
7,388
5,387
5,072
2,891
26,566
29,001
27,067
24,733
36,647
29,221
23,604
19,173
4,790
7,701
12,663
8,086
8,951
6,032
5,053
4,624
2,535
2,908
3,238
3,584
2,822
2,238
1,792
1,059
7,325
10,609
15,901
11,670
11,773
8,270
6,845
5,683
19,241
18,392
11,166
13,063
24,874
20,951
16,759
13,490
12,287
12,232
12,797
13,451
12,121
10,575
8,452
5,742
3,902
4,140
4,549
4,844
6,070
3,422
2,761
2,225
6,814
3,080
4,194
4,688
4,279
2,222
1,748
1,478
(96
)
1,071
209
245
1,595
576
680
434
470
543
23,212
19,697
23,039
24,630
23,150
16,653
13,431
9,988
(3,971
)
(1,305
)
(11,873
)
(11,567
)
1,724
4,298
3,328
3,502
628
323
871
199
489
855
818
741
(3,343
)
(982
)
(11,002
)
(11,368
)
2,213
5,153
4,146
4,243
8,163
629
(2,260
)
(2,437
)
797
1,308
$
(11,506
)
$
(1,611
)
$
(8,742
)
$
(8,931
)
$
1,416
$
3,845
$
4,146
$
4,243
74.6
%
73.4
%
73.0
%
71.7
%
79.8
%
81.6
%
78.5
%
84.9
%
25.4
26.6
27.0
28.3
20.2
18.4
21.5
15.1
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
18.0
26.6
46.8
32.7
24.4
20.6
21.4
24.1
9.5
10.0
12.0
14.5
7.7
7.7
7.6
5.5
27.6
36.6
58.7
47.2
32.1
28.3
29.0
29.6
72.4
63.4
41.3
52.8
67.9
71.7
71.0
70.4
46.3
42.2
47.3
54.4
33.1
36.2
35.8
29.9
14.7
14.3
16.8
19.6
16.6
11.7
11.7
11.6
25.6
10.6
15.5
19.0
11.7
7.6
7.4
7.7
(0.4
)
4.3
0.8
0.8
5.9
2.3
1.9
1.5
2.0
2.8
87.4
68.7
86.0
100.5
63.2
57.0
56.9
52.1
Table of Contents
Three Months Ended
Sept. 30,
June 30,
March 31,
Dec. 31,
Sept. 30,
June 30,
March 31,
Dec. 31,
2001
2001
2001
2000
2000
2000
2000
1999
(14.9
)
(5.3
)
(44.7
)
(47.7
)
4.7
14.7
14.1
18.3
2.4
1.1
3.2
0.8
1.3
2.9
3.5
3.9
(12.6
)
(3.4
)
(40.6
)
(46.0
)
6.0
17.6
17.6
22.1
30.7
2.2
(8.3
)
(9.9
)
2.2
4.5
(43.3
)%
(5.6
)%
(32.3
)%
(36.1
)%
3.9
%
13.2
%
17.6
%
22.1
%
Year Ended September 30
2001
2000
1999
$
74,407
$
66,136
$
25,873
69,300
53,017
24,797
(11,659
)
9,826
(1,989
)
(8,084
)
(16,503
)
(5,644
)
36,343
35,084
26,225
Table of Contents
Table of Contents
Table of Contents
We may not be able to compete effectively
in the emerging Internet traffic and content management
market.
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.
We may not be able to sustain or develop
new distribution relationships.
Table of Contents
Our expansion into international markets
may not succeed.
Our operating results are exposed to risks
associated with international commerce.
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 business may be harmed if our contract
manufacturers are not able to provide us with adequate supplies
of our products.
Table of Contents
Our business could suffer if there are any
interruptions or delays in the supply of hardware components
from our third-party sources.
Undetected software errors may seriously
harm our business and results of operations.
We may not adequately protect our
intellectual property and our products may infringe on the
intellectual property rights of third parties.
Our stock price may be
volatile.
Table of Contents
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Interest Rate Risk.
We do not hold derivative financial
instruments or equity securities in our investment portfolio.
The Board of Directors authorized one transaction to purchase
and sell publicly traded company options. 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 limits all short-term
investments to 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.
Maturing in
Three Months
Three Months
Greater than
September 30, 2001:
or Less
to One Year
One Year
Total
Fair Value
(In thousands)
$
8,169
$
$
$
8,169
$
8,169
4.1
%
$
$
33,500
$
17,294
$
50,794
$
51,462
4.6
%
3.4
%
Maturing in
Three Months
Three Months
Greater than
September 30, 2000:
or Less
to One Year
One Year
Total
Fair Value
(In thousands)
$
13,717
$
$
$
13,717
$
13,717
6.4
%
$
6,126
$
26,523
$
2,014
$
34,663
$
34,603
6.6
%
6.7
%
7.0
%
Maturing in
Three Months
Three Months
Greater than
September 30, 1999:
or Less
to One Year
One Year
Total
Fair Value
(In thousands)
$
14,367
$
$
$
14,367
$
14,367
5.1
%
$
5,315
$
3,813
$
$
9,128
$
9,047
5.5
%
5.7
%
Foreign Currency Risk. Currently the majority of our sales and expenses are denominated in U.S. dollars and as a result, we have not experienced significant foreign exchange gains and losses to date. While we have conducted some transactions in foreign currencies during the fiscal year ended September 30, 2001 and expect to continue to do so, we do not anticipate that foreign exchange 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.
29
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Page | ||||
|
||||
Report of Independent Accountants
|
31 | |||
Consolidated Balance Sheets
|
32 | |||
Consolidated Statements of Operations
|
33 | |||
Consolidated Statements of Shareholders
Equity
|
34 | |||
Consolidated Statements of Cash Flows
|
35 | |||
Notes to Consolidated Financial Statements
|
36 |
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
In our opinion, the consolidated financial
statements listed appearing under Items 14(a)(1) present fairly,
in all material respects, the financial position of F5 Networks,
Inc. and its subsidiaries at September 30, 2001 and 2000,
and the results of their operations and their cash flows for
each of the three years in the period ended September 30,
2001 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 index appearing
under Item 14(a)(2) 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 the opinion expressed above.
Seattle, Washington
31
PRICEWATERHOUSECOOPERS LLP
Table of Contents
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
September 30
2001
2000
(In thousands)
$
69,783
$
53,199
22,628
38,237
2,602
5,231
6,885
2,290
1,858
101,898
100,815
6,000
6,000
15,496
13,524
1,269
541
1,540
$
124,663
$
122,420
$
4,460
$
10,561
11,517
7,737
11,031
16,199
27,008
34,497
1,167
238
123,393
87,419
(469
)
573
(52
)
(536
)
(3,061
)
(26,942
)
3,848
96,488
87,685
$
124,663
$
122,420
The accompanying notes are an integral part of these consolidated financial statements.
32
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
Year Ended September 30
2001
2000
1999
(In thousands, except per share data)
$
78,628
$
87,980
$
23,420
28,739
20,665
4,405
107,367
108,645
27,825
33,240
24,660
5,582
12,265
7,911
1,618
45,505
32,571
7,200
61,862
76,074
20,625
50,767
36,890
13,505
17,435
14,478
5,642
18,776
9,727
3,869
975
2,625
2,127
2,487
90,578
63,222
25,503
(28,716
)
12,852
(4,878
)
2,021
2,903
534
(26,695
)
15,755
(4,344
)
4,095
2,105
$
(30,790
)
$
13,650
$
(4,344
)
$
(1.36
)
$
0.65
$
(0.42
)
22,644
21,137
10,238
$
(1.36
)
$
0.59
$
(0.42
)
22,644
23,066
10,238
The accompanying notes are an integral part of these consolidated financial statements.
33
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
Subscriptions
Convertible
Notes
Accumulated
Preferred Stock
Common Stock
Receivable
Other
From
Unearned
Comprehensive
Accumulated
Shares
Amount
Shares
Amount
Shareholders
Compensation
Income/(Loss)
Deficit
Total
(In thousands)
1,806
$
4,197
6,021
$
2,875
$
(1,694
)
$
(5,458
)
$
(80
)
588
256
256
428
420
420
150
750
$
(750
)
4,025
(4,025
)
2,487
2,487
(1,806
)
(4,197
)
8,114
11,885
7,688
2,860
25,549
25,549
(4,344
)
(1
)
(2
)
(4,347
)
18,161
45,760
(750
)
(3,232
)
(3
)
(9,802
)
31,973
669
716
716
2,199
1,414
1,414
84
1,198
1,198
281
281
4,900
4,900
500
31,475
31,475
1,956
(1,956
)
2,127
2,127
13,650
(274
)
225
13,601
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
The accompanying notes are an integral part of these consolidated financial statements.
34
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Year Ended September 30
2001
2000
1999
(In thousands)
$
(30,790
)
$
13,650
$
(4,344
)
975
345
1,377
4,019
(92
)
285
225
2,625
2,127
2,487
15,310
2,876
1,183
5,348
2,335
573
3,398
(3,398
)
4,900
423
(30,715
)
(9,508
)
790
(5,639
)
(519
)
(5,422
)
(315
)
(731
)
(728
)
(1,306
)
(181
)
(3,018
)
11,940
5,473
(5,127
)
11,769
3,578
(11,659
)
9,826
(1,989
)
(2,987
)
(3,013
)
851
217
(9,152
)
(13,334
)
(2,631
)
(8,084
)
(16,321
)
(5,644
)
25,549
31,475
34,928
2,309
3,328
676
188
281
(1,082
)
36,343
35,084
26,225
16,600
28,589
18,592
(16
)
(187
)
(1
)
53,199
24,797
6,206
$
69,783
$
53,199
$
24,797
The accompanying notes are an integral part of these consolidated financial statements.
35
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Description of
the Company:
F5 Networks, Inc. (the Company) was
incorporated on February 26, 1996 in the State of
Washington and is a leading provider of integrated Internet
traffic and content management solutions designed to improve the
availability and performance of mission-critical Internet-based
servers and applications. The Companys proprietary
software-based solutions monitor and manage local and
geographically dispersed servers and intelligently direct
traffic to the server best able to handle a users request.
The Company purchases material component parts and certain
licensed software from suppliers and generally contracts with
third parties for the assembly of products. The Company operates
in one segment providing integrated internet traffic and content
management solutions.
2. Summary of
Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements and
accompanying notes are prepared in accordance with accounting
principles generally accepted in the United Sates of America.
The consolidated financial statements include the accounts of
the Company and all majority owned subsidiaries. Significant
intercompany transactions have been eliminated in consolidation.
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.
Use of Estimates
The preparation of financial statements is in
conformity with accounting principles generally accepted in the
United States of America and requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Actual results could differ from those estimates.
Estimates that are particularly susceptible to
changes in the near term are the adequacy of allowances for
sales returns and bad debt, inventory obsolescence, warranty
costs and deferred taxes.
Cash Equivalents and Short-term
Investments
Cash equivalents are highly liquid investments,
consisting of investments in money market funds and short-term
investments which are readily convertible to cash without
penalty and subject to insignificant risk of changes in value.
The Companys cash equivalents and short term investments
balance consists of the following (in thousands):
36
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentration of Credit Risk
The Company places its temporary cash investments
with five major financial institutions.
The Companys customers are from diverse
industries and geographic locations. Net revenues from
international customers are primarily denominated in U.S.
Dollars and were approximately $35.0 million,
$20.6 million and $2.2 million for the years ended
September 30, 2001, 2000 and 1999, respectively. During
fiscal 2001 no single reseller or customer exceeded 10% of the
Companys net revenue or accounts receivable balance.
During fiscal 2000 and 1999, one of the Companys
resellers, Exodus Communications, accounted for 14% and 22% of
net revenue and 8% and 16% of the Companys accounts
receivable balance, respectively. In association with Exodus
filing Chapter 11 bankruptcy, the Company recorded a
non-recurring adjustment to its bad-debt expense of
$1.75 million and $226,000 in cost of goods sold related to
the leased inventory during fiscal 2001. The Company does not
require collateral to support credit sales. Allowances are
maintained for potential credit losses and sales returns.
Inventories
Inventories consist of hardware and the 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 a restricted escrow
account established in connection with a lease agreement for the
companys corporate headquarters. Under the term of the
lease, a $6.0 million standby letter of credit is required
through November 2012, unless the lease is terminated before
then.
Property and Equipment
Property and equipment is stated at cost.
Depreciation of property and equipment and amortization of
capital leases are provided on the straight-line method over the
estimated useful lives of the assets of 2 to 5 years.
Leasehold improvements are amortized over the lesser of the term
of the lease 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 in the normal course of business are
reflected in the results of operations at the time of disposal.
Software Development Costs
Software development costs incurred in
conjunction with product development 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 costs using the
straight-line method over the estimated economic life of the
product, generally three years. In fiscal 2001, the Company
capitalized $327,000 in software development costs, generally
representing labor costs, and recorded no related amortization.
37
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying
value of long-lived assets to be held and used, including, but
not limited to, property and equipment, other assets, and
deferred income taxes, when events and circumstances warrant
such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow
from the asset is separately identifiable and is less than its
carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with
the risk involved. Losses on long-lived assets to be disposed of
are determined in a similar manner, except that fair values are
reduced for the cost to dispose.
Revenue Recognition
The Company recognizes revenue under Statement of
Financial Accounting Standards (SFAS) No. 48,
Revenue Recognition When Right of Return Exists, SEC
Staff Accounting Bulleting (SAB) No. 101,
Revenue Recognition in Financial Statements,
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.
The Company sells products through resellers,
original equipment manufacturers and other channel partners, as
well as to end users, under similar terms. Typically this
combines software license, installation and customer support
elements into a package with a single bundled price
and allocates a portion of the sales price to each element of
the bundled package based on their respective fair values when
the individual elements are sold separately. Revenues from the
license of software, net of an allowance for estimated returns,
are recognized when the product has been shipped and the
customer is obligated to pay for the product. Installation
revenue is recognized when the product has been installed at the
customers site. Revenues for customer support are
recognized on a straight-line basis over the service contract
term. Estimated sales returns are based on historical experience
by product and are recorded at the time revenues are recognized.
The following presents revenues by shipment
destination for the years ended 2001, 2000 and 1999 (in
thousands):
Warranty Expense
The Company generally offers warranties between
90 days and one year depending on whether it relates to
hardware or software. Estimated future warranty obligations
related to products are provided by charges to operations in the
period in which the related revenue is recognized. These
estimates are based on historical warranty experience and other
relevant information of which the Company is aware. During the
years ended September 30, 2001, 2000 and 1999 warranty
expense was $0.4 million, $2.3 million and
$0.3 million, respectively.
38
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Advertising costs are expensed as incurred.
Advertising expense was approximately $1.5 million,
$1.6 million and $1.0 million for the years ended
September 30, 2001, 2000 and 1999, 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 Translation
The financial statements of F5 Networks, Ltd., F5
Networks, Singapore Pte. Ltd. and F5 Networks, Japan K.K. have
been translated into U.S. dollars in accordance with Statement
of Financial Accounting Standards No. 52 Foreign
Currency Translation. Under the provisions of this
Statement, all assets and liabilities in the balance sheet of
the subsidiaries are translated at year-end exchange rates, and
translation gains and losses are reported as a component of
comprehensive income (loss) and are accumulated in 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. Transaction losses for the fiscal years ended
September 30, 2001, 2000 and 1999 of $139,000, $84,000, and
$0, respectively, were charged to operations.
Comprehensive Income (Loss)
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, in June 1997. This
statement establishes standards for reporting and displaying
comprehensive income in the financial statements and was adopted
by the Company during the quarter ended September 30, 1999.
In addition to net income (loss), comprehensive income
(loss) includes charges or credits to equity that are not
the result of transactions with shareholders. For the Company,
this includes foreign currency translation and unrealized gains
and losses on investments. The Company has included components
of comprehensive income within the Consolidated Statements of
Shareholders Equity.
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 and FASB interpretation No. 44 (FIN
No. 44) accounting for certain transactions involving
stock compensation, 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 equity instruments
issued to nonemployees in accordance with the provisions of SFAS
No. 123.
39
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair Value of Financial Instruments
For certain financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, recorded amounts approximate market value,
due to the short maturities of these instruments.
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. For periods in
which the Company incurred a net loss, dilutive common stock
equivalent shares are excluded from the calculation as their
impact would have been antidilutive. The antidilutive securities
not included in diluted net loss per share calculation totaled
1,533,386 shares.
The following table sets forth the computation of
basic and diluted net income (loss) per share for the years
ended September 30, 2001, 2000 and 1999 (in thousands,
except per share data).
Derivatives
In the first quarter of fiscal 2001, the Company
adopted Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133) which establishes
accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 requires that an
entity recognize derivatives as either assets or liabilities on
the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation.
The Company designates the derivatives based upon
criteria established by SFAS 133. For a derivative
designated as a fair value hedge, the gain or loss is recognized
in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributed to the risk being
hedged. For a derivative designated as a cash flow hedge, the
effective portion of the derivatives gain or loss is
initially reported as a component of accumulated other
comprehensive income (loss) and subsequently reclassified into
earnings when the hedged exposure affects earnings. The
ineffective portion of the gain or loss is reported in earnings
immediately. The impact of derivatives on the Companys
financial position in fiscal 2001, has been insignificant.
40
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New Accounting Pronouncements
In July of 2001 the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 141
Business Combinations which is effective for all
business combinations initiated after July 1, 2001. SFAS
No. 141, supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for using
the purchase method of accounting. Further, SFAS No. 141
requires certain intangibles to be recognized as assets apart
from goodwill if they meet certain criteria and also requires
expanded disclosures regarding the primary reasons for
consummation of the combination and the allocation of the
purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. The Company does not
believe the standard will have a significant impact on the
financial position of the company.
In July of 2001, the FASB issued SFAS
No. 142 Goodwill and Other Intangible Assets
which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets, and addresses financial
accounting and reporting for intangible assets acquired
individually or with a group of other assets and the accounting
and reporting for goodwill and other intangible assets
subsequent to their acquisition. Under the model set forth in
SFAS No. 142, goodwill is no longer amortized to earnings,
but instead be subject to periodic testing for impairment. The
Company does not believe the standard will have a significant
impact on the financial position of the company.
In July 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations.
FASB 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It
applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development, and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The
provisions of FAS 143 will be effective for fiscal years
beginning after June 15, 2002, however early application is
permitted. The Company does not believe the standard will have a
significant impact its financial statements.
In August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets.
This Statement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. The provisions of
FAS 144 will be effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the
implications of adoption of FAS 144 and anticipates
adopting its provisions in fiscal year 2002.
3. Inventories:
Inventories are comprised of the following (in
thousands):
41
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Due to changes in current market conditions and a
revision of our sales forecast, a review was made of the
Companys inventory needs and an assessment of our future
purchase commitments during fiscal 2001. As a result, the
Company determined two provisions for excess inventory and
future purchase commitments would be recorded. The first
provision for excess inventory was charged to cost of revenues
in the amount of $3.9 million, which consisted of a
$3.1 million inventory valuation allowance and
approximately $800,000 of future purchase commitments. As of
September 30, 2001, $1.5 million of this reserve had
been utilized. The second provision for excess inventory was in
the amount of $1.0 million. This charge is associated with
charge is associated with the changes in the configuration of
the Companys EDGE-FX Cache product, which will increase
the functionality of the product. These costs are associated
with updating both existing inventory and product previously
sold to customers, as well as costs to fulfill existing purchase
commitments and have been included in cost of revenues for the
for the fiscal year ended September 30, 2001. As of
September 30, 2001, $232,000 of this reserve had been
utilized.
4. Property and
Equipment:
At September 30, 2001 and 2000, property and
equipment consist of the following (in thousands):
Depreciation and amortization expense was
approximately $5.3 million, $2.3 million and
$0.5 million for the years ended September 30, 2001,
2000 and 1999 respectively.
5. Accrued
Liabilities:
At September 30, 2001 and 2000, accrued
liabilities consist of the following (in thousands):
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
6. Restructuring
Charges:
During the first fiscal quarter of 2001, F5
recorded a restructuring charge of $1.1 million in
connection with management decision to bring operating expenses
in line with the business revenue growth model. As a result of
change in the business revenue growth model, the Company
terminated 96 employees throughout all divisions of the Company.
In 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
fiscal quarter of 2001 had been paid.
7. Income
Taxes:
Income (loss) before income taxes consists
of the following (in thousands):
The provision for income taxes for the fiscal
year 2001 consists of the following (in thousands):
No provision for federal or state income taxes
has been recorded for the year ended September 30, 1999, as
the Company incurred a loss.
43
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective rate differs from the U.S. federal
statutory rate as follows (in thousands):
The tax effects of the temporary differences that
give rise to significant portions of the deferred tax assets are
as follows (in thousands):
The Companys deferred tax assets include
net operating loss carry forwards of approximately
$27 million. During the first three quarters of fiscal year
2001, the Company maintained a partial valuation allowance
consistent with prior year against its deferred tax assets. In
the fourth quarter of fiscal year 2001, the Company re-evaluated
the need to provide a full valuation allowance. Due to changes
in the current economic environment and based on the weight of
all the available positive and negative evidence, the Company
determined that it was not more likely than not, that the
deferred taxes would be recognized and therefore, a full
valuation allowance should be provided to completely offset the
net deferred tax assets.
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
8. Shareholders
Equity:
a. Preferred
Stock
In April 1998, the Company issued 156,250 shares
of the Companys Series C Convertible Preferred Stock
and warrants to purchase 187,500 shares of the Companys
common stock at $1.60 per share for an aggregate purchase price
of $1.5 million. The Company has allocated approximately
$75,000 of the purchase price of the Series C Convertible
Preferred Stock as the value of the warrants issued. On
February 1, 1999 these warrants were exercised. The holders
of the Series C Convertible Preferred Stock have certain
voting rights and liquidation preferences equal to $9.60 per
share. Each share of Series C Convertible Preferred Stock
was converted into six shares of the Companys common stock.
In August 1998, the Company issued 1,138,438
shares of Series D Redeemable Convertible Preferred Stock
for an aggregate purchase price of approximately
$7.7 million. The Company was required to redeem all
outstanding shares of the Series D Redeemable Convertible
Preferred Stock at $6.79 per share, plus all declared and unpaid
dividends, either in August 2005 or in three annual installments
beginning August 2003 at the request of holders of at least
two-thirds of the outstanding Series D Redeemable
Convertible Preferred Stock. The holders of the Series D
Redeemable Convertible Preferred Stock had certain voting rights
and liquidation preferences equal to $13.58 per share. Each
share of Series D Redeemable Convertible Preferred Stock
was converted into two shares of the Companys common stock.
b. Common
Stock
On January 27, 1999 the Company authorized a
2 for 1 stock split, in the form of stock dividends,
respectively on the Companys common stock. All references
to number of shares and per share amounts of the Companys
common stock in the accompanying financial statements and notes
have been restated to reflect these stock splits.
c. Initial
Public Offering
On June 4, 1999, the Company issued
2,860,000 shares of its common stock at an initial public
offering price of $10.00 per share. Also sold in this offering
were 590,000 shares held by selling shareholders, including
450,000 shares sold upon the exercise of the underwriters
over-allotment option. The net proceeds to the Company from the
offering, net of offering costs of approximately $3.1 million
were approximately $25.5 million. Concurrent with the
initial public offering, each outstanding share or the
Companys convertible preferred stock was automatically
converted into common stock.
d. Secondary
Public Offering
In October of 1999, the Company completed and
issued 500,000 shares of its common stock in a secondary public
offering at a price of $67.00 per share. Also sold in this
offering were 2,030,000 shares of common stock held by selling
shareholders. The net proceeds to the Company, from the
offering, net of offering costs of approximately $350,000 were
approximately $31.5 million.
e. Nokia
Private Placement of Common Stock and Warrants
On June 26, 2001, the Company entered into a
Common Stock and Warrant Purchase Agreement with Nokia Finance
International B.V. (NFI). Under this Agreement, the
Company issued and sold to NFI (i) 2,466,421 shares of
Common Stock and (ii) warrants (the Warrants)
to purchase additional shares of common stock. The Company
received total proceeds of $34.9 million, net of
$1.8 million in issuance costs from the sale of these
shares and the Warrants. The Warrants allow NFI to purchase
additional shares of common stock to increase its ownership
percentage in the Company (up to a maximum of one share less than
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
20%) during three ten business day periods
beginning on December 31, 2001, June 30, 2002 and
December 31, 2002, at an exercise price equal to the
average 10-day closing price before the start of each period.
The Company recorded the issuance of the common
stock and Warrants by allocating the net proceeds to the Common
Stock and the Warrants, based upon their relative fair values at
the date of issuance. The fair value allocated to the Warrants
was $1.7 million based on an independent valuation. Based
upon the relative fair value at the date of issuance, the amount
of net proceeds allocated to the Warrants and included as a
component of common stock was $1.6 million. The amount
allocated to the common stock was $33.3 million.
NFI has also signed a two-year OEM license and
reseller agreement that gives them access to all of the
Companys internet traffic and content management products.
Nokia may resell the Companys products and integrate the
Companys software as part of its product offering.
f. Warrants
In February 1999, the Company issued a warrant to
purchase up to 12,500 shares of the Companys common stock
at $8.00 per share to a certain customer in conjunction with a
sale of products.
The Company has issued warrants to purchase
common stock to a certain customer. All the warrants were
exercisable at the time of issuance. The assumptions applied in
the determination of the fair value of warrants issued were
(i) use of the Black-Scholes pricing model, (ii) risk
free interest rates ranging from 5.2% to 6.2%,
(iii) expected volatility rates of approximately 70% (based
on disclosed expected volatility rates of comparable companies)
and actual volatility subsequent to the initial public offering,
(iv) assumed expected lives of 4 to 10 years, and
(v) no expected dividends. The warrants were exercised in
October of 2000.
g. Equity
Incentive Plans
In January 1997, Companys shareholders
approved the Amended and Restated 1996 Stock Option Plan (the
1996 Employee Plan) that provides for discretionary
grants of non-qualified and incentive stock options for
employees and other service providers, and the Amended and
Restated Directors Nonqualified Stock Option Plan (the
1996 Directors Plan), which provides for
automatic grants of non-qualified stock options to eligible
non-employee directors. A total of 2,600,000 shares of
common stock has been reserved for issuance under the 1996
Employee Plan and the 1996 Directors Plan. Employees
stock options typically vest over a period of four years from
the grant date; director options typically vest over a period of
three years from the grant date. All options under the 1996
Employee Plan and the 1996 Directors Plan expire
10 years after the grant date. All outstanding, unvested
options under the 1996 Employee Plan and the 1996
Directors Plan vest in full upon a change in control of
the Company. The Company does not intend to grant any additional
options under either of these Plans. As of September 30,
2001 there were 853,546 shares outstanding and
17,596 shares available.
In November 1998, the Companys shareholders
adopted the 1998 Equity Incentive Plan (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. A
total of 3,300,000 shares of common stock have been
reserved for issuance under the 1998 Plan. Stock options granted
under this plan typically vest over a period of four years from
the grant date, and expire 10 years from the grant date.
The Company has not granted any stock purchase awards or stock
bonuses under the 1998 Plan. Upon certain changes in control of
the Company, the surviving entity will either assume or
substitute all outstanding options or stock awards under the
1998 Plan. If the surviving entity determines not to assume or
substitute such options or awards, then with respect to persons
whose service with the Company or an affiliate of the Company
has not terminated before a change in control, the vesting of
50% of these options or stock awards (and the time
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during which these awards may be exercised) will
accelerate and the options or awards terminated if not exercised
before the change in control. As of September 30, 2001
there were 4,028,923 shares outstanding and
819,766 shares available.
In April 1999, the Companys shareholders
adopted the 1999 Non-Employee Directors Stock Option Plan
which provides for automatic grants to F5 non-employee directors
of options to purchase shares of the Companys common
stock. The board administers the plan and cannot delegate
administration to a committee. The plan reserved an aggregate of
100,000 shares of common stock for issuance, subject to
adjustment in the event of certain capital changes. As of
September 30, 2001 there were options to purchase
20,000 shares outstanding. The plan was terminated by the
Board effective January 1, 2001.
In July 2000, the Companys Board of
Directors adopted the 2000 Employee Equity Incentive Plan (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 2,000,000 shares of common stock have been
reserved for issuance under the 2000 Plan. Stock options granted
under this plan typically vest over a period of four years from
the grant date, and expire 10 years from the grant date.
The Company has not granted any stock purchase awards or stock
bonuses under the 2000 Plan. Upon certain changes in control of
the Company, the surviving entity will either assume or
substitute all outstanding options or stock awards under the
2000 Plan. If the surviving entity determines not to assume or
substitute such options or awards, then with respect to persons
whose service with the Company or an affiliate of the Company
has not terminated before a change in control, the vesting of
50% of these options or stock awards (and the time during which
these awards may be exercised) will accelerate and the options
or awards will be terminated if not exercised before the change
in control. As of September 30, 2001 there were options to
purchase 1,963,414 shares outstanding and
36,371 shares available for awards under the 2000 plan.
In July 2000, the Companys Board of
Directors adopted two nonqualified stock option plans (the
McAdam Plans) in connection with hiring John McAdam,
the Companys President and Chief Executive Officer. The
first McAdam Plan provides for a grant of 645,000 non-qualified
stock options for Mr. McAdam that vest over a period of
four years from the grant date. The second McAdam Plan provides
for a grant of 50,000 options for Mr. McAdam that vest over
a period of two years from the grant date. All options under the
McAdam Plans expire 10 years from the grant date, and upon
certain changes in control of the Company, the vesting of 100%
of these options will accelerate and the options will be
terminated if not exercised before the change in control. As of
September 30, 2001, 50,000 shares had been issued,
there were options to purchase 645,000 shares outstanding
and no shares available.
In October 2000, the Companys Board of
Directors 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 that vest
ratably over a period of four years from the grant date. All
options under this plan expire 10 years from the grant
date. As of September 30, 2001, there were options to
purchase 200,000 shares outstanding and no shares available
for grant.
In May 2001, the Companys Board of
Directors adopted a non-qualified stock option plan in
connection with the hiring of Steve Coburn, the Companys
Vice President of Finance and Chief Financial Officer. This plan
provides for a grant of 200,000 non-qualified stock options for
Mr. Coburn that vest ratably over a period of four years.
All options under this plan expire 10 years from the grant
date. As of September 30, 2001, there were 200,000 stock
option shares outstanding and no shares available available for
grant.
The Company applies the provisions prescribed in
APB No. 25 and related interpretations in accounting for
stock options. In certain instances, the Company has issued
stock options with an exercise price less than the deemed fair
value of the Companys common stock at the date of grant.
Accordingly, total compensation costs related to these stock
options of approximately $0.1 million, $2.0 million and
$4.0 million was deferred
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during fiscal years 2001, 2000 and 1999,
respectively, and is being amortized over the vesting period of
the options, generally four years. Amortization of stock
compensation costs of approximately $2.6 million,
$2.1 million and $2.5 million has been recognized as
an expense for the years ended September 30, 2001, 2000 and
1999, respectively.
A summary of stock option transactions are as
follows:
The weighted-average fair values and
weighted-average exercise prices per share at the date of grant
for options granted for the years ended September 30, 2001,
2000 and 1999 were as follows:
The following table summarizes information about
fixed-price options outstanding at September 30, 2001 as
follows:
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1999 Employee Stock Purchase Plan
In May 1999, the board of directors approved the
adoption of the 1999 Employee Stock Purchase Plan (the
Purchase Plan). A total of 1,000,000 shares of
common stock has been reserved for issuance under the Purchase
Plan. The 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 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.
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 of that statement for all periods
prior to the Company becoming a public entity and fair value
method of that statement for all periods subsequent to the
Company becoming a public entity. The fair value of each option
is estimated at the date of grant with the following
weighted-average assumptions used for the years ended
September 30, 2001, 2000 and 1999:
For purposes of pro forma disclosures, the
estimated fair value of the options is amortized over the
options vesting period. The Companys pro forma net
income (loss) would have been as follows (in thousands,
except per share data):
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
9. Commitments
and Contingencies:
Future minimum operating lease payments (net of
sublease proceeds) for future fiscal years, as of
September 30, 2001, are approximately as follows (in
thousands):
Rent expense under non-cancelable operating
leases amounted to approximately $4.8 million,
$1.9 million and $0.5 million for the years ended
September 30, 2001, 2000, and 1999, respectively.
In April 2000, the Company entered into a lease
agreement on two buildings for a new corporate headquarters. The
lease commenced in July 2000 on the first building; and the
lease on the second building commenced in October 2000. The
lease for both buildings expires in 2012 with an option for
renewal. The Company established a restricted escrow account in
connection with this lease agreement. Under the term of the
lease, a $6.0 million irrevocable standby letter of credit
is required through November 2012, unless the lease is
terminated before then. This amount has been included on the
Companys balance sheet as of September 30, 2000 as a
component of restricted cash. The Company has surplus office
space of approximately 14,000 square feet which it subleased
until 2003 and approximately 110,000 square feet which it
subleased until 2012.
On August 8, 2001 a putative securities
class action, captioned Atlas v. F5 Networks, Inc. et
al., Civil Action No. 01-CV-7342, was filed against the
firms that underwrote F5 Networks initial public
offering, F5 Networks, and several of its officers and
directors in the United States District Court for the Southern
District of New York. The complaint alleges violations of
Sections 11 and 15 of the Securities Exchange Act of
1933 and Section 10(b) and Rule 10b-5 promulgated
thereunder and Section 20(a) of the Securities Exchange Act
of 1934 against the Company and its officers and directors, and
seeks unspecified damages on behalf of a purported class that
purchased F5 Networks common stock between
June 4, 1999 and December 6, 2000.
On August 15, 2001 a similar complaint,
captioned Lee v. F5 Networks, Inc. et al., Civil
Action No. 01-CV-7625, was filed in the United States
District Court for the Southern District of New York. The
complaint is substantially identical to the Atlas complaint: it
names the same defendants, contains the virtually identical
claims, and seeks unspecified damages on behalf of a purported
class of purchasers of common stock during an identical class
period.
Various plaintiffs have filed similar actions in
the United States District Court for the Southern District of
New York asserting virtually identical allegations against more
than 200 other issuers. These cases have all been assigned to
the Hon. Shira A. Scheindlin for coordination and decisions
on pretrial motions, discovery, and related matters other than
trial. The Company believes that it has meritorious defenses to
the lawsuits and will defend itself vigorously in the
litigation. An unfavorable resolution of the actions could have
a material, adverse effect on the business, results of
operations or financial condition of the Company.
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The company may be subject to additional legal
proceedings, claims and litigation arising in the ordinary
course of business. Although the outcome of these matters is
currently not determinable, the Company does not expect that the
resolution of the actions could have a material, adverse effect
on the business, results of operations or financial condition of
the Company.
10. Related Party
Transactions:
In March 1999, the Company issued 150,000 shares
of common stock to an officer of the Company in exchange for a
note receivable. These shares were acquired by exercising stock
options that vest over a period of four years. The note bears
interest at a rate of 4.83%, is collateralized by the shares,
partially guaranteed by the officer and is due in 2003. In
fiscal 2000, total payments of $281,000 were received on the
loan. Under the pledge agreement, the Company has the obligation
to repurchase any remaining unvested shares, and the note
becomes due upon the officers termination. Further, the
shares may not be transferred until they are vested, and the
related portion of the loan is repaid. In fiscal 2001, the
officer left the company and returned unvested shares totaling
approximately 56,000 options to purchase shares of common stock,
which were subsequently cancelled. In fiscal 2001, total
payments of $188,000 were received on the loan.
11. Employee
Benefit Plans:
The Company provides a 401(k) savings plan
whereby eligible employees may voluntarily contribute a
percentage of their compensation. Under the provision of the
plan the Company may, at their discretion, match a portion of
the employees eligible contributions. Contributions to the
plan during the years ended September 30, 2001, 2000 and
1999 were approximately $953,000, $833,000 and $612,000,
respectively. Contributions made by the company vest over four
years.
12. Supplemental
Cash Flow Information:
Supplemental disclosure of cash flow information
is summarized below for the years ended September 30, 2001,
2000 and 1999 (in thousands):
51
September 30
2001
2000
$
18,321
$
18,596
51,462
34,603
$
69,783
$
53,199
Table of Contents
Table of Contents
September 30
2001
2000
1999
$
72,406
$
88,047
$
25,672
10,004
7,029
1,655
24,957
13,569
498
$
107,367
$
108,645
$
27,825
Table of Contents
Table of Contents
Year Ended September 30
2001
2000
1999
$
(30,790
)
$
13,650
$
(4,344
)
22,644
21,137
10,238
1,918
11
22,644
23,066
10,238
$
(1.36
)
$
0.65
$
(0.42
)
$
(1.36
)
$
0.59
$
(0.42
)
Table of Contents
September 30
2001
2000
$
3,283
$
2,045
1,347
3,186
(2,028
)
$
2,602
$
5,231
Table of Contents
September 30
2001
2000
$
9,934
$
7,167
5,782
3,783
7,227
5,673
22,943
16,623
(7,447
)
(3,099
)
$
15,496
$
13,524
September 30
2001
2000
$
5,066
$
3,874
93
791
228
401
526
175
1,064
589
705
528
350
3,835
1,029
$
11,517
$
7,737
Table of Contents
September 30
2001
2000
1999
$
(25,900
)
$
17,976
$
(4,364
)
(795
)
(2,221
)
20
$
(26,695
)
$
15,755
$
(4,344
)
September 30
2001
2000
$
33
$
5,325
50
647
614
(469
)
697
5,503
3,227
(3,227
)
171
(171
)
3,398
(3,398
)
$
4,095
$
2,105
Table of Contents
September 30
2001
2000
1999
$
(9,343
)
$
5,514
$
(1,477
)
(526
)
409
105
308
(653
)
(1,315
)
(450
)
(248
)
(33
)
1,037
81
14,545
(3,398
)
1,644
$
4,095
$
2,105
$
September 30
2001
2000
1999
$
12,333
$
4,884
$
2,665
694
278
105
2,408
617
281
407
276
135
1,067
1,283
539
78
544
158
58
2,193
1,540
20,929
8,292
3,322
(20,929
)
(4,884
)
(3,314
)
3,408
8
(10
)
(8
)
$
$
3,398
$
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Weighted
Outstanding
Average Exercise
Options
Price Per Share
2,077,250
0.26
1,343,371
9.82
(738,191
)
1.33
(197,800
)
1.15
2,484,630
5.05
3,979,695
62.52
(668,456
)
1.07
(492,598
)
69.06
5,303,271
42.69
4,662,574
12.59
(607,987
)
1.06
(1,446,975
)
50.05
7,910,883
27.02
Year Ended September 30
2001
2000
1999
$
10.54
$
48.61
$
15.69
12.40
63.25
30.52
27.89
42.56
4.54
29.42
0.00
1.24
Weighted
Weighted Average
Average
Number
Remaining
Weighted Average
Number
Exercisable
Exercise Prices
Outstanding
Contractual Life
Exercise Price
Exercisable
Price
1,146,798
7.61
$
2.92
528,649
$
1.58
2,740,764
9.40
8.14
351,990
7.34
2,470,282
8.99
30.77
403,672
34.63
1,397,814
8.55
67.16
512,568
70.48
155,225
8.22
121.92
73,691
121.77
Table of Contents
Stock Option Plan
Employee Stock Purchase Plan
Year Ended September 30
Year Ended September 30
2001
2000
1999
2001
2000
1999
4.81
%
6.12
%
5.47
%
4.49
%
5.50
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
0.00
%
4 years
4 years
4 years
6 months
6 months
138.79
%
111.87
%
69.87
%
138.79
%
111.87
%
Year Ended September 30
2001
2000
1999
$
(30,790
)
$
13,650
$
(4,344
)
(105,573
)
(40,648
)
(5,151
)
(1.36
)
0.59
(0.42
)
(4.66
)
(1.92
)
(0.50
)
Table of Contents
Gross
Net
Operating
Operating
Lease
Sublease
Lease
Payments
Income
Payments
$
6,638
$
2,990
$
3,648
5,723
3,189
2,534
5,280
3,142
2,138
5,289
3,240
2,049
4,843
3,350
1,493
33,329
21,743
11,586
$
61,102
$
37,654
$
23,448
Table of Contents
Year Ended September 30
2001
2000
1999
$
$
$
750
(281
)
150
2,128
(50
)
(172
)
167
12
Table of Contents
PART III
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 10. Directors And Executive Officers of the Registrant.
See Directors and Executive Officers of the Registrant under Item 1, Part I above.
Information concerning compliance with Section 16 of the Securities Exchange Act is incorporated herein by reference to information appearing in the Companys Proxy Statement for its annual meeting of shareholders to be held on March 7, 2002, which information appears under the caption Section 16(a) Beneficial Ownership Reporting Compliance. Such Proxy Statement will be filed within 120 days of the Companys last fiscal year-end, September 30, 2001.
Items 11, 12 and 13
The information called for by Items 11, 12 and 13 of this Part III is included in the Companys Proxy Statement relating to the Companys annual meeting of shareholders to be held on March 7, 2002 and is incorporated herein by reference. The information appears in the Proxy Statement under the captions Election of Directors, Remuneration of Executive Officers, and Voting Securities and Principal Holders. Such Proxy Statement will be filed within 120 days of the Companys last fiscal year-end, September 30, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Consolidated Financial Statements and Financial Statements schedules:
(1) Consolidated Financial Statements. |
Valuation and Qualifying Accounts and Reserves.
52
(b) Reports on Form 8-K:
None
53
54
Report of PricewaterhouseCoopers LLP, Independent
Accountants
Consolidated Balance Sheets as of September 30, 2001 and
2000
Consolidated Statements of Operations for the years ended
September 30, 2001, 2000 and 1999
Consolidated Statements of Shareholders Equity for the
years ended September 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2)
Consolidated Financial Statement
Schedule.
Table of Contents
(c)
Exhibits:
Exhibit
Number
(Referenced to
Item 601 of
Exhibit
Regulation S-K)
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
Common Stock Purchase Warrant issued to Nokia
Finance International B.V.(3)
10
.1
Form of Indemnification Agreement between the
Registrant and each of its directors and certain of its
officers.(1)
10
.2
1998 Equity Incentive Plan.(1)
10
.3
Form of Option Agreement under the 1998 Equity
Incentive Plan.(1)
10
.4
1999 Employee Stock Purchase Plan.(1)
10
.5
Amended and Restated Directors Nonqualified
Stock Option Plan.(1)
10
.6
Form of Option Agreement under the Amended and
Restated Directors Nonqualified Stock Option Plan.(1)
10
.7
Amended and Restated 1996 Stock Option Plan.(1)
10
.8
Form of Option Agreement under the Amended and
Restated 1996 Stock Option Plan.(1)
10
.9
1999 Non-Employee Directors Stock Option
Plan.(1)
10
.10
Form of Option Agreement under 1999 Non-Employee
Directors Stock Option Plan.(1)
10
.11
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000.(5)
10
.12
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000.(5)
10
.13
Office Lease Agreement, dated July 31, 1999,
between Registrant and 401 Elliott West LLC.(2)
10
.14
Agreement, dated February 19, 1999, between
the Registrant and Steven Goldman.(1)
10
.15
Investor Rights Agreement, dated August 21,
1998, between Registrant and certain holders of the
Registrants Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock.(1)
10
.16
Common Stock and Warrant Purchase Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(3)
10
.17
Investors Rights Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(3)
10
.18
Sublease Agreement dated March 30, 2001
between the Company and Cell Therapeutics, Inc.(3)
10
.19
2000 Employee Equity Incentive Plan(4)
*10
.20
Form of Option Agreement under the 2000 Equity
Incentive Plan
10
.21
NonQualified Stock Option Agreement between Jeff
Pancottine and the Company dated October 23, 2000(4)
*10
.22
NonQualified Stock Option Agreement between Steve
Coburn and the Company dated May 29, 2001
*23
.1
Consent of PricewaterhouseCoopers LLP,
Independent Accountants.
Table of Contents
*
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-1, File No. 333-86767.
(3)
Incorporated by reference from Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001
(4)
Incorporated by reference from Registration
Statement on Form S-8, File No. 333-51878.
(5)
Incorporated by reference from Annual Report on
Form 10-K for the year ended September 30, 2000.
Table of Contents
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. |
By: | /s/ JOHN MCADAM |
|
|
John McAdam | |
Chief Executive Officer and President |
Dated: December 28, 2001
Pursuant to the requirements of the Securities 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) |
December 28, 2001 | |||
By: |
/s/ STEVEN B. COBURN
Steven B. Coburn |
Senior Vice President, Chief Financial Officer
(Principal Finance and Accounting Officer) |
December 28, 2001 | |||
By: |
/s/ JEFFREY S. HUSSEY
Jeffrey S. Hussey |
Chairman of the Board | December 28, 2001 | |||
By: |
/s/ KEITH D. GRINSTEIN
Keith D. Grinstein |
Director | December 28, 2001 | |||
By: |
/s/ KARL D. GUELICH
Karl D. Guelich |
Director | December 28, 2001 | |||
By: |
/s/ ALAN J. HIGGINSON
Alan J. Higginson |
Director | December 28, 2001 | |||
By: |
/s/ KENNY J. FRERICHS
Kenny J. Frerichs |
Director | December 28, 2001 |
55
EXHIBIT INDEX
Exhibit
Number
(Referenced to
Item 601 of
Exhibit
Regulation S-K)
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
Common Stock Purchase Warrant issued to Nokia
Finance International B.V.(3)
10
.1
Form of Indemnification Agreement between the
Registrant and each of its directors and certain of its
officers.(1)
10
.2
1998 Equity Incentive Plan.(1)
10
.3
Form of Option Agreement under the 1998 Equity
Incentive Plan.(1)
10
.4
1999 Employee Stock Purchase Plan.(1)
10
.5
Amended and Restated Directors Nonqualified
Stock Option Plan.(1)
10
.6
Form of Option Agreement under the Amended and
Restated Directors Nonqualified Stock Option Plan.(1)
10
.7
Amended and Restated 1996 Stock Option Plan.(1)
10
.8
Form of Option Agreement under the Amended and
Restated 1996 Stock Option Plan.(1)
10
.9
1999 Non-Employee Directors Stock Option
Plan.(1)
10
.10
Form of Option Agreement under 1999 Non-Employee
Directors Stock Option Plan.(1)
10
.11
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000.(5)
10
.12
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000.(5)
10
.13
Office Lease Agreement, dated July 31, 1999,
between Registrant and 401 Elliott West LLC.(2)
10
.14
Agreement, dated February 19, 1999, between
the Registrant and Steven Goldman.(1)
10
.15
Investor Rights Agreement, dated August 21,
1998, between Registrant and certain holders of the
Registrants Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock.(1)
10
.16
Common Stock and Warrant Purchase Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(3)
10
.17
Investors Rights Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(3)
10
.18
Sublease Agreement dated March 30, 2001
between the Company and Cell Therapeutics, Inc.(3)
10
.19
2000 Employee Equity Incentive Plan(4)
*10
.20
Form of Option Agreement under the 2000 Equity
Incentive Plan
10
.21
NonQualified Stock Option Agreement between Jeff
Pancottine and the Company dated October 23, 2000(4)
*10
.22
NonQualified Stock Option Agreement between Steve
Coburn and the Company dated May 29, 2001
*23
.1
Consent of PricewaterhouseCoopers LLP,
Independent Accountants.
* | 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-1, File No. 333-86767. |
56
(3) | Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. |
(4) | Incorporated by reference from Registration Statement on Form S-8, File No. 333-51878. |
(5) | Incorporated by reference from Annual Report on Form 10-K for the year ended September 30, 2000. |
57
F5 NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
Balance at
Balance at
beginning of
Charges to
Charges to
end of
Description
fiscal period
costs & expenses
other accounts
Deductions
fiscal period
89
409
85
413
292
774
653
413
1,670
1,644
3,314
413
880
435
858
413
1,996
1,601
808
3,314
2,117
547
4,884
858
5,799
2,743
3,914
808
9,511
277
8,265
2,331
4,884
16,045
20,929
58
EXHIBIT 10.20
F5 NETWORKS, INC.
2000 EMPLOYEE EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
Pursuant to the Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, F5 Networks, Inc. (the "Company") has granted you an option under its 2000 Employee Equity Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in the Grant Notice at the exercise price indicated in the Grant Notice. Your option is granted in connection with and in furtherance of the Company's compensatory benefit plan for the Employees, Directors and Consultants of the Company and its Affiliates. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares subject to your option and your exercise price per share referenced in the Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan.
3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY THE GRANT NOTICE, which may include one or more of the following if the Company, in its sole discretion at the time your option is exercised, is then offering such alternatives:
(a) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds (a "cashless exercise").
(b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then by delivery of already-owned shares of Common Stock (valued at their Fair Market Value on the date of exercise) if (i) either you have held the already-owned shares for the period required to avoid a charge to the Company's reported earnings (generally six months) or you did not acquire the already-owned shares, directly or indirectly from the Company, and (ii) you own the already-owned shares free and
clear of any liens, claims, encumbrances or security interests. "Delivery" for these purposes, in the sole discretion of the Company at the time your option is exercised, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, your option may not be exercised by tender to the Company of Common Stock to the extent such tender would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock.
(c) Provided there has been a change in control described in subsection 11(c) of the Plan and the surviving corporation or acquiring corporation refuses to assume your option or to substitute a similar option for your option, then by authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to you as a result of the exercise of your option. Notwithstanding the foregoing, your option may not be exercised by withholding shares of Common Stock to the extent such withholding would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock.
4. WHOLE SHARES. Your option may only be exercised for whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, your option may not be exercised unless the shares issuable upon exercise of your option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing the option, and the option may not be exercised if the Company determines that the exercise would not be in material compliance with such laws and regulations.
6. TERM. The term of your option commences on the Date of Grant and expires upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous Service for any reason other than death or Disability, provided that if during any part of such three-month period the option is not exercisable solely because of the condition set forth in paragraph 5, the option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service;
(b) twelve (12) months after the termination of your Continuous Service due to Disability;
(c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates for reason other than Cause;
(d) the Expiration Date indicated in the Grant Notice; or
(e) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or your Disability. The Company has provided for extended exercisability of your option in the event of your death or Disability, but the Company cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates.
7. EXERCISE.
(a) You may exercise the vested portion of your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option or (2) the disposition of shares acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.
8. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option.
9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.
10. WITHHOLDING OBLIGATIONS.
(a) At the time your option is exercised, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option.
(b) Your option is not exercisable unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested.
11. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
12. GOVERNING PLAN DOCUMENT. Your option is subject to all applicable provisions of the Plan, which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control.
EXHIBIT 10.22
F5 NETWORKS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as of May 29, 2001 (the "Grant Date") between F5 Networks, Inc., a Washington corporation (the "Company") and Steve Coburn ("Holder").
THE PARTIES AGREE AS FOLLOWS:
1. GRANT OF OPTION; GRANT DATE. The Company hereby grants to Holder, the right (the "Option") to purchase up to 200,000 shares of the Company's Common Stock (the "Option Shares") at a price per share of $12.72 (the "Exercise Price"), on the terms and conditions set forth in this Agreement. This Option is not intended to qualify as an incentive stock option for purposes of Section 422 of the Code. The number and kind of Option Shares and the Exercise Price may be adjusted in certain circumstances in accordance with the provisions of Section 9 below.
2. DEFINITIONS. For purposes of this Agreement, the following terms shall be defined as set forth below:
2.1 Affiliate. "Affiliate" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing.
2.2 Board. "Board" means the Board of Directors of the Company.
2.3 Code. "Code" means the Internal Revenue Code of 1986, as amended.
2.4 Common Stock. "Common Stock" means the common stock of the Company.
2.5 Continuous Service. "Continuous Service" means that Holder's service with the Company or an Affiliate, whether as an employee or consultant, is not interrupted or terminated. Holder's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which Holder renders service to the Company or an Affiliate as an employee or consultant or a change in the entity for which Holder renders such service, provided that there is no interruption or termination of Holder's Continuous Service. For example, a change in status from an employee of the Company to a consultant of an Affiliate will not constitute an interruption of Continuous Service. The Board, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by the Board, including sick leave, military leave or any other personal leave.
2.6 Disability. "Disability" means the permanent and total disability of Holder within the meaning of Section 22(e)(3) of the Code.
2.7 Expiration Date. "Expiration Date" means May 29, 2011.
2.8 Fair Market Value. "Fair Market Value" means, as of any date, the value of the Common Stock. If the Common Stock is listed on any established stock exchange or traded on the NASDAQ National Market or the NASDAQ Small Cap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the day of determination or, if the day of determination is not a market trading day, then on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.
2.9 Securities Act. "Securities Act" means the Securities Act of 1933, as amended.
2.10 Vesting Commencement Date. "Vesting Commencement Date" shall mean Holder's first day of continuous service with the Company.
3. VESTING. Subject to the limitations contained herein, the Option will vest and become exercisable with respect to 25% of the Option Shares on the first anniversary of the Vesting Commencement Date and with respect to the remaining Option Shares in equal monthly installments over the three years following the Vesting Commencement Date; provided that vesting will cease upon the termination of Holder's Continuous Service.
4. METHOD OF PAYMENT OF THE EXERCISE PRICE. Payment of the Exercise Price is due in full upon exercise of all or any part of the Option. Holder may elect to make payment of the Exercise Price in cash or by check or one or more of the following if the Company, in its sole discretion at the time the Option is exercised, is then offering such alternatives:
(a) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds (a "cashless exercise").
(b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then by delivery of already-owned shares of Common Stock (valued at their Fair Market Value on the date of exercise) if (i) either Holder has held the already-owned shares for the period required to avoid a charge to the Company's reported earnings (generally six months) or Holder did not acquire the already-owned shares, directly or indirectly from the Company and (ii) Holder owns the already-owned shares free and clear of any liens, claims, encumbrances or security interests. "Delivery" for these purposes, in the sole discretion of the Company at the time the Option is exercised, shall include delivery to the Company of Holder's attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of Common Stock to the extent such tender would constitute a violation
of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock.
(c) Provided there has been a change in control described in Section 9(c) and the surviving corporation or acquiring corporation refuses to assume the Option or to substitute a similar option for the Option, then by authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to Holder as a result of the exercise of the Option. Notwithstanding the foregoing, the Option may not be exercised by withholding shares of Common Stock to the extent such withholding would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock.
5. WHOLE SHARES. The Option may only be exercised for whole shares.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, the Option may not be exercised unless the shares issuable upon exercise of the Option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of the Option must also comply with other applicable laws and regulations governing the Option, and the Option may not be exercised if the Company determines that the exercise would not be in material compliance with such laws and regulations.
7. TERM. The term of the Option commences on the Grant Date and expires upon the EARLIEST of the following:
(a) three (3) months after the termination of Holder's Continuous Service for any reason other than death or Disability, provided that if during any part of such three-month period the Option is not exercisable solely because of the condition set forth in Section 6, the Option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of Holder's Continuous Service;
(b) twelve (12) months after the termination of Holder's Continuous Service due to Disability;
(c) eighteen (18) months after Holder's death if Holder dies either during Holder's Continuous Service or within three (3) months after Holder's Continuous Service terminates for reason other than Cause;
(d) the Expiration Date; or
(e) the tenth (10th) anniversary of the Grant Date.
8. EXERCISE.
(a) The vested portion of the Option may be exercised during its
term by delivering a Notice of Exercise in the form attached hereto as Exhibit
A, together with the Exercise Price (payable in the manner set forth in Section
4) to the Secretary of the Company, or to such other person as the Company may
designate, during regular business hours, together with such additional
documents as the Company may then require.
(b) By exercising the Option, Holder agrees that, as a condition to any exercise of the Option, the Company may require Holder to enter an arrangement providing for the payment by Holder to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of the Option or (2) the disposition of shares acquired upon such exercise.
9. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) Capitalization Adjustments. If any change is made in the Common Stock without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the number of Option Shares and the Exercise Price will be appropriately adjusted by the Board, whose determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.)
(b) Change in Control--Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, the Option shall be terminated if not exercised (if applicable) prior to such event.
(c) Change in Control--Asset Sale, Merger, Consolidation or Reverse Merger.
(i) The Option will immediately vest 100% in the event of a change in control of the Company consisting of: (1) a sale of substantially all of the assets of the Company, (2) a merger or consolidation in which the Company is not the surviving corporation or (3) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise. If applicable, the time during which the Option may be exercised shall also be accelerated in full. The Option shall terminate if not exercised (if applicable) at or prior to such event, and any surviving corporation or acquiring corporation shall assume the remaining unvested portion of the Option or shall substitute a similar Option.
(ii) For purposes of subsection 9(c) the Option shall be deemed assumed if, following the change in control, the Option confers the right to purchase, in accordance with its terms and conditions, for each share of Common Stock subject to the Option immediately prior to the change in control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Common Stock on the effective date of the change in control was entitled.
10. TRANSFERABILITY. The Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during Holder's life only by Holder. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, Holder may designate a third party who, in the event of Holder's death, shall thereafter be entitled to exercise the Option.
11. NOT A SERVICE CONTRACT. This Agreement is not an employment or service contract, and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on Holder's part to continue in the employ of the Company, or of the Company to continue Holder's employment. In addition, nothing in this Agreement shall obligate the Company, its shareholders, Board, officers or employees to continue any relationship that Holder might have as a director or consultant for the Company.
12. WITHHOLDING OBLIGATIONS.
(a) At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, Holder hereby authorizes withholding from payroll and any other amounts payable to Holder, and otherwise agrees to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company, which arise in connection with the Option.
(b) The Option is not exercisable unless the tax withholding obligations of the Company are satisfied. Accordingly, Holder may not be able to exercise the Option when desired even though the Option is vested.
13. NO RIGHTS AS A SHAREHOLDER. The Option shall not entitle the Holder to any cash dividend, voting or other right of a shareholder unless and until the date of issuance of the shares that are the subject of the Option.
14. PROFESSIONAL ADVICE. The acceptance and exercise of the Option and the sale of Option Shares has consequences under federal and state tax and securities laws which may vary depending upon the individual circumstances of the Holder. Accordingly, Holder acknowledges that he has been advised to consult his personal legal and tax advisor in connection with this Agreement and his dealings with respect to the Option and the Option Shares. Holder further acknowledges that the Company has made no warranties or representations to Holder with respect to the income tax consequences of the grant and exercise of the Option or the sale of the
Option Shares and Holder is in no manner relying on the Company or its representatives for an assessment of such consequences.
15. ASSIGNMENT; BINDING EFFECT. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, legal representatives, and successors of the parties hereto; provided, however, that Holder may not assign any of Holder's rights under this Agreement.
16. DAMAGES. Holder shall be liable to the Company for all costs and damages, including incidental and consequential damages, resulting from a disposition of Option Shares which is not in conformity with the provisions of this Agreement.
17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington excluding those laws that direct the application of the laws of another jurisdiction.
18. NOTICES. All notices and other communications under this Agreement shall be in writing. Unless and until Holder is notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows:
F5 Networks, Inc.
401 Elliott Ave West
Seattle, WA 98119
Unless and until the Company is notified in writing to the contrary, all notices, communications, and documents intended for Holder and related to this Agreement, if not delivered by hand, shall be mailed to Holder's last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, and five (5) business days after mailing, if by mail.
19. AMENDMENT OF THIS AGREEMENT. The Board at any time, and from time to time, may amend the terms of this Agreement; provided, however, that the rights under this Agreement shall not be impaired by any such amendment unless (i) the Company requests the consent of the Holder and (ii) Holder consents in writing.
IN WITNESS WHEREOF, the parties have executed this Option Agreement as of the Effective Date.
F5 NETWORKS, INC.
By /s/ Joann Reiter ---------------------------------------------- Title Vice President and General Counsel ---------------------------------------------- |
Holder hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement.
/s/ STEVEN B. COBURN ---------------------------------------------------- Holder |
EXHIBIT A
NOTICE OF EXERCISE
(To be signed only upon exercise of Option)
To: F5 Networks, Inc.
401 Elliott Ave West
Seattle, WA 98119
The undersigned, the holder of an option to purchase shares of common stock of F5 Networks, Inc. pursuant to an Option Agreement dated as of __________ __, ____ (the "Option Agreement") hereby irrevocably elects to exercise the purchase right represented by the Option Agreement for, and to purchase under that Option Agreement, __________ shares of Common Stock and herewith makes payment of $_____________ for those shares and payment of $___________ for holder's share of withholding and employment taxes resulting from such exercise. Holder hereby confirms the representations, warranties and agreements set forth in the Option Agreement.
DATED: __________________, ____.
HOLDER:
ADDRESS:
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No.333-80177, 333-82249, 333-34570 and 333-51878) of F5 Networks, Inc., of our report dated October 26, 2001 relating to the consolidated financial statements and financial statement schedule, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Seattle, Washington
December 27, 2001