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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-75817
PROSPECTUS
3,000,000 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.
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Prior to this offering there has been no public market for the common stock.
Our shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol "FFIV."
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PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price....................................... $ 10.00 $30,000,000
Underwriting discounts and commissions.............................. $ 0.70 $2,100,000
Proceeds to F5, before expenses..................................... $ 9.30 $26,598,000
Proceeds to the selling shareholder, before expenses................ $ 9.30 $1,302,000
</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.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
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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
June 4, 1999
<PAGE>
EDGAR Artwork Descriptions
Inside Front Cover of Prospectus:
Caption 1:
Internet Quality Control
Caption 2:
Availability
Performance
Manageability
Graphic depicting F5 Networks logo surrounded by names and logos
of its current products and product under development:
Upper left hand quadrant caption:
BIG/ip logo and name
Upper right hand quadrant caption:
3DNS logo and name
Lower left hand quadrant caption:
Global/SITE logo with caption "under development" underneath
Lower right hand quadrant caption:
see/IT logo and name
F5 Networks logo
Inside Gatefold:
Upper left hand corner:
F5 Networks logo
Title: Availability, performance and control for mission-critical
Internet sites
Graphic depicting the role of the BIG/ip Controller, 3DNS Controller, see/IT
Network Management Console and global/SITE Controller in an organization's
Internet-based environment. In the graphic, an organization's Internet and
file servers are shown in multiple locations (Seattle, New York, London and
Tokyo) with the F5 products placed between the Internet servers and the
organization's routers. Dashed lines illustrate the interaction of the F5
products within the organizations's network.
Caption 1- upper left hand corner:
BIG/ip Controller name and logo
An intelligent load balancer for local area networks
Caption 2 - upper right hand corner
3DNS Controller name and logo
An intelligent load balancer for wide area networks
Caption 3 - lower right hand corner
See/IT Network Management Console name and logo
A traffic analysis and network management software application for
BIG/ip and 3DNS
Caption 4 - lower left hand corner:
Global/SITE Controller name and logo with caption "Under Development"
underneath
File replication and synchronization controller for managing content
across geographically dispersed Internet sites
Inside Back Cover:
F5 Networks logo with the following words underneath:
F5 Networks, Inc. provides integrated Internet traffic management solutions
designed to improve the availability and performance of mission-critical
Internet-based servers and applications
Page 31:
Illustration of redundant BIG/ip Controllers sitting between an
organization's server array and network
Page 32:
Illustration of 3DNS Controllers at multiple locations showing the
interaction of 3DNS with BIG/ip and an organization's network
<PAGE>
TABLE OF CONTENTS
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PAGE
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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.
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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
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THE OFFERING
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<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>
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(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.
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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
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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)
--------- ---------
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Weighted average shares--basic and diluted.... 14,201 14,412
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</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
ACTUAL AS ADJUSTED (2)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 2,460 $ 28,208
Working capital................................................................... 2,561 28,309
Total assets...................................................................... 8,516 34,264
Redeemable convertible preferred stock............................................ 7,688 --
Shareholders' equity (deficit).................................................... (3,681) 29,755
</TABLE>
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(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
the initial public offering price of $10.00 per share and the application of
the estimated net proceeds after deducting underwriting discounts and
commissions and our estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
6
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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 MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE.
Our quarterly operating results have varied significantly in the past and
will vary significantly in the future, which makes it difficult for us to
predict our future operating results. In particular, we anticipate that the size
of customer orders may increase as we continue to focus on larger business
accounts 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 75% 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
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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 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,
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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
19.1% 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.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED
MARKETING AND SALES, PROFESSIONAL SERVICES AND CUSTOMER SUPPORT PERSONNEL.
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 THE LOSS OF ANY KEY PERSONNEL MAY HARM OUR
BUSINESS AND RESULTS OF OPERATIONS.
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 services
of any of our key personnel, especially the services of Mr. Hussey, may
seriously harm our business and results of operations. We do not have employment
contracts with any of our key personnel.
IT IS DIFFICULT TO PREDICT OUR FUTURE OPERATING RESULTS BECAUSE 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.
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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.
OUR BUSINESS MAY BE HARMED IF OUR CONTRACT MANUFACTURERS ARE NOT ABLE TO PROVIDE
US WITH ADEQUATE SUPPLIES OF OUR PRODUCTS.
We rely on third party contract manufacturers to assemble our products. We
outsource the manufacturing of our 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."
OUR BUSINESS COULD SUFFER IF THERE ARE ANY INTERRUPTIONS OR DELAYS IN THE SUPPLY
OF HARDWARE COMPONENTS FROM OUR THIRD-PARTY SOURCES.
We currently purchase several hardware components used in the assembly of
our products from limited sources. Lead times for these components vary
significantly. Any interruption or delay in the supply of any of these hardware
components, or the inability to procure a similar component from alternate
sources at acceptable prices within a reasonable time, will seriously harm our
business and results of operations. 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.
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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.
WE MAY NEED TO RAISE ADDITIONAL FUNDS, WHICH MAY NOT BE AVAILABLE.
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
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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 WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER ALL
MATTERS REQUIRING SHAREHOLDER APPROVAL.
On completion of this offering, executive officers, directors and their
affiliates and 5% shareholders will beneficially own, in the aggregate,
approximately 72.3% 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. At the initial public offering price of $10.00, the
selling shareholders will realize appreciation of $1.4 million, or $10.00 per
share, or $5.6 million, or $9.54 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 $136.2 million, or $9.07 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 $8.34 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."
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
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 MAY SPEND THE OFFERING PROCEEDS IN WAYS WITH WHICH OUR SHAREHOLDERS MAY NOT
AGREE.
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 our shareholders may not agree. We cannot predict
that the proceeds will be invested to yield a favorable return. See "Use of
Proceeds."
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 $25,748,000 from the sale of 2,860,000
shares of common stock at the initial public offering price of $10.00 per share
after deducting underwriting commissions and discounts of $2,002,000 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, including increased expenditures for sales and
marketing, research and development and professional services and technical
support. We intend to use approximately $6.0 million from the net proceeds of
this offering to expand our sales and marketing capabilities, approximately $5.0
million to fund increases in our research and development activities and
approximately $3.0 million to expand our professional services and technical
support capabilities. 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.
The preceding allocations are only an estimate and the amounts that we
actually expend for working capital and general corporate purposes will vary
significantly depending on a number of factors, including future revenue growth
and the amount of cash we generate from operations. As a result, we will retain
broad discretion in the allocation and use of the net proceeds of this offering.
See "Risk Factors--We may spend the offering proceeds in ways with which our
shareholders may not agree."
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
the initial public offering price of $10.00 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 45,765
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 29,755
--------- ------- -------------
Total capitalization........................................ $ 4,007 $ 4,007 $ 29,755
--------- ------- -------------
--------- ------- -------------
</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 $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 the initial public offering price of $10.00 per share and after
deducting the 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 $29.7 million, or approximately $1.66 per share. This represents
an immediate increase in pro forma net tangible book value of $1.40 per share to
existing shareholders and an immediate dilution in net tangible book value of
$8.34 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>
Initial public offering price per share................................................... $ 10.00
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........... 1.40
---------
Pro forma net tangible book value per share after this offering........................... 1.66
---------
Dilution in net tangible book value per share to new investors............................ $ 8.34
---------
---------
</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 underwriting discounts and commissions and estimated offering expenses
payable by us, at the initial public offering price of $10.00 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% $13,963,000 32.8% $ 0.93
New investors.................................... 2,860,000 16.0% 28,600,000 67.2 10.00
--------- ----------- ---------- -----------
Total.................................... 17,877,469 100.0% $42,563,000 100.0%
--------- ----------- ---------- -----------
--------- ----------- ---------- -----------
</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 75% of
our revenues from sales of BIG/ip. One of our resellers, Exodus Communications,
accounted for 19.1% of our net revenues for the six months ended March 31, 1999
and 18.3% of our accounts receivable balance at 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. As of March 31, 1999, approximately 80% of our customers have
renewed their initial customer support contract. Based on our limited operating
history, it is difficult
18
<PAGE>
to predict what our rate of renewals will be in the future. We generally combine
the software license, installation, and customer support elements of our
products into a package with a single price. We allocate a portion of the sales
price to each element of the bundled package based on their respective fair
values when the individual elements are sold separately. 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. Our ordinary payment terms to our customers are net 30
days, but we have extended payment terms beyond net 30 days to some customers.
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.
19
<PAGE>
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 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.
20
<PAGE>
As our net revenue base increases, we do not believe we can sustain
percentage growth rates of net revenues that we have experienced historically.
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 5.9% of our product revenues for the six months ended March 31,
1998, and approximately 39.4% 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.
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<PAGE>
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.
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
22
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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.
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.
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<PAGE>
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 due to increased sales 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.
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<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 400 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 approximately 100 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.
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<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 19.1% 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 WebSystems, 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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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 $ 589,538 -- 177,750(2) -- $1,768,613
</TABLE>
- --------------------------
(1) Based on the initial public offering price of $10.00 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 Shareholders" 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.
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<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)....................................... 3,000,000 19.98 -- 3,000,000 16.78
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 (4)........................................... 1,687,852 11.24 -- 1,687,852 9.44
Kent L. Johnson (11)........................................ 384,000 2.55 -- 384,000 2.14
All directors and executive officers as a group (10 persons)
(12)...................................................... 6,739,930 44.00 -- 6,739,930 37.08
</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) The Duvall Trust is the sole shareholder of Britannia Holdings Limited. The
Elfin Trust Company Limited, a Guernsey corporation, is the trustee of the
Duvall Trust. Mr. Peter Howe is the trustee for the Elfin Trust Company
Limited. Includes 1,825,000 shares issuable upon exercise of warrants
exercisable within 60 days of March 31, 1999.
(4) 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.
(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 but does not include 400,000 shares held by Brian Dixon as trustee
of the Hussey Family Trust fbo Mr. Hussey's minor child and 48,000 shares
transferred to Mr. Hussey's brother in May 1999.
(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) 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.
(12) 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. All of these 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,
14,727,469 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
180 days................... 14,727,469 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 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.
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:
54
<PAGE>
- 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.................................. 990,000
BancBoston Robertson Stephens Inc........................ 605,000
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated........................................... 605,000
BT Alex. Brown Incorporated.............................. 80,000
Donaldson, Lufkin & Jenrette Securities Corporation...... 80,000
Lazard Freres & Co. LLC.................................. 80,000
PaineWebber Incorporated................................. 80,000
Salomon Smith Barney Inc................................. 80,000
Charles Schwab & Co., Inc................................ 80,000
William Blair & Co....................................... 40,000
Everen Securities, Inc................................... 40,000
First Albany Corporation................................. 40,000
Gerard Klauer Mattison & Co., Inc........................ 40,000
Jefferies & Company Inc.................................. 40,000
Ragen MacKenzie Incorporated............................. 40,000
William Smith Securities Incorporated.................... 40,000
SoundView Technology Group, Inc.......................... 40,000
----------------
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 are offering 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 $0.40 per share. The underwriters may allow and these dealers may re-allow a
concession not in excess of $0.10 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.
Three 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.
56
<PAGE>
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 all other shareholders of F5, including
executive officers and directors, who will own in the aggregate 14,877,469
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.
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 has been
determined by negotiation among F5, the selling shareholder and the
representatives. Among the factors that were considered in determining the
initial public offering price were 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.
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
57
<PAGE>
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.
58
<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................................... 605 130 667
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) (2,308) (851) (2,014)
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 19.1% 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 12,819,126 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
Sales returns................................................ 193 25 421
Cash paid for interest......................................... 19 30 12 1
</TABLE>
F-23
<PAGE>
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3,000,000 SHARES
[LOGO]
COMMON STOCK
-----------
PROSPECTUS
-----------
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
--------------
June 4, 1999
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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 JUNE 29, 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.
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