<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1999
REGISTRATION NO. 333-75817
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
F5 NETWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 3570 91-1714307
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
200 FIRST AVENUE WEST, SUITE 500
SEATTLE, WASHINGTON 98119
(206) 505-0800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JEFFREY S. HUSSEY
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
F5 NETWORKS, INC.
200 FIRST AVENUE WEST, SUITE 500
SEATTLE, WASHINGTON 98119
(206) 505-0800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
PATRICK A. POHLEN, ESQ. BROOKS STOUGH, ESQ.
THOMAS B. YOUTH, ESQ. SUSAN M. GIORDANO, ESQ.
COOLEY GODWARD LLP TODD W. SMITH, ESQ.
4205 CARILLON POINT GUNDERSON DETTMER STOUGH
KIRKLAND, WA 98033-7355 VILLENEUVE FRANKLIN & HACHIGIAN, LLP
(425) 893-7700 155 CONSTITUTION DRIVE
MENLO PARK, CALIFORNIA 94025
(650) 321-2400
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value....................... 3,450,000 $12.00 $41,400,000 $11,509 (3)
</TABLE>
(1) Includes 450,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(g) under the Securities Act of
1933, as amended.
(3) $11,120 of this amount has previously been paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 14, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
UNDERWRITERS MAY NOT CONFIRM SALES OF THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by F5 Networks, Inc. Of
the 3,000,000 shares of common stock being sold in this offering, 2,860,000
shares are being sold by F5 and 140,000 shares are being sold by the selling
shareholder. F5 will not receive any of the proceeds from the sale of shares by
the selling shareholder. See Management--Principal and Selling Shareholders on
pages 49 and 50.
The estimated initial public offering price will be between $10.00 and
$12.00 per share.
--------------
There is currently no public market for the common stock. We have applied to
list our shares of common stock for quotation on the Nasdaq National Market
under the symbol "FFIV."
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ----------
<S> <C> <C>
Initial public offering price....................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds to F5, before expenses..................................... $ $
Proceeds to the selling shareholder, before expenses................ $ $
</TABLE>
Three shareholders have granted the underwriters an option for a period of
30 days to purchase up to 450,000 additional shares of common stock.
--------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................ 4
Risk Factors...................................... 7
Forward Looking Statements........................ 13
Use of Proceeds................................... 14
Dividend Policy................................... 14
Capitalization.................................... 15
Dilution.......................................... 16
Selected Financial Data........................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 18
Business.......................................... 27
Management........................................ 38
Certain Transactions.............................. 47
Principal and Selling Shareholders................ 49
Description of Capital Stock...................... 51
Shares Eligible for Future Sale................... 54
Underwriting...................................... 56
Legal Matters..................................... 57
Experts........................................... 57
Additional F5 Information......................... 57
Index to Financial Statements..................... F-1
</TABLE>
Information contained on F5's Web site does not constitute part of this
prospectus.
BIG/ip-Registered Trademark- and the F5 logo are registered United States
trademarks of F5. This prospectus also contains trademarks and tradenames of
other companies.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS,
BEFORE MAKING AN INVESTMENT DECISION.
F5 NETWORKS
F5 is a leading provider of integrated Internet traffic management solutions
designed to improve the availability and performance of mission-critical
Internet-based servers and applications. Our products monitor and manage local
and geographically dispersed servers and intelligently direct traffic to the
server best able to handle a user's request. Our products are designed to help
prevent system failure and provide timely responses to user requests and data
flow. Our BIG/ip-Registered Trademark- and 3DNS-TM- Controllers, when combined
with our see/IT-TM- Network Management Console, help organizations optimize
their network server availability and performance and cost-effectively manage
their Internet infrastructure. Our solutions are used by organizations who rely
on the Internet as a fundamental component of their business. Our customers
include Internet service providers, such as Exodus Communications, PSINet, MCI
WorldCom, e-commerce companies and many other organizations that employ
high-traffic Internet sites. Since shipping our first product in July 1997, we
have sold our products to over 400 end-customers.
The Internet has emerged as a critical commerce and communications platform
for businesses and consumers worldwide. The growing use of the Internet is
causing the complexity and volume of Internet traffic to increase dramatically.
According to UUNet, Internet traffic doubles every 100 days. The widespread
proliferation in the use and importance of the Internet has strained many
organizations' network infrastructures. In response to dramatic increases in
Internet use and traffic, organizations are expanding server capacity and are
deploying redundant servers. According to IBM, servers are being connected to
the Internet at a rate of 53,000 per month. While additional and redundant
servers help address the rapidly increasing traffic, they also increase an
organization's need for sophisticated Internet traffic management tools to
manage the availability and performance of its servers and applications.
We believe that our products deliver Internet quality control by providing
the following key benefits:
- HIGH SYSTEM AVAILABILITY. Our products help prevent system failure by
quickly detecting server, application and network failures and directing
traffic to functioning servers and applications.
- INCREASED PERFORMANCE. Our products intelligently direct user requests to
the server with the fastest response time by monitoring server and
application response time and verifying content.
- COST-EFFECTIVE SCALABILITY. Our products help optimize existing server
capacity and allow the transparent addition of servers into an existing
network.
- EASIER NETWORK MANAGEABILITY. Our products collect information that can be
used to facilitate network management and planning from a central
location.
- ENHANCED NETWORK CONTROL. Our products enable organizations to prioritize
and manage network traffic based on user-defined criteria to meet their
specific needs.
We plan to continue expanding our suite of products to provide complete,
integrated Internet traffic management solutions that further optimize the
availability and performance of network servers and applications. For example,
we are currently developing our global/SITE-TM- Controller to ensure data
integrity by automatically synchronizing content across local and geographically
dispersed network servers. We also plan to continue investing significant
resources to expand our direct sales force and further develop our indirect
sales channels through leading industry resellers, original equipment
manufacturers, systems integrators, Internet service providers and other channel
partners. Finally, we intend to continue investing in our professional services
group in order to provide the installation, training and support services
required to help our customers optimize their use of our Internet traffic
management solutions.
Our headquarters are located at 200 First Avenue West, Suite 500, Seattle,
Washington 98119, our telephone number is (206) 505-0800 and our Web site
address is www.F5.com.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by F5........ 2,860,000 shares
Common stock offered by the
selling shareholder............. 140,000 shares
Common stock to be outstanding
after this offering............. 17,877,469 shares (1)
Use of proceeds................... For working capital and general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol..... FFIV
</TABLE>
- ------------------------
(1) The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 1999 and does
not include the following:
- 2,425,805 shares subject to options outstanding as of March 31, 1999 with
a weighted average exercise price of $0.74 per share;
- 2,904,352 additional shares that could be issued under our stock plans,
including 2,600,000 shares reserved for issuance under our stock plans but
subject to shareholder approval; and
- 2,212,500 shares that could be issued upon exercise of warrants
outstanding as of March 31, 1999 with a weighted average exercise price of
$0.75 per share.
--------------
ALL INFORMATION IN THIS PROSPECTUS RELATING TO OUTSTANDING SHARES OF F5
COMMON STOCK AND OPTIONS OR WARRANTS TO PURCHASE F5 COMMON STOCK IS BASED UPON
INFORMATION AS OF MARCH 31, 1999. PRO FORMA INFORMATION GIVES EFFECT TO THE
CONVERSION OF ALL OUTSTANDING SHARES OF F5 PREFERRED STOCK AS OF THE CLOSING OF
THIS OFFERING. UNLESS OTHERWISE INDICATED, THE INFORMATION THROUGHOUT THIS
PROSPECTUS DOES NOT TAKE INTO ACCOUNT THE POSSIBLE ISSUANCE OF ADDITIONAL SHARES
OF COMMON STOCK TO THE UNDERWRITERS PURSUANT TO THEIR OVER-ALLOTMENT OPTION.
PLEASE SEE "CAPITALIZATION" FOR A MORE COMPLETE DISCUSSION REGARDING THE
OUTSTANDING SHARES OF F5 COMMON STOCK AND OPTIONS OR WARRANTS TO PURCHASE F5
COMMON STOCK AND OTHER RELATED MATTERS.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
PERIOD FROM FEBRUARY SEPTEMBER 30, MARCH 31,
26, 1996 (INCEPTION) TO -------------------- --------------------
SEPTEMBER 30, 1996 1997 1998 1998 1999
----------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $ 2 $ 229 $ 4,889 $ 1,837 $ 6,457
Loss from operations............................ (348) (1,428) (3,668) (1,027) (5,248)
Net loss........................................ $ (330) $ (1,456) $ (3,672) $ (1,046) $ (5,159)
Net loss per share--basic and diluted........... $ (0.06) $ (0.24) $ (0.60) $ (0.17) $ (0.82)
Weighted average shares--basic and diluted...... 5,932 6,000 6,086 6,258 6,297
Pro forma net loss per share (unaudited):
Net loss per share--basic and diluted......... $ (0.26) $ (0.36)
--------- ---------
--------- ---------
Weighted average shares--basic and diluted.... 14,201 14,412
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
ACTUAL AS ADJUSTED (2)
--------- -----------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 2,460 $ 30,868
Working capital................................................................... 2,561 30,969
Total assets...................................................................... 8,516 36,924
Redeemable convertible preferred stock............................................ 7,688 --
Shareholders' equity (deficit).................................................... (3,681) 24,727
</TABLE>
- ------------------------
(1) See Note 2 of notes to financial statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) Adjusted to reflect the sale by F5 of 2,860,000 shares of common stock at an
assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds after deducting estimated
underwriting discounts and commissions and our estimated offering expenses.
See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS MAY SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS AND
MAY RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS.
We were founded in February 1996 and have a limited operating history, which
makes an evaluation of our prospects difficult. Because of our limited operating
history, we have limited insight into trends that may emerge and affect our
business. In addition, the revenues and income potential of our business and
market are unproven. An investor in our common stock must consider the
challenges, expenses and difficulties we face as an early stage company in a new
and rapidly evolving market.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE, AND IT IS DIFFICULT TO PREDICT OUR
FUTURE OPERATING RESULTS.
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 and sales to governmental entities. A delay in the recognition of
revenue, even from just one account, may have a significant negative impact on
our results of operations for a given period. In the past, a significant portion
of our sales have been realized near the end of a quarter. Accordingly, a delay
in an anticipated sale past the end of a particular quarter may negatively
impact our results of operations for that quarter. Furthermore, we base our
decisions regarding our operating expenses on anticipated revenue trends, and
our expense levels are relatively fixed. Consequently, if revenue levels fall
below our expectations, our net income (loss) will decrease (increase) because
only a small portion of our expenses vary with our revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We believe that period-to-period comparisons of our results of operations
are not meaningful and should not be relied upon as indicators of future
performance. Our operating results will likely be below the expectations of
securities analysts and investors in some future quarter or quarters. Our
failure to meet these expectations will likely seriously harm the market price
of our common stock.
WE HAVE INCURRED LOSSES AND WE EXPECT TO INCUR SIGNIFICANT FUTURE OPERATING
EXPENSES AND LOSSES.
We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses of $330,000 for the period from February
26, 1996, inception, to September 30, 1996, $1.5 million for the year ended
September 30, 1997 and $3.7 million for the year ended September 30, 1998. As of
March 31, 1999, we had an accumulated deficit of $10.6 million, and we expect to
incur significant losses in the future.
We intend to substantially increase our operating expenses. As a result, we
will need to generate significant increases in our quarterly net revenues to
achieve and maintain profitability. Although our net revenues have grown in
recent quarters, we may not be able to sustain these growth rates or achieve or
sustain profitability. Our failure to achieve and sustain profitability will
seriously harm our business and results of operations. See "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OUR SUCCESS DEPENDS ON SALES OF OUR BIG/IP-REGISTERED TRADEMARK- CONTROLLER.
We currently derive approximately 80% of our net revenues from sales of our
BIG/ip Controller. 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
7
<PAGE>
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. We are currently
developing our global/SITE-TM- Controller and new features for our existing
products. We expect to continue to develop new products and new product features
in the future. If we fail to develop and deploy new products and new product
features on a timely basis, our business and results of operations may be
seriously harmed. See "Business--Product Development."
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE EMERGING INTERNET TRAFFIC
MANAGEMENT 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 management market include Cisco Systems, Alteon Web
Systems, ArrowPoint Communications, HydraWeb Technology, RadWare and Resonate.
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 servers instead of our products. See
"Business--Competition."
WE MAY NOT BE ABLE TO SUPPORT OUR RAPID GROWTH EFFECTIVELY.
Since the introduction of our product line, we have experienced a period of
rapid growth and expansion which has placed, and continues to place, a
significant strain on all of our resources. From September 30, 1997 to March 31,
1999, we increased the number of our employees from 20 to 124. We expect our
growth to continue to strain our management, operational and financial
resources. For example, we may not be able to install adequate financial control
systems in an efficient and timely manner, and our current or planned
information systems, procedures and controls may be inadequate to support our
future operations. The difficulties associated with installing and implementing
new systems, procedures and controls may place a significant burden on our
management and our internal resources. Our inability to manage growth
effectively may seriously harm our business and results of operations.
OUR EXPANSION INTO INTERNATIONAL MARKETS MAY NOT SUCCEED.
We intend to expand into international markets. We have only limited
experience in marketing, selling and supporting our products internationally.
International sales represented approximately 6.6% of our net revenues for the
year ended September 30, 1997, 3.5% for the year ended September 30, 1998 and
5.1% for the six months ended March 31, 1999. We have recently engaged sales
personnel in the United Kingdom and in Germany. 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.
WE MAY NOT BE ABLE TO SUSTAIN OR DEVELOP NEW DISTRIBUTION RELATIONSHIPS.
Our sales strategy requires that we establish multiple distribution channels
in the United States and internationally through leading industry resellers,
original equipment manufacturers, systems integrators,
8
<PAGE>
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. One of our resellers, Exodus Communications, Inc., accounted for
17.6% of our net revenues for the six months ended March 31, 1999. Our inability
to effectively establish our indirect sales channels will seriously harm our
business and results of operations.
WE NEED TO EXPAND OUR MARKETING AND SALES, PROFESSIONAL SERVICES AND CUSTOMER
SUPPORT CAPABILITIES TO INCREASE MARKET ACCEPTANCE OF OUR PRODUCTS.
Our products require a sophisticated marketing and sales effort targeted at
several levels within a prospective customer's organization. We have recently
expanded our sales force and plan to hire additional sales personnel for direct
sales and to develop leads for our indirect sales channels. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. Our inability to retain and hire
qualified sales personnel may seriously harm our business and results of
operations.
We currently have a small professional services and customer support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. The installation of Internet traffic
management solutions, the integration of these solutions into existing networks
and the ongoing support can be complex. Accordingly, we need highly-trained
professional services and customer support personnel. Hiring professional
services and customer support personnel is very competitive in our industry due
to the limited number of people available with the necessary technical skills
and understanding of our products. Our inability to attract, train or retain the
number of highly qualified professional services and customer support personnel
that our business needs may seriously harm our business and results of
operations.
WE DEPEND ON OUR KEY PERSONNEL AND ON OUR ABILITY TO HIRE ADDITIONAL QUALIFIED
PERSONNEL.
Our success depends to a significant degree upon the continued contributions
of our key management, product development, sales and marketing and finance
personnel, many of whom will be difficult to replace. In particular, we rely on
our President and Chief Executive Officer, Jeffrey Hussey. The loss of Mr.
Hussey's services would seriously harm our business and results of operations.
We do not have employment contracts with any of our key personnel.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, product development,
sales and marketing and finance personnel. Competition for personnel is intense,
and there can be no assurance that we will be successful in attracting and
retaining highly skilled personnel. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers and sales and
marketing personnel, may seriously harm our business and results of operations.
WE HAVE AN UNPREDICTABLE SALES CYCLE.
We are unable to predict our sales cycle because we have limited experience
selling our products. Historically, our sales cycle has ranged from
approximately two to three months. Sales of BIG/ip, 3DNS and our see/IT-TM-
Network Management Console require us to educate potential customers on their
use and benefits. The sale of our products is subject to delays from the lengthy
internal budgeting, approval and competitive evaluation processes that large
corporations and governmental entities may require. For example, customers
frequently begin by evaluating our products on a limited basis and devote time
and resources to testing our products before they decide whether or not to
purchase. Customers may also defer orders as a result of anticipated releases of
new products or enhancements by us or our competitors. As a result, our products
have an unpredictable sales cycle that contributes to the uncertainty of our
future operating results.
9
<PAGE>
THE AVERAGE SELLING PRICES OF OUR PRODUCTS MAY DECREASE, 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.
WE ARE DEPENDENT ON CONTRACT MANUFACTURERS AND WILL NEED TO EXPAND OUR
MANUFACTURING OPERATIONS.
We rely on third party contract manufacturers to assemble our products. We
outsource the manufacturing of our pre-configured, industry-standard hardware
platforms to primarily two contract manufacturers, Micro Standard Distributors
and Unisoft, who assemble these hardware platforms to our specifications. The
inability of our contract manufacturers to provide us with adequate supplies of
our products or the loss of one or more of our contract manufacturers may cause
a delay in our ability to fulfill orders while we obtain a replacement
manufacturer and may seriously harm our business and results of operations.
If the demand for our products grows, we will need to increase our material
purchases, contract manufacturing capacity and internal test and quality
functions. Any disruptions in product flow may limit our revenue, may seriously
harm our competitive position and may result in additional costs or cancellation
of orders by our customers. See "Business--Manufacturing."
WE CURRENTLY PURCHASE SEVERAL COMPONENTS USED IN THE MANUFACTURE OF OUR INTERNET
TRAFFIC MANAGEMENT PRODUCTS FROM LIMITED 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. See "Business--Manufacturing."
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 vendor's 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.
10
<PAGE>
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 copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. In addition, we have not entered into
non-competition agreements with several of our former employees.
From time to time, third parties may assert 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. 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. See "Business--Intellectual Property."
OUR FAILURE AND THE FAILURE OF OUR KEY SUPPLIERS, MANUFACTURERS AND CUSTOMERS TO
BE YEAR 2000 COMPLIANT MAY NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF
OPERATIONS.
The Year 2000 computer issue creates a significant risk for us in at least
four areas:
- potential warranty or other claims arising from our products;
- systems we use to run our business;
- systems used by our suppliers and contract manufacturers; and
- the potential reduced spending by other companies on Internet traffic
management solutions as a result of significant information systems
spending on Year 2000 remediation or to limit additional changes to their
systems during the current year.
A failure in any of these areas to be Year 2000 compliant may seriously harm
our operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance."
LAWS RELATING TO ENCRYPTED SOFTWARE MAY LIMIT THE MARKETABILITY OF OUR PRODUCTS.
The encryption technology contained in our products is subject to United
States export controls. These export controls limit our ability to distribute
encrypted software outside of the United States and Canada. While we take
precautions against unlawful exportation, this exportation inadvertently may
have occurred in the past or may occur from time to time in the future,
subjecting us to potential liability and serious harm. We may also encounter
difficulties competing with non-United States producers of products containing
encrypted software, who may both import their products into the United States
and sell products overseas.
OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN.
We expect that the net proceeds from this offering, cash from operations and
borrowings available under our credit facility will be sufficient to meet our
working capital and capital expenditure needs for at least the next twelve
months. After that, we may need to raise additional funds, and additional
financing may not be available on favorable terms, if at all. Further, if we
issue additional equity securities, shareholders may experience dilution, and
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of our common stock. If we cannot raise funds, if
needed, on acceptable terms, we may not be able to develop new products or
enhance our existing products, take
11
<PAGE>
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. This may seriously harm our business and results of
operations. See "Use of Proceeds," "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
OUR EXISTING SHAREHOLDERS HAVE VOTING CONTROL OVER F5.
On completion of this offering, executive officers, directors and their
affiliates and 5% shareholders will beneficially own, in the aggregate,
approximately 72.6% of our outstanding common stock. As a result, these
shareholders will be able to exercise significant control over all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions, which may have the effect of delaying or
preventing a third party from acquiring control over us. See "Principal and
Selling Shareholders."
THIS OFFERING WILL BENEFIT OUR CURRENT SHAREHOLDERS.
Our current shareholders, including members of management, will recognize
significant benefits from this offering including the creation of a public
market for our common stock. Assuming an initial public offering price of
$11.00, the selling shareholders will realize appreciation of $1.5 million, or
$11.00 per share, or approximately $6.2 million, or $10.54 per share, if the
underwriters exercise the over-allotment option in full. In addition, upon
consummation of this offering, unrealized appreciation for the current
shareholders, including members of management, will be $151.4 million, or $10.08
per share.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $9.19 in net tangible book
value per share of common stock. Investors will incur additional dilution upon
the exercise of outstanding stock options and warrants. See "Dilution."
OUR STOCK PRICE MAY FLUCTUATE AFTER THIS OFFERING.
An active public market for our common stock may not develop or be sustained
after this offering. Although the initial public offering price will be
determined based on several factors, the market price for our common stock will
vary from the initial offering price after this offering. See "Underwriting."
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. In the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may in
the future be the target of similar litigation. Securities litigation may result
in substantial costs and divert management's attention and resources, which may
seriously harm our business and results of operations.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT A
CHANGE IN CONTROL OF F5.
Provisions of our articles of incorporation and bylaws, as well as
provisions of Washington law, may make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our shareholders. See
"Description of Capital Stock."
SUBSTANTIAL SALES OF SHARES MAY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
If our shareholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. Such sales might also make it more difficult
for us to sell equity or equity-related securities in the future at a time and
price that we deem appropriate. After completion of this offering, we will have
outstanding 17,877,469
12
<PAGE>
shares of common stock, assuming no exercise of outstanding options or warrants
after March 31, 1999. See "Shares Eligible for Future Sale" and "Underwriting."
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE OFFERING PROCEEDS.
The majority of the net proceeds of this offering are not allocated for
specific uses and our management can spend most of the proceeds from this
offering in ways with which the shareholders may not agree. We cannot predict
that the proceeds will be invested to yield a favorable return. See "Use of
Proceeds."
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy."
FORWARD LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors."
13
<PAGE>
USE OF PROCEEDS
F5 will receive net proceeds of $28,407,800 from the sale of 2,860,000
shares of common stock at an assumed initial public offering price of $11.00 per
share after deducting estimated underwriting commissions and discounts of
$2,202,200 and estimated expenses of $850,000. We will not receive any proceeds
from the sale of common stock by the selling shareholder.
The principal purpose of this offering is to create a public market for the
common stock of F5. We intend to use the proceeds of this offering for working
capital and general corporate purposes. We may also use some of the proceeds for
strategic acquisitions of products and technologies that will complement or
extend our existing Internet traffic management solutions, although we are not
currently planning any of these transactions. Pending these uses, we intend to
invest the net proceeds of the initial public offering in investment grade
interest-bearing securities.
DIVIDEND POLICY
F5 has never declared or paid any cash dividends on shares of its common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of F5 as of March 31, 1999
(1) on an actual basis, (2) on a pro forma basis, after giving effect to the
conversion of all outstanding shares of preferred stock into common stock and
(3) on a pro forma basis as adjusted to reflect, our receipt of the estimated
net proceeds from the sale of 2,860,000 shares of common stock offered by us at
an assumed initial public offering price of $11.00 per share and the filing of
our amended articles of incorporation upon the closing of this offering.
The capitalization information set forth in the table below is qualified by,
and should be read in conjunction with, the more detailed financial statements
and notes of F5 appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED
--------- ---------------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Redeemable convertible preferred stock:
Series D convertible: no par value,
1,138,438 shares issued and outstanding, actual;
no shares issued and outstanding, pro forma and pro forma as
adjusted...................................................... $ 7,688 $ -- $ --
--------- ------- -------------
Shareholders' equity:
Preferred stock: no par value, 10,000,000 shares authorized,
1,806,250 shares issued and outstanding, actual; 10,000,000
shares authorized, no shares issued and outstanding, pro forma
and pro forma as adjusted..................................... 4,197 -- --
Common stock: no par value, 50,000,000 shares authorized,
6,903,093 issued and outstanding, actual; 50,000,000 shares
authorized, 15,017,469 shares issued and outstanding, pro
forma; and 100,000,000 shares authorized, 17,877,469 shares
issued and outstanding, pro forma as adjusted................. 8,132 20,017 48,425
Note receivable from shareholder................................ (750) (750) (750)
Unearned compensation........................................... (4,643) (4,643) (4,643)
Accumulated deficit............................................. (10,617) (10,617) (10,617)
--------- ------- -------------
Total shareholders' equity (deficit)........................ (3,681) 4,007 32,415
--------- ------- -------------
Total capitalization........................................ $ 4,007 $ 4,007 $ 32,415
--------- ------- -------------
--------- ------- -------------
</TABLE>
- ------------------------
(1) Pro forma reflects the conversion upon the closing of this offering of each
outstanding share of preferred stock into common stock as follows:
<TABLE>
<CAPTION>
AS
OUTSTANDING CONVERTED
------------- ----------
<S> <C> <C>
Series A preferred stock............................ 400,000 2,400,000
Series B preferred stock............................ 1,250,000 2,500,000
Series C preferred stock............................ 156,250 937,500
Series D preferred stock............................ 1,138,438 2,276,876
</TABLE>
This capitalization table excludes the following shares:
- 2,425,805 shares subject to options outstanding as of March 31, 1999 with
a weighted average exercise price of $0.74 per share;
- 2,904,352 additional shares that could be issued under our stock plans,
including 2,600,000 shares reserved for issuance under our stock plans but
subject to shareholder approval; and
- 2,212,500 shares that could be issued upon exercise of warrants
outstanding as of March 31, 1999 with a weighted average exercise price of
$0.75 per share.
15
<PAGE>
DILUTION
F5's pro forma net tangible book value as of March 31, 1999 was $3.9
million, or approximately $0.26 per share, after giving effect to the conversion
of all outstanding preferred stock into common stock on a pro forma basis. Pro
forma net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of shares of our
common stock outstanding on a pro forma basis. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to the sale of the 2,860,000 shares of common
stock offered by us hereby at an assumed initial public offering price of $11.00
per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value at March 31, 1999 would have been $32.3 million, or
approximately $1.81 per share. This represents an immediate increase in pro
forma net tangible book value of $1.55 per share to existing shareholders and an
immediate dilution in net tangible book value of $9.19 per share to new
investors of common stock in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................................... $ 11.00
Pro forma net tangible book value per share as of March 31, 1999...................... $ 0.26
Increase in net tangible book value per share attributable to new investors........... 1.55
---------
Pro forma net tangible book value per share after this offering........................... 1.81
---------
Dilution in net tangible book value per share to new investors............................ $ 9.19
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1999,
after giving effect to the conversion of all outstanding preferred stock into
common stock, the difference between the number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid by existing holders of common stock and by the new investors, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, at an assumed initial public offering price of
$11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ 15,017,469 84.0% $13,807,000 30.5% $ 0.92
New investors.................................... 2,860,000 16.0% 31,460,000 69.5 11.00
--------- ----------- ---------- -----------
Total.................................... 17,877,469 100.0% $45,267,000 100.0%
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
</TABLE>
The foregoing tables assume no exercise of the underwriters' over-allotment
option and exclude the following: 2,425,805 shares subject to options
outstanding as of March 31, 1999 with a weighted average exercise price of $0.74
per share; 2,904,352 additional shares that could be issued under our stock
plans, including 2,600,000 shares reserved for issuance under our stock plans
but subject to shareholder approval; and 2,212,500 shares that could be issued
upon exercise of warrants outstanding as of March 31, 1999 with a weighted
average exercise price of $0.75 per share. To the extent that any shares are
issued upon exercise of outstanding options or warrants or reserved for future
issuance under our stock plans, there will be further dilution to new investors.
See "Management--Incentive Stock Plans" and "Description of Capital Stock."
The sale by the selling shareholder in this offering will reduce the number
of shares of common stock held by existing shareholders to 14,877,469, or
approximately 83.2% of the total number of shares of common stock outstanding
upon the closing of this offering and will increase the number of shares held by
new public investors to 3,000,000, or approximately 16.8% of the total number of
shares of common stock outstanding after this offering. See "Principal and
Selling Shareholders."
16
<PAGE>
SELECTED FINANCIAL DATA
The selected statement of operations data for the period February 26, 1996,
inception, to September 30, 1996, and for the years ended September 30, 1997 and
1998 and the balance sheet data at September 30, 1997 and 1998 are derived from
the financial statements of F5, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and included elsewhere in
this prospectus. The financial data as of and for the periods ended March 31,
1998 and 1999 are unaudited, but have been prepared on a basis consistent with
the audited financial statements of F5 and the notes thereto and include all
adjustments (constituting only normal recurring adjustments) which F5 considered
necessary for a fair presentation of the information. The results of operations
for the six months ended March 31, 1999 are not necessarily indicative of
results to be expected for the year or for any future periods. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this prospectus (in
thousands, except per share data).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
PERIOD FROM
FEB. 26, 1996 SEPTEMBER 30, MARCH 31,
(INCEPTION) TO -------------------- --------------------
SEPT. 30, 1996 1997 1998 1998 1999
------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Products.............................................. $ 2 $ 229 $ 4,119 $ 1,608 $ 5,428
Services.............................................. -- -- 770 229 1,029
------ --------- --------- --------- ---------
Total net revenues...................................... 2 229 4,889 1,837 6,457
------ --------- --------- --------- ---------
Cost of net revenues:
Products.............................................. 1 71 1,091 402 1,449
Services.............................................. -- -- 314 57 580
------ --------- --------- --------- ---------
Total cost of net revenues.............................. 1 71 1,405 459 2,029
------ --------- --------- --------- ---------
Gross profit.......................................... 1 158 3,484 1,378 4,428
------ --------- --------- --------- ---------
Operating expenses:
Sales and marketing................................... 62 565 3,881 1,342 5,103
Research and development.............................. 103 569 1,810 534 2,344
General and administrative............................ 180 383 1,041 438 1,191
Amortization of unearned compensation................. 4 69 420 91 1,038
------ --------- --------- --------- ---------
Total operating expenses............................ 349 1,586 7,152 2,405 9,676
------ --------- --------- --------- ---------
Loss from operations.................................... (348) (1,428) (3,668) (1,027) (5,248)
Interest income (expense), net.......................... 18 (28) (4) (19) 89
------ --------- --------- --------- ---------
Net loss................................................ $ (330) $ (1,456) $ (3,672) $ (1,046) $ (5,159)
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
Net loss per share--basic and diluted................... $ (0.06) $ (0.24) $ (0.60) $ (0.17) $ (0.82)
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
Weighted average shares--basic and diluted.............. 5,932 6,000 6,086 6,258 6,297
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
Pro forma net loss per share (unaudited):
Net loss per share--basic and diluted................. $ (0.26) $ (0.36)
--------- ---------
--------- ---------
Weighted average shares--basic and diluted............ 14,201 14,412
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------------------- -------------
1996 1997 1998 1999
--- --- --------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 624 $ 143 $ 6,206 $ 2,460
Working capital (deficit)................................. 617 (317) 6,763 2,561
Total assets.............................................. 817 919 9,432 8,516
Long-term obligations..................................... 29 216 -- --
Redeemable convertible preferred stock.................... -- -- 7,688 7,688
Shareholders' equity (deficit)............................ 737 (231) (80) (3,681)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND NOTES. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED
UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS AND THE
TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
F5 is a leading provider of integrated Internet traffic management solutions
designed to improve the availability and performance of mission-critical
Internet-based servers and applications. We were incorporated on February 26,
1996 and began operations in April 1996. During the period from February 26,
1996 through September 30, 1996, we were a development stage enterprise and had
no product revenues. Our operating activities during this period related
primarily to developing our initial product, recruiting personnel, building our
corporate infrastructure and raising capital.
In July 1997, we released our first version of our
BIG/ip-Registered Trademark- Controller, and began to expand our operations. We
increased our investments in research and development, marketing programs,
domestic and international sales channels, customer support and services and our
general and administrative infrastructure. Since June 30, 1997, we have:
- hired more than 130 employees;
- hired sales representatives in six domestic locations;
- hired professional services and customer support personnel in five
domestic locations;
- released several upgrades to BIG/ip;
- released two new products, our 3DNS-TM- Controller and our see/IT-TM-
Network Management Console;
- engaged sales representatives in the European and Asia Pacific markets;
and
- established a distributor relationship with one international reseller.
Our net revenues grew from $229,000 for the year ended September 30, 1997 to
$4.9 million for the year ended September 30, 1998, and were $6.5 million for
the six months ended March 31, 1999. Currently, we derive approximately 80% of
our revenues from sales of BIG/ip. One of our resellers, Exodus Communications,
accounted for approximately 17.6% of our net revenues for the six months ended
March 31, 1999. In addition, we expect to derive a significant portion of our
net revenues from sales of BIG/ip in the future.
Net revenues derived from customers located outside of the United States
were $15,000 in 1997, $172,000 in 1998 and $327,000 for the six months ended
March 31, 1999. We plan to expand our international operations significantly,
particularly in selected countries in the European and Asia Pacific markets,
because we believe international markets represent a significant growth
opportunity. The expansion of our international operations will be subject to a
variety of risks that could significantly harm our business and results of
operations.
Customers who purchase BIG/ip or 3DNS receive installation services and an
initial customer support contract, typically covering a 12-month period.
Customers may also purchase consulting services and renew their initial customer
support contract. We generally combine the software license, installation, and
customer support elements of our products into a package with a single price. We
allocate a portion of the
18
<PAGE>
sales price to each element of the bundled package based on their respective
fair values when the individual elements are sold separately. Revenues from the
license of software are recognized when the product has been shipped and the
customer is obligated to pay for the product. Installation revenue is recognized
when the product has been installed at the customer's site. Revenues for
customer support are recognized on a straight-line basis over the service
contract term. Consulting services are customarily billed at fixed rates, plus
out-of-pocket expenses. Estimated sales returns are based on historical
experience by product and are recorded at the time revenues are recognized.
We have incurred losses since our inception, and as of March 31, 1999, had
an accumulated deficit of $10.6 million. Our success in growing net revenues
depends on increasing our customer base and expanding our product line as well
as continued growth of the emerging Internet traffic management market.
Accordingly, we intend to continue to invest heavily in sales and marketing,
promotion of the F5 brand, customer service and support, research and
development, operating infrastructure and general and administrative staff to
support our growth. As a result of these investments, we expect that our
operating expenses will increase significantly and that we will continue to
incur substantial operating losses for the foreseeable future. To achieve and
maintain profitability we will need to increase our net revenues significantly.
Although we have experienced rapid growth in net revenues in recent periods, we
may not be able to sustain these growth rates or achieve or sustain
profitability.
We have recorded a total of $6.2 million of unearned compensation costs
since our inception through March 31, 1999. 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 over the
vesting period of the options and have recorded unearned compensation charges of
$69,000 and $420,000 for the years ended September 30, 1997 and 1998,
respectively, and $91,000 and $1.0 million for the six months ended March 31,
1998 and 1999, respectively.
We expect to recognize amortization expense related to unearned compensation
of approximately $2.5 million, $1.8 million, $961,000 and $408,000 during the
years ended September 30, 1999, 2000, 2001 and 2002, respectively. We cannot
guarantee, however, that we will not accrue additional unearned compensation
costs in the future or that our current estimate of these costs will prove
accurate, either of which events could seriously harm our business and results
of operations.
We expense our research and development costs as incurred except for certain
software development costs. Software development costs incurred in connection
with product development are charged to research and development expense until
technological feasibility is established. After that, until the product is
released for sale, these software development costs are capitalized. These costs
are then amortized over the estimated economic life of the products, generally
two years.
Through March 31, 1999, we capitalized a total of $201,000 of software
development costs. We amortized $4,000 and $79,000 of these costs during the
years ended September 30, 1997 and 1998, respectively, and $31,000 and $52,000
for the six months ended March 31, 1998 and 1999, respectively.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of net revenues
and operating results are not necessarily meaningful and should not be relied
upon as indications of future performance. This is particularly true of
companies such as ours that operate in new and rapidly evolving markets.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total net revenues for the periods indicated. Data for the period from
inception, February 26, 1996, to September 30, 1996, are not presented because
we did not have product revenues during that period. Further, we believe amounts
from February 26, 1996 through September 30, 1996 are not comparable to the year
ended September 30, 1997
19
<PAGE>
due to different lengths of the respective periods and the rapid acceleration of
our activities and related expenses throughout the 1997 period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, MARCH 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Products...................................................................... 100.0% 84.3% 87.5% 84.1%
Services...................................................................... -- 15.7 12.5 15.9
--------- --------- --------- ---------
Total net revenues.......................................................... 100.0 100.0 100.0 100.0
Cost of net revenues:
Products...................................................................... 31.0 22.3 21.9 22.4
Services...................................................................... -- 6.4 3.0 9.0
--------- --------- --------- ---------
Total cost of net revenues.................................................. 31.0 28.7 24.9 31.4
--------- --------- --------- ---------
Gross margin................................................................ 69.0 71.3 75.1 68.6
Operating expenses:
Sales and marketing........................................................... 246.8 79.4 73.1 79.0
Research and development...................................................... 248.5 37.0 29.1 36.3
General and administrative.................................................... 167.2 21.3 23.8 18.5
Amortization of unearned compensation......................................... 30.1 8.6 5.0 16.1
--------- --------- --------- ---------
Total operating expenses.................................................... 692.6 146.3 131.0 149.9
--------- --------- --------- ---------
Loss from operations............................................................ (623.6) (75.0) (55.9) (81.3)
Interest income (expense), net.................................................. (12.2) (0.1) (1.0) 1.4
--------- --------- --------- ---------
Net loss........................................................................ (635.8)% (75.1)% (56.9)% (79.9)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
Net Revenues:
Net revenues consist of sales of our products and services, which include
software license and services. Services include revenue from service and support
agreements provided as part of the initial product sale, sales of extended
service and support contracts and consulting services.
PRODUCT REVENUES. Product revenues increased by 237.6% from $1.6 million
for the six months ended March 31, 1998 to $5.4 million for the six months ended
March 31, 1999. This increase in product revenues was due primarily to an
increase in the quantity of our products sold through our direct and indirect
sale channels.
SERVICE REVENUES. Service revenues increased by 349.3% from $229,000 for
the six months ended March 31, 1998 to $1.0 million for the six months ended
March 31, 1999. This increase was due primarily to an increase in the installed
base of our products which resulted in increased revenues from service and
support contracts.
As our net revenue base increases, we do not believe we can sustain
percentage growth rates of net revenues that we have experienced historically.
20
<PAGE>
Cost of Net Revenues:
Cost of net revenues consists primarily of out-sourced hardware components
and manufacturing, fees for third-party software products integrated into our
products, service and support personnel and an allocation of our facilities and
depreciation expenses.
COST OF PRODUCT REVENUES. Cost of product revenues, increased 260.4%, from
$402,000 for the six months ended March 31, 1998 to $1.4 million for the six
months ended March 31, 1999. This increase was due primarily to higher sales
volumes. Cost of product revenues increased as a percent of product revenues
from 25.0% for the six months ended March 31, 1998, to 26.7% for the six months
ended March 31, 1999. This increase was due primarily to an increase in the
percentage of product revenues generated from resellers who buy our products for
lower average prices than our direct sales prices. Resellers accounted for
approximately 5.0% of our product revenues for the six months ended March 31,
1998, and approximately 33.0% of our product revenues for the six months ended
March 31, 1999. To the extent that we experience price erosion or sales of our
products by resellers increase more rapidly than direct sales, our profit
margins will decline.
COST OF SERVICE REVENUES. Cost of service revenues increased 917.5%, from
$57,000 for the six months ended March 31, 1998 to $580,000 for the six months
ended March 31, 1999. Cost of service revenues increased as a percent of service
revenues from 24.9% for the six months ended March 31, 1998 to 56.4% for the six
months ended March 31, 1999. The increases in cost of service revenues in
absolute dollars and as a percent of service revenues was due primarily to
increases in service and support personnel.
SALES AND MARKETING. Our sales and marketing expenses consist primarily of
salaries, commissions and related benefits of our sales and marketing staff,
costs of our marketing programs, including public relations, advertising and
trade shows and an allocation of our facilities and depreciation expenses. Sales
and marketing expenses increased by 280.3%, from $1.3 million for the six months
ended March 31, 1998 to $5.1 million for the six months ended March 31, 1999.
This increase was due to an increase in sales and marketing personnel and
professional services personnel from 24 to 54, and increased advertising and
promotional activities. We expect to increase sales and marketing expenses in
order to grow net revenues and expand our brand awareness.
RESEARCH AND DEVELOPMENT. Our research and development expenses consist
primarily of salaries and related benefits for our product development personnel
and an allocation of our facilities and depreciation expenses. Research and
development expenses increased by 339.0%, from $534,000 for the six months ended
March 31, 1998 to $2.3 million for the six months ended March 31, 1999. This
increase was due to an increase in product development personnel from 9 to 46.
Our future success is dependent in large part on the continued enhancement of
our current products and our ability to develop new, technologically advanced
products that meet the sophisticated needs of our customers. We expect research
and development expenses to increase in future periods.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist
primarily of salaries, benefits and related costs of our executive, finance,
human resource and legal personnel, third-party professional service fees, and
an allocation of our facilities and depreciation expenses. General and
administrative expenses increased by 171.9% from $438,000 for the six months
ended March 31, 1998 to $1.2 million for the six months ended March 31, 1999.
This increase was due primarily to an increase in general and administrative
personnel from 7 to 24. We expect general and administrative expenses to
increase as we expand our staff, further develop our internal information
systems and incur costs associated with being a publicly held company.
UNEARNED COMPENSATION. We recorded unearned compensation charges of $91,000
and $1.0 million for the six months ended March 31, 1998 and 1999, respectively.
See Note 8 of notes to our financial statements.
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<PAGE>
INTEREST INCOME (EXPENSE) NET. Interest income consists of earnings on our
cash and cash equivalent balances offset by interest expense associated with
debt obligations. Net interest expense was $19,000 for the six months ended
March 31, 1998 compared to net interest income of $89,000 for the six months
ended March 31, 1999. This increase was due primarily to increased interest
earned on cash and cash equivalents received from the sale of preferred stock in
August 1998.
INCOME TAXES. There was no provision for federal or state income taxes for
any period as we have incurred operating losses since inception. As of September
30, 1998, we had approximately $4.6 million of net operating loss carryforwards
for federal income tax purposes. Utilization of the net operating loss
carryforwards may be subject to annual limitations due to the ownership change
limitations contained in the Internal Revenue Code of 1986 and similar state
provisions. Annual limitations may result in the expiration of the net operating
losses before we can utilize them. The federal net operating loss carryforwards
will expire at various dates beginning in 2011 through 2018 if we do not use
them. See Note 5 of notes to our financial statements.
YEARS ENDED SEPTEMBER 30, 1997 AND 1998
Net Revenues:
PRODUCT REVENUES. Product revenues increased by 1,698.7% from $229,000 in
1997 to $4.1 million in 1998. This increase was due primarily to an increase in
the quantity of our products sold.
SERVICE REVENUES. There were no service revenues in 1997 because the
initial product sales during that period did not include a service and support
contract. Beginning in fiscal year 1998, our products included a service and
support contract. Service revenues were $770,000 in 1998. This increase in
service revenues was due to an increase in the installed base of our products
which included a service and support contract.
Cost of Net Revenues:
COST OF PRODUCT REVENUES. Cost of product revenues increased by 1,436.6%
from $71,000 in 1997 to $1.1 million in 1998. This increase was due primarily to
the increase in our products sold. Cost of product revenues as a percentage of
net revenues decreased from 31.0% to 26.5% due to a decrease in direct product
costs including costs of manufacturing personnel as a percentage of revenue.
COST OF SERVICE REVENUES. Cost of service revenues was $314,000 in 1998.
Cost of service revenues as a percent of service revenues was 40.8% in 1998. We
expect that the cost of service revenues will fluctuate in the future based on
the rate of increase in service and support personnel compared with increases in
service revenues.
SALES AND MARKETING. Our sales and marketing expenses increased by 586.9%,
from $565,000 in 1997 to $3.9 million in 1998. This increase was due primarily
to investing in our sales and marketing infrastructure, both domestically and
internationally. These investments included an increase in our sales and
marketing and professional services personnel from 7 to 37, recruiting fees,
travel expenses, and increased marketing activities, including advertising,
trade shows and other promotional expenses. Sales and marketing expenses
decreased from 246.8% of net revenues in 1997 to 79.4% of net revenues in 1998.
This percentage decrease was due primarily to our net revenues growing faster
than our sales and marketing expenses.
RESEARCH AND DEVELOPMENT. Our research and development expenses increased
by 218.1% from $569,000 in 1997 to $1.8 million in 1998. This increase was due
primarily to an increase in our software engineers and other technical staff
from 9 to 27. Research and development expenses decreased from 248.5% of our net
revenues in 1997 to 37.0% of our net revenues in 1998. This percentage decrease
was due primarily to our net revenues growing faster than our research and
development expenses.
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<PAGE>
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
increased by 171.8% from $383,000 in 1997 to $1.0 million in 1998. This increase
was due primarily to an increase in general and administrative personnel from 4
to 16. General and administrative costs decreased from 167.2% of our net
revenues in 1997 to 21.3% of our net revenues in 1998. This percentage decrease
was due primarily to our net revenues growing faster than our general and
administrative expenses.
INTEREST INCOME (EXPENSE), NET. Net interest expense was $28,000 in 1997
compared to net interest expense of $4,000 in 1998. This decrease was due
primarily to increased interest earned on cash and cash equivalents received
from the sale of our preferred stock in August 1998.
QUARTERLY RESULTS OF OPERATIONS
The following tables present our unaudited quarterly results of operations
for the seven quarters ended March 31, 1999 in dollars and as a percentage of
net revenues. You should read the following tables in conjunction with our
financial statements and related notes in this prospectus. We have prepared this
unaudited information on the same basis as the audited financial statements.
These tables include all adjustments, consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of our operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Products..................................... $ 166 $ 742 $ 866 $ 929 $ 1,582 $ 2,282
Services..................................... -- 100 129 215 326 413
----- ----- --------- -------- ------------- ------
Total net revenues......................... 166 842 995 1,144 1,908 2,695
Cost of net revenues:
Products..................................... 55 201 202 291 397 624
Services..................................... -- 9 47 115 143 196
----- ----- --------- -------- ------------- ------
Total cost of net revenues................. 55 210 249 406 540 820
----- ----- --------- -------- ------------- ------
Gross profit............................... 111 632 746 738 1,368 1,875
----- ----- --------- -------- ------------- ------
Operating expenses:
Sales and marketing.......................... 203 555 787 1,097 1,442 2,216
Research and development..................... 210 194 340 525 751 1,020
General and administrative................... 110 202 236 252 351 525
Amortization of unearned compensation........ 69 31 60 114 215 368
----- ----- --------- -------- ------------- ------
Total operating expenses................... 592 982 1,423 1,988 2,759 4,129
----- ----- --------- -------- ------------- ------
Loss from operations........................... (481) (350) (677) (1,250) (1,391) (2,254)
Interest income (expense), net................. (26) (23) 4 (2) 17 58
----- ----- --------- -------- ------------- ------
Net loss....................................... $(507) $(373) $ (673) $(1,252) $(1,374) $(2,196)
----- ----- --------- -------- ------------- ------
----- ----- --------- -------- ------------- ------
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Net revenues:
Products..................................... $3,146
Services..................................... 616
---------
Total net revenues......................... 3,762
Cost of net revenues:
Products..................................... 825
Services..................................... 384
---------
Total cost of net revenues................. 1,209
---------
Gross profit............................... 2,553
---------
Operating expenses:
Sales and marketing.......................... 2,887
Research and development..................... 1,324
General and administrative................... 666
Amortization of unearned compensation........ 670
---------
Total operating expenses................... 5,547
---------
Loss from operations........................... (2,994)
Interest income (expense), net................. 31
---------
Net loss....................................... $(2,963)
---------
---------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Products..................................... 100.0% 88.1% 87.0% 81.2% 82.9% 84.7%
Services..................................... -- 11.9 13.0 18.8 17.1 15.3
------ ----- --------- -------- ----- -----
Total net revenues......................... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of net revenues:
Products..................................... 33.1 23.9 20.3 25.4 20.8 23.1
Services..................................... -- 1.0 4.7 10.1 7.5 7.3
------ ----- --------- -------- ----- -----
Total cost of net revenues................. 33.1 24.9 25.0 35.5 28.3 30.4
------ ----- --------- -------- ----- -----
Gross margin............................... 66.9 75.1 75.0 64.5 71.7 69.6
------ ----- --------- -------- ----- -----
Operating expenses:
Sales and marketing.......................... 122.3 65.9 79.1 95.9 75.5 82.2
Research and development..................... 126.5 23.0 34.2 45.9 39.4 37.8
General and administrative................... 66.3 24.0 23.7 22.0 18.4 19.5
Amortization of unearned compensation........ 41.5 3.7 6.0 10.0 11.3 13.7
------ ----- --------- -------- ----- -----
Total operating expenses................... 356.6 116.6 143.0 173.8 144.6 153.2
------ ----- --------- -------- ----- -----
Loss from operations........................... (289.7) (41.5) (68.0) (109.3) (72.9) (83.6)
Interest income (expense), net................. (15.7) (2.8) 0.4 (0.1) 0.9 2.1
------ ----- --------- -------- ----- -----
Net loss....................................... (305.4)% (44.3)% (67.6)% (109.4)% (72.0)% (81.5)%
------ ----- --------- -------- ----- -----
------ ----- --------- -------- ----- -----
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Net revenues:
Products..................................... 83.6%
Services..................................... 16.4
---------
Total net revenues......................... 100.0
Cost of net revenues:
Products..................................... 21.9
Services..................................... 10.2
---------
Total cost of net revenues................. 32.1
---------
Gross margin............................... 67.9
---------
Operating expenses:
Sales and marketing.......................... 76.7
Research and development..................... 35.2
General and administrative................... 17.8
Amortization of unearned compensation........ 17.8
---------
Total operating expenses................... 147.5
---------
Loss from operations........................... (79.6)
Interest income (expense), net................. 0.8
---------
Net loss....................................... (78.8)%
---------
---------
</TABLE>
Our quarterly operating results have fluctuated significantly and we expect
that future operating results will be subject to similar fluctuations for a
variety of factors, many of which are substantially outside our control. See
"Risk Factors--Our quarterly operating results are volatile and future operating
results remain uncertain."
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily financed our operations through
private placements of our preferred stock. Through March 31, 1999, gross
proceeds from private placements of preferred stock totaled approximately $12.4
million. To a lesser extent, we have financed our operations through equipment
financing, traditional lines of credit, and the exercise of options and warrants
to purchase common stock.
As of March 31, 1999, we had cash and cash equivalents of $2.5 million, an
increase of $2.3 million from cash and cash equivalents held as of March 31,
1998. This increase was due primarily to the sale of our preferred stock, which
raised approximately $9.2 million, offset by cash used in operating activities
and purchases of property and equipment.
We have a $2.0 million working capital revolving line of credit with a
lender that is collateralized by all of our accounts receivable and bears
interest at the lender's prime rate plus one-half percent. This facility allows
us to borrow up to the lesser of 75% of our eligible accounts receivable or $2.0
million. The agreement under which the line of credit was established contains
certain covenants, including a provision requiring us to maintain specific
financial ratios. As of March 31, 1999, there were no outstanding borrowings
under this line of credit. We also had a capital equipment line with a lender
for $100,000. This line expired in August 1998 and was never utilized.
24
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Cash used in our operating activities was $1.4 million in 1997, $3.4 million
in 1998 and $3.5 million for the six months ended March 31, 1999. These net cash
outflows resulted from operating losses as well as increases in accounts
receivable and other current assets and were partially offset by increases in
accounts payable, accrued liabilities and deferred revenues.
Net cash used in investing activities since our inception through March 31,
1999 was approximately $1.9 million, substantially all of which was used for the
purchase of property and equipment. We expect capital expenditures to increase
in the second half of fiscal 1999 due to the costs of expansion and expenditures
for information systems and test equipment.
As of March 31, 1999, our principal commitment consisted of obligations
outstanding under operating leases. In March 1999, we agreed to lease
approximately 20,000 square feet in a facility located in Seattle, Washington,
for a term of 60 months. The annual cost of this lease is approximately
$397,000, subject to annual adjustments. Although we have no other material
commitments, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in our operations,
infrastructure and personnel. In the future we may also require a larger
inventory of products in order to provide better availability to customers and
achieve purchasing efficiencies.
We intend to substantially increase our operating expenses. These operating
expenses will consume a material amount of our cash resources, including a
portion of the net proceeds of this offering. We believe that the net proceeds
from this offering, cash from operations and borrowings under our credit
facility will be sufficient to meet our working capital and capital expenditures
needs for at least the next twelve months. After that we may need to raise
additional funds, and additional financing may not be available on favorable
terms, if at all. Further, if we issue additional equity securities,
shareholders may experience dilution, and the new equity securities may have
rights, preferences or privileges senior to those of existing holders of our
common stock. If we cannot raise funds, if needed, on acceptable terms, we may
not be able to develop new products or enhance our existing products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. This may seriously harm our business and results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
As of October 1, 1998 we adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. We had no material components of
comprehensive income. The adoption of this statement has had no impact on our
financial position, shareholders' equity (deficit), results of operations or
cash flows. Accordingly, our comprehensive loss for the three months ended
December 31, 1998 is equal to our reported loss.
Additionally, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way business enterprises report information
in annual statements and interim financial reports regarding operating segments,
products and services, geographic areas and major customers. This statement is
effective for financial statements for fiscal years beginning after December 15,
1997. The adoption of this statement did not have a material impact on the way
we report information in our financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. We are required to adopt SOP 98-1 for the fiscal year
beginning in October 1999. Our adoption of SOP 98-1 is not expected to have a
material impact on our financial statements.
25
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 of Financial Accounting Standards, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is, the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. We do not use derivative instruments, therefore the
adoption of this statement will not have any effect on our results of operations
or financial position.
YEAR 2000 COMPLIANCE
BACKGROUND OF YEAR 2000 ISSUES. Many currently installed computer and
communications systems and software products are unable to distinguish 21(st)
century dates from 20(th) century dates. This situation could result in system
failures or miscalculations causing business disruptions. As a result, many
companies' software and computer and communications systems may need to be
upgraded or replaced to become Year 2000 compliant.
OUR PRODUCT TESTING AND LICENSING. We have tested all of our current
products for Year 2000 compliance. We derived our testing method from our review
and analysis of the Year 2000 testing practices of other software vendors,
relevant industry Year 2000 compliance standards and the specific functionality
and operating environments of our products. The tests are run on all supported
platforms for each current release of our product and include testing for date
calculations and internal storage of date information with test numbers starting
in 1999 and going beyond the Year 2000. Based on these tests, we believe our
products to be Year 2000 compliant with respect to date calculations and
internal storage of date information.
CUSTOMER CLAIMS. We may be subject to customer claims to the extent our
products fail to operate properly as a result of the occurrence of the date
January 1, 2000. Liability may result to the extent our products are not able to
store, display, calculate, compute and otherwise process date-related data. We
could also be subject to claims based on the failure of our products to work
with software or hardware from other vendors.
OUR EXTERNAL VENDORS. We periodically verify Year 2000 compliance by
external vendors that supply us with material software and information systems
and communicate with our significant suppliers to determine their Year 2000
readiness. As part of our assessment, we periodically evaluate the level of
validation we require of third parties to ensure their Year 2000 readiness. To
date, we have not encountered any material Year 2000 problems with software and
information systems provided to us by third parties.
OUR INTERNAL SYSTEMS. We periodically review our internal management
information and other systems to identify any products, services or systems that
may not be Year 2000 compliant and to take corrective action when required. To
date, we have not encountered any material Year 2000 problems with our computer
systems or any other equipment that might be subject to such problems.
COSTS OF ADDRESSING YEAR 2000 COMPLIANCE. Based on our preliminary
evaluations, we do not believe we will incur significant expenses or be required
to invest heavily in computer system improvements to be Year 2000 compliant. We
do not believe the cost of remediation for Year 2000 non-compliance issues
identified to date will exceed $50,000. However, significant uncertainty exists
concerning the potential costs and effects associated with Year 2000 compliance.
Any Year 2000 compliance problem experienced by us or our customers could
decrease demand for our products which could seriously harm our business and
results of operations.
CONTINGENCY PLANNING. We have not formulated a contingency plan at this
time but expect to have specific contingency plans in place prior to November
30, 1999.
26
<PAGE>
BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS RELATING
TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF F5, WHICH INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
F5 is a leading provider of integrated Internet traffic management solutions
designed to improve the availability and performance of mission-critical
Internet-based servers and applications. Our products monitor and manage local
and geographically dispersed servers and intelligently direct traffic to the
server best able to handle a user's request. Our products are designed to help
prevent system failure and provide timely responses to user requests and data
flow. Our BIG/ip-Registered Trademark- and 3DNS-TM- Controllers, when combined
with our see/IT-TM- Network Management Console, help organizations optimize
their network server availability and performance and cost-effectively manage
their Internet infrastructure. Our solutions are used by organizations who rely
on the Internet as a fundamental component of their business. Our customers
include Internet service providers, such as Exodus Communications, PSINet, MCI
WorldCom, e-commerce companies and many other organizations that employ
high-traffic Internet sites. Since shipping our first product in July 1997, we
have sold our products to over 300 end-customers.
INDUSTRY BACKGROUND
The Internet has emerged as a critical commerce and communications platform
for businesses and consumers worldwide. International Data Corporation estimates
that there were 97 million Internet users at the end of 1998 and anticipates
this number will grow to approximately 320 million by 2002. This dramatic growth
in the number of Internet users coupled with the increased availability of
powerful new tools and equipment that enable the development, processing and
distribution of data across the Internet have led to a proliferation of
Internet-based applications and services, such as e-commerce, e-mail, electronic
file transfers and online interactive applications. At the same time that the
number of users of, and uses for, the Internet has increased significantly, the
complexity and volume of Internet traffic has increased dramatically. According
to UUNet, Internet traffic doubles every 100 days.
As a result of the Internet's growing popularity and capabilities, numerous
businesses have come to rely on it as a fundamental commerce and communications
tool. For example, a growing number of organizations, such as Web hosting and
e-commerce companies, rely primarily on the Internet to transact business. In
addition, many businesses are using the Internet to deploy mission-critical
business applications in browser-based intranet and extranet computing
environments. Failure to deliver the expected availability and performance for
these Internet-based applications can result in a significant cost to the
organization.
This widespread proliferation in the use and importance of the Internet has
strained many organizations' network infrastructures. In order to support the
dramatic increases in Internet use and traffic, many organizations have
aggressively expanded network server capacity. According to IBM, servers are
being connected to the Internet at a rate of 53,000 per month. Network
infrastructures are further strained by unpredictable traffic, the complexity of
the network environment and the increased variety of data, including multimedia
components and video clips. In this environment, organizations often deploy
multiple servers in a group, or array, which contains individual
application-specific servers or redundant servers that operate together as a
virtual large server. Server arrays can reduce single points of failure and be a
cost-effective way to increase the potential capacity of the system by providing
the flexibility to add additional servers to the array as needed. The practice
of geographically dispersing server arrays to help prevent system failure and
direct traffic more efficiently is also a growing trend.
27
<PAGE>
While additional servers, redundant server configurations and geographically
dispersed server sites help address an organization's rapidly increasing
traffic, they also increase the organization's need for sophisticated Internet
traffic management tools to help manage the availability and performance of its
servers and applications. For optimal server array performance, intelligent
devices are required to direct traffic and synchronize content across local and
geographically dispersed servers. These intelligent devices, or load balancers,
identify which server, whether local or remote, is best able to handle user
requests.
Most currently available Internet traffic management products are extensions
to hardware-based routers, which lack the robust functionality required to
support current mission-critical Internet-based servers and applications. These
products are typically not designed to address application availability, nor do
they meet the manageability and scalability required by organizations who depend
on the Internet as a fundamental commerce and communications tool. As a result,
we believe that traditional traffic management products do not adequately
address the need to manage traffic flows and ensure the availability of
mission-critical servers and applications in the rapidly changing Internet
environment.
F5 SOLUTION
We develop, market and support cost-effective, integrated Internet traffic
management solutions designed to ensure that mission-critical Internet-based
servers and applications are continuously available and perform reliably. Our
products monitor and manage locally and geographically dispersed servers and
intelligently direct traffic to the server best able to handle the user request.
We believe that our products deliver Internet quality control by providing the
following key benefits:
HIGH SYSTEM AVAILABILITY. Our integrated suite of products works with
servers deployed in a redundant server array over a local or wide area network
to enhance network performance and reduce single points of failure. Our
solutions continuously monitor network performance to enable real-time detection
of server, application and content degradation or failure. Based on this
information, our solutions automatically direct user requests to functioning
servers and applications. Our products also enable network administrators to
deploy new servers and take individual servers offline for routine maintenance
without disrupting service to end users.
INCREASED PERFORMANCE. Our products provide a significant performance
improvement over other current approaches. Our solutions monitor server and
application response time and verify content. This information is used to
intelligently direct user requests to the server with the fastest response time.
By intelligently allocating traffic throughout the network, our solutions reduce
server overload conditions that may cause performance degradation.
COST-EFFECTIVE SCALABILITY. Our solutions enable more efficient utilization
of existing server capacity by intelligently allocating traffic among servers.
This capability allows organizations to optimize the capacity of existing
servers and, as traffic volume dictates, cost-effectively expand server capacity
through incremental additions of relatively low cost servers rather than
upgrading to larger, more expensive servers. Our solutions can be used with
multiple heterogeneous hardware platforms, allowing organizations to protect
their investments in their legacy hardware installations as well as integrate of
future hardware investments.
EASIER NETWORK MANAGEABILITY. Our products collect information that can be
used to facilitate network management and planning from a central location.
Leveraging our products' strategic location in the network, our solutions
collect data that is crucial for traffic analysis and apply proprietary trend
and analysis tools that synthesize this data so that network managers can
forecast network requirements more accurately. In addition, we are in the
process of developing solutions to automatically synchronize content across
remote locations, thereby helping to ensure users access to the same content
regardless of server location.
ENHANCED NETWORK CONTROL. Our solutions enable organizations to prioritize
and arrange network traffic based on user-defined criteria to meet their
specific needs. For example, our products may be
28
<PAGE>
configured to utilize the most cost-efficient communication links or,
alternatively, to achieve the most rapid response time.
STRATEGY
Our objective is to be the leading provider of integrated Internet traffic
management solutions designed to optimize network server availability and
performance. Key components of our strategy include:
OFFER A COMPLETE INTERNET TRAFFIC MANAGEMENT SOLUTION. We plan to continue
expanding our existing suite of products to provide a complete Internet traffic
management solution that further optimizes the availability and performance of
network servers and applications. To support this objective, we have recently
introduced our see/IT Network Management Console that communicates with our
BIG/ip and 3DNS Controllers to enable real-time network monitoring and
pro-active network management. Furthermore, we are currently developing our
global/SITE-TM- Controller that is designed to ensure data integrity by
automatically synchronizing content across local and geographically dispersed
network servers. To further support our suite of products, we intend to continue
to invest in our professional services group to provide the installation,
training and support services required to help our customers optimize their use
of our Internet traffic management solutions.
INVEST IN TECHNOLOGY TO CONTINUE TO MEET CUSTOMER NEEDS. We plan to
continue to invest in research and development to provide our customers with
complete Internet traffic management solutions that meet their needs. Our
current technology platform has been designed to quickly and easily expand the
features and functionalities of our suite of products as well as develop
additional products that address the complex and changing needs of our
customers. We are also in the process of developing specialized software modules
that will allow our customers to purchase products with specific features based
on their specific requirements.
EXPAND SALES CHANNELS AND GEOGRAPHIC SCOPE OF SALES. We plan to invest
significant resources to expand our direct sales force and further develop our
indirect sales channels. In addition to maintaining a strong direct sales force,
we plan to expand our indirect sales channels through leading industry
resellers, original equipment manufacturers, systems integrators, Internet
service providers and other channel partners. Furthermore, we plan to pursue
sales of our Internet traffic management solutions to governmental entities. We
also plan to aggressively develop our direct and indirect international sales
capabilities, particularly in selected countries in the European and Asia
Pacific markets.
LEVERAGE OUR MARKET LEADERSHIP TO CONTINUE TO BUILD THE F5 BRAND. We plan
to continue building brand awareness that positions us as one of the leading
providers of Internet traffic management solutions. Our goal is for the F5 brand
to be synonymous with superior network performance, high quality customer
service and ease of use. To achieve these objectives, we plan to increase our
investments in a broad range of marketing programs, including active tradeshow
participation, advertising in print publications, direct marketing, high-profile
Web events and our Internet site.
PURSUE STRATEGIC ACQUISITIONS. We may selectively pursue strategic
acquisitions for products and technologies that will complement or expand our
existing Internet traffic management solutions.
PRODUCTS AND TECHNOLOGY
We have developed BIG/ip, 3DNS and see/IT as a suite of Internet traffic
management products that facilitate high performance, high availability and
scalable access to network server arrays located at a single site or across
multiple, geographically dispersed sites. Our suite of products helps to ensure
that Web
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servers can respond to ever-increasing Internet traffic. The following is a
summary of our products currently available and under development:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT NAME DESCRIPTION INTRODUCTION DATE
<S> <C> <C>
BIG/ip-Registered Trademark- Intelligent load balancer for local July 1997
Controller area networks
3DNS-TM- Controller Intelligent load balancer for wide September 1998
area networks
see/IT-TM- Network Management Traffic analysis and network April 1999
Console management software application for
BIG/ip and 3DNS
global/SITE-TM- Controller File replication and Under development
synchronization controller for
managing content across
geographically dispersed Internet
sites
</TABLE>
BIG/IP CONTROLLER. BIG/ip is an intelligent load balancer consisting of our
proprietary software, which we load on a pre-configured, industry-standard
hardware platform. Situated between a network's routers and server array, BIG/ip
continuously monitors the array of local servers to ensure application
availability and performance and automatically directs user requests to the
server best able to handle these requests. By quickly detecting application,
server and network failures and directing service toward those servers and
applications that are functioning properly, BIG/ip is designed to help prevent
system failure and provide timely responses to user requests and data flow.
BIG/ip offers a comprehensive choice of load-balancing algorithms that enables
an organization to choose a load-balancing configuration that best suits its
particular needs. Additionally, BIG/ip actively queries and checks content
received from applications, thereby helping to ensure the quality of Web
content. Thus, if a server and application are responding to users' requests
with incorrect content, BIG/ip redirects requests to those servers and
applications that are responding properly.
BIG/ip is compatible with any system that uses the standard Internet
communication method, also known as Internet protocol or IP, and can operate
with multiple, heterogeneous hardware platforms. This enables organizations to
leverage their existing infrastructure without limiting their options to meet
future network needs. BIG/ip supports a wide variety of network protocols,
including Web, e-mail, audio, video, database and file transfer protocol, which
is the standard method of transfering files over the Internet. BIG/ip also
manages traffic for network devices such as firewalls that prevent unauthorized
access to a network system, cache servers that store frequently accessed Web
content and multimedia servers, to help provide reliable content availability
for end users. BIG/ip's ability to intelligently distribute traffic across
server arrays reduces the need for increasingly larger and more expensive
servers to accommodate increases in network traffic. This configuration also
reduces the single point of failure inherent with a single large server and
allows for the orderly addition of new servers or the routine maintenance or
upgrades of servers without disrupting service to the end user. A typical
configuration of redundant BIG/ip Controllers located between the server array
and network is shown below.
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[ILLUSTRATION]
Additional BIG/ip features include:
- SECURE SOCKETS LAYER SESSION PERSISTENCE enables server arrays to support
e-commerce and other applications in a secure, cost-effective and scalable
environment.
- SECURE SERVER PROTECTION protects against unauthorized use of the network
server array.
- RATE SHAPING allows priority levels to be assigned to specific types of
traffic.
- PACKET FILTERING enables content providers to direct network traffic to
servers based on user-definable criteria for increased network security
and performance.
- BIG/CONFIG, a simple point-and-click browser-based installation and
configuration tool, facilitates remote monitoring and administration of
the network in a secure environment.
3DNS CONTROLLER. 3DNS is an intelligent load balancer that manages and
distributes user requests across wide area networks. 3DNS consists of our
proprietary software, which we load on a pre-configured, industry-standard
hardware platform. Like BIG/ip, 3DNS functions with multiple heterogeneous
hardware platforms and supports a wide variety of network protocols, including
Web, e-mail, audio, video, database and file transfer protocol, and manages
traffic for network devices such as firewalls, cache servers and multimedia
servers.
When an end-user request is received from a local domain name server or DNS,
3DNS collects network information and communicates with each BIG/ip in the
network to determine the server array
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with the fastest response time. 3DNS then sends the request to the BIG/ip at
this server array, and the BIG/ip then directs the request to the individual
server best able to handle it. Although organizations can deploy a single 3DNS
in their network configuration, multiple 3DNS Controllers are often deployed
within the network to provide redundancy to help ensure network availability and
performance for end users. A typical 3DNS configuration is shown below:
[ILLUSTRATION]
Additional 3DNS features include:
- DYNAMIC LOAD BALANCING optimizes use of available network resources across
wide area networks.
- USER-DEFINED PRODUCTION RULES allow organizations to pre-configure traffic
distribution decisions according to their specific user requirements.
- SECURE SERVER PROTECTION offers security features for wide area networks
similar to those BIG/ip provides for local area networks.
- BIG/CONFIG, a simple point-and-click browser-based installation and
configuration tool, facilitates remote monitoring and administration of
the network in a secure environment.
SEE/IT NETWORK MANAGEMENT CONSOLE. see/IT is a recently introduced software
application that communicates with BIG/ip and 3DNS to help improve the
management and functionality of an organization's network servers. see/IT, which
runs on an NT server, uses real-time data collected by BIG/ip and 3DNS to
perform crucial traffic analysis management functions. Furthermore, by reviewing
historical patterns, network administrators can build predictive models and
forecast usage, which helps them to intelligently plan and budget for additional
server and bandwidth capacity. see/IT integrates the BIG/config
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software module that comes pre-loaded with BIG/ip and 3DNS and consists of the
following two additional Internet browser-based modules:
- BIG/PICTURE-TM- is a real-time monitoring tool that displays key data on
network traffic in easy-to-read graphical illustrations, thereby enabling
network administrators to quickly obtain information regarding network and
server performance, including data about server status and traffic, number
of connections, active and inactive IP addresses and the availability of
individual applications.
- BIG/ANALYSIS-TM- is a forward-looking trend and analysis tool that uses
the information generated by BIG/picture to project future network and
server needs. Network managers and system administrators can use this tool
to create "what if?" scenarios to help forecast the need for additional
servers, interface upgrades and other network capacity requirements.
GLOBAL/SITE CONTROLLER. global/SITE is a global data management solution
currently under development that has been designed to help organizations
automate publishing, distribution and synchronization of file-based content and
applications to local and geographically dispersed Internet sites. global/SITE
is being developed to work with our other products to provide an integrated
Internet traffic management solution. global/SITE will consist of our
proprietary software, which we will load on a pre-configured, industry-standard
hardware platform and is being developed to intelligently deploy both program
and data files to arrays of heterogeneous Web servers. global/SITE's
configuration database will allow administrators to define standard rules for
content deployment as well as accommodate unique content distribution events as
needed.
PRODUCT DEVELOPMENT
We believe that our future success depends on our ability to build upon our
current technology platform, expand the features and functionalities of our
suite of Internet traffic management products and develop additional products
that maintain our technological competitiveness. Our product development group,
which is divided along product lines, employs a standard process for the design,
development, documentation and quality control of our Internet traffic
management solutions. As of March 31, 1999, we employed 46 people in this group.
Each product line is headed by a lead architect, who is responsible for
developing the technology behind the product. To help develop the technology,
the lead architects work closely with our customers to better understand their
requirements. Each line also has a product manager, who ensures that the team
develops and delivers a product that satisfies our customers' needs. Software
engineers, who help design and build the products, and technicians, who perform
test engineering, configuration management, quality assurance and documentation
functions, complete our product development teams. The test engineering team
evaluates the overall quality of our products and determines whether they are
ready for release.
Our product development expenses for fiscal 1996, 1997, 1998 and the six
months ended March 31, 1999 were $103,000, $569,000, $1.8 million and $2.3
million, respectively. We expect our product development expenses to increase as
we hire additional research and development personnel to develop new products
and upgrade our existing ones.
CUSTOMERS
Our target customers include Internet service providers and companies with
e-commerce sites and high-traffic Internet or intranet Web sites. We have also
participated in several high profile Web events. For example, BIG/ip and 3DNS
were used to manage traffic for the official shuttle.nasa.gov Web site for the
John Glenn space shuttle mission. This site featured a real-time audio and video
simulcast of the live NASA broadcast of the shuttle liftoff. In addition, video
clips covering the remainder of the mission were periodically updated and made
available through the site. On its most active day, this site received over 7
million user requests. Since shipping our first product in July 1997, we have
sold our products directly or through resellers, including Exodus Communications
and Frontier GlobalCenter, to over 400 end-
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customers. Our largest reseller, Exodus Communications, accounted for 17.6% of
our net revenues for the six months ended March 31, 1999. The following is a
list of customers that have purchased at least $100,000 of our products since
the end of March 1998:
<TABLE>
<CAPTION>
Resellers - Exodus Communications
- Frontier GlobalCenter
- Vanstar
<S> <C>
ISP/Web Hosting - Exodus Communications
- MCI WorldCom
- PSINet Inc.
- StarMedia Network, Inc.
<CAPTION>
<S> <C>
Intranet/Enterprise - BankAmerica Corporation
- BellSouth.net
- Encylopedia Britannica, Inc.
- Microsoft Corporation
- Motorola, Inc.
- People's Bank
- Techwave Corporation
- Unum Corporation
</TABLE>
SALES AND MARKETING
We market and sell our Internet traffic management solutions through a
direct sales force in the United States, the United Kingdom and Germany, as well
as through domestic and international channel partners. We plan to invest
significant resources to expand our direct sales force and further develop our
indirect sales channels by developing relationships with leading industry
resellers, original equipment manufacturers, systems integrators, Internet
service providers and other channel partners. Typically, our agreements with our
channel partners are not exclusive and do not prevent our channel partners from
selling competitive products. These agreements typically have terms of one or
two years with no obligation to renew, and typically do not provide for
exclusive sales territories or minimum purchase requirements.
Exodus and Frontier Global Center account for most of our indirect sales. We
are in the process of seeking international channel partners for our products in
the United States and selected countries in the European and Asia Pacific
markets. We also intend to increase the number of individuals focused on sales
to governmental entities, and develop strategic relationships that will help
facilitate these sales. As of March 31, 1999, we employed 40 people in sales and
marketing.
Our regional sales managers are responsible for direct customer contact and
are located in Seattle, San Francisco, Los Angeles, Houston, Chicago, Boston,
New York, Atlanta, Washington, D.C., London and Munich. Our inside sales
managers generate and qualify leads for our regional sales managers and help
manage accounts by serving as a liaison between our field and internal corporate
resources. Our field systems engineers also support our regional sales managers
by participating in joint sales calls and providing pre-sales technical
resources as needed.
We plan to continue to build strong brand awareness to leverage the value of
our Internet traffic management products and professional services in the
marketplace. We believe brand visibility is a key factor in increasing customer
awareness, and our goal is for the F5 brand to be synonymous with superior
performance, high quality customer service and ease of use. We market our
products and services through a broad range of marketing programs, including
active tradeshow participation, advertising in print publications, direct
marketing, high-profile Web events and our Internet site. Our marketing programs
are focused on creating awareness of our Internet traffic management solutions
and services and are targeted at information technology professionals such as
chief information officers.
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<PAGE>
PROFESSIONAL SERVICES AND TECHNICAL SUPPORT
We believe that our ability to consistently provide high-quality customer
service and support will be a key factor in attracting and retaining customers.
Prior to the installation of our Internet traffic management solutions, our
professional services team works with organizations to analyze and understand
their special network needs. They also make recommendations on how to integrate
our solutions to best utilize our product features and functionality to support
their unique network environment. Once our customers purchase our products, we
go on-site to help with installation and provide an initial training session to
help our customers make use of the functionality built into our products.
Our technical support team provides remote support through a 24x7 help desk.
Our technical support team also assists our customers with online updates and
upgrades. We also offer seminars and training sessions for our customers on the
configuration and use of our products, including local and wide area network
system administration and management. In addition, we provide a full range of
consulting services to our customers, including comprehensive network
management, documentation and performance analysis and capacity planning to
assist in predicting future network requirements. As of March 31, 1999, our
professional services and technical support team consisted of 14 employees.
MANUFACTURING
We outsource the manufacturing of our pre-configured, industry-standard
hardware platforms to primarily two contract manufacturers, Micro Standard
Distributors and Unisoft, who assemble these hardware platforms to our
specifications. These platforms consist primarily of an Intel-based computing
platform, rack-mounted enclosure system and custom-designed front panel. We
install our proprietary software onto the hardware platforms and conduct
functionality testing, quality assurance and documentation control prior to
shipping our products.
We have experienced minor delays in shipments from these contract
manufacturers in the past which have not had a material impact on our results of
operations. We may experience delays in the future or other problems, such as
inferior quality and insufficient quantity of product, any of which may
seriously harm our business and results of operations. From time to time, we
intend to introduce new products and product enhancements, which will require
that we coordinate our efforts with those of our contract manufacturers to
ensure a sufficient quantity of hardware components. In addition, as our sales
increase our contract manufacturers will need to achieve volume production to
meet our demand. The inability of our contract manufacturers to provide us with
adequate supplies of high-quality hardware platforms or the loss of one or more
of our contract manufacturers may cause a delay in our ability to fulfill orders
while we obtain a replacement manufacturer and may seriously harm our business
and results of operations.
Subcontractors supply our contract manufacturers with the standard parts and
components for our products. These standard hardware parts and components
consist of motherboards, reboot cards and chasses.
Generally, purchase commitments with our limited source suppliers are on a
purchase order basis. An interruption or delay in the supply of any of these
hardware components, or the inability to procure these components from alternate
sources at acceptable prices and within a reasonable time, will seriously harm
our business and results of operations. In addition, qualifying additional
suppliers can be time-consuming and expensive and may increase the likelihood of
errors.
Lead times for purchasing these components vary significantly and depend on
factors such as the specific supplier, contract terms and demand for a component
at a given time. If orders do not match forecasts, excess or inadequate supplies
of certain materials, including components manufactured by our subcontractors,
may seriously harm our business and results of operations.
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<PAGE>
COMPETITION
Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. We compete in the
Internet traffic management market primarily on the basis of price, service,
warranty and product performance. Our principal competitors in the Internet
traffic management market include Cisco Systems, Alteon Web Systems, ArrowPoint
Communications, HydraWeb Technology, RadWare and Resonate. We expect to continue
to face additional competition as new participants enter the Internet traffic
management market. 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. In addition,
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 servers instead of our products.
Cisco Systems has a product offering similar to ours and holds the dominant
share of the market. Cisco has a longer operating history and significantly
greater financial, technical, marketing and other resources than we do. Cisco
also has a more extensive customer base and broader customer relationships
including relationships with many of our current and potential customers that
could be leveraged. In addition, Cisco has significantly more established
customer support and professional services organizations and more extensive
direct sales force and direct and indirect sales channels than we do. Cisco and
our other competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition,
these companies may adopt aggressive pricing policies to gain market share. As a
result, we may not be able to maintain a competitive position against current or
future competitors. Our failure to maintain and enhance our competitive position
within the market may seriously harm our business and results of operations.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We
currently do not have any issued patents or any patent applications pending for
any 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. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. In addition, we have not entered into
non-competition agreements with several of our former employees.
We incorporate software that is licensed from several third party sources
into our products. These licenses generally renew automatically on an annual
basis. We believe that alternative technologies for this licensed software are
available both domestically and internationally.
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. Although we have not been a party to any claims
alleging infringement of intellectual property rights, we cannot assure you that
we will not be subject to these claims in the future. 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
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<PAGE>
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.
EMPLOYEES
As of March 31, 1999, we employed 124 full-time persons, 46 of whom were
engaged in product development, 40 in sales and marketing, 14 in professional
services and technical support and 24 in finance, administration and operations.
None of our employees is represented by a labor union and we have not
experienced any work stoppages to date. We consider our employee relations to be
good.
FACILITIES
We currently lease an aggregate of approximately 20,000 square feet of
office space in Seattle, Washington. The current lease for the Seattle facility
expires in February 2004, with an option to renew for five years. Given our
anticipated growth, we may need to find suitable additional or substitute
facilities in the near future but believe these facilities will be available as
needed on commercially reasonable terms. We also lease office space for our
sales personnel in New York, California, Germany and the United Kingdom.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently involved in
any material legal proceedings.
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MANAGEMENT
THE FOLLOWING TABLE SETS FORTH CERTAIN INFORMATION WITH RESPECT TO OUR
EXECUTIVE OFFICERS AND DIRECTORS AS OF MARCH 31, 1999:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Jeffrey S. Hussey................................. 37 Chairman of the Board, Chief Executive Officer and
President
Robert J. Chamberlain............................. 45 Vice President of Finance, Chief Financial Officer
and Treasurer
Steven Goldman.................................... 38 Vice President of Sales and Marketing
Brett L. Helsel................................... 39 Vice President of Product Development and Chief
Technology Officer
Brian R. Dixon.................................... 39 Vice President of Operations and Secretary
Carlton G. Amdahl (1)............................. 47 Director
Kimberly D. Davis (1)............................. 32 Director
Alan J. Higginson (2)............................. 52 Director
Sonja L. Hoel (2)................................. 32 Director
Kent L. Johnson (2)............................... 55 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
JEFFREY S. HUSSEY co-founded F5 in February 1996 and has been our Chairman,
Chief Executive Officer and President since that time. From February 1996 to
March 1999, Mr. Hussey also served as our Treasurer. From July 1995 to February
1996, Mr. Hussey served as Vice President of Alexander Hutton Capital L.L.C., an
investment banking firm. From September 1993 to July 1995, Mr. Hussey served as
President of Pacific Comlink, an inter-exchange carrier providing frame relay
and Internet access services to the Pacific Rim, which he founded in September
1993. Mr. Hussey holds a B.A. in Finance from Seattle Pacific University and an
M.B.A. from the University of Washington.
ROBERT J. CHAMBERLAIN has served as our Vice President of Finance, Chief
Financial Officer and Treasurer since March 1999. From September 1998 to
February 1999, Mr. Chamberlain served as Senior Vice President and Chief
Financial Officer of Yesler Software, an early stage company developing a
personal multimedia web communication product. From February 1998 to July 1998,
Mr. Chamberlain served as Co-President of Photodisc, a provider of digital
imagery, which merged with Getty Images Inc. in February 1998. From May 1997 to
February 1998, Mr. Chamberlain served as Senior Vice President and Chief
Financial Officer of Photodisc. From April 1996 to May 1997, Mr. Chamberlain
served as Executive Vice President and Chief Financial Officer of Midcom
Communications Inc., a telecommunications service provider. From January 1992 to
December 1995, Mr. Chamberlain served as Vice President Finance and Operations
of ElseWare Corporation, a font technology company. From July 1989 to April
1991, Mr. Chamberlain was an audit partner in the high technology practice of
KPMG Peat Marwick, and was employed by KPMG Peat Marwick since January 1980. Mr.
Chamberlain holds a B.S. in Business Administration and Accounting from
California State University, Northridge.
STEVEN GOLDMAN has served as our Vice President of Sales and Marketing since
July 1997. 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 Microsytems,
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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.
BRETT L. HELSEL has served as our Vice President of Product Development and
Chief Technology Officer since May 1998. 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.
BRIAN R. DIXON has served as our Vice President of Operations since March
1999. From June 1996 to March 1999, Mr. Dixon served as our Vice President of
Finance and Operations. From September 1992 to April 1996, Mr. Dixon served as
Vice President of Finance for the Seattle SuperSonics professional basketball
team. From January 1990 to August 1992, Mr. Dixon served as Controller for the
outdoor advertising division of Ackerley Communications, a sports, entertainment
and outdoor advertising company. Mr. Dixon holds a B.A. in Accounting and
Finance from Seattle Pacific University and is a certified public accountant.
CARLTON G. AMDAHL has served as one of our directors since May 1998. Mr.
Amdahl operates Amdahl Associates, a consulting firm specializing in technology
management, product strategy and system architecture. Mr. Amdahl has served as
President of Network Caching Technology L.L.C., a network caching company, since
February 1999 and as President and Chief Executive Officer of Inca Technology, a
network caching company, since October 1997. From 1985 to January 1996, Mr.
Amdahl served as Chairman of the board of directors and Chief Technical Officer
of NetFRAME Systems, a high performance network server company, which he founded
in 1985. Mr. Amdahl is a Stanford University Sloan Fellow and holds a B.S.
degree in Electrical Engineering and Computer Science from the University of
California, Berkeley and an M.S. in Management from Stanford University.
KIMBERLY D. DAVIS has served as one of our directors since August 1998. Ms.
Davis has been a general partner of IDG Ventures, L.L.C. since July 1997. From
August 1994 to July 1997, Ms. Davis was an associate at BankAmerica Ventures, a
venture capital firm. From June 1993 to August 1993, Ms. Davis served as a
product manager in the Multimedia Publishing Group at Microsoft Corporation.
From August 1988 to July 1992, Ms. Davis was a consultant at Andersen
Consulting, a consulting firm. Ms. Davis holds a B.S. in Industrial Engineering
from Stanford University and an M.B.A. from the Harvard Business School.
ALAN J. HIGGINSON has served as one of our directors since May 1996. From
November 1995 to November 1998, Mr. Higginson served as President of Atrieva
Corporation, a provider of advanced data backup and retrieval technology. From
May 1990 to November 1995, Mr. Higginson served as Executive Vice President of
Worldwide Sales and Marketing for Sierra On-line, a developer of multimedia
software for the home personal computer market. From May 1990 to November 1995,
Mr. Higginson served as President of Sierra On-line's 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.
SONJA L. HOEL has served as one of our directors since August 1998. Ms. Hoel
has been a managing director and general partner of Menlo Ventures, a venture
capital firm, since July 1996 and has been employed by Menlo Ventures since July
1994. From August 1993 to April 1994, Ms. Hoel was an associate at the Edison
Venture Fund, a venture capital firm. From December 1991 to June 1993, Ms. Hoel
served as a business development consultant at Symantec Corporation, a consumer
software applications company, and from January 1989 to June 1991, served as an
investment analyst at TA Associates, a venture capital firm. Ms. Hoel holds a
B.S. in Commerce from the University of Virginia and an M.B.A from the Harvard
Business School.
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KENT L. JOHNSON has served as one of our directors since May 1996. Mr.
Johnson is President of Alexander Hutton Capital, L.L.C., which he co-founded in
August 1994. From April 1989 to May 1994, Mr. Johnson served as Senior Vice
President and Chief Operating Officer of Brazier Forest Industries, a forest
products company. Mr. Johnson is also a director of Timeline, Inc., a software
company. Mr. Johnson holds a B.A. in Business Administration from the University
of Washington and an M.B.A. from Seattle University.
Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed.
There are no family relationships among any of our directors or executive
officers.
BOARD COMPOSITION
Upon the closing of this offering, we will have authorized a range of
directors from five to nine. In accordance with the terms of our amended
articles of incorporation, the terms of office of the board of directors will be
divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
shareholders to be held in 2000;
- Class II directors, whose term will expire at the annual meeting of
shareholders to be held in 2001; and
- Class III directors, whose term will expire at the annual meeting of
shareholders to be held in 2002.
Our Class I directors will be Ms. Davis and Ms. Hoel, our Class II directors
will be Messrs. Higginson and Johnson, and our Class III directors will be
Messrs. Amdahl and Hussey. At each annual meeting of shareholders after the
initial classification, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may have the effect
of delaying or preventing changes in control or management of F5.
BOARD COMMITTEES
- AUDIT COMMITTEE. Our audit committee, consisting of Mr. Amdahl and Ms.
Davis, reviews our internal accounting procedures and consults with and
reviews the services provided by our independent auditors.
- COMPENSATION COMMITTEE. Our compensation committee, consisting of Ms. Hoel
and Messrs. Higginson and Johnson, reviews and recommends to the board of
directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and
benefits of our employees. Mr. Hussey, who acts as a plan administrator
for our 1998 Equity Incentive Plan, authorizes stock option grants for
employees other than officer and director level employees within ranges
pre-approved by the board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
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<PAGE>
DIRECTOR COMPENSATION
Directors currently receive no cash compensation from F5 for their services
as members of the board of directors. They are reimbursed for certain expenses
in connection with attendance at board and committee meetings. From time to
time, certain non-employee directors have received grants of options to purchase
shares of our common stock. In May 1996, Messrs. Higginson and Johnson each were
granted an option to purchase 84,000 shares of our common stock at an exercise
price of $0.50 per share. In May 1998, Mr. Amdahl was granted an option to
purchase 84,000 shares of our common stock at an exercise price of $0.50 per
share. Upon the consummation of this offering, eligible non-employee directors
will receive automatic option grants under our 1999 Non-Employee Directors'
Option Plan. See "--Equity Incentive Plans--Amended and Restated Directors'
Nonqualified Stock Option Plan" and "--1999 Non-Employee Directors' Option
Plan."
EXECUTIVE COMPENSATION
The table below sets forth the compensation paid by us during the fiscal
year ended September 30, 1998 to (a) our President and Chief Executive Officer
and (b) our only other executive officer other than the Chief Executive Officer
whose salary and bonus for fiscal 1998 exceeded $100,000 and who served as an
executive officer of F5 during the fiscal year ended September 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS ALL OTHER COMPENSATION
- -------------------------------------------------- --------- --------- -----------------------
<S> <C> <C> <C>
Jeffrey S. Hussey................................. $ 128,749 $ 3,196 --
President and Chief Executive Officer
Steven Goldman.................................... 120,000 5,000 $ 46,444(1)
Vice President of Sales and Marketing
</TABLE>
- ------------------------
(1) Represents commissions paid to Mr. Goldman in fiscal 1998.
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant any options to the executive officers shown in the Summary
Compensation Table above in fiscal 1998.
FISCAL YEAR-END OPTION VALUES
The following table sets forth for the executive officers shown in the
Summary Compensation Table the aggregate dollar value realized upon exercise of
stock options in the last fiscal year and number and value of securities
underlying unexercised options held at September 30, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS AT
UNDERLYING UNEXERCISED OPTIONS SEPTEMBER 30, 1998 ($) (1)
VALUE AT SEPTEMBER 30, 1998 -----------------------------------
SHARES ACQUIRED REALIZED ------------------------------------ UNEXERCISABLE
NAME ON EXERCISE (#) ($) (1) EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE ($) ($)
- ------------------ ----------------- --------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey S.
Hussey.......... -- -- -- -- -- --
Steven Goldman.... 59,250 $ 648,788 -- 177,750(2) -- $1,946,363
</TABLE>
- --------------------------
(1) Based on the assumed initial public offering price of $11.00 per share less
the exercise price, multiplied by the number of shares underlying the
option.
(2) These options vest 25% on each of the first, second, third and fourth
anniversary of the grant date. These options will vest fully if we are
acquired in a merger or asset sale. All of these options have a ten-year
term.
41
<PAGE>
INCENTIVE STOCK PLANS
1998 EQUITY INCENTIVE PLAN. Our board of directors adopted our 1998 Equity
Incentive Plan on October 22, 1998, and our shareholders approved it on November
12, 1998. We have reserved a total of 800,000 shares for issuance under the
plan. In addition, in April 1999 we reserved, subject to shareholder approval,
an additional 1,500,000 shares for issuance under the plan. The plan provides
for grants of incentive stock options that qualify under Section 422 of the
Internal Revenue Code of 1986, as amended, to employees, including officers, of
F5 or any affiliate of F5, and nonstatutory stock options, restricted stock
purchase awards, and stock bonuses to employees, including officers, or
directors of and consultants to F5 or any affiliate of F5. The board or a
committee appointed by the board administers the plan. Our board has the
authority to determine which recipients and what types of awards are to be
granted, including the exercise price, number of shares subject to the award and
the exercisability of the awards.
The term of a stock option granted under the plan generally may not exceed
10 years. The board of directors determines the exercise price of options
granted under the plan. However, in the case of an incentive stock option, the
exercise price cannot be less than 100% of the fair market value of our common
stock on the date of grant and, in the case of a nonstatutory stock option, the
exercise price cannot be less than 50% of the fair market value of our common
stock on the date of grant. Options granted under the plan vest at the rate
specified in the option agreement. Except as expressly provided by the terms of
a nonstatutory stock option agreement, an optionee may not transfer options
other than by will or the laws of descent or distribution, provided that an
optionee may designate a beneficiary who may exercise the option following the
optionee's death. An optionee whose relationship with us or any related
corporation ceases for any reason, except by death or permanent and total
disability, generally may exercise vested options up to three months following
cessation. Vested options may generally be exercised for up to 12 months after
an optionee's relationship with F5 or any affiliate of F5 ceases due to
disability and for generally up to 18 months after the relationship with F5 or
any affiliate of F5 ceases due to death. However, options may terminate or
expire sooner or later as may be determined by the board and set forth in the
option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of the
total combined voting power of F5 or any affiliate of F5, unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the option on the date of grant and the term of the option does not exceed five
years from the date of grant. In addition, the aggregate fair market value,
determined at the time of grant, of the shares of our common stock with respect
to which incentive stock options are exercisable for the first time by an
optionee during any calendar year under the plan and all other stock plans of F5
and its affiliates may not exceed $100,000. The options, or portions of the
options, which exceed this limit are treated as nonstatutory options.
When we become subject to Section 162(m) of the Internal Revenue Code,
which, among other things, denies a deduction to publicly held corporations for
certain compensation paid to specific employees in a taxable year to the extent
that the compensation exceeds $1,000,000, no person may be granted options under
the plan covering an aggregate of more than 200,000 shares of our common stock
in any calendar year.
Shares subject to stock awards that have lapsed or terminated, without
having been exercised in full, may again become available for the grant of
awards under the plan.
Restricted stock purchase awards granted under the plan may be granted
pursuant to a repurchase option in our favor in accordance with a vesting
schedule determined by the board. The purchase price of these awards will be at
least 50% of the fair market value of our common stock on the date of grant.
Stock bonuses may be awarded in consideration for past services. Rights under a
stock bonus or restricted stock purchase agreement may not be transferred other
than by will or by the laws of descent and distribution unless the stock bonus
or restricted stock purchase agreement specifically provides for
transferability.
Upon certain changes in control of F5 as provided under the plan, the
surviving entity will either assume or substitute all outstanding stock awards
under the plan. If the surviving entity determines not to
42
<PAGE>
assume or substitute these awards, then with respect to persons whose service
with F5 or an affiliate of F5 has not terminated before the change in control,
the vesting of 50% of these stock awards (and the time during which these awards
may be exercised) will accelerate and the awards terminated if not exercised
before the change in control.
As of March 31, 1999, we had issued 133,000 shares upon the exercise of
options granted under the plan and options to purchase 461,258 shares were
outstanding with 205,742 shares reserved for future grants or purchases under
the plan. The plan will terminate on October 21, 2008, unless terminated sooner
by the board.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN. Our board of directors adopted
the Amended and Restated 1996 Stock Option Plan on December 2, 1996, and our
shareholders approved it on January 28, 1997. We have reserved a total of
2,600,000 shares for issuance under the plan, less any shares issuable upon the
exercise of options granted under the Amended and Restated Directors'
Nonqualified Stock Option Plan. The plan provides for grants of incentive stock
options that qualify under Section 422 of the Internal Revenue Code to
employees, including officers and employee directors, of F5 or any affiliate of
F5 and nonstatutory stock options to employees, consultants and other persons
selected by the board. The board or a committee appointed by the board
administers the plan. The board has the authority to determine which recipients
and what types of options are to be granted, including the exercise price,
number of shares subject to the option and the exercisability of the options.
The term of a stock option granted under the plan generally may not exceed
10 years. The exercise price of incentive stock options and non-statutory stock
options granted under the plan following the offering, will not be less than
100% of the fair market value of our common stock on the date of grant. Options
granted under the plan vest at the rate specified in the option agreement,
provided that options will vest as to 25% of the underlying shares each year
following the date of grant if vesting is not specified in the option agreement.
An optionee may not transfer any options other than by will or the laws of
descent or distribution. If an optionee's service terminates due to death or
disability, then any option held by this optionee who F5 or an affiliate of F5
has continuously employed for two years will automatically become fully vested
and be exercisable for the duration of the option term.
An optionee whose relationship with F5 or any affiliate of F5 ceases for any
reason, other than by death or permanent and total disability, may exercise
vested options up to 90 days following the cessation or a longer period as may
be extended by the board in the case of a nonstatutory stock option. Options may
be exercised for up to 12 months after an optionee's relationship with F5 or its
affiliate ceases due to death or disability or a longer period as the board of
directors may extend in the case of a nonstatutory stock option.
No incentive stock option may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of the
total combined voting power of F5 or any affiliate of F5, unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the option on the date of grant and the term of the option does not exceed five
years from the date of grant. In addition, the aggregate fair market value,
determined at the time of grant, of the shares of our common stock with respect
to which incentive stock options are exercisable for the first time by an
optionee during any calendar year under the plan and all other stock plans of F5
and its affiliates may not exceed $100,000. The options, or portions of the
options, which exceed this limit are treated as nonstatutory options.
Shares subject to stock options that have lapsed or terminated, without
having been exercised in full, may again become available for the grant of
options under the plan.
Upon certain changes of control of F5 as provided under the plan, or in the
case of a dividend in excess of 10% of the then fair market value of our stock,
all outstanding options will automatically become fully vested and exercisable
for the duration of the option term.
As of March 31, 1999, we had issued 438,843 shares upon the exercise of
options granted under the plan and options to purchase 1,768,547 shares were
outstanding with 98,610 shares reserved for future
43
<PAGE>
grants or purchases under either this plan or our Amended and Restated
Directors' Nonqualified Stock Option Plan. We do not plan to grant any
additional options under this plan.
AMENDED AND RESTATED DIRECTORS' NONQUALIFIED STOCK OPTION PLAN. Our board
of directors adopted the Amended and Restated Directors' Nonqualified Stock
Option Plan on December 2, 1996, and our shareholders approved it on January 28,
1997. The plan provides for the issuance of up to 2,600,000 shares of our common
stock, less the number of any shares issuable upon exercise under the Amended
and Restated 1996 Stock Option Plan. All of our non-employee directors who
joined our board of directors before August 21, 1998 were entitled to receive
non-discretionary stock option grants under the plan. Options granted under the
plan do not qualify as incentive stock options under the Internal Revenue Code.
Each option granted pursuant to the plan has an exercise price equal to $0.50.
Under the plan, each non-employee director who joined the board following the
closing of the offering of our Series A preferred stock and before May 1, 1998
and who was not elected in direct connection with his or her investment in our
stock (or with the investment in our stock by an affiliated or representative
entity of the non-employee director) was automatically granted an option to
purchase that number of shares of our common stock equal to one percent of the
then-current fully-diluted number of shares of our common stock. After May 1,
1998, each newly appointed non-employee director was automatically granted an
option to purchase 84,000 shares of our common stock. Options granted under the
plan vest in three equal annual installments from the date of grant and become
immediately vested and exercisable upon a director's death or disability.
Options granted under the plan are generally non-transferable. An optionee whose
directorship with F5 ceases for any reason, other than by death or disability,
may exercise vested options up to 90 days following cessation, unless these
options terminate or expire sooner by their terms. Options may be exercised for
up to one year after an optionee's directorship with F5 ceases due to disability
or death. An optionee may not exercise any options granted under the plan,
however, after the expiration of ten years from the date it was granted. Upon
certain changes of control of F5 as provided under the plan, the plan's options
will automatically become fully vested and be exercisable for the duration of
the option term.
As of March 31, 1999, we had issued 98,000 shares upon the exercise of
options granted under the plan, and options to purchase 196,000 shares were
outstanding with 98,610 shares reserved for future grants or purchases under
either this plan or the 1996 Stock Option Plan. We do not plan to grant any
additional options under the Amended and Restated Directors' Nonqualified Stock
Option Plan.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. We adopted the 1999
Non-Employee Directors' Stock Option Plan in April 1999 to provide for the
automatic grant to F5 non-employee directors of options to purchase shares of
our common stock. The board administers the plan unless it has delegated
administration to a committee. In April 1999, we reserved, subject to
shareholder approval, an aggregate of 100,000 shares of common stock for
issuance under the plan, subject to adjustment in the event of certain capital
changes.
Each person who is first elected or appointed as a non-employee director
after the initial public offering will automatically receive a fully vested and
exercisable option for 5,000 shares. In addition, on the day after each of our
annual meetings of the shareholders, starting with the annual meeting in 2000,
each eligible non-employee director will automatically receive a fully vested
and exercisable option for 5,000 shares, provided that the recipient has been a
non-employee director for at least the prior six months. As long as a
non-employee director who is an optionholder continues to serve with us or with
an affiliate of ours, whether in the capacity of a director, an employee or a
consultant, the optionholder may exercise the option.
The optionholder may not transfer the option except by will or by the laws
of descent and distribution. Although only the optionholder may exercise the
option during his or her lifetime, the optionholder may designate a third party
who may exercise the option in the event of the optionee's death. Options
granted under the plan expire 10 years after the date of grant and have an
exercise price equal to 100% of the fair market value of the common stock on the
date of grant. If the optionholder's service to
44
<PAGE>
F5 or an affiliate terminates, the optionholder may exercise the option for 12
months if termination is due to disability, for 18 months if termination is due
to death or for three months in all other circumstances.
In the event of a "change in control," the surviving or acquiring
corporation may assume outstanding options under the plan or substitute similar
options. A "change in control" means a sale of all or substantially all of F5's
assets, a merger or consolidation in which F5 is not the surviving corporation
or a reverse merger in which F5 is the surviving corporation but the shares of
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property.
1999 EMPLOYEE STOCK PURCHASE PLAN. In April 1999, we adopted, subject to
shareholder approval, the 1999 Employee Stock Purchase Plan, authorizing the
issuance of 1,000,000 shares of common stock pursuant to purchase rights granted
to employees of F5 or to employees of any designated affiliate of F5. The
purchase plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which employees may purchase our
common stock through payroll deductions. We implement this purchase plan by
offerings of purchase rights to eligible employees. Under the purchase plan, we
may specify offerings with a duration of not more than 27 months, and may
specify shorter purchase periods within each offering. The first offering will
begin on the effective date of this offering. Unless otherwise determined by the
board of directors, common stock is purchased for accounts of employees
participating in the purchase plan at a price per share equal to the lower of
(1) 85% of the fair market value of a share of common stock on the first day of
the offering or (2) 85% of the fair market value of a share of common stock on
the date of purchase.
Generally, employees who work at least 20 hours per week and 5 months per
calendar year may deduct up to 15% of their base compensation for the purchase
of stock under the purchase plan. Employees may end their participation in the
offering at any time up to one day before the offering ends. Participation ends
automatically on termination of employment with F5 or an affiliate.
We may grant eligible employees purchase rights under this plan only if the
rights together with any other rights granted under other employee stock
purchase plans established by F5 or an affiliate of F5, if any, do not permit
the employee's rights to purchase our stock to accrue at a rate which exceeds
$25,000 of fair market value of this stock for each calendar year in which these
rights are outstanding. No employee is eligible for the grant of any rights
under the purchase plan if immediately after we grant these rights, the employee
has voting power over 5% or more of our outstanding capital stock. As of the
date hereof, no shares of common stock had been purchased under the purchase
plan.
401(k) PLAN. We have adopted a tax-qualified employee savings and
retirement plan, the 401(k) Plan, for eligible United States employees. Eligible
employees may elect to defer a percentage of their eligible compensation in the
401(k) Plan, subject to the statutorily prescribed annual limit. We may make
matching contributions on behalf of all participants in the 401(k) Plan in an
amount determined by our board of directors. We may also make additional
discretionary profit sharing contributions in amounts as determined by the board
of directors, subject to statutory limitations. Matching and profit-sharing
contributions, if any, are subject to a vesting schedule; all other
contributions are at all times fully vested. We intend the 401(k) Plan, and the
accompanying trust, to qualify under Sections 401(k) and 501 of the Internal
Revenue Code so that contributions by employees or by F5 to the 401(k) Plan, and
income earned (if any) on plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that we will be able to deduct our
contributions, if any, when made. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of a
number of investment options.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by the Washington Business Corporation Act as it
currently exists. Consequently, subject to the Washington Business Corporation
Act, no director will be personally liable to us or our shareholders for
monetary damages resulting from his or her conduct as a director of F5, except
liability for:
45
<PAGE>
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Upon the closing of this offering, our articles of incorporation will also
provide that we may indemnify any individual made a party to a proceeding
because that individual is or was an F5 director or officer, and this right to
indemnification will continue as to an individual who has ceased to be a
director or officer and will inure to the benefit of his or her heirs, executors
or administrators. Any repeal of or modification to our articles of
incorporation may not adversely affect any right of an F5 director or officer
who is or was a director or officer at the time of any repeal or modification.
To the extent the provisions of our articles of incorporation provide for
indemnification of directors or officers for liabilities arising under the
Securities Act of 1933, as amended, those provisions are, in the opinion or the
Securities and Exchange Commission, against public policy as expressed in the
Securities Act and they are therefore unenforceable.
Upon the closing of this offering, our bylaws will provide that we will
indemnify our directors and officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law.
Upon the closing of this offering, we will enter into agreements to
indemnify our directors and certain officers, in addition to indemnification
provided for in our articles of incorporation or bylaws. These agreements, among
other things, indemnify our directors and certain officers for certain expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
any of these persons in any action or proceeding, including any action by us
arising out of the person's services as our director or officer or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and officers. We also currently maintain
liability insurance for our officers and directors.
CHANGE OF CONTROL ARRANGEMENTS
Upon certain changes in control of F5 as provided under the 1998 Equity
Incentive Plan, all outstanding stock awards under this plan will either be
assumed or substituted by the surviving entity. If the surviving entity
determines not to assume or substitute these awards, then with respect to
persons whose service with F5 or an affiliate of F5 has not terminated before
the change in control, the vesting of 50% of these stock awards and the time
during which these awards may be exercised will be accelerated and the awards
terminated if not exercised before the change in control.
Upon certain changes of control of F5 as provided under the Amended and
Restated 1996 Stock Option Plan, or in the case of a dividend in excess of 10%
of the then fair market value of our stock, then all outstanding options under
this plan will automatically become fully vested and exercisable for the
duration of the option term.
Upon certain changes of control of F5 as provided under the Amended and
Restated Directors' Nonqualified Stock Option Plan, all outstanding options will
automatically become fully vested and be exercisable for the duration of the
option term.
Pursuant to the terms of an agreement between F5 and Mr. Goldman, in the
event of a business combination in which F5 is not the surviving entity, if the
surviving entity terminates Mr. Goldman as Vice President of Sales and Marketing
or changes his position to one that is not equal or greater in scope,
responsibility, compensation or stature, then Mr. Goldman may be entitled to a
severance payment equal to his 1998 compensation.
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<PAGE>
CERTAIN TRANSACTIONS
Since our incorporation in February 1996 through March 31, 1999, we have
issued and sold securities to the following persons who are our executive
officers, directors or principal shareholders.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
PREFERRED PREFERRED PREFERRED PREFERRED WARRANTS COMMON
INVESTOR (1) STOCK (2) STOCK (3) STOCK (4) STOCK (5) (6) STOCK
- ------------------------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Dixon........... -- -- -- -- -- 106,813
Robert J. Chamberlain.... -- -- -- -- -- 150,000
Steven Goldman........... -- -- -- -- -- 92,250
Alan J. Higginson........ 10,000 -- -- -- -- --
Jeffrey S. Hussey........ -- -- -- -- -- 3,448,000
Kent L. Johnson.......... 10,000(7) -- -- -- -- 56,000
Michael D. Almquist...... -- -- -- -- -- 1,480,000
Britannia Holdings
Limited................ -- 937,500 -- -- 1,825,000 600,000
Cypress Partners Limited
Partnership............ -- -- 156,250 -- -- 187,500
Encompass Group
Incorporated........... 100,000 156,250 -- -- 187,500 --
Menlo Ventures (8)....... -- -- -- 843,926 -- --
Alexander Hutton Capital,
L.L.C. (9)............. -- -- -- -- -- 240,000
Pacific Technology
Ventures U.S.A., L.P.
(10)................... -- -- -- 294,512 -- --
</TABLE>
- ------------------------
(1) See "Principal and Selling Shareholder" for more detail on shares held by
these purchasers.
(2) The per share purchase price for our Series A preferred stock was $3.00.
Upon the closing of the offering, each outstanding share of Series A
preferred stock will convert into six shares of common stock at a
conversion price of $0.50 per share.
(3) The per share purchase price for our Series B preferred stock was $1.60.
Upon the closing of the offering, each outstanding share of Series B
preferred stock will convert into two shares of common stock at a
conversion price of $0.80 per share.
(4) The per share purchase price for our Series C preferred stock was $9.60.
Upon the closing of the offering, each outstanding share of Series C
preferred stock will convert into six shares of common stock at a
conversion price of $1.60 per share.
(5) The per share purchase price for our Series D preferred stock was $6.79.
Upon the closing of the offering, each outstanding share of Series D
preferred stock will convert into two shares of common stock at a
conversion price of $3.395 per share.
(6) Warrants are exercisable for our common stock at purchase prices per share
as follows:
<TABLE>
<CAPTION>
WARRANTS PRICE
- -------------------------------------------------------------------------------------- ---------
<S> <C>
600,000.............................................................................. $ 0.50
100,000.............................................................................. $ 0.64
1,312,500............................................................................. $ 0.80
</TABLE>
(7) Consists of 10,000 shares held by KLJ Ventures, of which Mr. Johnson is
President.
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<PAGE>
(8) The shares listed represent 809,910 shares held by Menlo Ventures VII, L.P.
and 34,016 shares held by Menlo Entrepreneurs Fund VII, L.P. Ms. Hoel, one
of our directors, is a managing director and general partner of Menlo
Ventures.
(9) Mr. Johnson, one of our directors, is President of Alexander Hutton
Capital, L.L.C.
(10) Ms. Davis, one of our directors, is a general partner of IDG Ventures,
L.L.C., which is the general partner of Pacific Technology Ventures
U.S.A., L.P.
In addition, we have granted options to certain of our executive officers.
See "Management-- Executive Compensation."
In May, August and December 1996, we sold an aggregate of 400,000 shares of
Series A Preferred stock to certain investors, including Messrs. Higginson and
Johnson, two of our directors, members of the Hussey family, and Encompass Group
Limited, one of our principal shareholders, at an aggregate purchase price of
$1.2 million or $3.00 per share. We paid Alexander Hutton Capital, L.L.C. a
placement agent fee of $70,000 in connection with the sale of our Series A
preferred stock. Mr. Johnson, one of our directors, is President of Alexander
Hutton Capital, L.L.C.
In March and August of 1997, we issued Brittania Holdings a warrant
exercisable for 100,000 and 600,000 shares of common stock in conjunction with
convertible note agreements of $500,000 and $300,000, respectively. The warrants
have per share exercise prices of $0.64 and $0.50, respectively.
In September, October and November 1997, we sold an aggregate of 1,250,000
shares of Series B preferred stock to certain investors, including Brittania
Holdings and Encompass Group Limited, two of our principal shareholders, at an
aggregate purchase price of $2.0 million or $1.60 per share. We also issued
Brittania Holdings a warrant exercisable for 1,125,000 shares of common stock at
a per share exercise price of $0.80 and Encompass Group Limited a warrant
exercisable for 187,500 shares of common stock at a per share exercise price of
$0.80.
On April 15, 1998, we sold an aggregate of 156,250 shares of Series C
preferred stock to Cypress Partners Limited Partnership at an aggregate purchase
price of $1.5 million or $9.60 per share, and issued Cypress Partners Limited
Partnership a warrant exercisable for 187,500 shares of common stock at a per
share exercise price of $1.60, which was exercised on February 1, 1999.
On August 21, 1998, we sold an aggregate of 1,138,438 shares of Series D
preferred stock to certain investors, including affiliates of Menlo Ventures and
IDG Ventures, two of our principal shareholders, at an aggregate purchase price
of $7.7 million or $6.79 per share. Ms. Hoel, one of our directors, is a
managing director and general partner of Menlo Ventures, and Ms. Davis, one of
our directors, is a general partner of IDG Ventures.
In March 1999, we issued 150,000 shares of our common stock to Mr.
Chamberlain in exchange for a promissory note. 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 and partially
guaranteed by Mr. Chamberlain and is due in 2003. Under the pledge agreement, we
have the obligation to repurchase any remaining unvested shares, and the note
becomes due upon Mr. Chamberlain's termination. Further, the shares may not be
transferred until they are vested and paid for except under certain
circumstances as provided under the pledge agreement.
We plan to enter into indemnification agreements with our directors and
certain officers for the indemnification of and advancement of expenses to these
persons to the fullest extent permitted by law. We also intend to enter into
these agreements with our future directors and certain officers.
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal shareholders will be approved by a majority of
the independent and disinterested members of the board of directors, will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties and will be in connection with our bona fide business purposes.
48
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of March 31, 1999 for:
- each person or group that we know owns more than 5% of the common stock;
- each of our directors;
- our chief executive officer;
- executive officers whose compensation exceeded $100,000 in 1998;
- a shareholder who is selling shares in this offering; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING NUMBER OF OWNED AFTER OFFERING
---------------------- SHARES BEING ----------------------
NAME AND ADDRESS (1) NUMBER PERCENT (2) OFFERED NUMBER PERCENT (2)
- ------------------------------------------------------------ --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
5% SHAREHOLDERS
Michael D. Almquist ........................................ 1,480,000 9.86% 140,000 1,340,000 7.50%
2232 12th Avenue West
Seattle, Washington 98119
Britannia Holdings Limited (3) ............................. 4,300,000 25.53 -- 4,300,000 21.82
P.O. Box 556
Main Street
Charlestown, Nevis
Menlo Ventures VII, L.P. (4) ............................... 1,687,852 11.24 -- 1,687,852 9.44
3000 Sand Hill Rd., Bldg. 4-100
Menlo Park, California 94025
Cypress Partners Limited Partnership ....................... 1,125,000 7.49 -- 1,125,000 6.29
P.O. Box 9006
Seattle, Washington 98109
Encompass Ventures, Inc. (5) ............................... 1,100,000 7.23 -- 1,100,000 6.09
777 - 108th Avenue N.E., Suite 2300
Bellevue, Washington 98004
CURRENT EXECUTIVE OFFICERS AND DIRECTORS
Jeffrey S. Hussey (6)....................................... 3,048,000 20.30 -- 3,048,000 17.05
Steven Goldman (7).......................................... 134,250 * -- 134,250 *
Carlton G. Amdahl(8)........................................ 28,000 * -- 28,000 *
Kimberly D. Davis (9)....................................... 589,024 3.92 -- 589,024 3.29
Alan J. Higginson (10)...................................... 141,300 * -- 141,300 *
Sonja L. Hoel (11).......................................... 1,687,852 11.24 -- 1,687,852 9.44
Kent L. Johnson (12)........................................ 384,000 2.55 -- 384,000 2.14
All directors and executive officers as a group (10 persons)
(13)...................................................... 6,787,930 44.31 -- 6,787,930 37.47
</TABLE>
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each of the named individuals is
c/o F5 Networks, Inc., 200 First Avenue West, Suite 500, Seattle,
Washington 98119
(2) Beneficial ownership of shares is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes any shares
over which a person exercises sole or shared voting or investment power, or
of which a person has the right to acquire ownership at any time within 60
days after March 31, 1999. Except as otherwise indicated, and subject to
applicable
49
<PAGE>
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of common stock held by
them. Applicable percentage ownership in the following table is based on
15,017,469 shares of common stock outstanding as of March 31, 1999 and
17,877,469 shares of common stock outstanding immediately following the
completion of this offering.
(3) Includes 1,825,000 shares issuable upon exercise of warrants exercisable
within 60 days of March 31, 1999.
(4) The shares listed represent 1,619,820 shares held by Menlo Ventures VII,
L.P. and 68,032 shares held by Menlo Entrepreneurs Fund VII, L.P.
(5) Includes 187,500 shares issuable upon warrants exercisable within 60 days
of March 31, 1999.
(6) Includes 900,000 shares held by Freeman Wellman & Co. in an IRA fbo Mr.
Hussey and does not include 400,000 shares held by Brian Dixon as trustee
of the Hussey Family Trust fbo Mr. Hussey's minor child.
(7) Includes 42,000 shares issuable upon exercise of options exercisable within
60 days of March 31, 1999.
(8) Consists of 28,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(9) Ms. Davis is a general partner of IDG Ventures, L.L.C., which is the
general partner of Pacific Technology Ventures U.S.A., L.P. All shares
listed are held by Pacific Technology Ventures U.S.A., L.P. Ms. Davis
disclaims beneficial ownership of all shares held by Pacific Technology
Ventures U.S.A., L.P. except to the extent of her pro rata interest in this
partnership.
(10) Includes 84,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(11) Ms. Hoel is a managing director and general partner of Menlo Ventures. The
shares listed represent 1,619,820 shares held by Menlo Ventures VII, L.P.
and 68,032 shares held by Menlo Entrepreneurs Fund VII, L.P. Ms. Hoel
disclaims beneficial ownership of all shares held by Menlo Entrepreneurs
Fund VII, L.P. except to the extent of her pro rata interest in this
partnership.
(12) Consists of 56,000 shares held by Mr. Johnson, including 28,000 shares
issuable upon exercise of options exercisable within 60 days of March 31,
1999, 60,000 shares held by KLJ Ventures and 240,000 shares held by
Alexander Hutton Capital, L.L.C. Mr. Johnson is President of KLJ Ventures
and President of Alexander Hutton Capital, L.L.C. Mr. Johnson disclaims
beneficial ownership of all shares held by Alexander Hutton Capital,
L.L.C. except to the extent of his pro rata interest in this limited
liability company.
(13) Includes 150,000 shares subject to repurchase by F5 and 300,691 shares
issuable upon exercise of options exercisable within 60 days of March 31,
1999.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will have authorized 100,000,000
shares of common stock, no par value, and 10,000,000 shares of undesignated
preferred stock, no par value. The following description of our capital stock
does not purport to be complete and is subject to and qualified in its entirety
by our second amended and restated articles of incorporation and bylaws and by
the provisions of applicable Washington law.
COMMON STOCK
As of March 31, 1999, there were 15,017,469 shares of common stock
outstanding assuming conversion of all shares of the preferred stock, which were
held by 86 shareholders. Effective upon the close of this offering, holders of
common stock are entitled to one vote per share on all matters to be voted upon
by the shareholders. Holders of common stock will not have cumulative voting
rights, and, therefore, holders of a majority of the shares voting for the
election of directors will be able to elect all of the directors.
Holders of common stock will receive such dividends as our board of
directors may declare from time to time out of funds legally available for the
payment of dividends, subject to the terms of any existing or future agreements
between us and our debtholders. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of F5, the holders of common stock will
share ratably in all assets legally available for distribution after payment of
all debts and other liabilities and subject to the prior rights of any holders
of preferred stock then outstanding. Holders of our common stock have no
preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, we will have authorized
10,000,000 shares of undesignated preferred stock. The board of directors has
the authority to issue the preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of the series, without any further vote
or action by our shareholders. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of F5 without further action by the shareholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. We have no current plans
to issue any shares of preferred stock.
WARRANTS
As of March 31, 1999, warrants to purchase 2,212,500 shares of common stock
were outstanding at a weighted-average exercise price of $0.75 per share. Each
warrant contains provisions for the adjustment of the exercise price and the
aggregate number of shares issuable upon the exercise of the warrant in the
event of stock dividends, stock splits, reorganizations, reclassifications and
consolidations. Warrants exercisable for an aggregate of 2,200,000 shares of
common stock contain additional provisions for the adjustment of the exercise
price and the aggregate number of shares issuable upon certain dilutive
issuances of securities at prices below the then existing warrant exercise
price.
51
<PAGE>
REGISTRATION RIGHTS
Following this offering, holders of 8,114,376 shares of common stock and of
warrants exercisable for 2,200,000 shares of common stock will have certain
rights relating to the registration of these shares under state and federal
securities laws. These rights, which are assignable, are outlined in an
agreement between F5 and these holders. A majority of these holders may
generally require that we register the common stock subject to these rights for
public resale provided that the proposed aggregate selling offering price would
exceed $5.0 million. If we register any of our common stock either for our own
account or for the account of other security holders, these holders may also
include their common stock subject to these rights in the registration, subject
to the ability of the underwriters to limit the number of shares included in the
offering. The holders of our common stock that were issued upon conversion of
our Series A, B, C and D preferred stock may also require us to register all or
a portion of their common stock subject to these rights on Form S-3, when use of
this form becomes available, provided that among other limitations, the proposed
aggregate offering price would be at least $2.0 million. The registration rights
of a holder terminates, when the holder can, within a three month period, offer
and sell all of his or her registrable securities pursuant to Rule 144 and as to
all holders, three years after this offering.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF AMENDED ARTICLES OF
INCORPORATION, BYLAWS AND WASHINGTON LAW
Our board of directors, without shareholder approval, will have upon the
closing of this offering authority under our amended articles of incorporation
to issue preferred stock with rights superior to the rights of the holders of
common stock. As a result, our board could issue preferred stock quickly and
easily, which could adversely affect the rights of holders of common stock and
which our board could issue with terms calculated to delay or prevent a change
in control of F5 or make removal of management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. Effective upon the closing of this
offering, our articles of incorporation will provide for the division of our
board of directors into three classes, as nearly as equal in number as possible,
with the directors in each class serving for a three-year term, and one class
being elected each year by our shareholders. The Class I term will expire at the
annual meeting of shareholders to be held in 2000; the Class II term will expire
at the annual meeting of shareholders to be held in 2001; and the Class III term
will expire at the annual meeting of shareholders to be held in 2002. At each
annual meeting of shareholders after the initial classification, the successors
to directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following election.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a majority of the board of directors, it
may discourage a third party from making a tender offer or otherwise attempting
to gain control of F5 and may maintain the incumbency of the board of directors.
SHAREHOLDER MEETINGS. Upon the closing of this offering our bylaws will
provide that, except as otherwise required by law or by our amended articles of
incorporation, special meetings of the shareholders can only be called pursuant
to a resolution adopted by our board of directors, the chairman of the board or
president. These provisions of our amended articles of incorporation and bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors and in the
policies formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, these provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they also may inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
52
<PAGE>
Washington law also imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19.040 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deferring or preventing a change in control.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for F5's
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding 17,877,469 shares
of common stock, assuming the issuance of 3,000,000 shares of common stock
offered hereby, conversion of all shares of preferred stock and no exercise of
options or warrants after March 31, 1999. Of these shares, the 3,000,000 shares
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act; provided, however, that if shares are
purchased by "affiliates," as that term is defined in Rule 144 under the
Securities Act, their sales of shares would be subject to certain limitations
and restrictions that are described below.
The remaining 14,877,469 shares of common stock, assuming conversion of all
shares of preferred stock, held by existing shareholders as of March 31, 1999
were issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act. Of these shares, 14,757,469 shares will be
subject to lock-up agreements described below on the effective date of the
offering. Upon expiration of the lock-up agreements 180 days after the effective
date, 14,607,469 shares will become eligible for sale, subject in most cases to
the limitations of Rules 144 and 701. In addition, holders of stock options and
warrants could exercise their options and warrants and sell the shares issued
upon exercise as described below.
<TABLE>
<CAPTION>
SHARES
DAYS AFTER THE EFFECTIVE ELIGIBLE FOR
DATE SALE COMMENT
- --------------------------- -------------- --------------------------------------------------------------------
<S> <C> <C>
Upon effectiveness......... 3,000,000 Shares sold in the offering
90 days.................... 120,000 Shares salable under Rule 144 that are not subject to the lock-up
180 days................... 14,607,469 Lock-up released: shares salable under Rules 144 and 701
After 180 days............. 150,000 Shares will become salable at various times after 180 days after the
effective date
</TABLE>
As of March 31, 1999, there were a total of 2,212,500 shares of common stock
that could be issued upon exercise of outstanding warrants. All of these shares
are subject to lock-up agreements. As of March 31, 1999, there were a total of
2,425,805 shares of common stock subject to outstanding options under our stock
plans, 200,751 of which were vested. However, all of these shares are subject to
lock-up agreements. Immediately after the completion of the offering, we intend
to file registration statements on Form S-8 under the Securities Act to register
all of the shares of common stock issued or reserved for future issuance under
our stock plans. After the effective dates of the registration statements on
Form S-8, shares purchased upon exercise of options granted pursuant to our
Amended and Restated 1996 Stock Option Plan, Amended and Restated Directors'
Nonqualified Stock Option Plan, 1998 Equity Incentive Plan, 1999 Non-Employees
Directors' Plan and 1999 Employee Stock Purchase Plan generally would be
available for resale in the public market.
The officers, directors and certain shareholders of F5 have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus. Hambrecht & Quist, however, may in its sole
discretion, at any time and in most cases without notice, release all or any
portion of the shares subject to lock-up agreements.
54
<PAGE>
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of F5's
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 178,775 shares immediately after the effective date of
this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to this sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about F5.
RULE 701
In general, under Rule 701, any F5 employee, director, officer, consultant
or advisor who purchases shares from F5 in connection with a compensatory stock
or option plan or other written agreement before the effective date of the
offering is entitled to resell these shares 90 days after the effective date of
this offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one year minimum holding period
requirement.
In addition, following this offering, the holders of 8,114,376 shares of
common stock and of warrants exercisable for 2,200,000 shares of common stock
will, under certain circumstances, have rights to require us to register their
shares for future sale.
LOCK-UP AGREEMENTS
All officers and directors and certain holders of common stock or securities
convertible for common stock and options and warrants to purchase common stock
have agreed pursuant to certain "lock-up" agreements that they will not offer,
sell, contract to sell, pledge, grant any option to sell, or otherwise dispose
of, directly or indirectly, any shares of common stock or securities convertible
or exchangeable for common stock, or warrants or other rights to purchase common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Hambrecht & Quist L.L.C.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist
L.L.C., BancBoston Robertson Stephens Inc. and Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated, have severally agreed to purchase from F5 and the
selling shareholder the following respective numbers of shares of common stock.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------- ----------------
<S> <C>
Hambrecht & Quist L.L.C..................................
BancBoston Robertson Stephens Inc........................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated...........................................
----------------
Total.................................................. 3,000,000
----------------
----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from F5 and the selling shareholder, his counsel and the
independent auditors. The nature of the underwriters' obligation is such that
they have committed to purchase all shares of common stock offered hereby if any
of these shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at this price less a concession not in excess
of $ per share. The underwriters may allow and these dealers may re-allow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the underwriters may change the offering
price and other selling terms.
Certain shareholders have granted to the underwriters an option, exercisable
no later than 30 days after the date of this prospectus, to purchase up to
450,000 additional shares of common stock at the initial public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. Such shareholders will be obligated, pursuant to the option, to
sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of shares of common stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
F5 and the selling shareholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments the underwriters may be required to make in respect
thereof.
F5, the selling shareholder and certain other shareholders of F5, including
executive officers and directors, who will own in the aggregate 14,607,469
shares of common stock after the offering, have agreed that they will not,
without the prior written consent of Hambrecht & Quist L.L.C., offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them during the 180-day period following the date of
this prospectus. We have agreed that we will not, without the prior written
consent of Hambrecht & Quist L.L.C., offer, sell or otherwise dispose of any
shares of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted prior to the date hereof, and
may grant additional options under our stock option plans.
56
<PAGE>
Certain persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the common stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced may be discontinued at any time.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among F5, the selling shareholder and the representatives. Among
the factors to be considered in determining the initial public offering price
are prevailing market and economic conditions, revenues and earnings of F5,
market valuations of other companies engaged in activities similar to F5,
estimates of the business potential and prospects of F5, the present state of
our business operations, our management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions or
other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for F5
by Cooley Godward LLP, Kirkland, Washington. Certain legal matters will be
passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP, Menlo Park, California.
EXPERTS
The financial statements of F5 Networks, Inc. as of September 30, 1997 and
1998 and for the period from February 26, 1996, inception, to September 30, 1996
and each of the years in the two year period ended September 30, 1998, included
in this registration statement have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
ADDITIONAL F5 INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock offered hereby. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to F5 and our
common stock, reference is made to the registration statement and the exhibits
and schedules thereto. You may read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information about
the public reference rooms. Our SEC filings are also available to the public
from the SEC's Web site at
http://www.sec.gov. Information contained on F5's Web site does not constitute
part of this prospectus.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934 and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms, our Web site and the Web site of the SEC referred to above.
57
<PAGE>
F5 NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statement of Shareholders' Equity (Deficit)................................................................ F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
F5 Networks, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of F5 Networks, Inc. at
September 30, 1997 and 1998, and the results of its operations and its cash
flows for the period from February 26, 1996 (inception) to September 30, 1996
and for each of the years in the two year period ended September 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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
April 6, 1999
F-2
<PAGE>
F5 NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1999
PRO FORMA
SHAREHOLDERS'
EQUITY
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, (UNAUDITED)
1997 1998 1999 NOTE 2
--------------- --------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 143 $ 6,206 $ 2,460
Accounts receivable, net of allowances of $0, $382
and $550.......................................... 329 2,032 3,379
Inventories......................................... 77 99 398
Deferred finance costs.............................. 395
Other current assets................................ 68 250 438
------ ------ ------
Total current assets.......................... 617 8,587 7,070
Property and equipment, net........................... 196 682 1,219
Software development costs, net of accumulated
amortization of $4, $83 and $135.................... 52 118 66
Other assets.......................................... 54 45 161
------ ------ ------
Total assets.................................. $ 919 $ 9,432 $ 8,516
------ ------ ------
------ ------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt................... $ 500
Capital lease obligations, current portion.......... 19 $ 19 $ 8
Accounts payable.................................... 117 559 1,458
Accrued liabilities................................. 114 458 1,475
Deferred revenue.................................... 184 788 1,568
------ ------ ------
Total current liabilities..................... 934 1,824 4,509
Capital lease obligations, net of current portion..... 19
Long-term debt, net of current portion................ 197
------ ------ ------
Total liabilities............................. 1,150 1,824 4,509
------ ------ ------
Commitments (Note 9)
Redeemable convertible preferred stock, no par value:
Series D Convertible, $0, $15,460, $15,460 and no
liquidation preference, no, 1,138,438, 1,138,438
and no shares issued and outstanding.............. 7,688 7,688
------ ------ ------
Shareholders' equity (deficit):
Preferred stock, no par value; 10,000,000 shares
authorized
Series A Convertible, $1,200 $1,200, $1,200 and no
liquidation preference, 400,000, 400,000,
400,000 and no shares issued and outstanding.... 1,123 1,123 1,123
Series B Convertible, $250, $2,000, $2,000 and no
liquidation preference, 156,250, 1,250,000,
1,250,000 and no shares issued and
outstanding..................................... 208 1,656 1,656
Series C Convertible, $0, $1,500, $1,500 and no
liquidation preference, no, 156,250, 156,250 and
no shares issued and outstanding................ 1,418 1,418
Common stock, no par value; 50,000,000 shares
authorized, 100,000,000 shares authorized pro
forma, 6,000,000, 6,021,500, 6,903,093 and
15,017,469 shares issued and outstanding.......... 393 2,875 8,132 20,017
Note receivable from shareholder.................... (750) (750)
Unearned compensation............................... (169) (1,694) (4,643) (4,643)
Accumulated deficit................................. (1,786) (5,458) (10,617) (10,617)
------ ------ ------ -------
Total shareholders' equity (deficit)............ (231) (80) (3,681) 4,007
------ ------ ------ -------
Total liabilities and shareholders' equity
(deficit)................................... $ 919 $ 9,432 $ 8,516
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
F5 NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26,
1996 YEAR ENDED SEPTEMBER SIX MONTHS ENDED MARCH
(INCEPTION) 30, 31,
TO SEPTEMBER -------------------- ------------------------
30, 1996 1997 1998 1998 1999
------------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Products......................... $ 2 $ 229 $ 4,119 $ 1,608 $ 5,428
Services......................... -- -- 770 229 1,029
------------- --------- --------- ----------- -----------
Total net revenues............. 2 229 4,889 1,837 6,457
Cost of net revenues:
Products......................... 1 71 1,091 402 1,449
Services......................... -- -- 314 57 580
------------- --------- --------- ----------- -----------
Total cost of net revenues..... 1 71 1,405 459 2,029
------------- --------- --------- ----------- -----------
Gross profit..................... 1 158 3,484 1,378 4,428
Operating expenses:
Sales and marketing.............. 62 565 3,881 1,342 5,103
Research and development......... 103 569 1,810 534 2,344
General and administrative....... 180 383 1,041 438 1,191
Amortization of unearned
compensation................... 4 69 420 91 1,038
------------- --------- --------- ----------- -----------
Total operating expenses....... 349 1,586 7,152 2,405 9,676
------------- --------- --------- ----------- -----------
Loss from operations............... (348) (1,428) (3,668) (1,027) (5,248)
Other income (expense):
Interest expense................. -- (46) (42) (26) (1)
Interest income.................. 18 18 38 7 90
------------- --------- --------- ----------- -----------
Net loss....................... $ (330) $ (1,456) $ (3,672) $ (1,046) $ (5,159)
------------- --------- --------- ----------- -----------
------------- --------- --------- ----------- -----------
Net loss per share--basic and
diluted.......................... $ (0.06) $ (0.24) $ (0.60) $ (0.17) $ (0.82)
------------- --------- --------- ----------- -----------
------------- --------- --------- ----------- -----------
Weighted average shares--basic and
diluted.......................... 5,932 6,000 6,086 6,258 6,297
------------- --------- --------- ----------- -----------
------------- --------- --------- ----------- -----------
Pro forma net loss per share
(unaudited):
Net loss per share--basic and
diluted........................ $ (0.26) $ (0.36)
--------- -----------
--------- -----------
Weighted average shares--basic
and diluted.................... 14,201 14,412
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
F5 NETWORKS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM FEBRUARY 26, 1996 (INCEPTION) TO MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK AMOUNT
-----------------------------------------
SHARES SERIES A SERIES B SERIES C
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Common stock issued to
founding shareholders.......
Common stock issued for
merger......................
Sales of Series A Convertible
Preferred Stock,
(net of issuance costs of
$77)...................... 370,000 $1,123
Issuance of Series A
Convertible Preferred Stock
upon payment of subscription
receivable from
shareholder................. 10,000
Unearned compensation.........
Amortization of unearned
compensation................
Net loss......................
--------- -------- -------- --------
Balance, September 30, 1996... 380,000 1,123
Issuance of Series A
Convertible Preferred Stock
upon payment of subscription
receivable from
shareholders................ 20,000
Sales of Series B Convertible
Preferred Stock............. 156,250 $ 250
Value ascribed to warrants
issued in conjunction with
sale of Convertible
Preferred Stock............. (42)
Value ascribed to warrants
issued with note payable....
Unearned compensation.........
Amortization of unearned
compensation................
Net loss......................
--------- -------- -------- --------
Balance, September 30, 1997... 556,250 1,123 208
Sales of Series B Convertible
Preferred Stock, (net of
issuance costs of $30)...... 1,093,750 1,740
Sales of Series C Convertible
Preferred Stock, (net of
issuance costs of $7)....... 156,250 $1,493
Value ascribed to warrants
issued in conjunction with
sales of Convertible
Preferred Stock............. (292) (75)
Exercise of stock options by
employees...................
Exercise of stock warrants....
Repurchase of common stock
under shareholder
agreement...................
Issuance of common stock under
shareholder agreement.......
Conversion of note payable to
common stock................
Unearned compensation.........
Amortization of unearned
compensation................
Net loss......................
--------- -------- -------- --------
Balance, September 30, 1998... 1,806,250 1,123 1,656 1,418
Exercise of stock options by
employees (unaudited).......
Exercise of stock warrants
(unaudited).................
Note receivable from
shareholder for exercise of
stock options (unaudited)...
Unearned compensation
(unaudited).................
Amortization of unearned
compensation (unaudited)....
Net loss (unaudited)..........
--------- -------- -------- --------
Balance, March 31, 1999
(unaudited)................. 1,806,250 $1,123 $1,656 $1,418
--------- -------- -------- --------
--------- -------- -------- --------
<CAPTION>
SUBSCRIPTIONS
/NOTES
COMMON STOCK RECEIVABLE UNEARNED
------------------ FROM COMPEN- ACCUMULATED
SHARES AMOUNT SHAREHOLDERS SATION DEFICIT TOTAL
---------- ------ ------------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to
founding shareholders....... 5,388,000
Common stock issued for
merger...................... 612,000
Sales of Series A Convertible
Preferred Stock,
(net of issuance costs of
$77)...................... $(90) $ 1,033
Issuance of Series A
Convertible Preferred Stock
upon payment of subscription
receivable from
shareholder................. 30 30
Unearned compensation......... $ 4 $ (4)
Amortization of unearned
compensation................ 4 4
Net loss...................... $ (330) (330)
---------- ------ ----- ---------- ----------- -------
Balance, September 30, 1996... 6,000,000 4 (60) (330) 737
Issuance of Series A
Convertible Preferred Stock
upon payment of subscription
receivable from
shareholders................ 60 60
Sales of Series B Convertible
Preferred Stock............. 250
Value ascribed to warrants
issued in conjunction with
sale of Convertible
Preferred Stock............. 42
Value ascribed to warrants
issued with note payable.... 109 109
Unearned compensation......... 238 (238)
Amortization of unearned
compensation................ 69 69
Net loss...................... (1,456) (1,456)
---------- ------ ----- ---------- ----------- -------
Balance, September 30, 1997... 6,000,000 393 (169) (1,786) (231)
Sales of Series B Convertible
Preferred Stock, (net of
issuance costs of $30)...... 1,740
Sales of Series C Convertible
Preferred Stock, (net of
issuance costs of $7)....... 1,493
Value ascribed to warrants
issued in conjunction with
sales of Convertible
Preferred Stock............. 367
Exercise of stock options by
employees................... 215,750 29 29
Exercise of stock warrants.... 5,750 5 5
Repurchase of common stock
under shareholder
agreement................... (2,600,000) (245 ) (245)
Issuance of common stock under
shareholder agreement....... 1,800,000 172 172
Conversion of note payable to
common stock................ 600,000 209 209
Unearned compensation......... 1,945 (1,945)
Amortization of unearned
compensation................ 420 420
Net loss...................... (3,672) (3,672)
---------- ------ ----- ---------- ----------- -------
Balance, September 30, 1998... 6,021,500 2,875 (1,694) (5,458) (80)
Exercise of stock options by
employees (unaudited)....... 304,093 100 100
Exercise of stock warrants
(unaudited)................. 427,500 420 420
Note receivable from
shareholder for exercise of
stock options (unaudited)... 150,000 750 (750)
Unearned compensation
(unaudited)................. 3,987 (3,987)
Amortization of unearned
compensation (unaudited).... 1,038 1,038
Net loss (unaudited).......... (5,159) (5,159)
---------- ------ ----- ---------- ----------- -------
Balance, March 31, 1999
(unaudited)................. 6,903,093 $8,132 $(750) $(4,643) $(10,617) $(3,681)
---------- ------ ----- ---------- ----------- -------
---------- ------ ----- ---------- ----------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
F5 NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER SIX MONTHS ENDED MARCH 31,
PERIOD FROM FEBRUARY 30,
26, 1996 (INCEPTION) -------------------- ----------------------------
TO SEPTEMBER 30, 1996 1997 1998 1998 1999
--------------------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (330) $ (1,456) $ (3,672) $ (1,046) $ (5,159)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of unearned compensation....... 4 69 420 91 1,038
Provision for doubtful accounts and sales
returns................................... 412 105 246
Depreciation and amortization............... 14 59 323 115 235
Non cash interest expense................... 6 12 12
Changes in operating assets and liabilities:
Accounts receivable....................... (1) (328) (2,115) (826) (1,593)
Inventories............................... (29) (48) (22) (31) (299)
Other current assets...................... (7) (55) (186) (34) (188)
Other assets.............................. (6) (48) 9 (114) (116)
Accounts payable and accrued
liabilities............................. 37 194 806 699 1,521
Deferred revenue.......................... 184 604 65 780
------ --------- --------- ------ ------
Net cash used in operating activities... (318) (1,423) (3,409) (964) (3,535)
------ --------- --------- ------ ------
Cash flows from investing activities:
Issuance of notes to officer.................. (10)
Purchases of property and equipment........... (150) (98) (731) (267) (720)
Additions to software development costs....... (56) (145) (130)
Proceeds from sale leaseback.................. 30
------ --------- --------- ------ ------
Net cash used in investing activities... (120) (154) (886) (397) (720)
------ --------- --------- ------ ------
Cash flows from financing activities:
Proceeds from issuance of Series A Convertible
Preferred Stock............................. 1,063 60
Proceeds from issuance of Series B Convertible
Preferred Stock............................. 250 1,235 1,235
Proceeds from issuance of Series C Convertible
Preferred Stock............................. 1,493
Proceeds from issuance of Series D Redeemable
Convertible Preferred Stock................. 7,688
Proceeds from the exercise of stock options
and warrants................................ 34 23 520
Repurchase of common stock under shareholder
agreement................................... (245) (245)
Proceeds from issuance of common stock under
shareholder agreement....................... 172 172
Proceeds from line of credit.................. 825 250
Repayments of line of credit.................. (825)
Proceeds from issuance of long-term debt...... 800
Principal payments on capital lease
obligations................................. (1) (14) (19) (9) (11)
------ --------- --------- ------ ------
Net cash provided by financing
activities............................ 1,062 1,096 10,358 1,426 509
------ --------- --------- ------ ------
Net increase (decrease) in cash and cash
equivalents........................... 624 (481) 6,063 65 (3,746)
Cash and cash equivalents, at beginning of
year.......................................... -- 624 143 143 6,206
------ --------- --------- ------ ------
Cash and cash equivalents, at end of year....... $ 624 $ 143 $ 6,206 $ 208 $ 2,460
------ --------- --------- ------ ------
------ --------- --------- ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION:
F5 Networks, Inc. (formerly F5 Labs, Inc.) (the "Company") was incorporated
on February 26, 1996 in the State of Washington.
F5 is a leading provider of integrated Internet traffic management solutions
designed to improve the availability and performance of mission-critical
Internet-based servers and applications. Our proprietary software-based
solutions monitor and manage local and geographically dispersed servers and
intelligently direct traffic to the server best able to handle a user's
request.
The Company purchases material component parts and certain licensed software
from suppliers and generally contracts with third parties for the assembly
of products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the March 31, 1998 and 1999
unaudited interim financial statements include all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the
financial statements. All references hereinafter to March 31, 1998 and 1999
amounts are based on unaudited information.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 presentation. These reclassifications
had no effect on previously reported net loss, shareholders' equity
(deficit) or cash flows.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the date of investment by the Company.
CONCENTRATION OF CREDIT RISK
The Company places its temporary cash investments with major financial
institutions. As of September 30, 1998, all of the Company's temporary cash
investments were placed with three institutions.
The Company's customers are from diverse industries and geographic
locations. Net revenues from international customers are denominated in U.S.
Dollars and were approximately $0, $15,000 and $172,000 in the period from
February 26, 1996 (inception) to September 30, 1996, and the years ended
September 30, 1997 and 1998, respectively and $108,000 and $327,000, for the
six months ended March 31, 1998 and 1999. For the six months ended March 31,
1999, one customer accounted
F-7
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
for 17.6% of net revenues. During the period from February 26, 1996
(inception) to September 30, 1996, the years ended September 30, 1997 and
1998, and the six months ended March 31, 1998, no single customer accounted
for more than 10% of the Company's net revenues. At March 31, 1998, two
customers represented 23.4% of accounts receivable and at March 31, 1999,
one customer represented 18.3% of accounts receivable. At September 30, 1997
and 1998, there were no significant accounts receivable from a single
customer. 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, software and related component parts and
are recorded at the lower of cost (as determined by the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Equipment under capital leases is
stated at the lower of the present value of the minimum lease payments
discounted at the Company's incremental borrowing rate at the beginning of
the lease term or fair value at the inception of the lease. Depreciation of
property and equipment and amortization of capital leases are provided on
the straight-line method over the estimated useful lives of the assets of 2
to 5 years. Leasehold improvements are amortized over the term of the lease
or the estimated useful life of the improvements. Manufacturing tools
represents the cost of construction of equipment to produce
brand-identification parts for Company products.
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. Gains from
sale leaseback transactions are deferred and amortized over the term of the
lease.
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 two years.
VALUATION OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including, but not limited to, property and equipment
and other assets, when events and circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from the asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value
F-8
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
exceeds the fair value of the long-lived asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the
cost to dispose.
EQUITY FINANCING COSTS
External direct costs associated with obtaining equity financing are
deferred and taken as a reduction of the proceeds upon completion of the
financing.
REVENUE RECOGNITION
On October 27, 1997, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing,
selling, leasing, or otherwise marketing computer software. The Company has
implemented SOP 97-2 for the year ended September 30, 1998.
The Company sells products through resellers, original equipment
manufacturers and other channel partners, as well as to end users, under
similar terms. The Company generally combines software license, installation
and customer support elements into a package with a single "bundled" price.
The Company allocates a portion of the sales price to each element of the
bundled package based on their respective fair values when the individual
elements are sold separately. Revenues from the license of software, net of
an allowance for estimated returns, are recognized when the product has been
shipped and the customer is obligated to pay for the product. Installation
revenue is recognized when the product has been installed at the customer's
site. Revenues for customer support are recognized on a straight-line basis
over the service contract terms. Estimated sales returns are based on
historical experience by product and are recorded at the time revenues are
recognized.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $0, $0
and $256,000 for the period from February 26, 1996 (inception) to September
30, 1996 and the years ended September 30, 1997 and 1998, respectively, and
$42,000 and $537,000, for the six months ended March 31, 1998 and 1999,
respectively.
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting. Under the liability method, deferred taxes are determined based
on the differences between the financial statement and tax bases of assets
and liabilities at enacted tax rates in effect in the year in which the
differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred tax assets to amounts expected to be
realized.
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
F-9
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Issued to Employees" 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 Company's stock and the exercise price
of the option. The unearned compensation is being amortized in accordance
with Financial Accounting Standards Board Interpretation No. 28 on an
accelerated basis over the vesting period of the individual options. The
Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force 96-18.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded
amounts approximate market value.
NET LOSS AND PRO FORMA NET LOSS PER SHARE
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS
No. 128 requires the presentation of basic and diluted earnings (loss) per
share for all periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding
during the period, except that pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 98, if applicable, common shares
issued in each of the periods presented for nominal consideration have been
included in the calculation as if they were outstanding for all periods
presented.
Pro forma basic and diluted net loss per share has been computed as
described above and also gives effect to the conversion of the convertible
instruments that will occur upon completion of the Company's initial public
offering. The Company has included the equivalent number of common shares
from the conversion of preferred stock in the calculation of pro forma net
loss per share. The preferred stock series are assumed converted because
their terms require conversion upon an initial public offering, subject to
certain conditions.
Dilutive securities include options, warrants and preferred stock on an as
if converted basis. Potentially dilutive securities totaling 3,636,000 for
the period from February 26, 1996 (inception) to September 30, 1996 and
5,066,000 and 11,506,626 for the years ended September 30, 1997 and 1998,
respectively, and 8,687,876 and 12,752,681 for the six months ended March
31, 1998 and 1999 (unaudited), respectively, and were excluded from
historical basic and diluted loss per share because of their anti-dilutive
effect.
PRO FORMA SHAREHOLDERS' EQUITY
Upon completion of the Company's qualified initial public offering as
described in Note 8a, all of the convertible and redeemable preferred stock
outstanding as of the closing date will automatically be converted into an
aggregate 8,114,376 shares of common stock.
Unaudited pro forma shareholders' equity at March 31, 1999, as adjusted for
the conversion of the convertible preferred stock outstanding at March 31,
1999 (see Note 8c) is disclosed on the accompanying balance sheet.
F-10
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26,
1996 YEAR ENDED SEPTEMBER SIX MONTHS ENDED MARCH
(INCEPTION) 30, 31,
TO SEPTEMBER ----------------------- -------------------------
30, 1996 1997 1998 1998 1999
------------- ---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............................................... $ (330) $ (1,456) $ (3,672) $ (1,046) $ (5,159 )
------ ---------- ----------- ----------- -----------
------ ---------- ----------- ----------- -----------
Weighted average shares of common stock outstanding
(shares used in computing basic and diluted net loss
per share)........................................... 5,932 6,000 6,086 6,258 6,297
------ ---------- ----------- ----------- -----------
------ ---------- ----------- ----------- -----------
Basic and diluted net loss per share................... $ (0.06) $ (0.24) $ (0.60) $ (0.17) $ (0.82 )
------ ---------- ----------- ----------- -----------
------ ---------- ----------- ----------- -----------
Shares used in computing basic and diluted net loss per
share................................................ 6,086 6,258 6,297
----------- -----------
Adjustment to reflect the effect of the assumed
conversion of preferred stock:
Preferred stock--Series A............................ 2,400 2,400
Preferred stock--Series B............................ 2,500 2,500
Preferred stock--Series C............................ 938 938
Preferred stock--Series D............................ 2,277 2,277
----------- -----------
8,115 8,115
----------- -----------
Shares used in computing pro forma basic and diluted
net loss per share................................... 14,201 14,412
----------- -----------
----------- -----------
Pro forma basic and diluted net loss per share......... $ (0.26) $ (0.36 )
----------- -----------
----------- -----------
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as additional potential shares of common stock related to
outstanding options and warrants which were excluded because they are
anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." This statement requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for
fiscal years beginning after
F-11
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
December 15, 1997. Reclassification for earlier periods is required for
comparative purposes. The Company does not have any material items of
comprehensive income, other than net loss, and accordingly, the statement
does not have any material impact on reported financial position or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and
services, major customers, and geographic areas in which the entity holds
significant assets and reports significant revenues. The statement will be
effective for fiscal years beginning after December 15, 1997.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. The adoption of this statement has not had any
material impact on reported financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which establishes guidelines for
the accounting for the costs of all computer software developed or obtained
for internal use. This statement is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the statement to have a
material impact on its financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. This statement is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. The Company does not use derivative instruments, therefore the
adoption of this statement will not have any effect on the Company's results
of operations or its financial position.
F-12
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
At September 30, 1997 and 1998, and March 31, 1999, property and equipment
were approximately as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
-------------------- 1999
1997 1998 (UNAUDITED)
--- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment................................................... $ 161 $ 529 $ 955
Equipment under capital leases....................................... 54 54 54
Office furniture and equipment....................................... 17 293 418
Leasehold improvements............................................... 29 116 148
Manufacturing tools.................................................. 137
--- --------- ------
261 992 1,712
Accumulated amortization for equipment under
capital leases..................................................... (15) (33) (42)
Accumulated depreciation............................................. (50) (277) (451)
--- --------- ------
$ 196 $ 682 $ 1,219
--- --------- ------
--- --------- ------
</TABLE>
Depreciation expense was approximately $14,000 for the period from February
26, 1996 (inception) to September 30, 1996 and $55,000 and $244,000 for the
years ended September 30, 1997 and 1998, respectively. Depreciation expense
was approximately $93,000 and $183,000 for the six months ended March 31,
1998 and 1999, respectively (unaudited).
4. ACCRUED LIABILITIES:
At September 30, 1997 and 1998, and March 31, 1999, accrued liabilities were
approximately as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
-------------------- 1999
1997 1998 (UNAUDITED)
--- --- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued payroll and benefits......................................... $ 37 $ 237 $ 449
Accrued deferred financing costs..................................... 395
Accrued sales and use taxes.......................................... 17 141 155
Other................................................................ 60 80 476
--- --- ------
$ 114 $ 458 $ 1,475
--- --- ------
--- --- ------
</TABLE>
F-13
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate:
<TABLE>
<CAPTION>
1997 1998
--- ---
<S> <C> <C>
Federal income tax benefit at statutory rate........................... (34)% (34 )%
Non-deductible stock compensation...................................... 3% 1%
Other.................................................................. 1%
--- ---
Change in valuation allowance.......................................... 30% 33%
--- ---
--- ---
</TABLE>
Deferred tax assets and liabilities at September 30, 1997 and 1998 were
approximately as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................... $ 583 $ 1,573
Allowance for doubtful accounts.................................................... 80
Accrued compensation and benefits.................................................. 8 61
Depreciation....................................................................... 9
--------- ---------
Total deferred tax assets........................................................ 591 1,723
--------- ---------
Deferred tax liabilities:
Depreciation....................................................................... (7)
Amortization....................................................................... (14) (53)
--------- ---------
Total deferred tax liabilities................................................... (21) (53)
--------- ---------
570 1,670
Valuation allowance.................................................................. (570) (1,670)
--------- ---------
$ 0 $ 0
--------- ---------
--------- ---------
</TABLE>
Differences between the tax bases of assets and liabilities and their
financial statement amounts are reflected as deferred income taxes based on
enacted tax rates. The net deferred tax assets have been reduced by a full
valuation allowance at September 30, 1997 and 1998 based on management's
determination that the recognition criteria for realization have not been
met.
As of September 30, 1998, the Company had net operating loss carryforwards
of approximately $4.6 million, to offset future taxable income for Federal
income tax purposes, which will expire between 2011 and 2018. Should certain
changes in the Company's ownership occur, there could be a limitation on the
utilization of its net operating losses.
6. LINES OF CREDIT:
In February 1998, the Company entered into a $750,000 line of credit with a
bank, bearing interest at the prime rate plus 1.0%. In July 1998, the line
of credit was modified to allow the Company to borrow up to the lesser of
$2.0 million or 75% of the Company's eligible accounts receivable. The
modification also calls for monthly interest payments, a decrease of the
interest rate to the prime rate
F-14
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT: (CONTINUED)
plus 0.5% and an extension of the due date to July 31, 1999. The line of
credit contains certain covenants, including, but not limited to, meeting
minimum financial ratios and earnings. No amount was outstanding under the
line of credit at September 30, 1998 or March 31, 1999 (unaudited).
In February 1998, the Company entered into a $100,000 line of credit with a
bank, bearing interest at the prime rate plus 1.5%. The line of credit was
restricted in use to the purchase of equipment. This line expired in August
1998 and was never utilized.
7. LONG-TERM DEBT:
In March and August 1997, the Company entered into $500,000 and $300,000
convertible note agreements with a preferred shareholder, respectively.
These notes bore simple interest at 11% annually, matured 18 months from the
date of the respective agreements and were collateralized by substantially
all of the Company's assets. The notes were convertible into the Company's
common stock at the lesser of $1.00 per share or 80% of the sales price of
the Company's Series B Convertible Preferred Stock and $0.50 per share,
respectively. In conjunction with these notes, the Company issued to the
preferred shareholder warrants to purchase 100,000 and 600,000 shares of the
Company's common stock at $0.64 and $0.50 per share, respectively. The
aggregate value assigned to the warrants issued with these notes payable of
$0 and $109,000, respectively, was reflected as both a debt discount and an
increase to common stock. The debt discount was accounted for as a component
of interest expense using a method which approximated the interest method.
In October 1997, the Company settled the $500,000 note and related accrued
interest by issuing to the preferred shareholder 312,500 shares of the
Company's Series B Convertible Preferred Stock. In November 1997, the
preferred shareholder converted the $300,000 note and related accrued
interest into 600,000 shares of the Company's common stock.
8. SHAREHOLDERS' EQUITY:
A. PREFERRED STOCK
The Series A Convertible Preferred Stock is non-cumulative and convertible
into six shares of common stock, subject to adjustment upon the occurrence
of certain events provided for in the Company's restated articles of
incorporation. The Series A Convertible Preferred Stock is mandatorily
convertible into common stock upon completion of an initial public offering
of the Company's common stock in which the price per share equals or exceeds
$1.50 and gross proceeds equal or exceed $12.0 million, or when two-thirds
of the shares of Series A Convertible Preferred Stock have been converted.
The holders of the Series A Convertible Preferred Stock have certain voting
rights and liquidation preferences equal to $3.00 per share.
In May 1996, the Company issued 370,000 shares of Series A Convertible
Preferred Stock for an aggregate purchase price of $1.1 million. In
conjunction with the issuance of the Company's Series A shares to a certain
investor, the Company issued warrants, to which no value was assigned, to
purchase 240,000 shares of the Company's common stock at $0.50 per share. On
December 30, 1998, these warrants were exercised.
In addition, the Company entered into stock subscriptions for 30,000 shares
of the Company's Series A Convertible Preferred Stock in exchange for notes
receivable from certain investors for an aggregate of $90,000. These notes
receivable bore interest at 9% per annum and had maturity periods
F-15
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
ranging from 3 to 6 months from the date of the agreements. In August 1996,
10,000 shares of the Company's Series A Convertible Preferred Stock were
issued upon payment in full of $30,000 principal value and accrued interest
of a subscription agreement. In fiscal year 1997, the Company issued the
remaining 20,000 shares under subscription upon payment in full of the
remaining principal amount and accrued interest.
In September 1997, the Company issued 156,250 shares of Series B Convertible
Preferred Stock for an aggregate purchase price of $250,000. In conjunction
with this issuance, the Company issued warrants to purchase 187,500 shares
of the Company's common stock at $0.80 per share. The Company has allocated
approximately $42,000 of the purchase price as the value of these warrants.
The Series B Convertible Preferred Stock is non-cumulative and convertible
into two shares of the Company's common stock, subject to adjustment upon
the occurrence of certain events provided for in the Company's amended and
restated articles of incorporation. The Series B Convertible Preferred Stock
is mandatorily convertible into common stock upon completion of an initial
public offering of the Company's common stock in which the price per share
equals or exceeds $3.20 and gross proceeds equal or exceed $8.0 million, or
when two-thirds of the Series B shares have been converted. The holders of
the Series B Convertible Preferred Stock have certain voting rights and
liquidation preferences equal to $1.60 per share.
In October and November 1997, the Company issued an additional 1,093,750
shares of the Company's Series B Convertible Preferred Stock for an
additional aggregate purchase price of $1.8 million, including conversion of
the $500,000 note and accrued interest of approximately $20,000 from a
preferred shareholder (see Note 7). In conjunction with this issuance, the
Company issued warrants to purchase 1,312,500 shares of the Company's common
stock at $0.80 per share. The Company has allocated approximately $292,000
of the purchase price of the Series B Convertible Preferred Stock as the
value of these warrants.
In April 1998, the Company issued 156,250 shares of the Company's Series C
Convertible Preferred Stock and warrants to purchase 187,500 shares of the
Company's common stock at $1.60 per share for an aggregate purchase price of
$1.5 million. The Company has allocated approximately $75,000 of the
purchase price of the Series C Convertible Preferred Stock as the value of
the warrants issued. On February 1, 1999 these warrants were exercised.
Shares of the Company's Series C Convertible Preferred Stock are
non-cumulative and convertible into six shares of the Company's common
stock, subject to the occurrence of certain events provided for in the
Company's amended and restated articles of incorporation. The shares are
mandatorily convertible upon the completion of an initial public offering in
which the per share price is equal to or exceeds $3.20 and gross proceeds
equal or exceed $8.0 million, or when two-thirds of the Series C Convertible
Preferred shares have been converted. The holders of the Series C
Convertible Preferred Stock have certain voting rights and liquidation
preferences equal to $9.60 per share.
In August 1998, the Company issued 1,138,438 shares of Series D Redeemable
Convertible Preferred Stock for an aggregate purchase price of approximately
$7.7 million. Holders of the Company's Series D Redeemable Convertible
Preferred Stock are entitled to receive an annual non-cumulative dividend of
$0.68 per share, subject to declaration by the Board of Directors, at their
sole discretion. The shares are convertible into two shares of the Company's
Common Stock, subject to the occurrence of certain events provided for in
the Company's amended and restated articles of incorporation. The shares are
mandatorily convertible into common stock upon the completion of an
F-16
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
initial public offering in which the per share price equals or exceeds $5.00
and gross proceeds are equal to or exceed $15.0 million. The Company is
required to redeem all outstanding shares of the Series D Redeemable
Convertible Preferred Stock at $6.79 per share, plus all declared and unpaid
dividends, either in August 2005 or in three annual installments beginning
August 2003 at the request of holders of at least two-thirds of the
outstanding Series D Redeemable Convertible Preferred Stock. The holders of
the Series D Redeemable Convertible Preferred Stock have certain voting
rights and liquidation preferences equal to $13.58 per share.
The Company has reserved 8,114,376 shares of the Company's common stock for
issuance upon the conversion of the Company's Convertible Preferred Stock
and Redeemable Convertible Preferred Stock.
B. COMMON STOCK
The Company issued 5,388,000 shares of common stock on February 26, 1996,
the date of its incorporation. In conjunction with the Company's formation
it entered into a merger with Ambiente Inc. ("Ambiente") which was
consummated in March 1996. Pursuant to the merger agreement, the Company
issued 612,000 shares of common stock to the shareholders of Ambiente.
Through the date of the merger, Ambiente had no significant operations,
assets or liabilities, other than software under development that had not
yet achieved technological feasibility. Accordingly, no value was assigned
to the stock issued.
On December 2, 1996 and January 27, 1999 the Company authorized a 3 for 1
and 2 for 1 stock split, in the form of stock dividends, respectively on the
Company's common stock. All references to number of shares and per share
amounts of the Company's common stock in the accompanying financial
statements and notes have been restated to reflect these stock splits.
Upon incorporation of the Company, the founding shareholders entered into an
agreement (as amended, the "Shareholder Agreement") which, among other
things, called for a mandatory offer to sell the shareholders' stock, first
to the remaining founders, then to the Company, in the event of termination
of their employment with the Company. In February 1998, one of the founders,
who was also an officer of the Company, and the Company purchased 2,600,000
shares of the Company's common stock under the Shareholder Agreement from
two founders who had terminated their employment. The Company facilitated
the transactions between the shareholders under the Shareholder Agreement,
retaining 800,000 of the repurchased shares.
In February 1999, the Company issued a warrant to purchase up to 12,500
shares of the Company's common stock at $8.00 per share to a certain
customer in conjunction with a sale of products.
The Company has issued warrants to purchase common stock to investors and to
a certain customer. The aggregate consideration for each respective
transaction was allocated to securities or debt and the warrants based on
their relative fair values. All the warrants were exercisable at the time of
issuance. The assumptions applied in the determination of the fair value of
warrants issued were (i) use of the Black-Scholes pricing model, (ii) risk
free interest rates ranging from 5.2% to 6.2%, (iii) expected volatility
rates of approximately 70% (based on disclosed expected volatility rates of
comparable companies) (iv) assumed expected lives of 4 to 10 years, and (v)
no expected dividends.
F-17
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
At March 31, 1999, warrants outstanding were as follows (unaudited):
<TABLE>
<CAPTION>
AGGREGATE
WARRANT TO SHARES OF EXERCISE EXERCISE
PURCHASE COMMON STOCK PRICE PRICE
- ---------------------------------------------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Common stock.................................................... 100,000 $ 0.64 $ 64,000
Common stock.................................................... 600,000 0.50 300,000
Common stock.................................................... 1,500,000 0.80 1,200,000
Common stock.................................................... 12,500 8.00 100,000
-------------- ------------
2,212,500 $ 1,664,000
-------------- ------------
-------------- ------------
</TABLE>
C. INITIAL PUBLIC OFFERING
In April 1999, the Company's Board of Directors authorized the Company to
file a Registration Statement with the Securities and Exchange Commission to
permit the Company to proceed with an initial public offering of its common
stock. Upon consummation of this offering, all of the outstanding Series A,
B, and C Convertible Preferred Stock, and Series D Redeemable Convertible
Preferred Stock will be converted into 8,114,376 shares of common stock.
Also, upon completion of this offering, the Company's number of authorized
shares of Common Stock will increase to 100,000,000.
D. EQUITY INCENTIVE PLANS
In January 1997, Company's shareholders approved the Amended and Restated
1996 Stock Option Plan (the "1996 Employee Plan") that provides for
discretionary grants of non-qualified and incentive stock options for
employees and other service providers, and the Amended and Restated
Directors' Nonqualified Stock Option Plan (the "1996 Directors' Plan"),
which provides for automatic grants of non-qualified stock options to
eligible non-employee directors. A total of 2,600,000 shares of common stock
has been reserved for issuance under the 1996 Employee Plan and the 1996
Directors' Plan. Employees' stock options typically vest over a period of
four years from the grant date; director options typically vest over a
period of three years from the grant date. All options under the 1996
Employee Plan and the 1996 Directors' Plan expire 10 years after the grant
date. In August 1997, the Company repriced all existing employee options to
an exercise price of $0.05 per share. This repricing was accounted for as a
cancellation of existing stock options and grant of new stock options. All
outstanding, unvested options under the 1996 Employee Plan and the 1996
Director's 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.
In November 1998, the Company's 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 800,000 shares
of common stock have been reserved for issuance under the 1998 Plan. Stock
options granted under this plan typically vest over a period of four years
from the grant date, and expire 10 years from the grant date. The Company
has not granted any stock purchase awards or stock bonuses under the 1998
Plan. Upon certain changes in control of the Company, the surviving entity
will either assume or substitute all outstanding options or stock awards
under the 1998 Plan. If the surviving entity determines not to assume or
substitute such options or awards, then with respect to persons
F-18
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
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.
The Company applies the accounting provisions prescribed in APB No. 25 and
related interpretations. In certain instances, the Company has issued stock
options with an exercise price less than the deemed fair value of the
Company's common stock at the date of grant. Accordingly, total compensation
costs related to these stock options of approximately $238,000 and $1.9
million was deferred during fiscal years 1997 and 1998, respectively, and
$251,000 and $3,986,000 for the six months ended March 31, 1998 and 1999,
respectively, and is being amortized over the vesting period of the options,
generally four years. Amortization of unearned compensation costs of
approximately $4,000 has been recognized as an expense for the period from
February 26, 1996 (inception) to September 30, 1996, $69,000 and $420,000
for the years ended September 30, 1997 and 1998, respectively. Amortization
of unearned compensation amounted to $91,000 and $1,038,000 for the six
months ended March 31, 1998 and 1999, respectively (unaudited).
A summary of stock option transactions are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE PRICE
OPTIONS PER SHARE
----------- ---------------
<S> <C> <C>
Inception
Options granted............................................................ 1,146,000 $ 0.38
Options canceled........................................................... (150,000) 0.34
-----------
Balances at September 30, 1996............................................. 996,000 0.38
Options granted............................................................ 1,349,000 0.15
Options canceled........................................................... (1,119,000) 0.36
-----------
Balances at September 30, 1997............................................. 1,226,000 0.15
Options granted............................................................ 1,543,000 0.29
Options exercised.......................................................... (215,750) 0.11
Options canceled........................................................... (476,000) 0.11
-----------
Balances at September 30, 1998............................................. 2,077,250 0.26
Options granted (unaudited)................................................ 981,448 2.27
Options exercised (unaudited).............................................. (454,093) 1.91
Options canceled (unaudited)............................................... (178,800) 0.38
-----------
Balances at March 31, 1999 (unaudited)..................................... 2,425,805 0.74
-----------
-----------
</TABLE>
Pro forma information regarding net 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. The fair value of each
option is estimated at the date of grant with the following weighted-average
F-19
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
assumptions used for grants issued for the period from February 26, 1996
(inception) to September 30, 1996, and for the years ended September 30,
1997 and 1998:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26,
1996 YEAR ENDED SEPTEMBER
(INCEPTION) 30,
TO SEPTEMBER --------------------
30, 1996 1997 1998
------------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................................. 6.21% 6.21% 4.62%
Dividend yield...................................................... 0.00% 0.00% 0.00%
Expected term of option............................................. 4 years 4 years 4 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's net
loss would have been as indicated in the pro forma table below:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26,
1996 YEAR ENDED SEPTEMBER
(INCEPTION) TO 30,
SEPTEMBER 30, --------------------
1996 1997 1998
--------------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net loss--as reported............................................... $ (330) $ (1,456) $ (3,672)
Net loss--pro forma................................................. (331) (1,468) (3,742)
Net loss per share--as reported..................................... (0.06) (0.24) (0.60)
Net loss per share--pro forma....................................... (0.06) (0.24) (0.61)
</TABLE>
F-20
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
The weighted-average fair values and weighted-average exercise prices per
share at the date of grant for options granted during the period from
February 26, 1996 (inception) to September 30, 1996 and for the years ended
September 30, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26,
1996 YEAR ENDED SEPTEMBER
(INCEPTION) TO 30,
SEPTEMBER 30, --------------------
1996 1997 1998
--------------- --------- ---------
<S> <C> <C> <C>
Weighted-average fair value of options granted with exercise prices
equal to the market value of the stock at the date of grant....... $ 0.01 $ 0.01 $ 0.08
Weighted-average exercise price of options granted with exercise
prices equal to the market value of the stock at the date of
grant............................................................. 0.05 0.05 0.50
Weighted-average fair value of options granted with exercise prices
less than the market value of the stock at the date of grant...... 0.41 1.60
Weighted-average exercise price of options granted with exercise
prices less than the market value of the stock at the date of
grant............................................................. 0.05 0.05 0.28
</TABLE>
The following table summarizes information about fixed-price options
outstanding at September 30, 1998 as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISABLE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------ ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02-0.05 1,034,626 8.88 $ 0.05 133,250 $ 0.04
0.25 436,624 9.70 0.25
0.50 336,000 8.49 0.50 112,000 0.50
0.75 255,000 9.89 0.75
1.50 15,000 9.98 1.50
</TABLE>
9. COMMITMENTS:
The Company is committed under non-cancelable operating leases for its
current and former office space, which expire in 2002 and 1999,
respectively. During 1998, the Company leased its former office space under
a non-cancelable sub-leasing arrangement for amounts equal to the liability
of the commitment, which expires in 1999. Additionally, the Company is
committed under non-cancelable
F-21
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS: (CONTINUED)
operating leases for certain office equipment. Minimum operating lease
payments and sub-leasing receipts for future fiscal years, as of September
30, 1998, are approximately as follows:
<TABLE>
<CAPTION>
OPERATING LEASE OPERATING SUBLEASE
PAYMENTS RECEIPTS
--------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $367 $ 18
2000........................................................ 385
2001........................................................ 75
2002........................................................ 1
------ ---
$828 $ 18
------ ---
------ ---
</TABLE>
In January 1999, the Company amended its operating lease to increase the
amount of its current office space and extend the term through 2004. This
increased the minimum operating lease payments to approximately $2.1
million.
Rent expense under noncancelable operating leases amounted to approximately
$7,000 for the period from February 26, 1996 (inception) to September 30,
1996, approximately $38,000 and $145,000 for the years ended September 30,
1997 and 1998, respectively. Rent expense amounted to approximately $71,000
and $168,000 for the six months ended March 31, 1998 and 1999, respectively
(unaudited).
The Company leases certain equipment under a capital lease which expires in
1999. Future minimum lease payments and the present value of the net minimum
lease payments for capital lease obligations as of September 30, 1998 are as
follows.
<TABLE>
<CAPTION>
CAPITAL LEASE
-----------------
(IN THOUSANDS)
<S> <C>
Future minimum lease payments............................................................ $ 22
Less amounts representing interest....................................................... (3)
--
Obligations under capital lease.......................................................... $ 19
--
--
</TABLE>
10. RELATED PARTY TRANSACTIONS:
In September 1996, the Company sold certain equipment to a related party for
approximately $39,000, which included relief of a liability of approximately
$2,000 and a receivable of approximately $7,000. The Company then leased
back this and additional equipment from the related party under a capital
lease of approximately $43,000. The Company recorded a deferred gain of
approximately $5,000 on this sale leaseback transaction to be recognized
over the term of the lease using the straight-line method. The unrealized
portion of the deferred gain of approximately $2,000 and $5,000 has been
included in accrued liabilities at September 30, 1997 and 1996,
respectively. At September 30, 1996, approximately $7,000 of receivables
from the related party, related to the sale of equipment, are included in
other current assets. In 1997, the Company recognized approximately $2,000
of the deferred gain on the sale leaseback transaction.
In August 1997, the Company entered into a capital lease of office equipment
of approximately $11,000 from a related party. In January 1998, the Company
loaned $10,000 to an officer of the
F-22
<PAGE>
F5 NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
Company under a note agreement bearing interest at 9.5% which was originally
due in January 1999 and was extended to January 2000. At September 30, 1998,
this note and accrued interest have been included in other current assets.
Additionally, approximately $14,000 of employee receivables have been
included in other current assets at September 30, 1998.
In March 1999, the Company issued 150,000 shares of common stock to an
officer of the Company in exchange for a note receivable. These shares were
acquired by exercising stock options that vest over a period of four years.
The note bears interest at a rate of 4.83%, is collateralized by the shares,
partially guaranteed by the officer and is due in 2003. Under the pledge
agreement, the Company has the obligation to repurchase any remaining
unvested shares, and the note becomes due upon the officer's termination.
Further, the shares may not be transferred until they are vested and paid
for.
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is summarized below for the
years ended September 30, 1997 and 1998, for the period from February 26,
1996 (inception) to September 30, 1996, and for the six months ended March
31, 1998 and 1999:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, SIX MONTHS
1996 YEAR ENDED ENDED
(INCEPTION) SEPTEMBER 30, MARCH 31,
TO SEPTEMBER --------------------- ---------------------
30, 1996 1997 1998 1998 1999
------------- ----- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Noncash investing and financing activities:
Equipment obtained through capital lease..................... $43 $ 11
Disposal of property and equipment for note and relief of
accounts payable........................................... 10
Deferred gain on sale leaseback.............................. 5
Series A Convertible Preferred Stock issued for note......... 90
Conversion of note payable and related accrued interest to
Series B Convertible
Preferred Stock............................................ $520 $520
Value ascribed to warrants in conjunction with sale of
Convertible Preferred Stock................................ 42 292 292
Value ascribed to warrants issued with note payable.......... 109
Conversion of note payable to common stock................... 209 209
Note receivable from shareholder for exercise of options..... $750
Unearned compensation........................................ 4 238 1,945 252 3,987
Write-off of accounts receivable............................. 30 78
Cash paid for interest......................................... 19 30 12 1
</TABLE>
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO]
COMMON STOCK
-----------
PROSPECTUS
-----------
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
--------------
, 1999
--------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 11,509
NASD filing fee............................................... 4,640
Nasdaq National Market listing fee............................ 95,000
Printing and engraving costs.................................. 120,000
Legal fees and expenses....................................... 350,000
Accounting fees and expenses.................................. 200,000
Blue Sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees............................. 10,000
Miscellaneous expenses........................................ 53,851
-----------
Total....................................................... $ 850,000
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23.B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for this
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. The registrant's second amended and restated articles of
incorporation, (Exhibit 3.2 hereto) contains provisions implementing, to the
fullest extent permitted by Washington law, these limitations on a director's
liability to the registrant and its shareholders.
The registrant has entered into certain indemnification agreements with its
directors and certain of its officers, the form of which is attached as Exhibit
10.1 to this registration statement and incorporated herein by reference. The
indemnification agreements provide the registrant's directors and certain of its
officers with indemnification to the maximum extent permitted by the WBCA.
The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the registrant and its executive officers and directors
and by the registrant of the Underwriters, for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in this
registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, F5 has issued unregistered securities to a
limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and F5 believes that each transaction was exempt from the
II-1
<PAGE>
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each of these transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in these transactions. All recipients had adequate access to information
about F5, through their relationships with F5.
Since March 31, 1996, F5 has issued and sold the following unregistered
securities:
(1) From March 31, 1996 to March 31, 1999, F5 granted stock options to
purchase an aggregate of 5,019,448 shares of common stock at exercise prices
ranging from $0.05 to $8.00 per share to employees, consultants, directors and
other service providers pursuant to F5's 1998 Equity Incentive Plan, Amended and
Restated 1996 Stock Option Plan and Amended and Restated Directors' Nonqualified
Stock Option Plan.
(2) In May, August and December 1996 and April 1997, F5 sold an aggregate of
400,000 shares of Series A convertible preferred stock to 31 private investors
at an aggregate purchase price of $1,200,000 or $3.00 per share.
(3) From May 15, 1996 to February 25, 1999, F5 issued warrants to four
private investors, one consultant and one customer to purchase an aggregate of
2,645,750 shares of common stock with a weighted average exercise price of
$0.79.
(4) In September, October and November 1997, F5 sold an aggregate of
1,250,000 shares of Series B convertible preferred stock to three private
investors at an aggregate purchase price of $2,000,000 or $1.60 per share.
(5) On April 15, 1998, F5 sold an aggregate of 156,250 shares of Series C
convertible preferred stock to one private investor at an aggregate purchase
price of $1,500,000 or $9.60 per share.
(6) On August 21, 1998, F5 sold an aggregate of 1,138,438 shares of Series D
redeemable convertible preferred stock to three private investors at an
aggregate purchase price of $7,729,994 or $6.79 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant, as
amended.
3.2* Form of Second Amended and Restated Articles of Incorporation to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
3.3* Bylaws of the Registrant, as currently in effect.
3.4* Form of Amended and Restated Bylaws of the Registrant to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
4.1* Specimen Common Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and certain of its officers.
10.2* 1998 Equity Incentive Plan.
10.3* Form of Option Agreement under the 1998 Equity Incentive Plan.
10.4* 1999 Employee Stock Purchase Plan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
10.5* Amended and Restated Directors' Nonqualified Stock Option Plan.
<S> <C>
10.6* Form of Option Agreement under the Amended and Restated Directors'
Nonqualified Stock Option Plan.
10.7* Amended and Restated 1996 Stock Option Plan.
10.8* Form of Option Agreement under the Amended and Restated 1996 Stock
Option Plan.
10.9* 1999 Non-Employee Directors' Stock Option Plan.
10.10* Form of Option Agreement under 1999 Non-Employee Directors' Stock
Option Plan.
10.11* Lease Agreement, dated October 9, 1997, between the Registrant and
First Avenue West Building L.L.C.
10.12* First Amendment to Lease Agreement, dated July 23, 1998 between
Registrant and First Avenue West Building L.L.C.
10.13* Second Amendment to Lease Agreement, dated September 30, 1998
between Registrant and First Avenue West Building L.L.C.
10.14* Third Amendment to Lease Agreement, dated January 6, 1999, between
the Registrant and First Avenue West Building L.L.C.
10.15* Business Loan Agreement, dated October 23, 1997, between Registrant
and Silicon Valley Bank, as amended by that certain Loan
Modification Agreement, dated July 14, 1998 by and between
Registrant and Silicon Valley Bank.
10.16* Agreement, dated February 19, 1999, between the Registrant and
Steven Goldman.
10.17* Form of Common Stock Purchase Warrant.
10.18* Common Stock Warrant, dated March 15, 1997 between Registrant and
Brittania Holdings Limited.
10.19* Common Stock Warrant, dated August 5, 1997, between Registrant and
Brittania Holdings Limited.
10.20* Common Stock Warrant, dated February 25, 1999, between Registrant
and PSINet, Inc., as amended.
10.21* Investor Rights Agreement, dated August 21, 1998, between Registrant
and certain holders of the Registrant's Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock.
10.22* Promissory Term Note, dated January 6, 1998, between Registrant and
Jeffrey S. Hussey, as amended.
10.23* Early Exercise Stock Purchase Agreement, dated March 10, 1999,
between Registrant and Robert J. Chamberlain.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (contained on signature page).
27.1* Financial Data Schedule.
</TABLE>
* Previously filed.
ITEM 17. UNDERTAKINGS
The registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in the
denominations and registered in the names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions
II-3
<PAGE>
referenced in Item 14 of this registration statement or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against these liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
this indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of this issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act will be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of these securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereinto duly authorized, in the
City of Seattle, State of Washington, on the 14th day of May, 1999.
<TABLE>
<S> <C> <C>
F5 NETWORKS, INC.
By: *
-----------------------------------------
Jeffrey S. Hussey
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board,
* Chief Executive Officer
- ------------------------------ and President (Principal May 14, 1999
Jeffrey S. Hussey Executive Officer)
Vice President of Finance,
/s/ ROBERT J. CHAMBERLAIN Chief Financial Officer
- ------------------------------ and Treasurer (Principal May 14, 1999
Robert J. Chamberlain Finance and Accounting
Officer)
*
- ------------------------------ Director May 14, 1999
Carlton G. Amdahl
*
- ------------------------------ Director May 14, 1999
Kimberly D. Davis
*
- ------------------------------ Director May 14, 1999
Alan J. Higginson
*
- ------------------------------ Director May 14, 1999
Sonja L. Hoel
*
- ------------------------------ Director May 14, 1999
Kent L. Johnson
</TABLE>
<TABLE>
<S> <C>
*By: /s/ ROBERT J. CHAMBERLAIN
--------------------------------------
Robert J. Chamberlain
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant, as
amended.
3.2* Form of Second Amended and Restated Articles of Incorporation to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
3.3* Bylaws of the Registrant, as currently in effect.
3.4* Form of Amended and Restated Bylaws of the Registrant to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
4.1* Specimen Common Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and certain of its officers.
10.2* 1998 Equity Incentive Plan.
10.3* Form of Option Agreement under the 1998 Equity Incentive Plan.
10.4* 1999 Employee Stock Purchase Plan.
10.5* Amended and Restated Directors' Nonqualified Stock Option Plan.
10.6* Form of Option Agreement under the Amended and Restated Directors'
Nonqualified Stock Option Plan.
10.7* Amended and Restated 1996 Stock Option Plan.
10.8* Form of Option Agreement under the Amended and Restated 1996 Stock
Option Plan.
10.9* 1999 Non-Employee Directors' Stock Option Plan.
10.10* Form of Option Agreement under 1999 Non-Employee Directors' Stock
Option Plan.
10.11* Lease Agreement, dated October 9, 1997, between the Registrant and
First Avenue West Building L.L.C.
10.12* First Amendment to Lease Agreement, dated July 23, 1998 between
Registrant and First Avenue West Building L.L.C.
10.13* Second Amendment to Lease Agreement, dated September 30, 1998
between Registrant and First Avenue West Building L.L.C.
10.14* Third Amendment to Lease Agreement, dated January 6, 1999, between
the Registrant and First Avenue West Building L.L.C.
10.15* Business Loan Agreement, dated October 23, 1997, between Registrant
and Silicon Valley Bank, as amended by that certain Loan
Modification Agreement, dated July 14, 1998 by and between
Registrant and Silicon Valley Bank.
10.16* Agreement, dated February 19, 1999, between the Registrant and
Steven Goldman.
10.17* Form of Common Stock Purchase Warrant.
10.18* Common Stock Warrant, dated March 15, 1997 between Registrant and
Brittania Holdings Limited.
10.19* Common Stock Warrant, dated August 5, 1997, between Registrant and
Brittania Holdings Limited.
10.20* Common Stock Warrant, dated February 25, 1999, between Registrant
and PSINet, Inc., as amended.
10.21* Investor Rights Agreement, dated August 21, 1998, between Registrant
and certain holders of the Registrant's Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock.
10.22* Promissory Term Note, dated January 6, 1998, between Registrant and
Jeffrey S. Hussey, as amended.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
10.23* Early Exercise Stock Purchase Agreement, dated March 10, 1999,
between Registrant and Robert J. Chamberlain.
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (contained on signature page).
27.1* Financial Data Schedule.
</TABLE>
* Previously filed.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
F5 NETWORKS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
F5 NETWORKS, INC.
_________ SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____ __, 1999
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC
DAIN RAUSCHER WESSELS, a division of Dain Rauscher Incorporated
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
F5 Networks, Inc., a Washington corporation (herein called the Company),
proposes to issue and sell _________ shares of its authorized but unissued
Common Stock, no par value (herein called the "Common Stock"), and the
shareholder of the Company named in part A of Schedule II hereto (herein
collectively called the "Primary Selling Securityholder") severally proposes to
sell an aggregate of _________ shares of Common Stock of the Company (said
_________ shares of Common Stock being herein called the "Underwritten Stock").
Certain shareholders of the Company named in Part B of Schedule II hereto
("Additional Selling Securityholders," which term shall include, except where
otherwise noted, the shareholder named as an Affiliated Selling Securityholder
in Schedule II hereto, herein called the "Affiliated Selling Securityholder")
propose to grant to the Underwriters (as hereinafter defined) an option to
purchase up to _________ additional shares of Common Stock, said _____ shares
of Common Stock being herein called "Option Stock" and with the Underwritten
Stock herein collectively called the "Stock." The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned. The Primary Selling Securityholder and the Additional Selling
Securityholders shall collectively be referred to herein as the "Selling
Securityholders."
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the "Commission") a registration
statement on Form S-1 (No.333-75817), including the related preliminary
prospectus, for the registration under the Securities Act of 1933, as amended
(herein called the "Securities Act") of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus (meeting the requirements of Rule 430A of the rules and
regulations of the Commission) heretofore filed by the Company with the
Commission have been delivered to you.
- -----------------
(1) Plus an option to purchase from the Additional Selling Securityholders up
to ______ additional shares to cover over-allotments.
<PAGE>
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a "Rule
462(b) Registration Statement"), and, in the event of any amendment thereto
after the effective date of such registration statement (herein called the
"Effective Date"), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule
462(b) registration statement). The term Prospectus as used in this Agreement
shall mean the prospectus relating to the Stock first filed with the
Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall
also mean (from and after the filing with the Commission of such supplement or
the effectiveness of such amendment) such prospectus as so supplemented or
amended. The term Preliminary Prospectus as used in this Agreement shall mean
each preliminary prospectus included in such registration statement prior to
the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) The Company hereby represents and warrants as follows:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation, has full corporate power and authority to own or lease
its properties and conduct its business as described in the Registration
Statement and the Prospectus and as being conducted, and is duly qualified as
a foreign corporation and in good standing in all jurisdictions in which the
character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure to be
so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company (a
"Material Adverse Effect")).
(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been any
material adverse change in the business, properties, financial condition or
results of operations of the Company whether or not arising from transactions
in the ordinary course of business, other than as set forth in the
Registration Statement and the Prospectus, and since such dates, except in the
ordinary course of business, the Company has not entered into any material
transaction not referred to in the Registration Statement and the Prospectus.
(iii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus relating to the proposed
offering of the Stock nor instituted or threatened instituting proceedings for
that purpose. The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Option Stock is to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; PROVIDED, HOWEVER, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for
use in the Registration Statement or the Prospectus.
(iv) The Company's authorized, issued and outstanding
capitalization as of March 31, 1999 is as set forth under the caption
Capitalization in the Prospectus. The Stock is duly and validly
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authorized, and, when issued and sold to the Underwriters and upon the
delivery of and payment for such shares of the Stock, as provided herein, will
be duly and validly issued, fully paid and nonassessable, and the Underwriters
will receive good and marketable title thereto, free and clear of all liens,
encumbrances, equities, security interests and claims whatsoever. The capital
stock conforms in all material respects to the description thereof contained
in the Prospectus. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the issuance and sale
of the Stock by the Company as contemplated herein or to the knowledge of the
Company for the transfer and sale of the Stock to be sold by the Selling
Securityholders. The shares of capital stock outstanding prior to the
issuance of the Underwritten Stock and, if any, the Option Stock have been
duly authorized and are validly issued, fully paid and nonassessable.
(v) Prior to the Closing Date, the Stock to be issued and sold
under this Agreement will be authorized for listing by the Nasdaq National
Market (herein called "NNM") upon official notice of issuance of the Stock.
(vi) Except as disclosed in the Registration Statement, and
except for stock options and shares of Common Stock granted or purchased in
the ordinary course of business after March 31, 1999 pursuant to the equity
incentive plans disclosed in the Registration Statement ("Option Plans"), the
Company does not have outstanding any options or warrants to purchase, or any
preemptive rights, or other rights to subscribe or to purchase or rights of
co-sale, any securities or obligations convertible or exercisable into, or any
contracts or commitments to issue or sell or register for sale, shares of its
capital stock or any such options, warrants, rights, convertible securities,
exercisable securities or obligations.
(vii) PricewaterhouseCoopers LLP, who have certified the
consolidated financial statements included in the Registration Statement, have
represented to the Company that they are, and the Company has no reason to
believe that such representation is incorrect, independent public accountants
as required by the Securities Act and the rules and regulations of the
Commission thereunder.
(viii) The financial statements of the Company, together with
related notes and schedules as set forth in the Registration Statement
("Financial Statements"), present fairly the financial position and the results
of operations of the Company, at the indicated dates and for the indicated
periods. The Financial Statements have been prepared in accordance with
generally accepted accounting principles, consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation of
results for such periods have been made. The selected and summary financial
data contained in the Registration Statement and the financial information set
forth under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" present fairly the information shown
therein and have been compiled on a basis consistent with the Financial
Statements. As of March 31, 1999, other than as set forth in the Financial
Statements, the Company has no material liabilities, contingent or otherwise,
other than liabilities incurred in the ordinary course of business and
described in the Registration Statement.
(ix) The Company has filed all tax returns required to be
filed and has paid or is contesting in good faith all taxes shown thereon as
due, and there is no tax deficiency that has been or might be asserted against
the Company that will or might have a Material Adverse Effect as of the date
hereof, and all tax liabilities are adequately provided for in the Financial
Statements of the Company as of the date thereof.
(x) The Company is not in violation or default under any
provision of its Articles of Incorporation or Bylaws as of the Closing Date
and any later date upon which the Option Stock is purchased, or any indenture,
license, mortgage, lease, franchise, permit, deed of trust or other agreement
or instrument to which the Company is a party or by which the Company or any
of its properties is bound or may be affected, except where such violation or
default would not have a Material Adverse Effect.
(xi) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company, enforceable
in accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by applicable laws and except as the enforcement
hereof may be limited by applicable bankruptcy, insolvency, reorganization,
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moratorium or other similar laws affecting creditors' rights generally, or by
general equitable principles. The execution and performance of this Agreement
and the consummation of the transactions herein contemplated, including, but
not limited to, the issuance and sale of the Stock by the Company and the sale
of the Stock by the Selling Securityholders do not and will not: (i) conflict
with, or result in a breach of, or violation of, any of the terms or
provisions of, or constitute, either by itself or upon notice or the passage
of time or both, a default under, any indenture, license, mortgage, lease,
franchise, permit, deed of trust or other agreement or instrument to which the
Company is a party or by which the Company or any of its properties is bound
or may be affected, except where such breach, violation or default would not
have a Material Adverse Effect, (ii) violate any of the provisions of the
Articles of Incorporation or Bylaws of the Company in effect as of the Closing
Date and any later date upon which the Option Stock is purchased, (iii) violate
any order, judgment, statute, rule or regulation applicable to the Company or
of any regulatory, administrative or governmental body or agency having
jurisdiction over the Company or any of its properties or assets, or
(iv) result in the creation or imposition of any lien, charge or encumbrance
upon any assets or properties of the Company.
(xii) Any consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its properties or assets which is required for the
execution, delivery and performance of this Agreement or the consummation of
the transactions contemplated hereby, including the issuance, sale and
delivery of the Stock to be issued, sold and delivered by the Company
hereunder, have been obtained, including the registration of the Stock under
the Securities Act, listing of the shares on the NNM and such consents,
approvals, authorizations, orders, registrations, filings, qualifications,
licenses and permits as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters.
(xiii) There is no pending or, to the Company's knowledge,
threatened action, suit, claim or proceeding against the Company or any of its
officers or any of its properties, assets or rights before any court or
governmental agency or body or otherwise which (i) might have a Material
Adverse Effect, (ii) might prevent consummation of the transactions
contemplated hereby or (iii) is required to be disclosed in the Registration
Statement and not otherwise disclosed; and there are no contracts or documents
of the Company that are required to be described in the Prospectus or to be
filed as exhibits to the Registration Statement which have not been fairly and
accurately described in all material respects in the Prospectus and filed as
exhibits to the Registration Statement. The contracts so described in the
Prospectus are in full force and effect on the date hereof, and neither the
Company nor, to the Company's knowledge, any other party is in breach of or
default under any of such contracts.
(xiv) Other than as set forth in the Registration Statement,
no claim is pending or, to the Company's knowledge, threatened to the effect
that the present or past operations of the Company infringe upon or conflict
with the rights of others with respect to any licenses, patents, patent
rights, patent applications, trademarks, trademark applications, trade names,
copyrights, trade secrets, drawings, schematics, applications, technology,
know-how and other tangible and intangible proprietary information or material
("Intellectual Property") which would impair the ability of the Company to
conduct its businesses as currently conducted; no claim is pending or, to the
Company's knowledge, threatened regarding the Company's ownership or other
interest in, or rights under, any Intellectual Property which is necessary in
any respect to permit the Company to conduct its businesses as currently
conducted; and, no claim is pending or, to the Company's knowledge, threatened
to the effect that any Intellectual Property owned by or licensed to the
Company is invalid or unenforceable. Except as disclosed in the Prospectus,
the Company owns, or has licensed or otherwise has sufficient rights to, all
Intellectual Property used or proposed to be used in the business of the
Company as currently conducted. Except as otherwise disclosed in the
Prospectus, no contract, agreement or understanding between the Company and
any other party exists which would impede or prevent in any respect the
continued use by the Company of the entire right, title and interest of the
Company in and to any Intellectual Property used in the business of the
Company as currently conducted.
(xv) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Stock.
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(xvi) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise
in connection with the sale of the Stock contemplated hereby, other than those
that have been expressly waived prior to the date hereof. There are no
registration rights with respect to the sale and issuance of the Stock, other
than those that have been expressly waived prior to the date hereof.
(xvii) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, and the rules and regulations thereunder.
(b) Each of the Selling Securityholders, severally and not jointly,
hereby represents and warrants as follows:
(i) Such Selling Securityholder has good and marketable
title to all the shares of Stock to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever, with full right and authority to deliver the
same hereunder, subject, in the case of each Selling Securityholder, to the
rights of American Stock Transfer & Trust Company, as custodian (herein called
the "Custodian"), and that upon the delivery of and payment for such shares of
the Stock hereunder, the Underwriters will receive good and marketable title
thereto, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever.
(ii) Certificates in negotiable form for the shares of the
Stock to be sold by such Selling Securityholder have been placed in custody
under a Custody Agreement for delivery under this Agreement with the
Custodian; such Selling Securityholder specifically agrees that the shares of
the Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the Underwriters and the
Company, that the arrangements made by such Selling Securityholder for such
custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity of
such Selling Securityholder (or, in the case of a Selling Securityholder that
is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur before
the delivery of such shares of the Stock hereunder, certificates for such
shares of the Stock shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such death, incapacity,
dissolution, liquidation or other event had not occurred, regardless of
whether the Custodian shall have received notice of such death, incapacity,
dissolution, liquidation or other event.
(c) The Affiliated Selling Securityholder hereby represents and
warrants that such Affiliated Selling Securityholder has reviewed the
Registration Statement and Prospectus and, although such Affiliated Selling
Securityholder has not independently verified the accuracy or completeness of
all the information contained therein, nothing has come to the attention of
such Affiliated Selling Securityholder that would lead such Affiliated Selling
Securityholder to believe that on the Effective Date, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and, on the Effective Date the
Prospectus contained and, on the Closing Date and any later date on which
Option Stock is to be purchased, contains any untrue statement of a material
fact or omitted or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; PROVIDED, HOWEVER, that none of the representations
and warranties in this paragraph (c) shall apply to statements in, or omissions
from, the Registration Statement or the Prospectus made in reliance upon and
in conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell 2,860,000 shares of the Underwritten Stock to the
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Underwriters, the Primary Selling Securityholder agrees to sell to the
Underwriters the number of shares of the Underwritten Stock set forth in
Schedule II opposite the name of such Primary Selling Securityholder, and each
of the Underwriters agrees to purchase from the Company and the Primary
Selling Securityholder the respective aggregate number of shares of
Underwritten Stock set forth opposite its name in Schedule I. The price at
which such shares of Underwritten Stock shall be sold by the Company and the
Primary Selling Securityholder and purchased by the Underwriters shall be
$_______ per share. The obligation of each Underwriter to the Company and the
Primary Selling Securityholder shall be to purchase from the Company and the
Primary Selling Securityholder that number of shares of the Underwritten Stock
which represents the same proportion of the total number of shares of the
Underwritten Stock to be sold by each of the Company and the Primary Selling
Securityholder pursuant to this Agreement as the number of shares of the
Underwritten Stock set forth opposite the name of such Underwriter in
Schedule I hereto represents of the total number of shares of the Underwritten
Stock to be purchased by all Underwriters pursuant to this Agreement, as
adjusted by Hambrecht & Quist LLC in such manner as Hambrecht & Quist LLC
deems advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters agreed
to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of shares
of the Stock which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER, that the
non-defaulting Underwriters shall not be obligated to purchase the shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the total
number of shares of the Stock which all Underwriters agreed to purchase
hereunder. If the total number of shares of the Stock which the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company and the
Selling Securityholders shall have the right, within 24 hours next succeeding
the 24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such shares and
portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Securityholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company and the Selling
Securityholders shall make arrangements within the 24-hour periods stated
above for the purchase of all the shares of the Stock which the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall
be terminated without further act or deed and without any liability on the
part of the Company or the Selling Securityholders to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company or the Selling Securityholders. Nothing in this
paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth,
the Additional Selling Securityholders grant an option to the several
Underwriters to purchase, severally and not jointly, up to 450,000 shares in
the aggregate of the Option Stock from such Additional Selling Securityholders
at the same price per share as the Underwriters shall pay for the Underwritten
Stock. Said option may be exercised only to cover over-allotments in the sale
of the Underwritten Stock by the Underwriters and may be exercised in whole or
in part at any time (but not more than once) on or before the thirtieth day
after the date of this Agreement upon written or telegraphic notice by you to
the Company setting forth the aggregate number of shares of the Option Stock
as to which the several Underwriters are exercising
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the option. Delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made as provided in Section 5 hereof. The number of
shares of the Option Stock to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Stock to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Stock, as adjusted by you in such manner as you deem advisable to
avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for
inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later than 7:00 A.M., San Francisco time, on the date
two business days preceding the Closing Date), and payment therefor, shall be
made at the office of Cooley Godward LLP, 4205 Carillon Point, Kirkland, WA
98033-7355, at 7:00a.m., San Francisco time, on the fourth business day after
the date of this Agreement, or at such time on such other day, not later than
seven full business days after such fourth business day, as shall be agreed
upon in writing by the Company, the Selling Securityholders and you. The date
and hour of such delivery and payment (which may be postponed as provided in
Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding
the Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Cooley Godward LLP,
4205 Carillon Point, Kirkland, WA 98033-7355, at 7:00a.m., San Francisco time,
on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made
to the Company or its order and payment for the Stock purchased from the
Selling Securityholders shall be made to the Custodian, for the account of the
Selling Securityholders, in each case by wire transfer of immediately
available funds. Such payment shall be made upon delivery of certificates for
the Stock to you for the respective accounts of the several Underwriters
against receipt therefor signed by you. Certificates for the Stock to be
delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of Lewco Securities Corporation,
2 Broadway, New York, New York 10004 on the business day prior to the Closing
Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the
business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any
later date on which Option Stock is purchased for the account of such
Underwriter. Any such payment by you shall not relieve such Underwriter from
any of its obligations hereunder.
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6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A
and (ii) not file any amendment to the Registration Statement or supplement to
the Prospectus of which you shall not previously have been advised and
furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement, (iii) the institution or
notice of intended institution of any action or proceeding for that purpose,
(iv) the receipt by the Company of any notification with respect to the
suspension of the qualification of the Stock for sale in any jurisdiction, or
(v) the receipt by it of notice of the initiation or threatening of any
proceeding for such purpose. The Company will make every reasonable effort to
prevent the issuance of such a stop order and, if such an order shall at any
time be issued, to obtain the withdrawal thereof at the earliest possible
moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of
each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together
with, in each case, all exhibits thereto unless previously furnished to you)
and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing (but
without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request, and (iii) thereafter
from time to time during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, likewise send to the Underwriters
as many additional copies of the Prospectus and as many copies of any
supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as you may reasonably request for the purposes
contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in
writing by you, shall occur as a result of which it is necessary, in the
opinion of counsel for the Company or of counsel for the Underwriters, to
supplement or amend the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser of the Stock, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended
prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the Stock
by the Underwriters and during such period, the Underwriters shall propose to
vary the terms of offering thereof by reason of changes in general market
conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the Company
or of counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus
or any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during
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the period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing under
said securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall
not be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to continue
such qualifications in effect for so long a period as you may reasonably
request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders
of the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to
the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses
incident to (i) the preparation, printing and filing with the Commission and
the National Association of Securities Dealers, Inc. ("NASD") of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agents
fees. The Selling Securityholders will pay any transfer taxes incident to the
transfer to the Underwriters of the shares of Stock being sold by the Selling
Securityholders.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel
in qualifying the Stock under state securities or blue sky laws and in the
review of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company
will not, for a period of 180 days following the effective date of the
Registration Statement, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any rights to purchase or acquire
Common Stock. The foregoing sentence shall not apply to (A) the Stock to be
sold to the Underwriters pursuant to this Agreement, (B) Common Stock or
options to purchase Common Stock or other equity incentives granted under the
Option Plans, (C) shares of Common Stock issued by the Company upon the
exercise of options granted under the Option Plans or upon the exercise of
warrants outstanding as of the date hereof, and (D) capital stock issued in
connection with acquisitions entered into by the Company, provided that the
Company shall notify Hambrecht & Quist LLC of such proposed acquisitions at
least five (5) business days prior to entering into a legally binding letter
of intent or a definitive agreement with respect to such acquisitions.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding
to or commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was
not and will not be an "investment company" or a company "controlled" by an
"investment
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company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Securities Exchange Act of 1934, as amended
(herein called the Exchange Act), or the common law or otherwise, and the
Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the
respective indemnified parties, in each case arising out of or based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement), or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that (1) the indemnity agreements of the Company contained
in this paragraph (a) shall not apply to any such losses, claims, damages,
liabilities or expenses if such statement or omission was made in reliance
upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any
Underwriter for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto and (2) the indemnity agreement contained in this paragraph (a) with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or
to the benefit of any person controlling such Underwriter) if at or prior to
the written confirmation of the sale of such Stock a copy of the Prospectus
(or the Prospectus as amended or supplemented) was not sent or delivered to
such person and the untrue statement or omission of a material fact contained
in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph (c) of Section 6 hereof. The
indemnity agreements of the Company contained in this paragraph (a) and the
representations and warranties of the Company contained in Section 2 hereof
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Subject to the provisions of paragraph (g) of this Section 7, the
Selling Securityholders severally and not jointly agree to indemnify and hold
harmless each Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15 of the
Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act or the
common law or otherwise, and the Selling Securityholders severally and not
jointly agree to reimburse each such Underwriter and each person (including
each partner or officer thereof) who controls any Underwriter within the
meaning of Section 15 of the Securities Act for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties,
in each case arising out of or based upon (i) information pertaining to such
Selling Securityholder furnished by or on behalf of such Selling
Securityholder expressly for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (ii) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in
Section 2(b) hereof, or (iii) in the case of the Affiliated Selling
Securityholder, facts that would constitute a breach of any representation or
warranty of such Affiliated Selling Securityholder set forth in Section 2(c)
hereof. The indemnity agreements of the Selling Securityholders contained
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in this paragraph (b) and the representations and warranties of the Selling
Securityholders contained in Section 2 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each Underwriter severally agrees to indemnify and hold
harmless the Company and the Selling Securityholder, each of its officers who
signs the Registration Statement on his own behalf or pursuant to a power of
attorney, each of its directors, each other Underwriter and each person
(including each partner or officer thereof) who controls the Company or any
such other Underwriter within the meaning of Section 15 of the Securities Act
and the Selling Securityholders, from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act, or
the common law or otherwise and to reimburse each of them for any legal or
other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any
Rule 462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, if such statement or omission was made in reliance
upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto. The indemnity
agreement of each Underwriter contained in this paragraph (c) shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Stock.
(d) Each party indemnified under the provisions of paragraphs (a),
(b) and (c) of this Section 7 agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted against
it or upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in
such paragraphs, it will promptly give written notice (herein called the
Notice) of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in
such paragraphs shall be available to any party who shall fail so to give the
Notice if the party to whom such Notice was not given was unaware of the
action, suit, investigation, inquiry or proceeding to which the Notice would
have related and was prejudiced by the failure to give the Notice, but the
omission so to notify such indemnifying party or parties of any such service
or notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution
or otherwise than on account of such indemnity agreement. Any indemnifying
party shall be entitled at its own expense to participate in the defense of
any action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the
indemnifying party or parties, by counsel chosen by such indemnifying party or
parties and reasonably satisfactory to the indemnified party or parties;
PROVIDED, HOWEVER, that (i) if the indemnified party or parties reasonably
determine that there may be a conflict between the positions of the
indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a
reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and the counsel chosen by the indemnifying party or parties
is reasonably
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<PAGE>
satisfactory to the indemnified party or parties, the indemnifying party or
parties will not be liable under paragraphs (a) through (d) of this Section 7
for any legal or other expenses subsequently incurred by the indemnified
party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party
or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso
to the preceding sentence and (B) the indemnifying party or parties shall
bear such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding.
(e) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a), (b) or (c) of this Section 7, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a), (b) or (c) of this
Section 7(i) in such proportion as is appropriate to reflect the relative
benefits received by each indemnifying party from the offering of the Stock
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of each indemnifying party in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Securityholders on
the one hand and the Underwriters on the other shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of
the Stock received by the Company and the Selling Securityholders and the
total underwriting discount received by the Underwriters, as set forth in the
table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by each indemnifying party and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (e) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of
this paragraph (e). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the first sentence of this paragraph (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending
against any action or claim which is the subject of this paragraph (e).
Notwithstanding the provisions of this paragraph (e), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this paragraph (e) to contribute are several in proportion to their
respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (d) of this
Section 7).
(f) Neither the Company nor the Selling Securityholders will,
without the prior written consent of each Underwriter, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional
release of such Underwriter and each such controlling person from all
liability arising out of such claim, action, suit or proceeding.
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<PAGE>
(g) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraphs (b)
and (c) of Section 2 hereof and under the indemnity and reimbursement
agreements contained in the provisions of this Section 7 and Section 11
hereof shall be limited to an amount equal to the initial public offering
price of the stock sold by such Selling Securityholder to the Underwriters.
In addition, no Selling Securityholder shall be liable under the indemnity
and reimbursement agreements of Sections 7 and 11 hereof unless and until the
Underwriters have made written demand on the Company for payment under such
Sections which shall not have been paid or agreed to be paid by the Company
within 45 days after receipt by the Company of such demand. A copy of such
demand when made to the Company shall be provided to the Selling
Securityholders. The Company and the Selling Securityholders may agree, as
among themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for which they
each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i)
the engagement in hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, calamity, crisis or
change in economic or political conditions in the financial markets of the
United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading
in securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, The
Nasdaq Stock Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange
or system, (iv) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of, or commencement
of any proceeding or investigation by, any court, legislative body, agency or
other governmental authority which in the Underwriters' reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking
of any action by any federal, state or local government or agency in respect
of its monetary or fiscal affairs which in the Underwriters' reasonable
opinion has a material adverse effect on the securities markets in the United
States. If this Agreement shall be terminated pursuant to this Section 8,
there shall be no liability of the Company or the Selling Securityholders to
the Underwriters and no liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that in the event of any such
termination the Company and the Selling Securityholders agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to
the performance by the Company and by the Selling Securityholders of all
their respective obligations to be performed hereunder at or prior to the
Closing Date or any later date on which Option Stock is to be purchased, as
the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to
the financial statements contained therein), shall have been approved at or
prior to the Closing Date by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel for the Underwriters.
(c) You shall have received from Cooley Godward LLP, counsel for
the Company and the Affiliated Selling Securityholders, an opinion, addressed
to the Underwriters and dated the Closing Date, covering the matters set
forth in Annex A hereto, and if Option Stock is purchased at any date after
the Closing Date, an additional opinion from such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinion remain valid as of such
later date.
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(d) You shall have received from Garvey, Schubert & Barer, counsel
for Michael D. Almquist, an opinion, addressed to the Underwriters and dated
the Closing Date, covering the matters set forth in Annex B hereto.
(e) You shall have received from _________, counsel for Brittania
Holdings Limited, an opinion, addressed to the Underwriters and dated
[_________] covering the matters set forth in Annex C hereto.
(f) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus omitted
to state any material fact required to be stated therein or necessary in
order to make the statements therein, respectively, not misleading, (ii)
since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as
of which information is given in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the business, properties,
financial condition or results of operations of the Company, whether or not
arising from transactions in the ordinary course of business, and, since such
dates, except in the ordinary course of business, Company has not entered
into any material transaction not referred to in the Registration Statement
in the form in which it originally became effective and the Prospectus
contained therein, (iv) the Company does not have any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal
proceedings to which the Company is a party or of which property of the
Company is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus, (vi) there are not any franchises,
contracts, leases or other documents which are required to be filed as
exhibits to the Registration Statement which have not been filed as required,
(vii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Option Stock is to be purchased, as the case may be, and (viii) there
has not been any material change in the market for securities in general or
in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make
a public offering of the Stock, or a material adverse change in market levels
for securities in general (or those of companies in particular) or financial
or economic conditions which render it inadvisable to proceed.
(g) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing Date
or such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (vii) of paragraph (f) of this Section 9 are
true and correct.
(h) You shall have received from PricewaterhouseCoopers LLP, a
letter or letters, addressed to the Underwriters and dated the Closing Date
and any later date on which Option Stock is purchased, confirming that they
are independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(herein called the Original Letter), but carried out to a date not more than
three business days prior to the Closing Date or such later date on which
Option Stock is purchased (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as
of the Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth
in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original Letter
or to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company which, in your sole judgment, makes it impractical or inadvisable
to proceed with the public offering of the Stock or the purchase of the
Option Stock as contemplated by the Prospectus.
(i) You shall have received from PricewaterhouseCoopers LLP a
letter stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing
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the scope of their examination of the Companys financial statements as at
March 31, 1999, did not disclose any weakness in internal controls that they
considered to be material weaknesses.
(j) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.
(k) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized for listing by the NNM upon
official notice of issuance.
(l) On or prior to the Closing Date, you shall have received from
all directors and officers of the Company, and shareholders, comprising at
least 98% of the outstanding shares of capital stock in the aggregate,
agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating
that without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, such person or entity will not, for a period of 180 days
following the effective date of the Registration Statement, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge, or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel for the Underwriters, shall be reasonably satisfied
that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company or
Selling Securityholders to the Underwriters and without liability of the
Underwriters to the Company or the Selling Securityholders; PROVIDED,
HOWEVER, that (i) in the event of such termination, the Company and the
Selling Securityholders agree to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of
the Company and the Selling Securityholders under this Agreement, including
all costs and expenses referred to in paragraphs (i) and (j) of Section 6
hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company or the Selling
Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by
reason of a default by any of the Underwriters, the Company will reimburse
the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling
Securityholders to deliver the Stock shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop
order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that in the event of any such
termination the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company and the
Selling Securityholders under this Agreement, including all costs and expenses
referred to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 7 of this Agreement, notwithstanding
the absence of a judicial determination as to the propriety and
enforceability of the obligations under this Section 11 and the possibility
that such payments
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might later be held to be improper; PROVIDED, HOWEVER, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving
such payments shall promptly refund them and (ii) such persons shall provide
to the Company, upon request, reasonable assurances of their ability to
effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and
the several Underwriters) indemnified under the provisions of said Section 7,
and their respective personal representatives, successors and assigns.
Nothing in this Agreement is intended or shall be construed to give to any
other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term successors and assigns as herein used shall not include any purchaser,
as such purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush
Street, San Francisco, California 94104; and if to the Company, shall be
mailed, telegraphed or delivered to it at its office, 200 First Avenue West,
Suite 500, Seattle, Washington 98119, Attention: Chief Financial Officer; and
if to the Selling Securityholders, shall be mailed, telegraphed or delivered
to the Selling Securityholders in care of F5 Networks, Inc., 200 First Avenue
West, Suite 500, Seattle, WA, 98119, Attention: Chief Financial Officer.
All notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties
and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or by
or on behalf of the Company or the Selling Securityholders or their
respective directors or officers, and (c) delivery and payment for the Stock
under this Agreement; PROVIDED, HOWEVER, that if this Agreement is terminated
prior to the Closing Date, the provision of paragraph (k) of Section 6 hereof
shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
16
<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
F5 NETWORKS, INC.
By
--------------------------------------
Jeffrey S. Hussey
President and Chief Executive Officer
Michael D. Almquist
By:
--------------------------------------
Jeffrey S. Hussey
Attorney-in-Fact
----------------------------------------
Jeffrey S. Hussey
Britannia Holdings Limited
By:
--------------------------------------
Jeffrey S. Hussey
Attorney-in-Fact
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC
DAIN RAUSCHER WESSELS, a division of Dain Rauscher Incorporated
By
------------------------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto
<PAGE>
[LETTERHEAD]
May 13, 1999
F5 Networks, Inc.
2-- First Avenue West, Suite 500
Seattle, WA 98119
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by F5 Networks, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") covering an underwritten public
offering of up to three million four hundred fifty thousand (3,450,000)
shares of Common Stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Articles of Incorporation and Bylaws, as currently in effect, and
the originals or copies certified to our satisfaction of such records,
documents, certificates, memoranda and other instruments as in our judgment
are necessary or appropriate to enable us to render the opinion expressed
below; (ii) assumed that the Second Amended and Restated Articles of
Incorporation, as set forth in Exhibit 3.2 of the Registration Statement,
shall have been duly approved and filed with the office of the Washington
Secretary of State; and (iii) that the shares of Common Stock will be sold
by the Underwriters at a price established by the Pricing Committee of the
Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and non-assessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included on the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ PATRICK A. POHLEN
------------------------------------
Patrick A. Pohlen
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated April 6, 1999 relating to the financial statements of F5
Networks, Inc., which appear in such Registration Statement. We also consent
to the references to us under the headings "Experts" and "Selected Financial
Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
May 13, 1999
