UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
Form 10-K
þ
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30,
2002
or
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-26041
F5 Networks, Inc.
(Exact name of Registrant as specified in its
charter)
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Washington
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91-1714307
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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401 Elliott Ave West
Seattle, Washington 98119
(Address of principal executive
offices)
(206) 272-5555
(Registrants telephone number, including
area code)
Securities registered pursuant to
Section 12(b) of the Act:
None
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.
Yes
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 6, 2002, the aggregate market
value of the Registrants Common Stock held by
non-affiliates of the Registrant was $250,224,378 based on the
closing sales price of the Registrants Common Stock on the
Nasdaq National Market.
As of December 6, 2002, the number of shares
of the Registrants Common Stock outstanding was 26,028,285.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive
proxy statement relating to its 2003 annual meeting of
shareholders, to be held on February 13, 2003, are
incorporated by reference into Part III hereof.
F5 NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30,
2002
TABLE OF CONTENTS
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Page
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PART I
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Item 1.
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Business
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2
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Item 2.
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Properties
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11
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Item 3.
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Legal Proceedings
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11
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Item 4.
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Submission of Matters to a Vote of Securities
Holders
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PART II
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Item 5.
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Market For Registrants Common Equity and
Related Shareholder Matters
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12
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Item 6.
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Selected Financial Data
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13
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Item 7.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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14
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Item 7A.
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Quantitative and Qualitative Disclosure About
Market Risk
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23
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Item 8.
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Financial Statements and Supplementary Data
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25
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Item 9.
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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PART III
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Item 10.
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Directors and Executive Officers of the Registrant
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48
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Item 11.
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Executive Compensation
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48
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Item 12.
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Security Ownership of Certain Beneficial Owners
and Management
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Item 13.
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Certain Relationships and Related Transactions
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Item 14.
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Controls and Procedures
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules and
Reports on Form 8-K
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48
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SIGNATURES
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51
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1
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. Our
core products, the BIG-IP® Controller, 3-DNS®
Controller, and the BIG-IP Link Controller, help manage traffic
to servers and network devices in a way that maximizes
availability and throughput. Our unique iControl
Architecture integrates our products 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, and streamlined manageability.
Industry Background
Since the late 1990s, businesses have
responded to the power, flexibility and economy of Internet
Protocol (IP) based networks by deploying new IP-based
applications, upgrading their client-server applications to new
IP-enabled versions, and IP-enabling legacy applications. During
the next several years, this process will likely accelerate as
Web Services enable businesses to build applications quickly and
easily by integrating software modules available from many
different sources. In addition, the growth of Internet usage
will continue to be driven by new applications such as Voice
Over IP (VOIP) and the increasing popularity of mobile Internet
access through wireless devices such as cell phones, PDAs and
notebook computers.
Internet Protocol specifies that all data
transmitted across the Internet must be split into packets. In
addition to its contents or payload, which corresponds to the
Application Layer (Layer 7) of the Open Systems
Interconnect (OSI) Reference Model, each packet has a header
that identifies the source and destination of the packet. The
OSI Reference Model is the framework that describes and defines
how networked systems communicate with one another. In the
simplest implementation of the OSI Model, header information is
added to the contents at the source computer and processed and
stripped by the destination computer. In common practice,
however, these functions are performed by network routers and
switches that the contents (email message, Web page, transaction
data, etc.) pass through enroute from source to destination. In
addition, as more and more organizations have begun to deploy a
growing variety of IP-enabled applications, there has been
increasing demand for Layer 7 technology that can read the
entire contents of a packetized transmission and make
intelligent decisions, based on a dynamic set of business rules,
about how to handle the transmission and where to route it to
ensure the availability and optimal performance of applications,
servers, and the network.
Because the functions performed at
Layers 2 - 4 are generally predictable and largely
repetitive, nearly all devices designed for Layer 2 -
4 processing are hardware-based and optimized for speed. Most
manufacturers of Layer 7 devices have also opted for
hardware-based solutions, limiting the ability of their products
to adapt to the rapidly changing requirements of Layer 7 traffic
management.
Through the end of 2000, the bulk of traffic on
the Internet was Web (HTTP) traffic. With the growth of online
banking, brokerage accounts and other financial services the
need to guarantee the security of
2
information and transactions had also led to the
emergence of the Secure Socket Layer (SSL) encryption as the
standard for secure Web traffic. During the interaction between
a user and a financial application, data sent from the user to
the server is typically encrypted by the users browser and
decrypted by the server, and this process is reversed for data
sent back to the user. The use of SSL has continued to grow with
the proliferation of Web-based applications that require secure
transactions. Because SSL processing is compute-intensive it
places a significant and costly burden on servers. As a result,
customers who use it are eager to find ways to offload SSL
processing to faster and less expensive devices.
As the growth of IP-enabled business applications
accelerates, there is an emerging need for technology to manage
the flow of application traffic both within corporate Intranets
and across the Internet. Current traffic management products
have provided functionality and flexibility to manage Web (HTTP)
traffic. F5 products differentiate by their capability to
intercept, inspect and act on the contents of traffic from other
types of IP-enabled applications, such as database applications,
Customer Relationship Management (CRM) applications, Enterprise
Resource Planning (ERP) applications, Web Services, and
VOIP.
We are an industry leader in Application Traffic
Management, enabling enterprises and service providers to
optimize any mission-critical IP-based application or web
service, providing secure and predictable delivery of
application traffic in an unpredictable environment. Through our
unique open iControl Application Programming Interface
(API), third-party applications and network devices can take an
active role in shaping IP network traffic, delivering
application aware networks that allow customers to direct
traffic based on their exact business requirements.
Our unique technology inspects IP traffic down to
the packet payload level and can direct traffic according to the
needs of each application. Its powerful offloading, inspection
and processing of application-level transactions is faster than
any other product on the market. It is also the first solution
that can automatically respond to, act upon and prevent ever
changing application security threats providing a
coordinated line of defense while making the most of existing
network security products.
The result for customers is that best-practice
architectures can be built quickly and inexpensively, without
buying more servers, deploying multiple products to handle
different applications, or attempting to build these functions
in the applications themselves. Enterprises and Service
Providers can readily adapt to changing business demands and
conditions quickly and cost-effectively. In this way our
products reduce implementation risks, improve reliability and
lower IT costs while creating a network that is truly
application-aware.
F5 Products
Our core product is the BIG-IP Controller for
local-area application traffic management. BIG-IP software runs
on a variety of Intel-based hardware platforms, including IP
application switches and server appliances manufactured by us,
our original equipment manufacturers (OEMs), and blade
servers manufactured by server vendors such as Dell,
Fujitsu-Siemens, Hewlett-Packard, IBM and RLX Technologies.
In terms of the OSI Reference Model, the core of
BIG-IP is sophisticated software that manages IP traffic at
Layer 7, also known as the application layer. F5s
BIG-IP application switches also perform Layer 2/3 switching and
industry-leading Layer 4 switching. But it is the superior
performance and functionality of the BIG-IP Layer 7 traffic
management software that distinguishes it from competing
products sold by Cisco Systems, Nortel Networks, and others.
In contrast to the tasks associated with Layers
2 - 4, Layer 7 (which encompasses Layer 5 & 6
functions as well) is complex and variable. Switching devices
for Layers 2 - 4 merely ensure that packets of
information sent over the Internet arrive at the destination to
which they are addressed, and that they are reassembled in the
correct sequence. In many ways, the kinds of functions carried
out at Layers 2 - 4 are analogous to those carried out
by the postal service in picking up and delivering mail.
Layer 7 corresponds to the content of the mail and the
interaction between the sender and receiver.
Our other products include 3-DNS Controller and
BIG-IP Link Controller. 3DNS allows enterprises with
geographically dispersed Web sites to direct traffic to a
particular Web site in accordance with customized business rules
or to redirect traffic to an available Web site if one of their
sites becomes overloaded
3
or is shut down for any reason. Link Controller
allows enterprises with more than one ISP to manage the use of
their available bandwidth to minimize costs while ensuring the
highest quality of service. 3-DNS and Link Controller are sold
separately on individual IP application switches and server
appliances, or bundled with BIG-IP on a single appliance or IP
application switch.
In early 2001, we recognized a growing need for
traffic management products that could not only communicate with
one another but with the increasing number and variety of
IP-enabled enterprise applications being deployed by large
organizations.
In response to that need, we published the
iControl SOAP/XML interface in a free Software Development Kit
(SDK) that allows customers and Independent Software Vendors
(ISVs) to modify their programs to communicate with our
products. This enabled the applications themselves to control
the flow of traffic on the network without human intervention.
The use of iControl reduces or eliminates the need for human
involvement, significantly reducing the cost of performing basic
network functions and dramatically reducing the likelihood of
error. Adding this extra functionality to their products is
attractive to ISVs, and since the introduction of the iControl
SDK, we have formed relationships with dozens of software
developers including Microsoft, Oracle, BEA, Tivoli (Japan),
Hewlett Packard, Siebel, and Computer Associates. Although we do
not derive revenue from iControl itself, the sale of
iControl-enabled ISV products helps promote and often leads
directly to the sale of our products.
Currently, we manufacture two lines of systems:
server appliances and IP application switches.
Server
Appliances
Server appliances were our original products and
continue to account for a little more than half of our systems
revenue. The BIG-IP 520 and 540 server appliances are equipped
with Intel-processors for high-speed Layer 4/7 processing and
are designed to accommodate add-in cards for fast, integrated
SSL encryption and decryption.
Since integrated SSL acceleration was introduced
as a feature in our platforms in early 2000, it has been an
important driver of system sales. By offloading
compute-intensive SSL processing from servers to our traffic
management systems, customers can free up valuable server space
for other applications. In addition, decrypting transmissions in
conjunction with Layer 7 traffic management allows BIG-IP to
inspect the contents and send them to the best available server
based on the nature of the contents and any rules that apply.
IP
Application Switches
We introduced our first IP application switch,
the BIG-IP 5000, in September 2001 in response to customer
demand for systems with an increased number of ports (allowing
them to be connected to many different types of network devices)
and integrated Layer 2/3 switching and SSL processing
capability. In January 2002, we introduced a mid-range version
of the IP Application switch called BIG-IP 2000. In October
2002, we introduced an upgraded and expanded line of IP
application switches, including the high-end BIG-IP 5100,
the BIG-IP 2400 mid-range product with integrated Layer 4
switching on an ASIC developed by our hardware team, and the
BIG-IP 1000 low-end switch.
F5 Technology
From our inception, we have been committed to the
belief that the complexity of Layer 7 traffic management
requires a software solution. When we were founded in 1996, our
initial products were designed to load-balance Internet traffic
across multiple Web servers. Shortly after our first products
were introduced, we began adding health checking and other
high-availability features that distinguished our products from
hardware-based products manufactured by competitors who
emphasized speed over functionality. In late 1999, for example,
we introduced BIG-IPs patented cookie
persistence capability, a key feature of the software that
establishes a link between a user and a specific server and
enables the user to return to that server if he/she leaves or
the connection is broken before a transaction is completed.
As IP traffic has evolved and the demands placed
on Layer 7 traffic management have increased, our
software-based technology has enabled us to adapt quickly. When
Session Initiation Protocol (SIP), a new
4
standard for Internet conferencing, VOIP, and
Instant Messaging (IM), was introduced in mid-2001, we added SIP
support to BIG-IP within four months.
The fact that all of our products are
software-based differentiates us from competing products in a
number of other important ways. First, our software can be
easily ported to Intel-based hardware platforms other than those
manufactured by us. This has enabled us to license the software
to OEM partners, who resell it on their own products. In
addition, it has created an opportunity for us to sell products
that run on blade servers and manage traffic across all the
blades. Currently, BIG-IP Blade Controller has been approved to
run on blades manufactured by Dell, Fujitsu-Siemens,
Hewlett-Packard, and RLX Technologies.
From a network administrators perspective,
one of the key benefits of a software-based solution is the
ability to write scripts that incorporate specific business
rules into the software. For example, if an organization has
three help desks located in Bombay, San Francisco and London,
all email requests for help can be directed to a single 3DNS
device that has been scripted to redirect the requests to
different help desks at different times of the day. Similarly, a
BIG-IP device managing traffic to an eCommerce Web site can be
scripted to recognize transmissions from preferred customers and
route them to a server that will expedite their transactions.
One of the most important features of our
software-based products is application awareness.
During development, BIG-IP, 3DNS, and our other products were
designed using a common architecture, called iControl, with a
common interface that allows them to communicate with one
another. That in itself distinguishes our products from others
in the market. With the release of BIG-IP Version 4.5 in October
2002, we expanded the application awareness of our
technology, introducing a new set of capabilities that further
distance our products from the competitions by providing
the first application traffic management solution on the market.
Key features of this new technology are:
Universal Inspection
Engine (UIE)
UIE
enables BIG-IP to examine the entire contents of a transmission
and identify any value within the header and payload. UIE can
recognize virtually any piece of data (such as a cell phone
number, a membership ID, an access code, etc.) in any stream of
application data, including SOAP/ XML (Simple Object Access
Protocol/ Extensible Markup Language), the standard protocols
that enable Web Services to communicate with one another.
iRules
Using the iControl interface, network administrators and
applications themselves can write commands that tell BIG-IP to
direct, persist, or filter traffic based on any of the values
identified by UIE.
Dynamic Security Control
Architecture (DSCA)
DCSA provides centralized security enforcement that enables
networks to respond quickly and adapt easily to new security
threats.
Product Development
Our future success depends on our ability to
maintain technology leadership in application traffic management
by constantly improving our current products and by developing
new products to meet the changing needs of our customers. Our
product development group, which is divided along product lines,
employs a standard process for the development, documentation
and quality control of software and systems designed to meet
these goals.
Product development also engages in technology
partnerships with software and component manufacturers that
allow us to integrate industry standard technology with our own
products. During the past two years, we have had a close working
relationship with Broadcom Corporation, which manufactures the
Layer 2/3 switches and SSL ASICs used in our family of
application switches. We also have a technology partnership with
Nokia focused on developing technology for mobile content
delivery networks.
Our software engineering group is located in our
headquarters in Seattle, Washington. Our hardware engineering
group is located in Spokane, Washington. Electronic
communication allows the members of both teams to collaborate
closely with one another on specific projects.
Our product development expenses for fiscal 2002,
2001, and 2000 were $18.0 million, $17.4 million, and
$14.5 million, respectively. During fiscal 2003, We expect
to continue to increase research and development expenses as our
future success is dependent on the continued enhancement of our
current products and our ability to develop new, technologically
advanced products that meet the changing needs of our customers.
5
Customers
Prior to fiscal 2001, our customer base was
comprised primarily of Internet Service Providers, Web hosting
companies and Internet startups engaged in eCommerce. In the
first half of fiscal 2001, we began focusing our marketing and
sales efforts on large enterprises, which currently account for
the majority of our revenue. Although we do not target specific
vertical markets, enterprise customers in Financial Services,
Manufacturing, Transportation and Mobile Telecommunications make
up the largest percentage of our customer base.
Marketing
We engage in a number of marketing programs and
initiatives aimed at promoting our brand and creating market
awareness of our technology and products. These include actively
participating in industry trade shows and briefing industry
analysts and members of the trade press on our latest products
and on new business and technology partnerships. In addition, we
market our products to chief information officers and other
information technology professionals through targeted
advertising, direct mail and high-profile Web events.
The cornerstone of our marketing strategy is to
build strong partnerships with large, well-established companies
that are leaders in their industry. By partnering with these
firms, we have been able to gain market mind-share and access to
large accounts that we would not have been able to achieve on
our own. Currently, we have three principal types of marketing
partnerships that overlap to varying degrees with our sales
channel partnerships. These include:
iControl partnerships we have
established relationships with various Independent Software
Vendors (ISVs) who have adapted their applications to interact
with our products via the iControl interface. iControl enhances
the functionality of their applications by enabling them to
control the network. As a result, customers who purchase
iControl-enabled applications have an incentive to purchase our
products in order to take advantage of their enhanced
functionality.
Blade server partnerships we have
marketing partnerships with various system vendors (Dell,
Fujitsu-Siemens, Hewlett Packard, and RLX Technologies) who have
approved BIG-IP Blade Controller to run on their blade servers.
Market focus and strategy are different for each partnership. In
some of these partnerships, vendors and/or their channels resell
Blade Controller to their customers. Others represent pure
marketing relationships.
OEM partnerships we license our
software to Dell and Nokia, who resell it on their own lines of
co-branded traffic management products. In conjunction with
these arrangements, the company participates in joint marketing
programs with both companies.
Sales
We sell our software, systems and services to
large enterprise customers through a variety of channels,
including OEMs, Distributors, Value-Added Resellers (VARs)
and System Integrators (SIs). In North America, we also
sell our products and services to major accounts through our own
direct sales force. OEM partners license our software and resell
on their own co-branded products. Distributors, VARs and
SIs purchase our software and systems and resell them to
their customers. In most cases, service contracts are negotiated
directly with the customer. Typically, the companys
agreements with its channel partners are not exclusive and do
not prevent them from selling competitive products. These
agreements typically have terms of one year with no obligation
to renew, and typically do not provide for exclusive sales
territories or minimum purchase requirements.
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 regional
sales managers and help manage accounts by serving as a liaison
between the field and internal corporate resources. Field
systems engineers also support our regional sales managers by
participating in joint sales calls and providing pre-sale
technical resources as needed.
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The majority of our field sales people work
closely with our channel partners to assist them in selling our
products to their customers. In North America, major account
teams are assigned to large enterprise customers who prefer to
work directly with us.
Customer Service and Technical
Support
Our ability to provide consistent, high-quality
customer service and technical support is a key factor in
attracting and retaining customers. Prior to the installation of
our products, our services personnel work with customers to
analyze their network needs and determine the best way to deploy
our products and configure product features and functions to
meet those needs. Our service personnel also provide on-site
installation and training services to help customers make
optimal use of product features and functions. Installation
generally occurs within 30 days of product shipment to the
customer.
At the time of purchase, customers typically
purchase a one-year maintenance contract, renewable annually,
that entitles them to an array of services provided by our
technical support team. Maintenance services provided under the
contract include online updates, upgrades and remote support
through a 24x7 help desk. Our technical support team also offers
seminars and training classes for customers on the configuration
and use of products, including local and wide area network
system administration and management. In addition, they provide
a full range of consulting services, 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 hardware platforms to a contract manufacturer,
Solectron, who assembles each product to our specifications.
Hardware platforms consist primarily of an Intel-based computing
platform, custom and commodity ASICs, a rack-mount enclosure
system and a custom-designed front panel. Solectron also
installs our application traffic management software onto these
hardware platforms and conducts functionality testing, quality
assurance and documentation control prior to shipping our
products.
Our agreement with Solectron allows them to
procure component inventory on our behalf based upon a rolling
production forecast. Subcontractors supply Solectron with
standard parts and components for our products based on our
production forecast. We are contractually obligated to purchase
component inventory that our contract manufacturer procures in
accordance with the forecast, unless we give notice of order
cancellation outside of applicable lead times. For any completed
product inventory carried by Solectron beyond 30 days, Solectron
will charge us a monthly carrying fee of 1.5%. Alternatively, we
have the option to purchase inventory held by Solectron beyond
30 days to avoid incurring related carrying charges. As
protection against component shortages and to provide
replacement parts for our service teams, we also stock limited
supplies of certain key components for our products.
Competition
The Internet traffic management market is
relatively new, rapidly evolving and highly competitive, and
competition in these markets is likely to persist and intensify.
Our principal competitors in this market include Cisco Systems,
Foundry Networks, Nortel Networks and Radware.
Cisco Systems has a product set similar to ours
and holds the largest share of the market. Cisco has a longer
operating history and significantly greater financial,
technical, marketing and other resources than we do. Cisco also
has a more extensive customer base and broader customer
relationships, including relationships with many of our current
and potential customers. In addition, Cisco has large,
well-established, worldwide customer support and professional
services organizations and a more extensive direct sales force
and sales channels.
Because of our size, market presence and
resources, Cisco and other competitors may be able to respond
more quickly than we can to new or emerging technologies and
changes in customer requirements. There is also the possibility
that these companies may adopt aggressive pricing policies to
gain market share. As a
7
result, our competitors pose a serious
competitive threat that could undermine our ability to win new
customers and maintain our existing customer base.
To mitigate these threats and strengthen our
competitive position, we have focused on differentiating our
products in two ways:
Emphasis on
software
Our sophisticated
Layer 7 software delivers performance, features and
functionality that competing hardware-based products cannot
match. Because our technology is software-based, we are also the
only company whose traffic management solution has been
certified to run on blade servers manufactured by leading
hardware vendors.
Tight integration of software and commodity
hardware
Our application
switches combine into a single platform functions
Layer 7 traffic management, Layer 2 - 4 switching, SSL
acceleration that are typically available from
competitors on two or more platforms. This results in
comparatively lower cost, better performance, easier deployment
and simpler management for equivalent or better functionality.
Intellectual Property
We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
to protect our intellectual property rights. We currently have
issued patents and 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 best efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology.
In addition to our own proprietary software, we
incorporate software licensed from several third-party sources
into our products. These licenses generally renew automatically
on an annual basis. We believe that alternative technologies for
this licensed software are available both domestically and
internationally.
Employees
As of September 30, 2002, we employed 467
full-time persons, including 127 in product development, 192 in
sales and marketing, 79 in professional services and technical
support and 69 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.
8
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, 2002:
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Name
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Age
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Position
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John McAdam
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President, Chief Executive Officer and Director
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Steven B. Coburn
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Senior Vice President of Finance and Chief
Financial Officer
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Steven Goldman
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42
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Senior Vice President of Sales and Services
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Brett L. Helsel
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Senior Vice President of Product Development and
Chief Technology Officer
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Jeff Pancottine
|
|
|
42
|
|
|
Senior Vice President of Marketing and Business
Development
|
Edward J. Eames
|
|
|
44
|
|
|
Senior Vice President of Business Operations and
Vice President of Global Services
|
Joann M. Reiter
|
|
|
45
|
|
|
Vice President, General Counsel and Corporate
Secretary
|
Jeffrey S. Hussey
|
|
|
41
|
|
|
Director
|
Alan J. Higginson(1)(2)
|
|
|
55
|
|
|
Director
|
Karl D. Guelich(1)(2)
|
|
|
60
|
|
|
Director
|
Keith D. Grinstein(1)(2)
|
|
|
42
|
|
|
Director
|
Kenny J. Frerichs
|
|
|
42
|
|
|
Director
|
|
|
(1)
|
Member of Audit Committee.
|
|
(2)
|
Member of Compensation Committee.
|
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 Logicraft, a CD ROM server company, after its merger with
Virtual Microsystems, a CD ROM server company. From 1990 to
March 1995, Mr. Goldman served as Vice President of Sales
for Virtual Microsystems. Mr. Goldman holds a B.A. in
Economics from the University of California at Berkeley.
9
Brett L. Helsel
has
served as our Senior Vice President of Product Development and
Chief Technology Officer since December 2000. He served as our
Senior Vice President of Product Development from February 2000
to December 2000 and as our Vice President of Product
Development and Chief Technology Officer from May 1998 to
January 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 from June 1997 to November
1999, 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 after Suns purchase of Cray Researchs
Commercial Systems Division, where he introduced the highly
successful UE10000 Starfire server. Previous to Sun Jeff was the
Vice President of Marketing at Cray Research, a supercomputer
systems vendor, responsible for commercial systems from June
1993 to June 1996 and the Vice President of Product Marketing at
Sequoia Systems, a Unix fault-tolerant systems vendor, from 1988
to 1993. 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 the Company in February
1996 and has served as a director since that time. From February
1996 through August 2002, Mr. Hussey was also Chairman of
the Board, and from February 1996 to July 2000, our Chief
Executive Officer and President. He served as our Chief
Strategist from July 2000 through October 2001 and as our
treasurer from February 1996 to March 1999. From June 1995 to
February 1996, Mr. Hussey was Vice President of Alexander
Hutton Capital L.L.C., an investment banking firm. From
September 1993 to July 1995, he 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.
10
Alan J. Higginson
has served as one of our directors
since May 1996. Mr. Higginson has been the President and
CEO of Hubspan, Inc., an ebusiness infrastructure provider,
since August 2001. From November 1995 to November 1998,
Mr. Higginson served as President of Atrieva Corporation, a
provider of advanced data backup and retrieval technology. 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 computer market. From May 1990 to November 1995,
Mr. Higginson served as President of Sierra On-lines
Bright Star division, a developer of educational software.
Mr. Higginson holds a B.S. in Commerce and an M.B.A. from
the University of Santa Clara.
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. He also serves as board chair for Coinstar,
Inc., a coin counting machine company, and as lead outside
director for Nextera, Inc. an economics-consulting firm.
Mr. Grinstein is a partner of Second Avenue Partners, a
venture capital fund. Mr. Grinsteins past experience
includes serving as president, chief executive officer and vice
chair of Nextel International, and as president and chief
executive officer of the Aviation Communications Division of
AT&T Wireless Services (formerly McCaw Communications.)
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. Mr.
Frerichs was designated by Nokia Finance International, B.V.
(NFI) pursuant to the Investor Rights Agreement entered
into in connection with NFIs investment in the Company.
This agreement required the Company to appoint a designee of NFI
to the board upon NFIs investment and to nominate a
designee of NFI for election by the Companys shareholders.
Our principal administrative, sales, marketing,
research and development facilities are located in Seattle,
Washington and consist of approximately 195,000 square feet. In
April 2000, we entered into a lease agreement on two buildings
for our corporate headquarters. The lease commenced in July 2000
on the first building; and the lease on the second building
commenced in October 2000. The leases for both buildings expire
in 2012 with an option for renewal. The second building consists
of approximately 110,000 square feet and has been fully
subleased until 2012. We also lease office space for our
hardware development, sales and support personnel in Spokane,
Washington, Washington DC, New York, Hong Kong, Singapore,
Taiwan, Japan, Australia, Germany, France, and the United
Kingdom.
Item 3. Legal
Proceedings
In July and August 2001, a series of putative
securities class action lawsuits were filed in United States
District Court, Southern District of New York against certain
investment banking firms that underwrote the Companys
initial and secondary public offerings, the Company and some of
the Companys officers and directors. These cases, which
have been consolidated under
In re F5 Networks, Inc.
Initial Public Offering Securities Litigation,
No. 01
CV 7055, assert that the registration statements for the
Companys June 4, 1999 initial public offering and
September 30, 1999 secondary offering failed to disclose
certain alleged improper actions by the underwriters for the
offerings. The consolidated amended complaint alleges claims
against the F5 defendants under Sections 11 and 15 of
the Securities Act of 1933, and under Sections 10(b) and
20(a) of
11
the Securities Exchange Act of 1934. Other
lawsuits have been filed making similar allegations regarding
the public offerings of more than 300 other companies. All of
these various consolidated cases have been coordinated for
pretrial purposes as
In re Initial Public Offering Securities
Litigation,
Civil Action No. 21-MC-92. Defendants have
filed motions to dismiss. 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
|
None.
PART II
|
|
Item 5.
|
Market for Registrants Common Equity and
Related Shareholder Matters
|
Market Prices and Dividends on Common
Stock
Our common stock is traded on the Nasdaq National
Market (symbol: FFIV). The following table sets forth the high
and low sales prices of our common stock.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
Fiscal Year Ended September 30, 2002
|
|
|
|
|
First Quarter
|
|
$
|
28.73
|
|
|
$
|
7.00
|
|
Second Quarter
|
|
$
|
27.23
|
|
|
$
|
17.78
|
|
Third Quarter
|
|
$
|
23.86
|
|
|
$
|
7.31
|
|
Fourth Quarter
|
|
$
|
15.48
|
|
|
$
|
7.13
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
Fiscal Year Ended September 30, 2001
|
|
|
|
|
First Quarter
|
|
$
|
40.94
|
|
|
$
|
9.50
|
|
Second Quarter
|
|
$
|
17.81
|
|
|
$
|
5.00
|
|
Third Quarter
|
|
$
|
19.20
|
|
|
$
|
3.75
|
|
Fourth Quarter
|
|
$
|
18.50
|
|
|
$
|
8.51
|
|
As of December 6, 2002 there were 26,028,285
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 retain cash to fund future
growth. Accordingly, we have not paid dividends and do not
anticipate declaring dividends on our common stock in the
foreseeable future.
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 $1.75 million of 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. These securities were sold in reliance on the exemption
from registration provided by Section 4 (2) of the
Securities Act as transactions by an issuer not involving a
public offering. As of the date of this filing, NFI has not
purchased additional shares.
12
|
|
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
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
1998
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
82,566
|
|
|
$
|
78,628
|
|
|
$
|
87,980
|
|
|
$
|
23,420
|
|
|
$
|
4,119
|
|
|
Services
|
|
|
25,700
|
|
|
|
28,739
|
|
|
|
20,665
|
|
|
|
4,405
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,266
|
|
|
|
107,367
|
|
|
|
108,645
|
|
|
|
27,825
|
|
|
|
4,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
20,241
|
|
|
|
33,240
|
|
|
|
24,660
|
|
|
|
5,582
|
|
|
|
1,091
|
|
|
Services
|
|
|
10,238
|
|
|
|
12,265
|
|
|
|
7,911
|
|
|
|
1,618
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,479
|
|
|
|
45,505
|
|
|
|
32,571
|
|
|
|
7,200
|
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
77,787
|
|
|
|
61,862
|
|
|
|
76,074
|
|
|
|
20,625
|
|
|
|
3,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
50,581
|
|
|
|
50,767
|
|
|
|
36,890
|
|
|
|
13,505
|
|
|
|
3,881
|
|
|
Research and development
|
|
|
17,985
|
|
|
|
17,435
|
|
|
|
14,478
|
|
|
|
5,642
|
|
|
|
1,810
|
|
|
General and administrative
|
|
|
15,045
|
|
|
|
18,776
|
|
|
|
9,727
|
|
|
|
3,869
|
|
|
|
1,041
|
|
|
Restructuring charges
|
|
|
3,274
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
443
|
|
|
|
2,625
|
|
|
|
2,127
|
|
|
|
2,487
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
87,328
|
|
|
|
90,578
|
|
|
|
63,222
|
|
|
|
25,503
|
|
|
|
7,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(9,541
|
)
|
|
|
(28,716
|
)
|
|
|
12,852
|
|
|
|
(4,878
|
)
|
|
|
(3,668
|
)
|
Other income (expense), net
|
|
|
1,420
|
|
|
|
2,021
|
|
|
|
2,903
|
|
|
|
534
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(8,121
|
)
|
|
|
(26,695
|
)
|
|
|
15,755
|
|
|
|
(4,344
|
)
|
|
|
(3,672
|
)
|
Provision for income taxes
|
|
|
489
|
|
|
|
4,095
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,610
|
)
|
|
$
|
(30,790
|
)
|
|
$
|
13,650
|
|
|
$
|
(4,344
|
)
|
|
$
|
(3,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$
|
(0.34
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
0.65
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
25,323
|
|
|
|
22,644
|
|
|
|
21,137
|
|
|
|
10,238
|
|
|
|
6,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
0.59
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
25,323
|
|
|
|
22,644
|
|
|
|
23,066
|
|
|
|
10,238
|
|
|
|
6,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
80,333
|
|
|
$
|
69,783
|
|
|
$
|
53,199
|
|
|
$
|
24,797
|
|
|
$
|
6,206
|
|
Working capital
|
|
|
74,510
|
|
|
|
74,890
|
|
|
|
66,318
|
|
|
|
25,876
|
|
|
|
6,763
|
|
Total assets
|
|
|
126,289
|
|
|
|
124,663
|
|
|
|
122,420
|
|
|
|
42,846
|
|
|
|
9,432
|
|
Long-term liabilities
|
|
|
1,315
|
|
|
|
1,167
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,688
|
|
Shareholders equity (deficit)
|
|
|
93,685
|
|
|
|
96,488
|
|
|
|
87,685
|
|
|
|
31,973
|
|
|
|
(80
|
)
|
13
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Revenues (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
82,566
|
|
|
$
|
78,628
|
|
|
$
|
87,980
|
|
|
Services
|
|
|
25,700
|
|
|
|
28,739
|
|
|
|
20,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,266
|
|
|
$
|
107,367
|
|
|
$
|
108,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
76.3
|
%
|
|
|
73.2
|
%
|
|
|
81.0
|
%
|
|
Services
|
|
|
23.7
|
|
|
|
26.8
|
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues.
Total
net revenues increased 1.0% in fiscal 2002 from fiscal 2001,
compared to a decrease of 1.0% in fiscal 2001 from fiscal 2000.
The increase in fiscal 2002 was due to higher product sales
resulting from a modest recovery in demand for our products. The
increased product sales were partially offset by a decrease in
service revenues resulting from changes in pricing and a higher
percentage of our channel partners providing maintenance and
installation services to end-users. The decrease in fiscal 2001
revenues, compared to fiscal 2000, was primarily due to lower
product sales as a result of a downturn in the US economy in
fiscal 2001.
International revenues represented 32%, 33% and
19% of total sales in fiscal 2002, 2001 and 2000, respectively.
The decrease in international sales as a percentage of net
revenues was primarily due to lower sales in Japan during fiscal
2002. Fiscal 2001 was the first complete year for which we had
subsidiaries in the Asia Pacific region that contributed to the
increase in our international sales as a percentage of net
revenues compared to fiscal 2000. We expect international sales
will continue to represent a significant portion of net
revenues, although we cannot provide assurance that
international sales as a percentage of net revenues will remain
at current levels.
Sales of our BIG-IP products represented 64%,
64%, and 62% of total net revenues in fiscal 2002, 2001 and
2000, respectively, and we expect to derive a significant
portion of our net revenues from sales of BIG-IP in the future.
During fiscal 2002 and 2001 no single reseller or customer
exceeded 10% of net revenue or our accounts receivable balance.
During fiscal 2000, one of our resellers, Exodus Communications,
accounted for 14% of net revenue and 8% of our accounts
receivable balance.
Product revenues.
Product revenues were
$82.6 million for the fiscal year ended September 30,
2002 compared to $78.6 million for the year ended
September 30, 2001, and $88.0 million for the year
ended September 30, 2000. The 5.0% increase in fiscal year
2002 was primarily the result of strong sales in North America,
partially offset by decreased sales in Japan. The 10.6% decrease
in fiscal year 2001, compared to fiscal 2000, was primarily the
result of reduced demand for our products in the US due to a
general slow down in the US economy.
Service revenues.
Service revenues were
$25.7 million for the fiscal year ended September 30,
2002 compared to $28.7 million for the fiscal year ended
September 30, 2001, and $20.7 million for the year
ended September 30, 2000. Service revenue decreased by
10.6% in fiscal year 2002 primarily due to changes in pricing
and a larger percentage of our resellers providing maintenance
and installation to end-users, partially offset by an increase
in the renewal of service and support contracts by existing
customers. The 39.1% increase in service revenues in fiscal year
2001, compared to fiscal 2000, was primarily due to an increase
in the installed base of our products and the renewal of service
and support contracts.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Gross margin (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
20,241
|
|
|
$
|
33,240
|
|
|
$
|
24,660
|
|
|
Services
|
|
|
10,238
|
|
|
|
12,265
|
|
|
|
7,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,479
|
|
|
|
45,505
|
|
|
|
32,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
77,787
|
|
|
$
|
61,862
|
|
|
$
|
76,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues (as a percentage of related
revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
24.5
|
%
|
|
|
42.3
|
%
|
|
|
28.0
|
%
|
|
Services
|
|
|
39.8
|
|
|
|
42.7
|
|
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28.2
|
|
|
|
42.4
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
71.8
|
%
|
|
|
57.6
|
%
|
|
|
70.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues.
Cost of product revenues decreased
39.1% to $20.2 million for the year ended September 30,
2002 from $33.2 million for the year ended
September 30, 2001. The cost of product revenues for fiscal
2000 totaled $24.7 million. Cost of product revenues
decreased as a percent of net product revenue to 24.5% for
fiscal year 2002 from 42.3% for fiscal year 2001 and 28.0% for
fiscal year 2000. The decrease in fiscal 2002 was primarily the
result of lower excess inventory charges and lower manufacturing
costs partially offset by increased warranty costs. Further, in
fiscal 2002, we unified our supply chain with a single contract
manufacturer and as result have improved our manufacturing
efficiencies as well as realized lower component costs. The
increase in fiscal 2001, compared to fiscal 2000, was primarily
the result of costs associated with product platform changes and
$4.9 million of charges related to excess inventory and
purchase commitments.
Cost of service
revenues.
Cost of service revenues
decreased to $10.2 million for fiscal 2002 from
$12.3 million for fiscal 2001. The cost of service revenues
for fiscal 2000 totaled $7.9 million. Cost of service
revenues decreased as a percent of net service revenues to 39.8%
for fiscal year 2002 from 42.7% for fiscal year 2001. The
decrease in fiscal 2002 relates primarily to improved
operational efficiencies and a decrease in headcount and related
costs. Cost of service revenues increased to 42.7% in fiscal
2001 compared to 38.3% for fiscal year 2000. The increase in
cost of service revenue in fiscal 2001, compared to fiscal 2000,
is due to an increase in customer base and an increase in
personnel and the related costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Operating expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
50,581
|
|
|
$
|
50,767
|
|
|
$
|
36,890
|
|
|
Research and development
|
|
|
17,985
|
|
|
|
17,435
|
|
|
|
14,478
|
|
|
General and administrative
|
|
|
15,045
|
|
|
|
18,776
|
|
|
|
9,727
|
|
|
Restructuring Charges
|
|
|
3,274
|
|
|
|
975
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
443
|
|
|
|
2,625
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87,328
|
|
|
$
|
90,578
|
|
|
$
|
63,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (as a percentage of
revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
46.7
|
%
|
|
|
47.3
|
%
|
|
|
34.0
|
%
|
|
Research and development
|
|
|
16.6
|
|
|
|
16.2
|
|
|
|
13.3
|
|
|
General and administrative
|
|
|
13.9
|
|
|
|
17.5
|
|
|
|
9.0
|
|
|
Restructuring Charges
|
|
|
3.0
|
|
|
|
0.9
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
0.4
|
|
|
|
2.4
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80.7
|
%
|
|
|
84.4
|
%
|
|
|
58.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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 decreased less than 1.0% to $50.6 million in
fiscal 2002 from $50.8 million in fiscal 2001. The decrease
in fiscal 2002 relates primarily to lower trade show and
promotional activities and decreased business travel expenses
partially offset by increased personnel costs as we continued to
expand our international operations. Sales and marketing
expenses increased to $50.8 million in fiscal 2001 from
$36.9 million in fiscal year 2000. The increase in fiscal
2001, compared to fiscal 2000, was due to an increase in
headcount and related costs, and increased advertising and
promotional activities. We expect to continue to increase sales
and marketing expenses in order to grow net revenues and expand
our brand awareness.
Research and development.
Research and development expenses
consist primarily of salaries and related benefits for our
product development personnel and an allocation of our
facilities and depreciation expenses. Research and development
expenses increased 3.2% to $18.0 million in fiscal 2002,
from $17.4 million in fiscal 2001 and $14.5 million in
fiscal year 2000. The increase in fiscal 2002 relates primarily
to increased personnel related costs and expenses related to the
development of new products. The increase in fiscal year 2001,
compared to fiscal 2000, relates primarily to personnel related
costs and an increase in facilities costs related to the Spokane
office. We expect to continue to increase research and
development expenses as our future success is dependent on the
continued enhancement of our current products and our ability to
develop new, technologically advanced products that meet the
changing needs of our customers.
General and
administrative.
General and
administrative expenses consist primarily of salaries, benefits
and related costs of our executive, finance, information
technology, human resource and legal personnel, third-party
professional service fees, bad debt charges and an allocation of
our facilities and depreciation expenses. General and
administrative expenses decreased 19.9% to $15.0 million in
fiscal 2002 from $18.8 million in fiscal 2001. The decrease
in fiscal 2002 is primarily due to lower bad debt charges and
lower facilities expenses resulting from the sublease of one of
our buildings, partially offset by an increase in professional
services related to patent prosecution and other activities
related to our intellectual property. General and administrative
expenses increased to $18.8 million in fiscal 2001 from
$9.7 million in fiscal 2000. The increase in fiscal 2001,
compared to fiscal 2000, related primarily to an increase in bad
debt expense due to the bankruptcy filing by Exodus
Communications and an increase in headcount and other payroll
related costs.
Restructuring charges.
During the third quarter of fiscal
2002, we recorded a restructuring charge of $2.8 million in
connection with managements decision to exit the cache
appliance business. As a result of changes in the business, we
wrote-down certain assets, consolidated operations and
terminated 47 employees throughout all divisions of the
Company. In July 2002, all identified employees had been
notified and terminated resulting in an additional charge of
$503,000 related to employee separation costs.
Amortization of unearned compensation.
We have recorded a total of
$8.3 million of stock compensation costs since our
inception through September 30, 2002. 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 recorded stock
compensation charges of $0.4 million, $2.6 million,
and $2.1 million for the years ended September 30,
2002, 2001 and 2000, respectively.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Other Income and Income Taxes (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(9,541
|
)
|
|
$
|
(28,716
|
)
|
|
$
|
12,852
|
|
Other income, net
|
|
|
1,420
|
|
|
|
2,021
|
|
|
|
2,903
|
|
Income (loss) before income taxes
|
|
|
(8,121
|
)
|
|
|
(26,695
|
)
|
|
|
15,755
|
|
Provision for income taxes
|
|
|
489
|
|
|
|
4,095
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,610
|
)
|
|
$
|
(30,790
|
)
|
|
$
|
13,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (as a
percentage of revenue)
|
|
|
(8.8
|
)%
|
|
|
(26.7
|
)%
|
|
|
11.8
|
%
|
Other income, net
|
|
|
1.3
|
|
|
|
1.9
|
|
|
|
2.7
|
|
Income (loss) before income taxes
|
|
|
(7.5
|
)
|
|
|
(24.9
|
)
|
|
|
14.5
|
|
Provision for income taxes
|
|
|
0.5
|
|
|
|
3.8
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8.0
|
)%
|
|
|
(28.7
|
)%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net.
Other income, net, consists primarily
of interest income and foreign currency transaction gains and
losses. Other income, net, decreased 29.7% to $1.4 million
in fiscal 2002 from $2.0 million in fiscal 2001 and
$2.9 million in fiscal 2000. This decrease is primarily due
to declining interest rates and investment income.
Provision for income
taxes.
The income tax provision of
$489,000 reported in fiscal 2002 is due to foreign income taxes
related to our international operations. The income tax
provision increased to $4.1 million in fiscal 2001 from
$2.1 million in fiscal 2000. The increase in the provision
for income taxes was caused by our decision to provide for a
full valuation allowance against net deferred tax assets in
fiscal 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Liquidity and Capital Resources (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
74,510
|
|
|
$
|
74,890
|
|
|
$
|
66,318
|
|
Cash and cash equivalents
|
|
|
20,801
|
|
|
|
18,321
|
|
|
|
18,536
|
|
Cash provided by (used in) operating activities
|
|
|
9,505
|
|
|
|
(11,833
|
)
|
|
|
9,848
|
|
Cash used in investing activities
|
|
|
(12,663
|
)
|
|
|
(24,709
|
)
|
|
|
(43,709
|
)
|
Cash provided by financing activities
|
|
|
5,483
|
|
|
|
36,343
|
|
|
|
35,084
|
|
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 $1.75 million of issuance costs
from the sale of these shares and the Warrants.
Cash provided by operating activities during
fiscal 2002 was $9.5 million compared to cash used in
operating activities of $11.8 million in fiscal 2001 and
cash provided by operating activities of $9.8 million in
fiscal 2000. Cash provided by operating activities in fiscal
2002 resulted primarily from changes in operating assets and
liabilities, as adjusted for various non-cash changes including
restructuring charges, provision for asset write-downs,
provision for doubtful accounts, and depreciation and
amortization. Cash used in operating activities in fiscal 2001
resulted primarily from operating losses, partially offset by a
decrease in net accounts receivable. Cash provided by operating
activities in fiscal 2000 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.
17
Cash used in investing activities was
$12.7 million for the year ended September 30, 2002,
$24.7 million for the year ended September 30, 2001,
and $43.7 million for the year ended September 30,
2000. Cash used in each of the fiscal years 2002, 2001, and 2000
were due primarily to the purchase of investments and property
and equipment, partially offset by the sale of investments.
Cash provided by financing activities for the
year ended September 30, 2002 was $5.5 million as
compared to cash provided by financing activities of
$36.3 million in the prior year. In 2002, our financing
activities primarily related to cash received from the exercise
of employee stock options and the purchase of common shares
under our employee stock purchase plan. In 2001, we also
received $34.9 million related to the issuance of common
stock to Nokia, in the third quarter of fiscal 2001.
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.
As of September 30, 2002, our principal
commitments consisted of obligations outstanding under operating
leases. In April 2000, we entered into a lease agreement on two
buildings for our corporate headquarters. The lease commenced in
July 2000 on the first building; and the lease on the second
building commenced in October 2000. The lease for both buildings
expires in 2012 with an option for renewal. The lease for the
second building has been fully subleased through 2012. We
established a restricted escrow account in connection with this
lease agreement. Under the term of the lease, a
$6.0 million certificate of deposit is required through
November 2012, unless the lease is terminated before then. This
amount has been included on our balance sheet as a component of
restricted cash. Contractual obligations reflected in the
following table are net of anticipated sublease income.
Payments Due by Period (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
1-3
|
|
4-5
|
|
After 5
|
Obligations
|
|
Total
|
|
1 year
|
|
Years
|
|
Years
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
Net operating leases
|
|
$
|
20,840
|
|
|
$
|
2,755
|
|
|
$
|
4,596
|
|
|
$
|
4,238
|
|
|
$
|
9,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Accounting Policies
Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of our financial statements.
Revenue Recognition.
We recognize revenue in accordance
with the guidance provided under Statement of 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.
We sell products through resellers, original
equipment manufacturers (OEM) and other channel
partners, as well as directly to end users, under similar terms.
We recognize product revenue upon shipment, net of estimated
returns, provided that collection is determined to be probable
and no significant obligations remain. Product revenues from OEM
agreements are recognized based on reporting of sales from the
OEM partner. Typically a software license, hardware,
installation and post-contract customer support
(PCS) elements are combined into a package with a
single bundled price. A portion of the sales price
is allocated to each element of the bundled package based on
their respective fair values as determined when the individual
elements are sold separately. Revenues from the license of
software are recognized when the software has been shipped and
the customer is obligated to pay for the software. When rights
of return are present and we cannot estimate returns, we
recognize revenue when such rights lapse. Revenues for PCS are
recognized on a
18
straight-line basis over the service contract
term. PCS includes rights to upgrades, when and if available, a
limited period of telephone support, updates, and bug fixes.
Installation revenue is recognized when the product has been
installed at the customers site. Consulting services are
customarily billed at fixed rates, plus out-of-pocket expenses,
and revenues are recognized when the consulting has been
completed. Training revenue is recognized when the training has
been completed.
Our ordinary payment terms to our domestic
customers are net 30 days. Our ordinary payment terms to
our international customers are net 30 to 90 days based on
normal and customary trade practices in the individual markets.
We have offered extended payment terms beyond ordinary terms to
some customers. For these arrangements, revenue is recognized
when payments become due.
Reserve for Doubtful Accounts.
Estimates are used in determining our
allowance for bad debts and are based on our historical
collection experience, current trends, credit policy, specific
identification and a percentage of our accounts receivable by
aging category. In determining these percentages, we evaluate
historical write-offs of our receivables, current trends in the
credit quality of our customer base, as well as changes in the
credit policies. We perform ongoing credit evaluations of our
customers financial condition and generally do not require
any collateral. If there is a deterioration of a major
customers credit worthiness or actual defaults are higher
than our historical experience, the recoverability of amounts
due could be adversely affected.
Reserve for Product
Returns.
Sales returns are estimated
based on historical experience by type of product and are
recorded at the time revenues are recognized. In some instances,
product revenue from distributors is subject to agreements
allowing limited rights of return. Accordingly, we reduce
revenue recognized for estimated future returns at the time the
related revenue is recorded. When rights of return are present
and we cannot estimate returns, revenue is recognized when such
rights lapse. The estimates for returns are adjusted
periodically based upon changes in historical rates of returns,
inventory in the distribution channel, and other related
factors. It is possible that these estimates will change in the
future or that the actual amounts could vary from our estimates
and that the amounts of such changes could seriously harm our
business.
Reserve for Obsolete/ Excess Inventory.
We currently reduce the carrying value
of inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about
future demand and market conditions. If actual market conditions
are less favorable than those projected by management,
additional inventory write-downs may be required.
Reserve for Warranties.
Our warranty reserve is established
based on our historical experience and best estimate of the
amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While we believe
that our warranty reserve is adequate and that the judgment
applied is appropriate, such amounts estimated to be due and
payable could differ materially from what will actually
transpire in the future.
Recent Accounting Pronouncements
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 acquisition, construction or
development, and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. The adoption
of this standard did not have an 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 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
19
the disposal of a segment of a business. The
adoption of this standard did not have an impact on our
financial statements.
In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 requires that a
liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the
liability is incurred. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31,
2002. We do not expect the adoption of SFAS 146 to have a
material impact on our financial statements.
Risk Factors
In addition to the other information in this
report, the following risk factors should be carefully
considered in evaluating our company and its business.
Our success depends on sales 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 management market
to be characterized by rapid technological change, frequent new
product introductions, changes in customer requirements and
evolving industry standards. Our continued success depends on
our ability to identify and develop new products and new
features for our existing products to meet the demands of these
changes, and for those products and features to be accepted by
our existing and target customers. If we are unable to identify,
develop and deploy new products and new product features on a
timely basis, or if those products do not gain market
acceptance, our business and results of operations may be
seriously harmed.
We may not be able to compete effectively in
the emerging Internet traffic market
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
market include Cisco Systems, Foundry Networks, Nortel Networks
and RadWare. We expect to continue to face additional
competition as new participants enter the Internet traffic
management market. In addition, larger companies with
significant resources, brand recognition and sales channels may
form alliances with or acquire competing Internet traffic
management solutions and emerge as significant competitors.
Potential competitors may bundle their products or incorporate
an Internet traffic management component into existing products
in a manner that discourages users from purchasing our products.
Potential customers may also choose to purchase additional or
larger servers instead of our products.
Our quarterly 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 has 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.
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
20
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.
The average selling price of our products may
decrease and our costs may increase, which may negatively impact
gross profits
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.
It is difficult to predict our future
operating results because we have an unpredictable sales
cycle
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 and
3-DNS 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 our
competitors or us. As a result, our products have an
unpredictable sales cycle that contributes to the uncertainty of
our future operating results.
We may not be able to sustain or develop new
distribution relationships
Our sales strategy requires that we establish and
maintain multiple distribution channels in the United States and
internationally through leading industry resellers, original
equipment manufacturers, 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 2002 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.
Our expansion into international markets may
not succeed
We intend to continue expanding into
international markets. International sales represented 32% of
our net revenues for the year ended September 30, 2002, 33%
of our net revenues for the year ended September 30, 2001
and 19% of our net revenues for the year ended
September 30, 2000. 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.
Our operating results are exposed to risks
associated with international commerce
As our international sales increase, our
operating results become more exposed to international operating
risks. These risks include risks related to 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.
21
Our success depends on our key personnel and
our ability to attract, train and retain qualified marketing and
sales, professional services and customer support
personnel
Our success depends to a significant degree upon
the continued contributions of our key management, product
development, sales, marketing and finance personnel, many of who
may 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.
Our business may be harmed if our contract
manufacturers are not able to provide us with adequate supplies
of our products
We rely on third party contract manufacturers to
assemble our products. We outsource the manufacturing of our
hardware platforms to a contract manufacturer who assembles
these hardware platforms to our specifications. We have
experienced minor delays in shipments from our 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 manufacturer to provide us with adequate supplies
of our products or the loss of our contract manufacturer may
cause a delay in our ability to fulfill orders while we obtain a
replacement manufacturer and may 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.
Our business could suffer if there are any
interruptions or delays in the supply of hardware components
from our third-party sources
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.
Undetected software errors may seriously harm
our business and results of operations
Software products frequently contain undetected
errors when first introduced or as new versions are released. We
have experienced these errors in the past in connection with new
products and product upgrades. We expect that these errors will
be found from time to time in new or enhanced products after
commencement of commercial shipments. These problems may cause
us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product
development efforts and cause significant 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.
22
We may not adequately protect our intellectual
property and our products may infringe on the intellectual
property rights of third parties
We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
of confidential and proprietary information to protect our
intellectual property rights. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights
as fully as in the United States.
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 made 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.
|
|
Item 7A.
|
Quantitative and Qualitative Disclosure About
Market Risk
|
Interest Rate Risk.
Our cash equivalents consist of
high-quality securities, as specified in our investment policy
guidelines. The policy limits the amount of credit exposure to
any one issue or issuer to a maximum of 20% of the total
portfolio with the exception of treasury securities, commercial
paper and money market funds, which are exempt from size
limitation. The policy 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 (in thousands)
|
|
|
|
|
|
Three months
|
|
Three months
|
|
Greater than
|
|
|
|
|
or less
|
|
to one year
|
|
one year
|
|
Total
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
3,582
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,582
|
|
|
$
|
3,582
|
|
|
Weighted average interest rate
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
|
|
|
$
|
41,591
|
|
|
$
|
17,941
|
|
|
$
|
59,532
|
|
|
$
|
59,532
|
|
|
Weighted average interest rates
|
|
|
|
|
|
|
2.2
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
September 30, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
8,169
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,169
|
|
|
$
|
8,169
|
|
|
Weighted average interest rate
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
|
|
|
$
|
33,500
|
|
|
$
|
17,294
|
|
|
$
|
50,794
|
|
|
$
|
51,462
|
|
|
Weighted average interest rates
|
|
|
|
|
|
|
4.6
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
September 30, 2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
13,717
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,717
|
|
|
$
|
13,717
|
|
|
Weighted average interest rate
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
6,126
|
|
|
$
|
26,523
|
|
|
$
|
2,014
|
|
|
$
|
34,663
|
|
|
$
|
34,603
|
|
|
Weighted average interest rates
|
|
|
6.6
|
%
|
|
|
6.7
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
23
The following sensitivity analysis presents
hypothetical changes related to our investment in Artel
Solutions Group Holdings Limited (Artel). The
following information measures the change in fair value arising
from selected hypothetical changes in the stock price of Artel
(in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Given Percentage
|
|
Valuation Given Percentage
|
|
|
|
|
Increase in Price
|
|
Decrease in Price
|
|
|
Fair Value at
|
|
|
|
|
Investment
|
|
September 30, 2002
|
|
15%
|
|
35%
|
|
50%
|
|
15%
|
|
35%
|
|
50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artel
|
|
$
|
1,346
|
|
|
$
|
1,548
|
|
|
$
|
1,817
|
|
|
$
|
2,019
|
|
|
$
|
1,144
|
|
|
$
|
875
|
|
|
$
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Risk.
The majority of our sales and expenses
are denominated in U.S. dollars and as a result, we have not
experienced significant foreign currency transaction gains and
losses to date. While we have conducted some transactions in
foreign currencies during the fiscal year ended
September 30, 2002 and expect to continue to do so, we do
not anticipate that foreign currency transaction gains or losses
will be significant at our current level of operations. However,
as we continue to expand our operations internationally, they
may become significant in the future. We have not engaged in
foreign currency hedging to date, however we may do so in the
future.
24
|
|
Item 8.
|
Financial Statements and Supplementary
Data
|
F5 NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
Report of Independent Accountants
|
|
|
26
|
|
Consolidated Balance Sheets
|
|
|
27
|
|
Consolidated Statements of Operations
|
|
|
28
|
|
Consolidated Statements of Shareholders
Equity
|
|
|
29
|
|
Consolidated Statements of Cash Flows
|
|
|
30
|
|
Notes to Consolidated Financial Statements
|
|
|
31
|
|
Valuation and Qualifying Accounts and Reserves
|
|
|
47
|
|
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
F5 Networks, Inc.
In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of F5 Networks,
Inc. and its subsidiaries at September 30, 2002 and 2001,
and the results of their operations and their cash flows for
each of the three years in the period ended September 30,
2002, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
November 1, 2002
26
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,801
|
|
|
$
|
18,321
|
|
|
Short-term investments
|
|
|
59,532
|
|
|
|
51,462
|
|
|
Accounts receivable, net of allowances of $5,452
and $6,245
|
|
|
20,404
|
|
|
|
22,628
|
|
|
Inventories
|
|
|
349
|
|
|
|
2,602
|
|
|
Other current assets
|
|
|
4,713
|
|
|
|
6,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
105,799
|
|
|
|
101,898
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
6,000
|
|
|
|
6,000
|
|
Property and equipment, net
|
|
|
12,211
|
|
|
|
15,496
|
|
Long-term investments
|
|
|
1,346
|
|
|
|
|
|
Other assets, net
|
|
|
933
|
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
126,289
|
|
|
$
|
124,663
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,685
|
|
|
$
|
4,460
|
|
|
Accrued liabilities
|
|
|
13,546
|
|
|
|
11,517
|
|
|
Deferred revenue
|
|
|
14,058
|
|
|
|
11,031
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,289
|
|
|
|
27,008
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
1,315
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 10,000 shares
authorized, no shares outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 100,000 shares
authorized, 25,730 and 24,764 shares issued and outstanding
|
|
|
128,876
|
|
|
|
123,393
|
|
Accumulated other comprehensive income
|
|
|
454
|
|
|
|
573
|
|
Unearned compensation
|
|
|
(93
|
)
|
|
|
(536
|
)
|
Accumulated deficit
|
|
|
(35,552
|
)
|
|
|
(26,942
|
)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
93,685
|
|
|
|
96,488
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
126,289
|
|
|
$
|
124,663
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
27
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
82,566
|
|
|
$
|
78,628
|
|
|
$
|
87,980
|
|
|
Services
|
|
|
25,700
|
|
|
|
28,739
|
|
|
|
20,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,266
|
|
|
|
107,367
|
|
|
|
108,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
20,241
|
|
|
|
33,240
|
|
|
|
24,660
|
|
|
Services
|
|
|
10,238
|
|
|
|
12,265
|
|
|
|
7,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,479
|
|
|
|
45,505
|
|
|
|
32,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
77,787
|
|
|
|
61,862
|
|
|
|
76,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
50,581
|
|
|
|
50,767
|
|
|
|
36,890
|
|
|
Research and development
|
|
|
17,985
|
|
|
|
17,435
|
|
|
|
14,478
|
|
|
General and administrative
|
|
|
15,045
|
|
|
|
18,776
|
|
|
|
9,727
|
|
|
Restructuring charges
|
|
|
3,274
|
|
|
|
975
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
443
|
|
|
|
2,625
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
87,328
|
|
|
|
90,578
|
|
|
|
63,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(9,541
|
)
|
|
|
(28,716
|
)
|
|
|
12,852
|
|
Other income, net
|
|
|
1,420
|
|
|
|
2,021
|
|
|
|
2,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(8,121
|
)
|
|
|
(26,695
|
)
|
|
|
15,755
|
|
Provision for income taxes
|
|
|
489
|
|
|
|
4,095
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,610
|
)
|
|
$
|
(30,790
|
)
|
|
$
|
13,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$
|
(0.34
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
25,323
|
|
|
|
22,644
|
|
|
|
21,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
25,323
|
|
|
|
22,644
|
|
|
|
23,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
28
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
Receivable
|
|
|
|
Other
|
|
|
|
Total
|
|
|
|
|
From
|
|
Unearned
|
|
Comprehensive
|
|
Accumulated
|
|
Shareholders
|
|
|
Shares
|
|
Amount
|
|
Shareholders
|
|
Compensation
|
|
Income/(Loss)
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 1, 1999
|
|
|
18,161
|
|
|
$
|
45,760
|
|
|
$
|
(750
|
)
|
|
$
|
(3,232
|
)
|
|
$
|
(3
|
)
|
|
$
|
(9,802
|
)
|
|
$
|
31,973
|
|
Exercise of stock options by employees
|
|
|
669
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
716
|
|
Exercise of stock warrants
|
|
|
2,199
|
|
|
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,414
|
|
Issuance of stock under employee stock purchase
plan
|
|
|
84
|
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,198
|
|
Payment on note receivable from shareholder
|
|
|
|
|
|
|
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
Tax benefit from employee stock transactions
|
|
|
|
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,900
|
|
Issuance of common stock in a secondary public
offering (net of issuance costs of $2,025)
|
|
|
500
|
|
|
|
31,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,475
|
|
Unearned compensation on stock option grants
|
|
|
|
|
|
|
1,956
|
|
|
|
|
|
|
|
(1,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
2,127
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,650
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2000
|
|
|
21,613
|
|
|
|
87,419
|
|
|
|
(469
|
)
|
|
|
(3,061
|
)
|
|
|
(52
|
)
|
|
|
3,848
|
|
|
|
87,685
|
|
Exercise of stock options by employees
|
|
|
608
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642
|
|
Exercise of stock warrants
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock under employee stock purchase
plan
|
|
|
154
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,667
|
|
Repurchase of common stock
|
|
|
(30
|
)
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,082
|
)
|
Issuance of common stock and warrants to Nokia
(net of issuance costs of $1.75 million)
|
|
|
2,466
|
|
|
|
34,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,928
|
|
Payment on note receivable from stockholder for
exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
Cancellation of unvested stock options from
stockholder
|
|
|
(56
|
)
|
|
|
(281
|
)
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation on stock option grants
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
2,625
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,790
|
)
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2001
|
|
|
24,764
|
|
|
|
123,393
|
|
|
|
|
|
|
|
(536
|
)
|
|
|
573
|
|
|
|
(26,942
|
)
|
|
|
96,488
|
|
Exercise of stock options by employees
|
|
|
765
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,752
|
|
Issuance of stock under employee stock purchase
plan
|
|
|
201
|
|
|
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,731
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
443
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,610
|
)
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2002
|
|
|
25,730
|
|
|
$
|
128,876
|
|
|
|
|
|
|
$
|
(93
|
)
|
|
$
|
454
|
|
|
$
|
(35,552
|
)
|
|
$
|
93,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
29
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,610
|
)
|
|
$
|
(30,790
|
)
|
|
$
|
13,650
|
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2,771
|
|
|
|
975
|
|
|
|
|
|
|
Provisions for asset write downs
|
|
|
1,090
|
|
|
|
345
|
|
|
|
1,377
|
|
|
Provision for inventory write downs
|
|
|
325
|
|
|
|
4,019
|
|
|
|
|
|
|
Realized (gain) loss on sale of assets
|
|
|
1
|
|
|
|
(92
|
)
|
|
|
|
|
|
Realized loss on sale of investments
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
111
|
|
|
|
247
|
|
|
Amortization of unearned compensation
|
|
|
443
|
|
|
|
2,625
|
|
|
|
2,127
|
|
|
Provision for doubtful accounts and sales returns
|
|
|
6,181
|
|
|
|
15,310
|
|
|
|
2,876
|
|
|
Depreciation and amortization
|
|
|
5,612
|
|
|
|
5,348
|
|
|
|
2,335
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
3,398
|
|
|
|
(3,398
|
)
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
4,900
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,595
|
)
|
|
|
423
|
|
|
|
(30,715
|
)
|
|
|
Inventories
|
|
|
1,899
|
|
|
|
790
|
|
|
|
(5,639
|
)
|
|
|
Other current assets
|
|
|
1,091
|
|
|
|
(5,422
|
)
|
|
|
|
|
|
|
Other assets
|
|
|
51
|
|
|
|
(728
|
)
|
|
|
(1,621
|
)
|
|
|
Accounts payable and accrued liabilities
|
|
|
154
|
|
|
|
(3,018
|
)
|
|
|
11,940
|
|
|
|
Deferred revenue
|
|
|
3,018
|
|
|
|
(5,127
|
)
|
|
|
11,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
|
9,505
|
|
|
|
(11,833
|
)
|
|
|
9,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(104,975
|
)
|
|
|
(81,464
|
)
|
|
|
(70,133
|
)
|
|
Sale of investments
|
|
|
95,481
|
|
|
|
64,839
|
|
|
|
42,745
|
|
|
Investment in restricted cash
|
|
|
|
|
|
|
|
|
|
|
(2,987
|
)
|
|
Proceeds from construction refund
|
|
|
|
|
|
|
851
|
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
30
|
|
|
|
217
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,199
|
)
|
|
|
(9,152
|
)
|
|
|
(13,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12,663
|
)
|
|
|
(24,709
|
)
|
|
|
(43,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from secondary public offering, net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
31,475
|
|
|
Proceeds from the issuance of common stock and
warrants to Nokia
|
|
|
|
|
|
|
34,928
|
|
|
|
|
|
|
Proceeds from the exercise of stock options and
warrants
|
|
|
5,483
|
|
|
|
2,309
|
|
|
|
3,328
|
|
|
Proceeds from payments on shareholder loan
|
|
|
|
|
|
|
188
|
|
|
|
281
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,483
|
|
|
|
36,343
|
|
|
|
35,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,325
|
|
|
|
(199
|
)
|
|
|
1,223
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
155
|
|
|
|
(16
|
)
|
|
|
(187
|
)
|
Cash and cash equivalents, at beginning of year
|
|
|
18,321
|
|
|
|
18,536
|
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year
|
|
$
|
20,801
|
|
|
$
|
18,321
|
|
|
$
|
18,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
30
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Description of
the Company
F5 Networks, Inc. (the Company)
provides integrated products and services to manage, control and
optimize Internet traffic. The Companys core products, the
BIG-IP® Controller, 3-DNS® Controller, and the BIG-IP
Link Controller, help manage traffic to servers and network
devices in a way that maximizes availability and throughput.
F5s unique iControl
TM
Architecture provides
integration and interoperability between its products and also
allows its customers to develop integration and operability
between the Companys products and other third party
products. The Companys solutions address many elements
required for successful Internet and Intranet business
applications, including high availability, high performance,
intelligent load balancing, fault tolerance, security and
streamlined manageability.
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. All
inter-company 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 total assets.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities as
of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with purchased maturities of three months or less to
be cash equivalents.
Short-Term Investments
Investments in securities with maturities of less
than one year or where managements intent is to use the
investments to fund current operations are classified as
short-term investments. The Company considers its securities as
available for sale, which are reported at fair value with the
related unrealized gains and losses included as a component of
shareholders equity. Realized gains and losses and
declines in value of securities judged to be other than
temporary are included in other income (expense). The cost of
investments for purposes of computing realized and unrealized
gains and losses is based on the specific identification method.
31
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys short-term investments consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
September 30, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
33,500
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
33,623
|
|
Municipal bonds and notes
|
|
|
16,900
|
|
|
|
|
|
|
|
|
|
|
|
16,900
|
|
US Government securities
|
|
|
9,000
|
|
|
|
9
|
|
|
|
|
|
|
|
9,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,400
|
|
|
$
|
132
|
|
|
$
|
|
|
|
$
|
59,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
September 30, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes
|
|
$
|
18,004
|
|
|
$
|
2
|
|
|
$
|
(44
|
)
|
|
$
|
17,962
|
|
Municipal bonds and notes
|
|
|
33,500
|
|
|
|
|
|
|
|
|
|
|
|
33,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,504
|
|
|
$
|
2
|
|
|
$
|
(44
|
)
|
|
$
|
51,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments
Long-term investments consist of an investment in
Artel Solutions Group Holdings Limited (Artel.) In
December of 2001, the Company purchased, from a third-party,
approximately 16 million shares of common stock of Artel,
which represents an approximate 1% ownership percentage. Artel
is one of the Companys distribution partners in the Asia
Pacific Region. The Company paid approximately
$1.31 million for the shares, which represented the then
fair value of Artels common stock as traded on the Hong
Kong Stock Exchange. The investment is considered available for
sale and is included in long-term investments on the balance
sheet. As of September 30, 2002 unrealized gains of $36,000
were reflected as a component of comprehensive income based on
changes in the fair value of the common stock.
Concentration of Credit Risk
The Company deposits its cash and cash
equivalents with five major financial institutions. The Company
has not experienced any losses on its cash and cash equivalents.
The Company invests its excess cash in accordance with its
investment policy, which is approved by the Board of Directors
and reviewed periodically to minimize credit risk.
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 $34.8 million,
$35.0 million, and $20.6 million for the years ended
September 30, 2002, 2001, and 2000, respectively. During
fiscal 2002 and 2001 no single reseller or customer exceeded 10%
of the Companys net revenue or accounts receivable
balance. During fiscal 2000, one of the Companys
resellers, Exodus Communications, accounted for 14% of net
revenue and 8% of the Companys accounts receivable
balance. 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 related
component parts and are recorded at the lower of cost or market
(as determined by the first-in, first-out method).
We outsource the manufacturing of our
pre-configured hardware platforms to a contract manufacturer,
Solectron, who assembles each product to our specifications. Our
agreement with Solectron allows them to procure component
inventory on our behalf based upon a rolling production
forecast. We are contractually obligated to purchase the
component inventory in accordance with the forecast, unless we
give notice of order
32
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cancellation outside of applicable lead times.
For any product inventory carried by Solectron beyond
30 days, Solectron will charge us a monthly carrying fee of
1.5% of the inventorys carrying value. We have the option
to purchase inventory held by Solectron beyond 30 days to
avoid incurring the related carrying charges. As of
September 30, 2002, we were committed to purchase
approximately $2.1 million of inventory. As protection
against component shortages and to provide replacement parts for
our service teams, we also stock limited supplies of certain key
components for our products.
Restricted Cash
Restricted cash represents an escrow account
established in connection with a lease agreement for the
Companys corporate headquarters. Under the terms of the
lease, a $6.0 million certificate of deposit is required
through November 2012, unless the lease is terminated prior to
that date.
Property and Equipment
Property and equipment is stated at cost.
Depreciation of property and equipment and amortization of
capital leases are provided on the straight-line method over the
estimated useful lives of the assets ranging from two to five
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. During the years ended
September 30, 2002 and 2001, the Company capitalized
$392,000 and $327,000 of software development costs, generally
representing labor costs. Related amortization costs of $225,000
were recorded in fiscal 2002.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived
assets whenever events or changes in business circumstances
indicate that the carrying amounts of the assets may not be
fully recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposition is less than
its carrying amount.
Revenue Recognition
The Company recognizes revenue in accordance with
the guidance provided 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 (OEM) and other
channel partners, as well as directly to end users, under
similar terms. The Company recognizes product revenue upon
shipment, net of estimated returns, provided that collection is
determined to be probable and no significant obligations remain.
Product revenues from original equipment manufacturing
agreements are
33
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognized based on reporting of sales from the
OEM partner. Typically a software license, hardware,
installation and post-contract customer support
(PCS) elements are combined into a package with a
single bundled price. A portion of the sales price
is allocated to each element of the bundled package based on
their respective fair values as determined when the individual
elements are sold separately. Revenues from the license of
software are recognized when the software has been shipped and
the customer is obligated to pay for the software. When rights
of return are present and the Company cannot estimate returns,
the Company recognizes revenue when such rights lapse. Revenues
for PCS are recognized on a straight-line basis over the service
contract term. PCS includes rights to upgrades, when and if
available, a limited period of telephone support, updates, and
bug fixes. Installation revenue is recognized when the product
has been installed at the customers site. Consulting
services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
The following presents revenues by shipment
destination for the years ended 2002, 2001 and 2000 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
United States
|
|
$
|
73,458
|
|
|
$
|
72,406
|
|
|
$
|
88,047
|
|
Europe
|
|
|
13,990
|
|
|
|
10,004
|
|
|
|
7,029
|
|
Asia Pacific
|
|
|
20,818
|
|
|
|
24,957
|
|
|
|
13,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,266
|
|
|
$
|
107,367
|
|
|
$
|
108,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranties
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, 2002, 2001 and 2000 warranty
expense was $1.6 million, $0.4 million and
$2.3 million, respectively.
Advertising
Advertising costs are expensed as incurred and
totaled approximately $1.5 million for each of the years
ended September 30, 2002, 2001 and 2000.
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 all majority owned
subsidiaries 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
34
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. A transaction
gain of $15,000 was realized in the fiscal year ended
September 30, 2002. Transaction losses of $139,000 and
$84,000 were charged to operations for the fiscal years ended
September 30, 2001, and 2000 respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in
equity from transactions and other events and circumstances
other than those resulting from investments by shareholders and
distributions to shareholders. For the Company, this includes
foreign currency translation and unrealized gains and losses on
investments. The Company has included the components of
comprehensive income (loss) within the accompanying 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, FASB Interpretation No. 44 (FIN
No. 44) Accounting for Certain Transactions
Involving Stock Compensation, and related interpretations
and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No.
123), Accounting for Stock-Based Compensation.
Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the deemed
fair value of the Companys stock and the exercise price of
the option. The unearned compensation is being amortized in
accordance with Financial Accounting Standards Board
Interpretation No. 28 on an accelerated basis over the
vesting period of the individual options. The Company accounts
for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and related
interpretations.
Fair Value of Financial Instruments
For certain financial instruments, including cash
and cash equivalents, short-term investments, 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 fiscal
years 2002 and 2001 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.
Diluted earnings per share would have been reduced by the
calculated effect of outstanding stock options of 1,890,902 and
1,533,386 for fiscal 2002 and 2001, respectively.
35
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of
basic and diluted net income (loss) per share (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,610
|
)
|
|
$
|
(30,790
|
)
|
|
$
|
13,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
basic
|
|
|
25,323
|
|
|
|
22,644
|
|
|
|
21,137
|
|
|
Dilutive effect of common shares from stock
options
|
|
|
|
|
|
|
|
|
|
|
1,918
|
|
|
Dilutive effect of common shares from warrants
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
diluted
|
|
|
25,323
|
|
|
|
22,644
|
|
|
|
23,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.34
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.34
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
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 acquisition, construction or
development, and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. The adoption
of this standard did not have an 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 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 adoption of this
standard did not have an impact on our financial statements.
In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We do not
expect the adoption of SFAS 146 to have a material impact on our
financial statements.
3. Inventories
Inventories consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
Finished goods
|
|
$
|
324
|
|
|
$
|
3,283
|
|
Raw materials
|
|
|
316
|
|
|
|
1,347
|
|
Reserve for excess inventory
|
|
|
(291
|
)
|
|
|
(2,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
349
|
|
|
$
|
2,602
|
|
|
|
|
|
|
|
|
|
|
36
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the second quarter of fiscal 2002, we
began to outsource the manufacturing of our pre-configured,
hardware platforms to a single contract manufacturer, Solectron.
Our agreement allows Solectron to procure component inventory on
our behalf based upon a rolling production forecast. We are
contractually obligated to purchase component inventory that our
contract manufacturer procures in accordance with the forecast,
unless we give notice of order cancellation outside of
applicable lead times. For any completed product inventory
carried by Solectron beyond 30 days, Solectron will charge
us a monthly carrying fee of 1.5%. Alternatively, we have the
option to purchase inventory held by Solectron beyond
30 days to avoid incurring related carrying charges. As of
September 30, 2002, we were committed to purchase
approximately $2.1 million of such inventory over the next
few months. As protection against component shortages and to
provide replacement parts for our service teams, we also stock
limited supplies of certain key components for our products.
4. Property and
Equipment
Property and equipment consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
Computer equipment
|
|
$
|
11,692
|
|
|
$
|
9,934
|
|
Office furniture and equipment
|
|
|
5,276
|
|
|
|
5,782
|
|
Leasehold improvements
|
|
|
7,417
|
|
|
|
7,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,385
|
|
|
|
22,943
|
|
Accumulated depreciation and amortization
|
|
|
(12,174
|
)
|
|
|
(7,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,211
|
|
|
$
|
15,496
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was
approximately $5.4 million, $5.3 million, and
$2.3 million for the years ended September 30, 2002,
2001 and 2000, respectively.
5. Accrued
Liabilities
Accrued liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
Accrued payroll and benefits
|
|
$
|
6,871
|
|
|
$
|
5,066
|
|
Accrued sales and marketing
|
|
|
1,364
|
|
|
|
705
|
|
Accrued restructuring charges
|
|
|
1,076
|
|
|
|
|
|
Income taxes
|
|
|
873
|
|
|
|
1,064
|
|
Other
|
|
|
3,362
|
|
|
|
4,682
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,546
|
|
|
$
|
11,517
|
|
|
|
|
|
|
|
|
|
|
6. Restructuring
Charges
During the third quarter of fiscal 2002, we
recorded a restructuring charge of approximately
$2.8 million in connection with managements decision
to exit the cache appliance business. As a result of changes in
the business, we wrote-down certain assets, consolidated
operations and terminated 47 employees throughout all divisions
of the Company. In July 2002, all identified employees had been
notified and terminated resulting in
37
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an additional charge of $503,000 related to
employee separation costs. The following summarizes our
restructuring charges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for the
|
|
|
|
Cash
|
|
Balance at
|
|
|
Quarter Ended
|
|
|
|
Payments and
|
|
September 30,
|
|
|
June 30, 2002
|
|
Additional Charges
|
|
Write-offs
|
|
2002
|
|
|
|
|
|
|
|
|
|
Excess facilities
|
|
$
|
1,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Asset impairments
|
|
|
1,560
|
|
|
|
|
|
|
|
(1,560
|
)
|
|
|
|
|
Employee separation costs
|
|
|
|
|
|
|
503
|
|
|
|
(503
|
)
|
|
|
|
|
Other
|
|
|
211
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,771
|
|
|
$
|
503
|
|
|
$
|
(2,198
|
)
|
|
$
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Income
Taxes
Income (loss) before income taxes consists
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(7,413
|
)
|
|
$
|
(25,900
|
)
|
|
$
|
17,976
|
|
International
|
|
|
(708
|
)
|
|
|
(795
|
)
|
|
|
(2,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,121
|
)
|
|
$
|
(26,695
|
)
|
|
$
|
15,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
|
|
|
$
|
33
|
|
|
State
|
|
|
22
|
|
|
|
50
|
|
|
Foreign
|
|
|
467
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
489
|
|
|
|
697
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
|
|
|
|
3,227
|
|
|
State
|
|
|
|
|
|
|
171
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
(3,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
489
|
|
|
$
|
4,095
|
|
|
|
|
|
|
|
|
|
|
38
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective tax rate differs from the U.S.
federal statutory rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Income tax provision at statutory rate
|
|
$
|
(2,843
|
)
|
|
$
|
(9,343
|
)
|
|
$
|
5,514
|
|
State taxes, net of federal benefit
|
|
|
(269
|
)
|
|
|
(526
|
)
|
|
|
409
|
|
Impact of international operations
|
|
|
259
|
|
|
|
105
|
|
|
|
308
|
|
Research and development & other credits
|
|
|
(1,099
|
)
|
|
|
(653
|
)
|
|
|
(1,315
|
)
|
Impact of stock option compensation
|
|
|
(1,039
|
)
|
|
|
|
|
|
|
(450
|
)
|
Other
|
|
|
80
|
|
|
|
(33
|
)
|
|
|
1,037
|
|
Change in valuation allowance
|
|
|
5,400
|
|
|
|
14,545
|
|
|
|
(3,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
489
|
|
|
$
|
4,095
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of the temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
17,478
|
|
|
$
|
12,333
|
|
|
$
|
4,884
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
694
|
|
|
|
278
|
|
|
Allowance for doubtful accounts
|
|
|
1,961
|
|
|
|
2,408
|
|
|
|
617
|
|
|
Accrued compensation and benefits
|
|
|
471
|
|
|
|
407
|
|
|
|
276
|
|
|
Inventories and related reserves
|
|
|
487
|
|
|
|
1,067
|
|
|
|
|
|
|
Other accruals and reserves
|
|
|
1,630
|
|
|
|
1,283
|
|
|
|
539
|
|
|
Depreciation
|
|
|
1,011
|
|
|
|
544
|
|
|
|
158
|
|
|
Tax credit carryforwards
|
|
|
3,291
|
|
|
|
2,193
|
|
|
|
1,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,329
|
|
|
|
20,929
|
|
|
|
8,292
|
|
Valuation allowance
|
|
|
(26,329
|
)
|
|
|
(20,929
|
)
|
|
|
(4,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,408
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductible prepaid expenses and other
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax assets include
net operating loss carry forwards of approximately
$48.5 million; $40.4 million related to
U.S. operations and $8.1 million related to U.K.
operations. The U.S. net operating loss carry forwards will
begin to expire in fiscal year 2011 through 2022. The
U.K. net operating loss carries forward indefinitely. The
Company also has R&E Credit carry forwards which will begin
to expire in fiscal year 2011 through 2022.
8. Shareholders
Equity
In June 1999, the Company issued 2,860,000 shares
of common stock at an initial public offering price of $10.00
per share. 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.
39
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 1999, the Company issued 500,000
shares of common stock in a secondary public offering at a price
of $67.00 per share. The net proceeds to the Company, net of
offering costs of approximately $350,000, were approximately
$31.5 million.
|
|
b.
|
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
$1.75 million of 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. As of the date of this
filing, NFI has not purchased additional shares.
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 of the Warrants was
determined to be $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 management products. Nokia may
resell the Companys products and integrate the
Companys software as part of its product offering.
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 warrant was exercised in October 2000.
|
|
d.
|
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 have 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,
2002 there were options to purchase 546,739 shares outstanding
and 33,430 shares available for awards under the 1996 plan.
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 5,300,000 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
40
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
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, 2002 there were
options to purchase 3,558,375 shares outstanding and 962,706
shares available for awards under the 1998 plan.
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 3,500,000 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, 2002 there were options to
purchase 2,730,736 shares outstanding and
623,126 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. This
grant was cancelled and the plan terminated in fiscal 2002. The
second McAdam Plan provides for a grant of 50,000 options. As of
September 30, 2002, 50,000 shares had been issued
under the second McAdam Plan.
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, 2002, no remaining shares
are available for grant under the plan.
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, 2002, no remaining shares
are available for grant under the plan.
The Company applies the provisions prescribed in
APB No. 25 and related interpretations in accounting for
stock options. In prior years, the Company issued stock options
with an exercise price less than the deemed fair value of the
Companys common stock at the date of grant. In fiscal
2002, there were no options issued below fair market value;
accordingly no additional compensation costs were recorded.
Approximately $0.1 million and $2.0 million of
deferred compensation was recorded during fiscal years 2001 and
2000, respectively, and is being amortized over the vesting
period of the options, generally four years. Amortization of
stock compensation costs of approximately $0.4 million,
$2.6 million, and $2.1 million has been recognized as
an expense for the years ended September 30, 2002, 2001 and
2000, respectively.
41
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option transactions under all
of the Companys plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Outstanding
|
|
Exercise Price
|
|
|
Options
|
|
Per Share
|
|
|
|
|
|
Balance at September 30, 1999
|
|
|
2,484,630
|
|
|
$
|
5.05
|
|
|
Options granted
|
|
|
3,979,695
|
|
|
|
62.52
|
|
|
Options exercised
|
|
|
(668,456
|
)
|
|
|
1.07
|
|
|
Options canceled
|
|
|
(492,598
|
)
|
|
|
69.06
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2000
|
|
|
5,303,271
|
|
|
|
42.69
|
|
|
Options granted
|
|
|
4,662,574
|
|
|
|
12.59
|
|
|
Options exercised
|
|
|
(607,987
|
)
|
|
|
1.06
|
|
|
Options canceled
|
|
|
(1,446,975
|
)
|
|
|
50.05
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2001
|
|
|
7,910,883
|
|
|
|
27.02
|
|
|
Options granted
|
|
|
2,233,850
|
|
|
|
12.52
|
|
|
Options exercised
|
|
|
(764,504
|
)
|
|
|
4.91
|
|
|
Options canceled
|
|
|
(2,139,379
|
)
|
|
|
52.67
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2002
|
|
|
7,240,850
|
|
|
$
|
17.30
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair values and
weighted-average exercise prices per share at the date of grant
for options granted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted
with exercise prices equal to the market value of the stock at
the date of grant
|
|
$
|
10.06
|
|
|
$
|
10.54
|
|
|
$
|
48.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options
granted with exercise prices equal to the market value of the
stock at the date of grant
|
|
$
|
12.52
|
|
|
$
|
12.40
|
|
|
$
|
63.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted
with exercise prices less than the market value of the stock at
the date of grant
|
|
$
|
0.00
|
|
|
$
|
27.89
|
|
|
$
|
42.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options
granted with exercise prices less than the market value of the
stock at the date of grant
|
|
$
|
0.00
|
|
|
$
|
29.42
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about
options outstanding at September 30, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
Remaining
|
|
Weighted Average
|
|
Number
|
|
Average
|
Range of
|
|
Number of
|
|
Contractual Life
|
|
Exercise Price
|
|
of shares
|
|
Exercisable
|
Exercise Prices
|
|
Shares
|
|
(in years)
|
|
Per Share
|
|
Exercisable
|
|
Price Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.05 - $ 5.03
|
|
|
|
786,115
|
|
|
|
7.00
|
|
|
$
|
3.04
|
|
|
|
658,476
|
|
|
$
|
2.72
|
|
|
5.34 - 9.50
|
|
|
|
2,260,144
|
|
|
|
8.44
|
|
|
|
8.12
|
|
|
|
1,244,221
|
|
|
|
7.96
|
|
|
9.63 - 33.00
|
|
|
|
3,214,038
|
|
|
|
9.05
|
|
|
|
16.54
|
|
|
|
857,582
|
|
|
|
19.41
|
|
|
33.06 - 58.38
|
|
|
|
799,931
|
|
|
|
7.78
|
|
|
|
44.74
|
|
|
|
464,949
|
|
|
|
45.14
|
|
|
60.88 - 120.88
|
|
|
|
180,622
|
|
|
|
7.28
|
|
|
|
86.41
|
|
|
|
125,169
|
|
|
|
85.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.05 - $120.88
|
|
|
|
7,240,850
|
|
|
|
8.45
|
|
|
$
|
17.30
|
|
|
|
3,350,397
|
|
|
$
|
17.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
F5 NETWORKS, INC.
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 have 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
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 using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
Year Ended September 30
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.12%
|
|
|
|
4.81%
|
|
|
|
6.12%
|
|
|
|
2.57%
|
|
|
|
4.49%
|
|
|
|
5.50%
|
|
Expected dividend
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Expected lives
|
|
|
4.3 years
|
|
|
|
4.0 years
|
|
|
|
4.0 years
|
|
|
|
6 months
|
|
|
|
6 months
|
|
|
|
6 months
|
|
Expected volatility
|
|
|
99.41%
|
|
|
|
138.79%
|
|
|
|
111.87%
|
|
|
|
99.41%
|
|
|
|
138.79%
|
|
|
|
111.87%
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
(8,610
|
)
|
|
$
|
(30,790
|
)
|
|
$
|
13,650
|
|
Net income (loss) pro forma
|
|
|
(17,443
|
)
|
|
|
(105,573
|
)
|
|
|
(40,648
|
)
|
Net income (loss) per share as
reported basic
|
|
|
(0.34
|
)
|
|
|
(1.36
|
)
|
|
|
0.65
|
|
Net income (loss) per share as
reported diluted
|
|
|
(0.34
|
)
|
|
|
(1.36
|
)
|
|
|
0.59
|
|
Net income (loss) per share pro
forma basic
|
|
|
(0.69
|
)
|
|
|
(4.66
|
)
|
|
|
(1.92
|
)
|
Net income (loss) per share pro
forma diluted
|
|
|
(0.69
|
)
|
|
|
(4.66
|
)
|
|
|
(1.92
|
)
|
43
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Commitments and Contingencies
|
Future minimum operating lease payments, net of
sublease income, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Net
|
|
|
Lease
|
|
Sublease
|
|
Lease
|
|
|
Payments
|
|
Income
|
|
Payments
|
|
|
|
|
|
|
|
2003
|
|
$
|
5,803
|
|
|
$
|
3,048
|
|
|
$
|
2,755
|
|
2004
|
|
|
5,567
|
|
|
|
3,130
|
|
|
|
2,437
|
|
2005
|
|
|
5,399
|
|
|
|
3,240
|
|
|
|
2,159
|
|
2006
|
|
|
5,576
|
|
|
|
3,350
|
|
|
|
2,226
|
|
2007
|
|
|
5,472
|
|
|
|
3,460
|
|
|
|
2,012
|
|
Thereafter
|
|
|
27,532
|
|
|
|
18,281
|
|
|
|
9,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,349
|
|
|
$
|
34,509
|
|
|
$
|
20,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense under non-cancelable operating
leases amounted to approximately $4.4 million,
$4.8 million, and $1.9 million for the years ended
September 30, 2002, 2001, and 2000, respectively.
In April 2000, the Company entered into a lease
agreement on two buildings for corporate headquarters. The lease
for both buildings expires in 2012 with an option for renewal.
The lease commenced in July 2000 on the first building; and the
lease on the second building commenced in October 2000. The
second building has been fully subleased until 2012. The Company
established a restricted escrow account in connection with this
lease agreement. Under the term of the lease, a
$6.0 million certificate of deposit is required through
November 2012, unless the lease is terminated before then. This
amount has been included on the Companys balance sheet as
a component of restricted cash.
In July and August 2001, a series of putative
securities class action lawsuits were filed in United States
District Court, Southern District of New York against certain
investment banking firms that underwrote the Companys
initial and secondary public offerings, the Company and some of
the Companys officers and directors. These cases, which
have been consolidated under
In re F5 Networks, Inc. Initial
Public Offering Securities Litigation
, No. 01
CV 7055, assert that the registration statements for the
Companys June 4, 1999 initial public offering and
September 30, 1999 secondary offering failed to disclose
certain alleged improper actions by the underwriters for the
offerings. The consolidated amended complaint alleges claims
against the F5 defendants under Sections 11 and 15 of the
Securities Act of 1933, and under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. Other lawsuits have been
filed making similar allegations regarding the public offerings
of more than 300 other companies. All of these various
consolidated cases have been coordinated for pretrial purposes
as
In re Initial Public Offering Securities Litigation
,
Civil Action No. 21-MC-92. Defendants have filed motions to
dismiss. 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.
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 of $750,000. 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. 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,
44
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the shares may not be transferred until they are
vested, and the related portion of the loan is repaid. Total
payments of $281,000 and $188,000 were received on the loan in
fiscal years 2000 and 2001, respectively. In fiscal 2001, the
officer left the company and returned 56,000 unvested shares,
which were subsequently cancelled, in full satisfaction of the
outstanding balance.
|
|
11.
|
Employee Benefit Plans
|
The Company has a 401(k) savings plan whereby
eligible employees may voluntarily contribute a percentage of
their compensation. The Company may, at its discretion, match a
portion of the employees eligible contributions.
Contributions to the plan during the years ended
September 30, 2002, 2001, and 2000 were approximately
$950,000, $953,000, and $833,000, respectively. Contributions
made by the company vest over four years.
12. Supplemental
Cash Flow Information
Supplemental cash flow information consists of
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of note receivable from shareholder
for common stock
|
|
$
|
|
|
|
$
|
(281
|
)
|
|
$
|
|
|
Deferred compensation for options granted
|
|
|
|
|
|
|
150
|
|
|
|
2,128
|
|
Reduction to deferred compensation due to
cancelled stock option grants
|
|
|
|
|
|
|
(50
|
)
|
|
|
(172
|
)
|
Cash paid for taxes
|
|
|
903
|
|
|
|
167
|
|
|
|
12
|
|
45
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
13. Quarterly
Results of Operations (unaudited)
The following tables present our unaudited
quarterly results of operations for the eight quarters ended
September 30, 2002. You should read the following table in
conjunction with our financial statements and related notes
included elsewhere in this report. We have prepared this
unaudited information on the same basis as the audited financial
statements. The following table includes all adjustments,
consisting only of normal recurring adjustments that we consider
necessary for a fair presentation of our operating results for
the quarters presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended (in thousands)
|
|
|
|
|
|
Sept. 30,
|
|
June 30,
|
|
March 31,
|
|
Dec. 31,
|
|
Sept. 30,
|
|
June 30,
|
|
March 31,
|
|
Dec. 31,
|
|
|
2002
|
|
2002
|
|
2002
|
|
2001
|
|
2001
|
|
2001
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
20,376
|
|
|
$
|
20,750
|
|
|
$
|
20,782
|
|
|
$
|
20,658
|
|
|
$
|
19,825
|
|
|
$
|
21,298
|
|
|
$
|
19,772
|
|
|
$
|
17,733
|
|
Services
|
|
|
6,699
|
|
|
|
6,315
|
|
|
|
6,319
|
|
|
|
6,367
|
|
|
|
6,741
|
|
|
|
7,703
|
|
|
|
7,295
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,075
|
|
|
|
27,065
|
|
|
|
27,101
|
|
|
|
27,025
|
|
|
|
26,566
|
|
|
|
29,001
|
|
|
|
27,067
|
|
|
|
24,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,046
|
|
|
|
5,081
|
|
|
|
5,151
|
|
|
|
5,963
|
|
|
|
4,790
|
|
|
|
7,701
|
|
|
|
12,663
|
|
|
|
8,086
|
|
Services
|
|
|
2,360
|
|
|
|
2,504
|
|
|
|
2,680
|
|
|
|
2,694
|
|
|
|
2,535
|
|
|
|
2,908
|
|
|
|
3,238
|
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,406
|
|
|
|
7,585
|
|
|
|
7,831
|
|
|
|
8,657
|
|
|
|
7,325
|
|
|
|
10,609
|
|
|
|
15,901
|
|
|
|
11,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
20,669
|
|
|
|
19,480
|
|
|
|
19,270
|
|
|
|
18,368
|
|
|
|
19,241
|
|
|
|
18,392
|
|
|
|
11,166
|
|
|
|
13,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
13,062
|
|
|
|
13,256
|
|
|
|
11,823
|
|
|
|
12,440
|
|
|
|
12,287
|
|
|
|
12,232
|
|
|
|
12,797
|
|
|
|
13,451
|
|
Research and development
|
|
|
4,312
|
|
|
|
4,785
|
|
|
|
4,751
|
|
|
|
4,137
|
|
|
|
3,902
|
|
|
|
4,140
|
|
|
|
4,549
|
|
|
|
4,844
|
|
General and administrative
|
|
|
3,427
|
|
|
|
3,049
|
|
|
|
4,524
|
|
|
|
4,045
|
|
|
|
6,814
|
|
|
|
3,080
|
|
|
|
4,194
|
|
|
|
4,688
|
|
Restructuring charge
|
|
|
503
|
|
|
|
2,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
1,071
|
|
Amortization of unearned compensation
|
|
|
90
|
|
|
|
106
|
|
|
|
114
|
|
|
|
133
|
|
|
|
209
|
|
|
|
245
|
|
|
|
1,595
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,394
|
|
|
|
23,967
|
|
|
|
21,212
|
|
|
|
20,755
|
|
|
|
23,212
|
|
|
|
19,697
|
|
|
|
23,039
|
|
|
|
24,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(725
|
)
|
|
|
(4,487
|
)
|
|
|
(1,942
|
)
|
|
|
(2,387
|
)
|
|
|
(3,971
|
)
|
|
|
(1,305
|
)
|
|
|
(11,873
|
)
|
|
|
(11,567
|
)
|
Other income, net
|
|
|
355
|
|
|
|
287
|
|
|
|
273
|
|
|
|
505
|
|
|
|
628
|
|
|
|
323
|
|
|
|
871
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(370
|
)
|
|
|
(4,200
|
)
|
|
|
(1,669
|
)
|
|
|
(1,882
|
)
|
|
|
(3,343
|
)
|
|
|
(982
|
)
|
|
|
(11,002
|
)
|
|
|
(11,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
53
|
|
|
|
146
|
|
|
|
101
|
|
|
|
189
|
|
|
|
8,163
|
|
|
|
629
|
|
|
|
(2,260
|
)
|
|
|
(2,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(423
|
)
|
|
$
|
(4,346
|
)
|
|
$
|
(1,770
|
)
|
|
$
|
(2,071
|
)
|
|
$
|
(11,506
|
)
|
|
$
|
(1,611
|
)
|
|
$
|
(8,742
|
)
|
|
$
|
(8,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
F5 NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charges to
|
|
|
|
|
|
Balance
|
|
|
beginning
|
|
costs and
|
|
Charges to
|
|
|
|
at end
|
Description
|
|
period
|
|
expenses
|
|
other accounts
|
|
Deductions
|
|
of period
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
413
|
|
|
$
|
880
|
|
|
$
|
|
|
|
$
|
(435
|
)
|
|
$
|
858
|
|
|
Allowance for sales returns
|
|
$
|
413
|
|
|
$
|
1,996
|
|
|
$
|
|
|
|
$
|
(1,601
|
)
|
|
$
|
808
|
|
|
Income tax valuation allowance
|
|
$
|
3,314
|
|
|
$
|
|
|
|
$
|
2,117
|
|
|
$
|
(547
|
)
|
|
$
|
4,884
|
|
Year Ended September 30, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
858
|
|
|
$
|
5,799
|
|
|
$
|
|
|
|
$
|
(2,743
|
)
|
|
$
|
3,914
|
|
|
Allowance for sales returns
|
|
$
|
808
|
|
|
$
|
9,511
|
|
|
$
|
277
|
|
|
$
|
(8,265
|
)
|
|
$
|
2,331
|
|
|
Income tax valuation allowance
|
|
$
|
4,884
|
|
|
$
|
|
|
|
$
|
16,045
|
|
|
$
|
|
|
|
$
|
20,929
|
|
Year Ended September 30, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,914
|
|
|
$
|
2,889
|
|
|
$
|
|
|
|
$
|
(2,967
|
)
|
|
$
|
3,836
|
|
|
Allowance for sales returns
|
|
$
|
2,331
|
|
|
$
|
3,792
|
|
|
$
|
384
|
|
|
$
|
(4,891
|
)
|
|
$
|
1,616
|
|
|
Income tax valuation allowance
|
|
$
|
20,929
|
|
|
$
|
|
|
|
$
|
5,400
|
|
|
$
|
|
|
|
$
|
26,329
|
|
47
Item 9. Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors
And Executive Officers of the Registrant
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 February 13, 2003, 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, 2002.
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 February 13, 2003 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, 2002.
Item 14. Controls
and Procedures
Within the 90-day period prior to filing this
report, we carried out an evaluation, under the supervision and
with the participation of the Companys management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14 and 15d-14. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are
effective to timely alert them to any material information
relating to the Company (including its consolidated
subsidiaries) that must be included in our periodic SEC filings.
There have been no significant changes in the Companys
internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation.
We intend to review and evaluate the design and
effectiveness of our disclosure controls and procedures on an
ongoing basis and to improve our controls and procedures over
time and to correct any deficiencies that we may discover in the
future. Our goal is to ensure that our senior management has
timely access to all material financial and non-financial
information concerning our business. While we believe the
present design of our disclosure controls and procedures is
effective to achieve our goal, future events affecting our
business may cause us to modify our disclosure controls and
procedures.
PART IV
Item 15. Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents filed as part of this report
are as follows:
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|
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(1)
Consolidated Financial Statements:
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|
|
See Index to Consolidated Financial Statements
included under Item 8 in Part II of this
Form 10-K.
|
48
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|
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Exhibit
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|
|
|
|
Number
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|
|
|
Exhibit Description
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|
|
|
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|
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3.1
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|
|
|
|
Second Amended and Restated Articles of
Incorporation of the Registration(1)
|
|
3.2
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|
|
|
|
Amended and Restated Bylaws of the Registrant(1)
|
|
4.1
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|
|
|
|
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
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|
|
|
|
1998 Equity Incentive Plan(1)
|
|
10.3
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|
|
|
|
Form of Option Agreement under the 1998 Equity
Incentive Plan(1)
|
|
10.4
|
|
|
|
|
1999 Employee Stock Purchase Plan(1)
|
|
10.5
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|
|
|
|
Amended and Restated Directors Nonqualified
Stock Option Plan(1)
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|
10.6
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|
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|
|
Form of Option Agreement under the Amended and
Restated Directors Nonqualified Stock Option Plan(1)
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|
10.7
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|
|
|
|
Amended and Restated 1996 Stock Option Plan(1)
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|
10.8
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|
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|
|
Form of Option Agreement under the Amended and
Restated 1996 Stock Option Plan(1)
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|
10.9
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|
|
|
|
1999 Non-Employee Directors Stock Option
Plan(1)
|
|
10.10
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|
|
|
|
Form of Option Agreement under 1999 Non-Employee
Directors Stock Option Plan(1)
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|
10.11
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|
|
|
|
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000(5)
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10.12
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|
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|
|
NonQualified Stock Option Agreement between John
McAdam and the Company dated July 24, 2000(5)
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10.13
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|
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|
|
Office Lease Agreement dated July 31, 1999,
between Registrant and 401 Elliott West LLC(2)
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10.14
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|
Agreement dated February 19, 1999, between
the Registrant and Steven Goldman(1)
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10.15
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|
|
|
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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)
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|
10.16
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|
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Common Stock and Warrant Purchase Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(3)
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|
10.17
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|
|
|
|
Investors Rights Agreement dated
June 26, 2001 between the Company and Nokia Finance
International B.V.(3)
|
|
10.18
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|
|
|
|
Sublease Agreement dated March 30, 2001
between the Company and Cell Therapeutics, Inc.(3)
|
|
10.19
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|
|
|
|
2000 Employee Equity Incentive Plan(4)
|
|
10.20
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|
|
|
|
Form of Option Agreement under the 2000 Equity
Incentive Plan(6)
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|
10.21
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|
|
|
|
NonQualified Stock Option Agreement between Jeff
Pancottine and the Company dated October 23, 2000(4)
|
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10.22
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|
|
|
|
NonQualified Stock Option Agreement between Steve
Coburn and the Company dated May 29, 2001(6)
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|
23.1*
|
|
|
|
|
Consent of PricewaterhouseCoopers LLP,
Independent Accountants
|
|
99.1*
|
|
|
|
|
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
(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.
|
49
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|
(5)
|
Incorporated by reference from Annual Report on
Form 10-K for the year ended September 30, 2000.
|
|
(6)
|
Incorporated by reference from Annual Report on
Form 10-K for the year ended September 30, 2001.
|
(b) Reports on Form 8-K:
None.
The Companys quarterly and annual reports
are available, free of charge, on our corporate website
www.f5.com as soon as reasonably practicable after such material
is filed with the SEC.
50
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.
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|
|
John McAdam
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|
Chief Executive Officer and
President
|
Dated: December 17, 2002
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.
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|
|
|
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|
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Signature
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Title
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Date
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|
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|
|
By:
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/s/ JOHN MCADAM
John McAdam
|
|
Chief Executive Officer, President, and
Director
(Principal Executive Officer)
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December 17, 2002
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By:
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|
/s/ STEVEN B. COBURN
Steven B. Coburn
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|
Senior Vice President,
Chief Financial Officer
(Principal Finance and
Accounting Officer)
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|
December 17, 2002
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|
By:
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/s/ JEFFREY S. HUSSEY
Jeffrey S. Hussey
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|
Director
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|
December 17, 2002
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By:
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/s/ KEITH D. GRINSTEIN
Keith D. Grinstein
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|
Director
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|
December 17, 2002
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|
By:
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|
/s/ KARL D. GUELICH
Karl D. Guelich
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|
Director
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|
December 17, 2002
|
|
By:
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|
/s/ ALAN J. HIGGINSON
Alan J. Higginson
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|
Director
|
|
December 17, 2002
|
|
By:
|
|
/s/ KENNY J. FRERICHS
Kenny J. Frerichs
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|
Director
|
|
December 17, 2002
|
51
CERTIFICATIONS
I, John McAdam, certify that:
|
|
|
|
1)
|
I have reviewed this annual report on
Form 10-K of F5 Networks, Inc.
|
|
|
2)
|
Based on my knowledge, this annual report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;
|
|
|
3)
|
Based on my knowledge, the financial statements,
and other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
|
|
|
4)
|
The registrants other certifying officers
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|
|
|
|
|
a)
|
designed such disclosure controls and procedures
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
|
|
|
b)
|
evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
|
|
|
c)
|
presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
|
|
|
|
|
5)
|
The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):
|
|
|
|
|
a)
|
all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
|
|
|
b)
|
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and
|
|
|
|
|
6)
|
The registrants other certifying officers
and I have indicated in this annual report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|
|
|
|
/s/ JOHN MCADAM
|
|
|
|
John McAdam
|
|
Chief Executive Officer and
President
|
52
CERTIFICATIONS
I, Steven B. Coburn, certify that:
|
|
|
|
1)
|
I have reviewed this annual report on
Form 10-K of F5 Networks, Inc.
|
|
|
2)
|
Based on my knowledge, this annual report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;
|
|
|
3)
|
Based on my knowledge, the financial statements,
and other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
|
|
|
4)
|
The registrants other certifying officers
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|
|
|
|
|
a)
|
designed such disclosure controls and procedures
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
|
|
|
b)
|
evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
|
|
|
c)
|
presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
|
|
|
|
|
5)
|
The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):
|
|
|
|
|
d)
|
all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
|
|
|
e)
|
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and
|
|
|
|
|
6)
|
The registrants other certifying officers
and I have indicated in this annual report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|
|
|
|
/s/ STEVEN B. COBURN
|
|
|
|
Steven B. Coburn
|
|
Senior Vice President, Chief Financial
Officer
|
53
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit Description
|
|
|
|
|
|
|
3.1
|
|
|
|
|
Second Amended and Restated Articles of
Incorporation of the Registration(1)
|
|
3.2
|
|
|
|
|
Amended and Restated Bylaws of the Registrant(1)
|
|
4.1
|
|
|
|
|
Specimen Common Stock Certificate(1)
|
|
4.2
|
|
|
|
|
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(6)
|
|
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(6)
|
|
23.1*
|
|
|
|
|
Consent of PricewaterhouseCoopers LLP,
Independent Accountants
|
|
99.1*
|
|
|
|
|
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
(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.
|
|
(6)
|
Incorporated by reference from Annual Report on
Form 10-K for the year ended September 30, 2001.
|