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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K/A
Amendment No. 2
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-26041
F5 Networks, Inc.
(Exact name of Registrant as specified in its charter)
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| WASHINGTON
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91-1714307 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
401 Elliott Ave West
Seattle, Washington 98119
(Address of principal executive offices)
(206) 272-5555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
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Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act Yes o No
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2
of the Exchange Act. (Check one)
Large Accelerated
Filer o
Accelerated
Filer þ
Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of March 31, 2005, the aggregate market value of the Registrant’s Common Stock held by
non-affiliates of the Registrant was $1,886,824,225 based on the closing sales price of the
Registrant’s Common Stock on the Nasdaq National Market on that date.
As of December 5, 2005, the number of shares of the Registrant’s Common Stock outstanding was
39,420,897.
DOCUMENTS
INCORPORATED BY REFERENCE
Information
required in response to Part III of Form 10-K
(Items 10, 11, 12, 13 and 14) is hereby incorporated by
reference to the specified portions of the Registrant’s
Definitive Proxy Statement for the Annual Shareholders Meeting held
on March 2, 2006.
EXPLANATION OF AMENDMENT
We are amending our Annual Report on Form 10-K for the fiscal year ended September 30, 2005,
which was originally filed on December 12, 2005 (the “Original Report”) and amended by our Annual
Report on Form 10-K/A, which was filed on December 15, 2005 (the “First Amendment”), to restate our
consolidated financial statements for the years ended September 30, 2005, 2004 and 2003 and the
related disclosures. This Form 10-K/A (this “Amendment”), also includes the restatement of selected
consolidated financial data as of and for the years ended September 30, 2005, 2004, 2003, 2002 and
2001, which is included in Item 6, and the unaudited quarterly financial data for each of the
quarters in the years ended September 30, 2005 and 2004, which is included in Item 8.
The restatement of the Original Report (as amended by the First Amendment) reflected in this
Amendment (collectively the “Restatement”) includes adjustments arising from the determinations of
a Special Committee of our Board of Directors, consisting of independent members of our Board of
Directors, which was formed in May 2006 to conduct an internal investigation into our past stock
option practices.
For more information on these matters, please refer to Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Restatement of Consolidated Financial
Statements, Special Committee and Company Findings, Internal
Controls, Remedial Measures and Related Proceedings,”
Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to the Consolidated
Financial Statements, and Item 9A, “Controls and Procedures.”
We have not amended and we do not intend to amend any of our other previously filed annual
reports on Form 10-K for the periods affected by the Restatement other than this
Amendment. As a result of the Restatement of our consolidated financial statements, we will also
restate the interim financial statements for the quarterly and year to date periods ended
December 31, 2005 and 2004, March 31, 2006 and 2005 and June 30, 2005 to be included in our quarterly
reports on Forms 10-Q for the periods ended December 31, 2005, March 31, 2006 and June 30, 2006.
For this reason, the consolidated financial statements and related financial information contained
in such previously filed reports should no longer be relied upon. Except for the sections of this
Amendment entitled “Restatement of Consolidated Financial Statements, Special Committee and Company
Findings, Internal Controls, Remedial Measures and Related Proceedings” and “Risk Factors”
(included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”), Item 3, “Legal Proceedings,” Item 9A, “Controls and Procedures,” and Note 2 and Note
12 (unaudited) of the Notes to Consolidated Financial Statements, all of the information in this
Amendment is as of September 30, 2005 and does not reflect events occurring after the date of the
Original Report, other than the First Amendment and the Restatement, or modify or update
disclosures (including the exhibits to the First Amendment, except for the updated Exhibits 31.1,
31.2, and 32.1 described below) affected by subsequent events.
For the convenience of the reader, this Amendment sets forth the Original Report (as amended
by the First Amendment) in its entirety, as amended by, and to reflect, the Restatement. The
following items have been amended principally as a result of, and to reflect, the Restatement, and
no other information in the Original Report (as amended by the First Amendment) is amended hereby
as a result of the Restatement:
Part I—Item 1—Business;
Part I—Item 3—Legal Proceedings;
Part II—Item 5—Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities;
Part II—Item 6—Selected Consolidated Financial Data;
Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part II—Item 8—Financial Statements and Supplementary Data;
Part II—Item 9A—Controls and Procedures; and
Part IV—Item 15—Exhibits and Financial Statement Schedules.
This Amendment should be read in conjunction with our periodic filings made with the SEC
subsequent to the date of the Original Report, including any
amendments to those filings, as well as any Current Reports filed on Form 8-K
subsequent to the date of the Original Report. In addition, in accordance with applicable SEC
rules, this Amendment includes updated certifications from our Chief Executive Officer (CEO) and
Chief Accounting Officer (CAO) as Exhibits 31.1, 31.2, and 32.1.
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F5 NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K/A
Amendment No. 2
For the Fiscal Year Ended September 30, 2005
Table of Contents
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Forward-Looking Statements
The statements contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A
of the Securities Act of 1933. These statements include, but are not limited to, statements about
our plans, objectives, expectations, strategies, intentions or other characterizations of future
events or circumstances and are generally identified by the words “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. Because these
forward-looking statements are subject to a number of risks and uncertainties, our actual results
could differ materially from those expressed or implied by these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those
discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Risk Factors,” below and in other documents we file from time to time with the
Securities and Exchange Commission. All forward-looking statements included in this report are
based on information available to us on the date hereof. Our business and the associated risks may
have changed since the date this report was originally filed with the SEC. We assume no obligation
to update any such forward-looking statements. Further, except for the forward-looking statements
included in Item 9A, “Controls and Procedures,” Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Restatement of Consolidated Financial Statements,
Special Committee and Company Findings, Internal Controls, Remedial
Measures and Related Proceedings” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk
Factors,” all forward-looking statements contained in this Amendment, unless they are specifically
otherwise stated to be made as of a different date, are made as of December 12, 2005, the filing
date of the Original Report. In addition, except for the sections of this Amendment entitled
“Restatement of Consolidated Financial Statements, Special Committee and Company Findings, Internal
Controls, Remedial Measures and Related Proceedings” and “Risk Factors” (included in Item 7 below), Item 3, “Legal
Proceedings,” Item 9A, “Controls and Procedures,” and Note 2, “Restatement of Consolidated
Financial Statements,” and Note 12, “Subsequent Events Related to the Special Committee and Company
Investigations and the Restatement (unaudited)”, of the Notes to Consolidated Financial Statements,
this Amendment does not reflect events occurring after the filing of the Original Report on
December 12, 2005, other than the Restatement, and we undertake no obligation to update the
forward-looking statements in this Amendment.
Item 1. Business
General
F5 Networks, Inc. is a leading provider of application delivery networking products that
improve the performance, availability and security of applications running on networks that use the
Internet Protocol (IP). IP traffic between servers running applications and clients using those
applications passes through our products where the content is inspected to ensure that it is
delivered securely and in a way that optimizes the performance and availability of both the network
and the applications.
Our BIG-IP products help manage IP traffic between network servers, clients and other devices
in a way that maximizes the availability, scalability and throughput of those network components
and the applications that run on them. Our complementary FirePass SSL VPN products let enterprises
provide anyone connected to the Internet with secure remote access to their corporate networks and
applications by leveraging standard Web browser technology. Our TrafficShield application firewall,
which is available as a stand-alone appliance and as a software module on BIG-IP, provides
content-based, application-level security against malicious attacks that network firewalls and
other security devices can’t prevent. Our BIG-IP products share a common full-proxy operating
system, TMOS, or Traffic Management Operating System, that enables them to inspect and modify
traffic flows to and from servers and has built-in functionality to secure, optimize and ensure the
availability of application traffic. Our application delivery networking products that are
integrated on the TMOS platform also share a common software interface called iControl, which
enables them to communicate with one another and allows them to be integrated with third party
products, including custom and commercial enterprise applications.
The flexibility of our software-based technology, the breadth of functionality available on
our products and the integration of that functionality through iControl and TMOS are
characteristics that we believe differentiate our products from other application delivery
networking products. These characteristics enable us to provide comprehensive solutions that
address many elements required for IP-based networks and business applications, including high
availability, high performance, intelligent traffic management, streamlined manageability,
bandwidth optimization, remote access to corporate networks, and network and application security.
In connection with our products, we offer a broad range of services including consulting, training,
installation, maintenance and other technical support services.
On October 4, 2005, we acquired Swan Labs, Inc., or Swan Labs, for $43 million in cash. As a
result of the transaction, we acquired all the assets of Swan Labs, including its principal
products, WANJet and WebAccelerator. WANJet devices are deployed in
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data centers and branch offices to speed up file transfers, email, and the performance of any
IP-based application that runs over a Wide Area Network (WAN). WebAccelerator works in concert with
WANJet to speed up the performance of IP-based enterprise applications running over WANs. The
acquisition of Swan Labs expands our product line and gives us broader access to the WAN
optimization and web acceleration markets.
We were incorporated on February 26, 1996 in the State of Washington. Our headquarters is in
Seattle, Washington and our mailing address is 401 Elliott Avenue West, Seattle, Washington 98119.
The telephone number at our executive offices is (206) 272-5555. We have subsidiaries or branch
offices in Australia, Canada, China, France, Germany, Hong Kong, Israel, Japan, Malaysia, Northern
Ireland, Russia, Singapore, South Korea, Taiwan, Thailand and the United Kingdom. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports are available free of charge on our website, www.f5.com, as soon as
reasonably practicable after such material is electronically filed with the Securities and Exchange
Commission. The information found on our Internet site is not part of this or any other report we
file with or furnish to the Securities and Exchange Commission.
Unless the context otherwise requires, in this Annual Report on Form 10-K, the terms “F5
Networks,” “the Company,” “we,” “us,” and “our” refer to F5 Networks, Inc. and its subsidiaries.
Our fiscal year ends on September 30 and fiscal years are referred to by the calendar year in which
they end. For example, “fiscal year 2005” and “fiscal 2005” refer to the fiscal year ended
September 30, 2005.
Industry Background
Internet Protocol (IP) is a communications language used to transmit data over the Internet.
Since the late 1990’s, businesses have responded to the power, flexibility and economy of the
Internet by deploying new IP-based applications, upgrading their client-server applications to new
IP-enabled versions, and enabling existing or legacy applications for use over the Internet. Over
the next several years, we believe this process will accelerate as more and more organizations
discover the benefits of deploying IP-enabled applications and new technologies continue to enhance
the performance, reliability and security of both applications and IP networks. In addition, we
believe the growth of Internet usage will continue to be driven by new applications such as Web
Services, Voice over IP, increased penetration of broadband Internet access, enabling the remote
use of more applications, and the increasing popularity of mobile Internet access through wireless
devices such as cellular telephones, PDAs and notebook computers.
Internet Architecture
IP requires all data transmitted across the Internet to be divided into packets at the source
and reassembled at the destination. The Open Systems Interconnect (OSI) Reference Model is the
framework that divides network functions into seven layers and specifies how the layers should
interact to enable all of a network’s different hardware and software components to work together
to accomplish this process. Prior to transmission, each packet of data is automatically given a
header that identifies the source and destination of the packet. This header information is used in
the OSI Model for the purposes of identifying, routing and sequencing data packets, and is stripped
from the data upon arrival at its destination. Layers 2-4 of the OSI Model perform standardized,
repetitive tasks such as ensuring that packets of information sent over the Internet arrive at the
destination to which they are addressed and are reassembled in the correct sequence. Consequently,
most Layer 2-4 switches are hardware-based devices that use application-specific integrated
circuits (ASICs) and are optimized for speed. Unlike Layers 2-4, Layer 7, which in practice
includes the functions ascribed to Layers 5 and 6 in the OSI model, is complex and variable and
must support end-user applications and processes on a wide variety of platforms and devices. While
most Layer 4 switches rely on hardware-based architectures to maximize throughput, the demands of
processing data at Layer 7 increasingly require flexibility and adaptability that can be achieved
only through a software-based solution. The challenge in building highly flexible, function-rich,
software-based switches for application delivery networking is to deliver these capabilities at
speeds that do not slow the speed of network traffic.
Application Delivery Networking
As more applications are IP-enabled, there is growing demand for Layer 7 technology that can
read the entire contents or flow of data in a packetized transmission and make intelligent
decisions based on a dynamic set of business rules about how to handle the transmission to make the
applications, network, and servers always secure, fast, and available. Basic Layer 7 functions
include load-balancing (distributing traffic across multiple servers while making them appear to be
a single server), and health-checking (monitoring the performance of servers and applications to
ensure that they are working properly before routing traffic to them). In addition, Layer 7
processing encompasses a growing number of functions that have typically been performed by the
server or the application itself, or by point solutions running on separate devices. Functions in
this category include: SSL Acceleration — using Secure Socket Layer (SSL) encryption to secure
traffic between the server and the browser on an end user’s client device; Rate
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Shaping — prioritizing transmissions according to preset rules that give precedence to
different types of traffic; Compression — reducing the volume of data transmitted to take maximum
advantage of available bandwidth; TCP Optimization — improving server efficiency by maintaining an
open connection with a server during interactive sessions; IPv6 Translation — enabling
communication and interoperability between networked devices using IPv6, the newest version of the
Internet Protocol, and those using the older version IPv4; and modifying the content of a
transaction to improve security.
In addition to optimizing the performance and availability of their networks and applications,
enterprises face the increasingly complex challenge of providing security for applications and data
that are accessible over their IP networks. Layer 7 or application level security includes three
basic components: providing employees, partners and customers with secure access to corporate
applications; ensuring that access is limited to those applications for which a user is
specifically authorized; and protecting the integrity of applications and data.
Currently, the most widespread solution for secure remote access is technology that uses the
IP Security (IPSec) Protocol to establish a secure virtual private network (VPN) between a remote
device, such as a user’s home PC or a laptop, and the corporate network. Although an IPSec VPN
tunnel is very secure, it has a number of drawbacks. One is that IPSec requires the remote device
to have special software installed on it, and maintaining the most current version of this software
on all user devices is time consuming and costly. A more serious issue is that once IPSec
establishes a connection between a user and the corporate network, the user has full access to any
application in the network and the only way to prevent unauthorized use is to secure each
application or physically segment the network. As an alternative to using IPSec VPNs for remote
access, technology that employs SSL encryption to establish a secure VPN has emerged and is making
rapid inroads in the market. Because this technology relies on the SSL capabilities resident in any
standard Web browser, it is not necessary to install additional software on the remote device. This
makes it possible to access the network from a cell phone, PDA, kiosk, laptop, PC, or any other
device with a standard browser. In addition, SSL VPN technology supports the creation of separate
VPN tunnels to each application for which a user is authorized. This allows enterprises to exercise
more control over who can gain access to various parts of the network and to specific applications.
Along with the need to provide secure connectivity between users and applications, enterprises
face an immediate and growing need to protect applications and other data center resources from
application-level security threats that pass through conventional firewalls and slip past intrusion
detection and prevention (IDS and IPS) devices. SQL Slammer Worm, a virus that infected millions of
servers in a matter of minutes and nearly shut down the Internet in January 2003, is a prime
example of how attacks are now focused at the application level. By exploiting characteristics of
the User Datagram Protocol (UDP) which allows direct transmission of data to a server, SQL Slammer
Worm slipped past network security devices disguised as a simple data request. Once inside the
application, the code rewrote the server’s own instructions, replicating and sending copies of
itself to thousands of other servers. Because it was a “day-zero” attack — i.e., a brand new threat
with no prior history — intrusion detection and prevention devices were not equipped with a
signature to identify the SQL Slammer Worm and were unable to prevent it.
In the wake of the SQL Slammer Worm and plagued by other malicious attacks, enterprises have
begun to look beyond traditional security measures for solutions that can detect and shut down
day-zero, application-level attacks. Under the general category of application security, F5’s
solutions apply a “positive” security model that contrasts with the “negative” security model used
by IDS and IPS devices. In a negative security model, incoming traffic is checked against a list of
signatures for known worms, viruses and other security threats, and if no match is found the
traffic is allowed to pass. In a positive security model, incoming traffic is checked against a set
of rules that define what specific elements are permissible in traffic headed for a particular
application and rejects traffic containing anything that does not conform to the rules. In the case
of SQL Slammer Worm, a positive security device would have recognized that the UDP packet carrying
the SQL Slammer Worm was not a simple data request and blocked the transmission.
Although products that incorporate a positive security model have been around for many years,
they have been inherently slow and this has limited their use to enterprises that have historically
placed a high priority on security. Now that application-level attacks threaten to paralyze global
business, there is growing demand among enterprises for application security that can ward off
these attacks. The challenge is to deliver products that apply a positive security model to
application traffic without slowing network performance.
Since most large enterprises have hundreds — if not thousands — of servers and applications,
it is not practical to build functions that optimize the performance, availability and security of
applications into the applications themselves. Even if it were, maintenance costs would be
prohibitive and the net result would be a negative impact on the overall performance of servers and
applications. Deploying point solutions in the network eliminates those problems but creates a new
set of challenges. Using point solutions from multiple vendors can create interoperability issues,
and problems that do occur can be difficult to troubleshoot. From a security standpoint, it is also
much more difficult to audit traffic passing through multiple devices. As a result, enterprise
customers are
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demanding products that integrate the growing number of Layer 7 application traffic management
and security functions on a single platform. In the past, we have referred to these functions
collectively as “application traffic management.” However, as the scope and complexity of functions
performed at Layer 7 has increased, we believe the term “application delivery networking” is more
apt to describe the components of our addressable market, which include application security,
application optimization and application availability.
The F5 Solution
We are a leading provider of application delivery networking products that ensure the
security, optimization and availability of applications for any user, anywhere. We believe our
products offer the most intelligent architecture and advanced functionality in the marketplace
along with performance, flexibility and usability features that help organizations improve the way
they serve their employees, customers, and partners while lowering operational costs.
Software Based Products. From inception, we have been committed to the belief that the
complexity of Layer 7 application delivery networking requires a software-based rather than a
hardware-based solution. We believe our modular software architecture enables us to deliver the
broadest range of integrated functionality in the market and facilitates the addition and
integration of new functionality. We also believe that integrating our software with commodity
hardware components enables us to build products that deliver superior performance, functionality
and flexibility at competitive prices.
Full Proxy Architecture. The core of our software technology is the Traffic Management
Operating System (TMOS) introduced in September 2004 as part of BIG-IP version 9. We believe this
is a major enhancement of our previous technology that enables BIG-IP version 9 to deliver
functionality that is superior on many levels to any other application delivery networking product
in the market. With TMOS, BIG-IP version 9 employs a full proxy architecture that enables it to
inspect, modify and direct both inbound and outbound traffic flows across multiple packets. This
ability to manage application traffic to and from servers enables BIG-IP version 9 to direct,
optimize and secure that traffic in ways that are not possible with other application delivery
networking solutions.
Modular Functionality. In addition to its full proxy architecture, TMOS is specifically
designed to facilitate the development and integration of application delivery networking functions
as modules that can be added to BIG-IP’s core functionality to keep pace with rapidly evolving
customer needs. Add-on modules currently available with BIG-IP version 9 include: Intelligent
Compression; SSL Acceleration; Layer 7 Rate Shaping; Advanced Client Authentication; IPv6 Gateway;
Caching; and others. Recently, we also began shipping TrafficShield, our application firewall, as a
software module on BIG-IP, and we are currently beta-testing Global Traffic Manager (GTM) and Link
Controller modules on BIG-IP systems at customer sites.
Application Awareness. The open architecture of TMOS includes an application programming
interface (API) called iControl that allows our products to communicate with one another and with
third-party software and devices. Through this unique feature, third-party applications and network
devices can take an active role in shaping IP network traffic, directing traffic based on exact
business requirements defined by our customers and solutions partners and tailored to specific
applications. This “application awareness” capability is one of the most important features of our
software-based products and further differentiates our solutions from those of our competitors.
Adaptive Intelligence. The full-proxy capabilities of TMOS enable it to inspect or “read” the
entire contents of a transmission across multiple packets and identify specific elements of that
transmission, including items such as names, dates, and any type of number or label. Using our
industry standard Tool Command Language (TCL) scripting capability, customers can use those
elements as variables to create iRules that modify the content and direct the flow of traffic in
ways tailored to the dynamic needs of their applications.
Integrated Layer 7 Solutions. The combination of our full proxy architecture and enhanced
iRules enables BIG-IP to intercept, inspect and act on the contents of traffic from virtually every
type of IP-enabled application. In addition, the modularity of the TMOS architecture allows us to
deliver tightly integrated solutions that secure, optimize and ensure the availability of
applications and the networks they run on.
Our TrafficShield Application Firewall, which we acquired in 2004, was originally designed to run on a full
proxy architecture and has recently been ported to TMOS. Using the full proxy capabilities of TMOS, TrafficShield inspects the contents
of a transmission and applies a positive security model to identify and neutralize embedded security threats by comparing the
contents with rules that define permissible content for specific applications.
This has enabled us to integrate the application security functions of TrafficShield
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with the security and networking features built into TMOS and with the application
optimization and availability functions that run on top of TMOS. As a result of this integration,
TrafficShield can run as a stand-alone product or as a software module on BIG-IP.
Like TrafficShield, our FirePass SSL-VPN products incorporate a full proxy architecture to
provide secure remote access to corporate networks. Incoming requests for access to the network are
terminated at the device where the user is authenticated and authorized to access specific
applications before the traffic is sent on to the servers that host those applications. Once the
connection is established, access is only permitted to those applications for which a user is
authorized, and all traffic between the user and the applications is encrypted and audited. We plan
to port the FirePass software to TMOS following the release of our next-generation hardware
platform. FirePass is currently integrated with our other products primarily through iControl.
During the next 12 months, we also plan to port the application acceleration and WAN
optimization technology we recently acquired from Swan Labs to TMOS and integrate it with our other
products.
Strategy
Our objective is to lead the industry in delivering the enabling architecture that integrates
the network with the applications. This allows organizations to significantly improve costly and
time consuming business processes and provide new sources of revenue through highly differentiated
offerings. Key components of our strategy include:
Offering a complete application security solution and product set. We plan to utilize the
core technologies from our BIG-IP, FirePass and TrafficShield products to deliver standalone and
integrated systems that protect applications from hostile and inadvertent threats, including
user-to-system application security and system-to-system application security problems. We believe
these solutions will differentiate our products in the security market and provide a unique
solution to the problem of vulnerability of mission-critical applications.
Investing in technology to continue to meet customer needs. We will continue to invest in
research and development to provide our customers with comprehensive, integrated application
traffic management and security solutions. Our product development efforts will continue to
leverage the unique attributes of our software-based platforms to deliver new features and
functions that address the complex and changing needs of our customers. We will continue to use
commodity hardware in order to ensure performance and cost competitiveness.
Enhancing the existing channel model. We are investing significant resources in order to
further develop our indirect sales channels. We plan to expand our indirect sales channels through
leading industry resellers, systems integrators, Internet service providers and other channel
partners. We are also recruiting new channel partners and leveraging our existing channels to sell
our new security products.
Continuing to build and expand relationships with strategic iControl partners. We plan to
capitalize on our strategic relationships with enterprise software vendors who have created
interfaces to our products through our iControl application programming interface. These vendors
provide us significant leverage in the selling process, because they recommend our products to
their customers. In order to differentiate ourselves further from our competitors we plan to
explore opportunities to further embed iControl into existing and new third party products and to
jointly market and sell our solutions to enterprise customers with these key partners.
Enhancing our brand. We plan to continue building brand awareness that positions us as one of
the leading providers of application delivery networking solutions. Our goal is to make the F5
brand to be synonymous with superior technology, high-quality customer service and ease of use.
Products
Our core technology is software for application delivery networking, including application
security and secure remote access. Our products are systems that integrate our software with
hardware that is built using a combination of commodity components and our own custom ASIC for
Layer 4 processing. Our current offerings include three product families: BIG-IP, FirePass and
TrafficShield. In addition, we recently acquired two new application optimization products—WANJet
and WebAccelerator-with the purchase of Swan Labs.
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BIG-IP
Our family of BIG-IP Local Traffic Managers includes both IP application switches and server
appliances. Members of the BIG-IP family differ primarily in the hardware configurations that make
up each system. Our current product family includes four application switches: high-end (BIG-IP
6800 and 6400), mid-range (BIG-IP 3400), and an entry-level (BIG-IP 1500). In addition to CPUs for
Layer 7 processing, all but the entry-level systems come equipped with our own proprietary ASIC for
high-performance Layer 4 processing, a commodity Layer 2-3 switch for connectivity, and commodity
ASICs for SSL encryption and decryption and compression. The BIG-IP 520 and 540 server appliances
are equipped with CPUs for high-speed Layer 4-7 processing and are designed to accommodate
easily-installed upgrade cards that provide fast, integrated SSL encryption and decryption.
Other products in our BIG-IP systems family include BIG-IP Global Traffic Manager, formerly
called 3-DNS Controller; BIG-IP ISP Traffic Manager, formerly called Link Controller; and
Application Accelerator, introduced in FY05. BIG-IP Global Traffic Manager allows enterprises with
geographically dispersed data centers to direct traffic to a particular data center in accordance
with customized business rules, or to redirect traffic to an available data center if one of their
sites becomes overloaded or is shut down for any reason. BIG-IP ISP Traffic Manager allows
enterprises with more than one Internet service provider to manage the use of their available
bandwidth to minimize costs while ensuring the highest quality of service. Application Accelerator
speeds up the performance and improves the bandwidth utilization of IP-based applications running
over wide area networks. All three products can be purchased separately as stand-alone systems or
bundled with BIG-IP Local Traffic Manager on a single system.
FirePass
Our FirePass systems provide SSL VPN access for remote users of IP networks and any
applications connected to those networks from any standard Web browser on any device. The
components of FirePass include a dynamic policy engine, which manages user authentication and
authorization privileges, and special components that enable corporations to give remote users
controlled access to the full array of applications and resources within the network.
Our FirePass line of SSL VPN servers currently includes the FirePass 1000 and the FirePass
4100, which support 100 and 2000 concurrent users, respectively. Both support the complete range of
FirePass software features and offer a comprehensive solution for secure remote access to corporate
applications. FirePass 1000 and 4100 are designed to support medium to large businesses.
TrafficShield
TrafficShield is a Web application firewall that provides comprehensive, proactive,
application-layer protection against both generalized and targeted attacks. TrafficShield employs a
positive security model (‘deny all unless allowed’) to permit only valid and authorized application
transactions. As a result, TrafficShield can prevent “day-zero” attacks and other types of security
threats that pass through traditional firewalls and signature-based devices such as intrusion
detection and intrusion prevention systems. TrafficShield is available as both a stand-alone system
and as an add-on software module for our BIG-IP product family.
WANJet
WANJet, acquired with the purchase of Swan Labs on October 4, 2005, combines WAN optimization
and traffic shaping in a single device to accelerate file transfers, email, data replication, and
other applications over IP networks. It provides LAN-like performance on any WAN, ensuring
predictable application performance for all users, and encrypts and secures all transfers without
performance penalties. WANJet is deployed as dual-sided (symmetric) solution that optimizes
application traffic to and from data centers and branch offices.
WebAccelerator
WebAccelerator, also acquired through our purchase of Swan Labs, speeds web transactions
end-to-end by optimizing individual network object requests, connections, and end-to-end
transactions from the browser through to databases. Installed single-sided (asymmetric) in the data
center, or dual-sided (symmetric) in the data center and in branch locations, WebAccelerator
enhances web application performance from any location, speeding up interactive performance,
improving download times, utilizing bandwidth more efficiently, and dramatically reducing the cost
and improving the response time of delivering Web-enabled applications to the distributed users.
Currently both WANJet and WebAccelerator run on Swan Labs’ SL400 hardware platform in the data
center and SL 200 platforms in branch locations. Over the next 12 to 18 months, we plan to port
both WANJet and WebAccelerator software to run on TMOS and our standard F5 hardware platforms and
to integrate their technology with our other products.
9
Enabling Technologies
Our application delivery networking products come equipped with iControl and iControl Services
Manager functions, which are designed to facilitate the broader use of our products. iControl
allows customers and independent software vendors to modify their programs to communicate with our
products, eliminating the need for human involvement, lowering the cost of performing basic network
functions and reducing the likelihood of error. Although we do not derive revenue from iControl
itself, the sale of iControl-enabled applications by independent software vendors such as Microsoft
and Oracle helps promote and often leads directly to the sale of our other products.
iControl Services Manager takes advantage of iControl to provide a single, centralized
management and operational interface for our devices. This feature allows customers with dozens or
hundreds of our products to upgrade or modify the software on those products simultaneously from a
single console. This lowers the cost and simplifies the task of deploying, managing and maintaining
our products and reduces the likelihood of error when blanket changes are implemented.
Product Development
We believe our future success depends on our ability to maintain technology leadership by
constantly improving our products and by developing new products to meet the changing needs of our
customers. Our product development group employs a standard process for the development,
documentation and quality control of software and systems that is designed to meet these goals.
This process includes working with management, product marketing, customers and partners to
identify new or improved solutions that meet the evolving needs of our addressable markets.
Our principal software engineering group is located in our headquarters in Seattle,
Washington. Our core FirePass product development team is located in San Jose, California. Our core
TrafficShield product development team is located in Tel Aviv, Israel. Our hardware engineering
group is located in Spokane, Washington. The primary product development facility for WANJet and
WebAccelerator is in San Jose, California. There is also a smaller development facility for these
products in Belfast, Northern Ireland. Members of these teams collaborate closely with one another
to ensure the interoperability and performance of our hardware and software systems. In fiscal
2006, we plan to relocate our San Jose development teams to a single facility.
During the fiscal years ended September 30, 2005, 2004 and 2003, we had research and product
development expenses of $31.5 million, $24.4 million and $19.5 million, respectively.
Customers
Our customers include a wide variety of enterprise customers (Fortune 1000 or Business Week
Global 1000 companies) including those in telecommunications, financial services, technology,
manufacturing, transportation and government. In fiscal year 2005, international sales represented
40.5% of our net revenues. Refer to note 10 of our consolidated financial statements included in
this annual report on Form 10-K for additional information regarding our revenues by geographic
area.
Consistent with our goal of building a strong channel sales model, the majority of our revenue
is generated by sales through our distributors and value-added resellers. For fiscal year 2005,
sales to Ingram Micro Inc., one of our distributors, represented 18.6% of our revenues. Our
agreement with Ingram Micro is a standard, non-exclusive distribution agreement that renews
automatically on an annual basis and is terminable by either party with 30 days’ prior written
notice. The agreement grants Ingram Micro the right to distribute our products to resellers in
North America and certain other territories internationally, with no minimum purchase requirements.
Sales and Marketing
Sales
We sell our products and services to large enterprise customers through a variety of channels,
including distributors, value-added resellers and systems integrators. A substantial amount of our
revenue for fiscal year 2005 was derived from these channel sales. We also sell our products and
services to major accounts through our own direct sales force. Our agreements with our channel
partners are not exclusive and do not prevent them from selling competitive products. These
agreements typically have terms of one year with no obligation to renew, and typically do not
provide for exclusive sales territories or minimum purchase requirements.
10
Direct sales. Our field sales personnel are located in major cities throughout the Americas;
Europe, the Middle East, and Africa (EMEA); Japan and the Asia Pacific region. The inside sales
team generates and qualifies leads for regional sales managers and helps manage accounts by serving
as a liaison between the field and internal corporate resources. We sell our products directly to a
limited group of customers, primarily large enterprise end-users whose accounts are managed by our
major account services team. Field systems engineers also support our regional sales managers and
channel partners by participating in joint sales calls and providing pre-sale technical resources
as needed.
Distributor and value-added reseller relationships. We have established relationships with
large national and international distributors, local and specialized distributors and value-added
resellers from which we derive the majority of our sales. The distributors sell our products, and
the value-added resellers not only sell our products, but also assist their customers in network
design, installation and testing. Our field sales personnel will work closely with our channel
partners to assist them, if necessary, in the selling of our products to their customers.
Systems integrators. We also market our products through strategic relationships we have with
systems integrators. Systems integrators leverage products like ours as a core component of
application or network-based solutions that they deploy for their customers. In most cases, systems
integrators do not directly purchase our products for resale to their customers. Instead they
typically recommend our products as part of a broader solution. An example of this approach would
be packaged enterprise resource platform, ERP, or customer relationship management, CRM, solutions
delivered by systems integrators where our traffic management products provide high availability
and increased performance for the ERP or CRM applications.
Marketing
There are two primary aspects to our marketing strategy. First, we believe our future success
depends on our ability to understand and anticipate the dynamic needs of our addressable markets
and that we develop valuable solutions to address those needs. Our marketing organization works
directly with customers, partners and our product development teams to identify and create
innovative solutions to further enhance our leadership position. The second aspect is to continue
to build upon our iControl strategy. We have established relationships with various independent
software vendors who have adapted their applications to interact with our products via the iControl
interface. iControl enhances the functionality of third party applications by enabling them to
control the network in an automated way, based on business policies and rules associated with the
application. As a result, customers who purchase iControl-enabled applications have an incentive to
purchase our products in order to take advantage of the enhanced functionality made possible
through our technical cooperation. We also offer an on-line community website called DevCentral
that provides technical resources to customers, prospects and partners wanting to extend and
optimize F5 solutions using iControl to meet their specific needs.
We also engage in a number of marketing programs and initiatives aimed at promoting our brand
and creating market awareness of our technology and products. These include actively participating
in industry trade shows and briefing industry analysts and members of the trade press on our latest
products, and on new business and technology partnerships. In addition, we market our products to
chief information officers and other information technology professionals through targeted
advertising, direct mail and high- profile Web events.
Backlog
At the end of fiscal years 2005 and 2004, we had product backlog of approximately $11.7
million and $10.6 million, respectively. Backlog represents orders confirmed with a purchase order
for products to be shipped generally within 90 days to customers with approved credit status.
Orders are subject to cancellation, rescheduling by customers or product specification changes by
the customers. Although we believe that the backlog orders are firm, purchase orders may be
cancelled by the customer prior to shipment without significant penalty. For this reason, we
believe that our product backlog at any given date is not a reliable indicator of future revenues.
Customer Service and Technical Support
We believe that our ability to provide consistent, high-quality customer service and technical
support is a key factor in attracting and retaining large enterprise customers. Accordingly we
offer a broad range of support services that include installation, phone support, hardware repair
and replacement, software updates, consulting and training services. We deliver these services
directly to end users and also utilize a multi-tiered support model, leveraging the capabilities of
our channel partners when applicable. Our technical support staff is strategically located in
regional service centers to support our global customer base.
11
Prior to the installation of our products, our services personnel work with customers to
analyze their network needs and determine the best way to deploy our products and configure product
features and functions to meet those needs. Our services personnel also provide on-site
installation and training services to help customers make optimal use of product features and
functions.
Our customers typically purchase a one-year maintenance contract which entitles them to an
array of services provided by our technical support team. Maintenance services provided under the
contract include online updates, software error correction releases, hardware repair and
replacement, and remote support through a 24 hours a day, 7 days a week help desk, although not all
service contracts entitle a customer to round-the-clock call center support. Updates to our
software are only available to customers with a current maintenance contract. Our technical support
team also offers seminars and training classes for customers on the configuration and use of
products, including local and wide area network system administration and management. In addition,
we have a professional services team able to provide a full range of fee-based consulting services,
including comprehensive network management, documentation and performance analysis, and capacity
planning to assist in predicting future network requirements.
We also offer, as part of our maintenance service, an online, automated, self-help customer
support function called Ask F5 that allows customers to answer many commonly asked questions
without having to call our support desk. This allows the customer to rapidly address issues and
questions, while significantly reducing the number of calls to our support desk. This enables us to
provide comprehensive customer support while keeping our support-related expenses at a manageable,
consistent level.
Manufacturing
We outsource the manufacturing of our pre-configured hardware platforms to contract
manufacturers, primarily Solectron Corporation, for assembly according to our specifications. The
contract manufacturers install our software onto the hardware platforms and conduct functionality
testing, quality assurance and documentation control prior to shipping our products. Our agreement
with Solectron allows them to procure component inventory on our behalf based upon a rolling
production forecast. Subcontractors supply Solectron with standard parts and components for our
products based on our production forecast. We are contractually obligated to purchase component
inventory that our contract manufacturer procures in accordance with the forecast, unless we give
notice of order cancellation in advance of applicable lead times. As protection against component
shortages and to provide replacement parts for our service teams, we also stock limited supplies of
certain key components for our products.
Hardware platforms for our products consist primarily of commodity parts and certain custom
components designed and approved by our hardware engineering group. Most of our components are
purchased from sources which we believe are readily available from other suppliers. However,
several components used in the assembly of our products are purchased from single or limited
sources such as our proprietary Layer 4 ASIC that is manufactured for us by a third party contract
semiconductor foundry.
Competition
As the increasing breadth of our product offerings has enabled us to address a broader array
of opportunities within the overall Application Delivery Networking market, our competition has
become more numerous and more diverse. Our principal competitor in the traffic management market is
Cisco Systems, Inc. Other competitors in this market include Nortel Networks Corporation, Juniper
Networks, Inc. (which acquired Redline Networks, Inc.), Citrix Systems, Inc. (which acquired
Netscaler), Foundry Networks, Inc. and Radware Ltd. In the adjacent WAN optimization and
application acceleration markets, we compete mainly with Juniper (which recently acquired Peribit
Systems), Cisco (which recently acquired FineGround), and increasingly Packeteer, Inc.
In the SSL VPN market, we compete with Juniper, Citrix, Aventail Corporation, Nokia, Nortel,
and Symantec and a number of smaller players. Because SSL VPNs are a potential replacement for
IPSec VPNs, the most widely deployed solution for secure remote access today, we also compete with
Check Point Software Technologies, Ltd. which along with Juniper are the market leaders in IPSec
VPNs.
Application firewalls represent an emerging market opportunity that is populated mainly by
private, early-development-stage companies. One of these companies, Teros, Inc., was recently
acquired by Citrix Systems. As we enter this market with our TrafficShield products, we anticipate
that we will also encounter competition from vendors of traditional firewalls and other types of
security devices, many of which are larger and better-known vendors than we are.
Some of our competitors have a longer operating history and greater financial, technical,
marketing and other resources than we do. These larger competitors also have a more extensive
customer base and broader customer relationships, including relationships
12
with many of our current and potential customers. In addition, many have large,
well-established, worldwide customer support and professional services organizations and a more
extensive direct sales force and sales channels. Because of our relatively smaller size, market
presence and resources, our larger competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. There is also the possibility
that these companies may adopt aggressive pricing policies to gain market share. As a result, our
competitors could undermine our ability to win new customers and maintain our existing customer
base.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We have obtained three
patents in the United States and have applications pending for various aspects of our technology.
Our future success depends in part on our ability to protect our proprietary rights to the
technologies used in our principal products. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. In addition, the laws of some foreign countries
do not protect our proprietary rights as fully as do the laws of the United States. We cannot
assure you that any issued patent will preserve our proprietary position, or that competitors or
others will not develop technologies similar to or superior to our technology. Our failure to
enforce and protect our intellectual property rights could harm our business, operating results and
financial condition.
In addition to our own proprietary software, we incorporate software licensed from several
third-party sources into our products. These licenses generally renew automatically on an annual
basis. We believe that alternative technologies for this licensed software are available both
domestically and internationally.
Employees
As of September 30, 2005, we employed 792 full-time persons, including 217 in product
development, 331 in sales and marketing, 147 in professional services and technical support and 97
in finance, administration and operations. None of our employees are represented by a labor union.
We have experienced no work stoppages and believe that our employee relations are good.
Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to our executive officers and
directors as of November 30, 2005:
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
John McAdam
|
|
|
54 |
|
|
President, Chief Executive Officer and Director |
Edward J. Eames
|
|
|
47 |
|
|
Senior Vice President of Business Operations |
M. Thomas Hull
|
|
|
46 |
|
|
Senior Vice President of Worldwide Sales |
Dan Matte
|
|
|
39 |
|
|
Senior Vice President of Marketing |
Jeff Pancottine
|
|
|
45 |
|
|
Senior Vice President and GM, Security Business Unit |
Andy Reinland
|
|
|
41 |
|
|
Senior Vice President and Chief Finance Officer |
Joann M. Reiter
|
|
|
48 |
|
|
Senior Vice President and General Counsel |
John Rodriguez
|
|
|
45 |
|
|
Senior Vice President and Chief Accounting Officer |
Karl Triebes
|
|
|
38 |
|
|
Senior Vice President of Product Development and Chief Technology Officer |
A. Gary Ames(2)(3)
|
|
|
61 |
|
|
Director |
Keith D. Grinstein(1)(2)(3)
|
|
|
45 |
|
|
Director |
Karl D. Guelich(1)(2)(3)
|
|
|
63 |
|
|
Director |
Alan J. Higginson(1)(3)
|
|
|
58 |
|
|
Chairman of the Board of Directors |
Rich Malone(3)
|
|
|
57 |
|
|
Director |
|
|
|
| (1) |
|
Member of the Audit Committee. |
| |
| (2) |
|
Member of the Compensation Committee. |
| |
| (3) |
|
Member of the Governance and Nominating Committee. |
John McAdam has served as our President, Chief Executive Officer and a director since July
2000. Prior to joining us, Mr. McAdam served as General Manager of the Web server sales business at
International Business Machines Corporation from
13
September 1999 to July 2000. From January 1995 until August 1999, Mr. McAdam served as the
President and Chief Operating Officer of Sequent Computer Systems, Inc., a manufacturer of high-end
open systems, which was sold to International Business Machines Corporation in September 1999. Mr.
McAdam holds a B.S. in Computer Science from the University of Glasgow, Scotland.
Edward J. Eames has served as our Senior Vice President of Business Operations since January
2001 and as our Vice President of Professional Services from October 2000 to January 2001. From
September 1999 to October 2000, Mr. Eames served as Vice President of e-Business Services for
International Business Machines Corporation. From June 1992 to September 1999, Mr. Eames served as
the European Services Director and the Worldwide Vice President of Customer Service for Sequent
Computer Systems, Inc., a manufacturer of high-end open systems. Mr. Eames holds a Higher National
Diploma in Business Studies from Bristol Polytechnic and in 1994 completed the Senior Executive
Program at the London Business School.
14
M. Thomas Hull has served as our Senior Vice President of Worldwide Sales since October 2003.
Prior to joining us, Mr. Hull served as President and Chief Executive Officer of Picture IQ
Corporation from April 2001 to October 2003. From September 1998 through April 1999, he served as
Vice President of Corporate Sales for Visio Corporation. From April 1999 to January 2000, he served
as Senior Vice President of Worldwide Sales for Visio Corporation through its acquisition by
Microsoft Corporation in January 2000. From January 2000 through July 2000, Mr. Hull continued to
oversee sales of the Visio product set for Microsoft Corporation. He holds a B.S. in Electrical
Engineering from the University of Washington.
Dan Matte has served as our Senior Vice President of Marketing since June 2004, and as Vice
President of Product Marketing and Management from March 2002 through May 2004. He has served as
our Senior Director of Product Marketing and Management from February 2001 through February 2002.
From March 1999 to February 2001, Mr. Matte served as our Director of Product Management. He holds
a Bachelor of Commerce from Queens’s University and an MBA from the University of British Columbia.
Jeff Pancottine has served as our Senior Vice President and General Manager of our Security
Business Unit since June 2004 and as Senior Vice President of Marketing and Business Development
since October 2000. Prior to joining us, Mr. Pancottine served as Senior Vice President of Sales
and Marketing for the Media Systems Division of Real Networks, Inc., from April 2000 to October
2000. Prior to that, Mr. Pancottine was the Vice President of Business Marketing at Intel
Corporation, from November 1999 to April 2000. From June 1997 to November 1999, Mr. Pancottine held
the position of Vice President of Global Marketing at Sequent Computer Systems, Inc. Mr. Pancottine
holds a Master of Engineering in Computer Science from Cornell University, and a B.S. in Computer
Science from the University of California at Riverside. Mr.
Pancottine terminated his employment with us in early 2006.
Andy Reinland was promoted to Senior Vice President and Chief Finance Officer effective
October 25, 2005. Reinland joined F5 in 1998, serving as a senior financial analyst and, most
recently, Vice President of Finance. Prior to joining F5, Reinland was Chief Financial Officer for
RTIME, Inc., a developer of real-time 3D software for Internet applications, which was acquired by
Sony. Mr. Reinland started his career in public accounting. Mr. Reinland holds a B.A. in Business
from Washington State University.
Joann M. Reiter was promoted to Senior Vice President and General Counsel in October 2005 and
prior to that had served as our Vice President and General Counsel since April 2000 and as General
Counsel from April 1998 through April 2000. She has served as our Corporate Secretary since June
1999. Prior to joining us, Ms. Reiter served as Director of Operations for Excell Data Corporation,
an information technology consulting and system integration services company from September 1997
through March 1998. From September 1992 through September 1997 she served as Director of Legal
Services and Business Development for CellPro, Inc. a medical device manufacturer. She holds a J.D.
from the University of Washington and is a member of the Washington State Bar Association. Ms.
Reiter tendered her resignation effective as of November 22, 2006.
John Rodriguez was promoted to Senior Vice President and Chief Accounting Officer effective
October 25, 2005. For SEC reporting purposes, Mr. Rodriguez is the principal financial officer.
Rodriguez joined F5 in 2001 as Corporate Controller. His most recent position held was Vice
President and Corporate Controller. Prior to F5, Rodriguez was Vice President and Chief Financial
Officer of CyberSafe, a security solutions company, and Senior Director of Finance and Operations
at Mosaix, which was acquired by Lucent Technologies. Mr. Rodriguez started his career in public
accounting. Mr. Rodriguez holds a B.A. in Business from the University of Washington.
Karl Triebes has served as our Senior Vice President of Product Development and Chief
Technology Officer since August 2004. Prior to joining us, Mr. Triebes served as Chief Technology
Officer and Vice President of Engineering of Foundry Networks, Inc. from January 2003 to August
2004. From June 2001 to January 2003, he served as Foundry’s Vice President of Hardware
Engineering. From May 2000 to June 2001, Mr. Triebes was Vice President of Engineering at Alcatel
U.S.A., a telecommunications company. From December 1999 to May 2000, he was Assistant Vice
President of Newbridge Networks Corp., a networking company subsequently acquired by Alcatel. Mr.
Triebes holds a B.S. in Electrical Engineering from San Diego State University.
A. Gary Ames was appointed as one of our directors in July 2004. Mr. Ames served as President
and Chief Executive Officer of MediaOne International, a provider of broadband and wireless
communications from July 1995 until his retirement in June of 2000. From January 1990 to July 1995,
he served as President and Chief Executive Officer of U S West Communications, a regional provider
of residential and business telephone services, and operator and carrier services. Mr. Ames also
serves as director of Albertsons, Inc., Tektronix, Inc., Pac-West Telecomm, Inc. and iPass, Inc.
Keith D. Grinstein has served as one of our directors since December 1999. He also serves as
board chair for Coinstar, Inc., a coin counting machine company, and as lead outside director for
Nextera, Inc. an economics-consulting firm. Mr. Grinstein is a partner of Second Avenue Partners,
LLC, a venture capital fund. Mr. Grinstein’s past experience includes serving as President, Chief
Executive Officer and Vice Chair of Nextel International Inc., and as President and Chief Executive
Officer of the Aviation Communications Division of AT&T Wireless Services Inc. Mr. Grinstein holds
a B.A. from Yale University and a J.D. from Georgetown University.
15
Karl D. Guelich has served as one of our directors since June 1999 and as board chair from
January 2003 through April 2004. Mr. Guelich has been in private practice as a certified public
accountant since his retirement from Ernst & Young LLP in 1993, where he served as the Area
Managing Partner for the Pacific Northwest offices headquartered in Seattle from October 1986 to
November 1992. Mr. Guelich holds a B.S. in Accounting from Arizona State University.
Alan J. Higginson has served as board chair since April 2004, and as one of our directors
since May 1996. Mr. Higginson has been the President and Chief Executive Officer of Hubspan, Inc.,
an e-business infrastructure provider, since August 2001. From November 1995 to November 1998, Mr.
Higginson served as President of Atrieva Corporation, a provider of advanced data backup and
retrieval technology. Mr. Higginson holds a B.S. in Commerce and an M.B.A. from the University of
Santa Clara.
Rich Malone has served as one of our directors since August 2003. Mr. Malone has been the
Chief Information Officer of Edward Jones Investments Inc. since 1979, when he joined Edward Jones
Investments as a General Principal. In 1985, he became a member of the management committee of
Edward Jones Investments. Mr. Malone is currently a member of the BITS Advisory Group, the Xerox
Executive Advisory Forum and serves on the Technology Advisory Committee at Arizona State
University.
Item 2. Properties
Our principal administrative, sales, marketing, research and development facilities are
located in Seattle, Washington and consist of approximately 195,000 square feet. In April 2000, we
amended and restated the lease agreement on two buildings for our corporate headquarters. The lease
commenced in July 2000 on the first building; and the lease on the second building commenced in
September 2000. The lease for both buildings expires in 2012 with an option for renewal. The lease
for the second building has been fully subleased through 2012. We believe that our existing
properties are in good condition and suitable for the conduct of our business. We also lease office
space for our product development personnel in Spokane, Washington, San Jose, California, Israel,
Northern Ireland, and Russia and for our sales and support personnel in Washington D.C., New York,
Hong Kong, Singapore, China, Taiwan, Malaysia, South Korea, Japan, Australia, Germany, France, and
the United Kingdom. We believe that our future growth can be accommodated by current facilities or
by leasing additional space if necessary.
Item 3. Legal Proceedings
In July and August 2001, a series of putative securities class action lawsuits were filed in
United States District Court, Southern District of New York against certain investment banking
firms that underwrote the Company’s initial and secondary public offerings, the Company and some of
the Company’s officers and directors. These cases, which have been consolidated under In re F5
Networks, Inc. Initial Public Offering Securities Litigation, No. 01 CV 7055, assert that the
registration statements for the Company’s June 4, 1999 initial public offering and September 30,
1999 secondary offering failed to disclose certain alleged improper actions by the underwriters for
the offerings. The consolidated, amended complaint alleges claims against the Company and those of
our officers and directors named in the complaint under Sections 11 and 15 of the Securities Act of
1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Other lawsuits
have been filed making similar allegations regarding the public offerings of more than 300 other
companies. All of these various consolidated cases have been coordinated for pretrial purposes as
In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. In October 2002,
the directors and officers were dismissed without prejudice. The issuer defendants filed a
coordinated motion to dismiss these lawsuits in July 2002, which the Court granted in part and
denied in part in an order dated February 19, 2003. The Court declined to dismiss the Section 11
and Section 10(b) and Rule 10b-5 claims against the Company. In June 2004, a stipulation of
settlement for the claims against the issuer defendants, including the Company, was submitted to
the Court. On August 31, 2005, the Court granted preliminary approval of the settlement. The
settlement is subject to a number of conditions, including final approval by the Court. If the
settlement does not occur, and litigation against us continues, we believe we have meritorious
defenses and intend to defend the case vigorously. Securities class action litigation could result
in substantial costs and divert our management’s attention and resources. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation,
and any unfavorable outcome could have a material adverse impact on our business, financial
condition and operating results.
As of September 30, 2005 we were not aware of any additional pending legal proceedings that,
individually or in the aggregate, would have had a material adverse effect on the Company’s
business, operating results, or financial condition. We may in the future be party to litigation
arising in the ordinary course of business, including claims that we allegedly infringe upon
third-party trademarks or other intellectual property rights. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial resources.
16
See Note 12, “Subsequent Events Related to the Special Committee and Company Investigations
and the Restatement,” of the Notes to Consolidated Financial Statements for more
information regarding legal and regulatory proceedings that arose following September 30, 2005.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of the shareholders during the fourth quarter of fiscal
2005.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on The Nasdaq Global Market under the symbol “FFIV.” As described
in Note 12, “Subsequent Events Related to the Special Committee and Company Investigations and the
Restatement”, of the Notes to Consolidated Financial Statements, on August 14, 2006, we
received a written Staff Determination Notice from The Nasdaq Stock Market (“Nasdaq”) stating that
we were not in compliance with Nasdaq’s Marketplace Rule 4310(c)(14) and that our securities were
subject to delisting. We appealed this determination with the Nasdaq Listings Qualifications Panel
(“Panel”), and the Panel granted our request for continued listing on the Nasdaq Stock Market,
subject to certain conditions we expect to satisfy within the time period request by the Panel.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year 2005 |
|
Fiscal Year 2004 |
| |
|
High |
|
Low |
|
High |
|
Low |
First Quarter |
|
$ |
49.79 |
|
|
$ |
30.47 |
|
|
$ |
27.45 |
|
|
$ |
19.25 |
|
Second Quarter |
|
$ |
59.12 |
|
|
$ |
41.25 |
|
|
$ |
39.21 |
|
|
$ |
25.13 |
|
Third Quarter |
|
$ |
54.01 |
|
|
$ |
41.30 |
|
|
$ |
35.60 |
|
|
$ |
21.85 |
|
Fourth Quarter |
|
$ |
51.25 |
|
|
$ |
35.34 |
|
|
$ |
31.28 |
|
|
$ |
21.40 |
|
The last reported sales price of our common stock on the Nasdaq National Market on December 5,
2005 was $53.07.
As of December 5, 2005, there were 105 holders of record of our common stock. As many of our
shares of common stock are held by brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of beneficial holders of our common stock represented by these
record holders.
Dividend Policy
Our policy has been to retain cash to fund future growth. Accordingly, we have not paid
dividends and do not anticipate declaring dividends on our common stock in the foreseeable future.
Unregistered Securities Sold in 2005
We did not sell any unregistered shares of our common stock during the fiscal year 2005.
17
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with the consolidated
financial statements and notes thereto and with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and other financial data included elsewhere in this report.
The restated consolidated balance sheet data as of September 30, 2005 and 2004 and the restated
consolidated statement of operations data for the years ended September 30, 2005, 2004 and 2003 are
derived from our audited financial statements and related notes that are included elsewhere in this
report. The restated consolidated balance sheet data as of September 30, 2003, 2002, and 2001 and
the restated consolidated statement of operations for the years ended September 30, 2002 and 2001
has been restated to conform to the financial statements included in this Form 10-K/A and has been
derived from our unaudited financial statements and related notes which are not included in this
report. Our historical results of operations are not necessarily indicative of results of
operations to be expected for any future period.
See Management’s Discussion and Analysis and Note 2, “Restatement of Consolidated Financial
Statements,” of the Notes to Consolidated Financial Statements for more detailed information
regarding the restatement of our consolidated financial statements for the years ended September
30, 2005, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(In thousands, except per share data) |
|
| |
|
As restated |
|
|
As restated |
|
|
As restated |
|
| Consolidated Statement of Operations Data: |
|
(1) |
|
|
(1) |
|
|
(1) |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
219,603 |
|
|
$ |
126,169 |
|
|
$ |
84,197 |
|
Services |
|
|
61,807 |
|
|
|
45,021 |
|
|
|
31,698 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
281,410 |
|
|
|
171,190 |
|
|
|
115,895 |
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
48,990 |
|
|
|
28,406 |
|
|
|
17,843 |
|
Services |
|
|
16,194 |
|
|
|
10,993 |
|
|
|
9,132 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
65,184 |
|
|
|
39,399 |
|
|
|
26,975 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
216,226 |
|
|
|
131,791 |
|
|
|
88,920 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
89,866 |
|
|
|
66,446 |
|
|
|
54,897 |
|
Research and development |
|
|
31,516 |
|
|
|
24,438 |
|
|
|
19,455 |
|
General and administrative |
|
|
25,486 |
|
|
|
15,761 |
|
|
|
12,210 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
146,868 |
|
|
|
106,645 |
|
|
|
86,562 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
69,358 |
|
|
|
25,146 |
|
|
|
2,358 |
|
Other income, net |
|
|
8,076 |
|
|
|
2,731 |
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
77,434 |
|
|
|
27,877 |
|
|
|
3,109 |
|
Provision (benefit) for income taxes |
|
|
30,532 |
|
|
|
(8,451 |
) |
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
46,902 |
|
|
$ |
36,328 |
|
|
$ |
2,256 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share —basic |
|
$ |
1.26 |
|
|
$ |
1.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — basic |
|
|
37,220 |
|
|
|
33,221 |
|
|
|
26,453 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — diluted |
|
$ |
1.21 |
|
|
$ |
1.01 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — diluted |
|
|
38,761 |
|
|
|
35,961 |
|
|
|
28,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and short-term
investments(3) |
|
$ |
236,181 |
|
|
$ |
140,501 |
|
|
|
|
|
Restricted cash(4) |
|
|
3,871 |
|
|
|
6,243 |
|
|
|
|
|
Long-term investments(3) |
|
|
128,834 |
|
|
|
81,792 |
|
|
|
|
|
Total assets |
|
|
537,739 |
|
|
|
360,593 |
|
|
|
|
|
Long-term liabilities |
|
|
9,964 |
|
|
|
6,228 |
|
|
|
|
|
Total shareholders’ equity |
|
|
460,167 |
|
|
|
307,745 |
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to
Consolidated Financial Statements. |
| |
| (2) |
|
Amortization of unearned compensation reported in fiscal years 2001 through fiscal 2004 has
been reclassified to conform to the current year’s presentation. Specifically, amounts have
been attributed to the respective categories within operating expenses. |
| |
| (3) |
|
The combined overall increase in cash, cash equivalents, short-term and long-term investments
in fiscal 2004 was primarily due to the net proceeds of $113.6 million received from the sale
of our common stock in a public offering in November 2003. |
| |
| (4) |
|
Restricted cash represents escrow accounts established in connection with lease agreements
for our facilities. |
18
See Management’s Discussion and Analysis and Note 2, “Restatement of Consolidated
Financial Statements,” of the Notes to Consolidated Financial Statements for more detailed
information regarding the restatement of our consolidated financial statements for the years ended
September 30, 2002 and 2001.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2002 |
|
|
2001 |
|
| |
|
(In thousands, except per share data) |
|
| |
|
As reported |
|
|
Adjustments |
|
|
As restated |
|
|
As reported |
|
|
Adjustments |
|
|
As restated |
|
| |
|
|
|
|
|
(3) |
|
|
(1) |
|
|
|
|
|
|
(3) |
|
|
(1) |
|
| Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
82,566 |
|
|
$ |
— |
|
|
$ |
82,566 |
|
|
$ |
78,628 |
|
|
$ |
— |
|
|
$ |
78,628 |
|
Services |
|
|
25,700 |
|
|
|
— |
|
|
|
25,700 |
|
|
|
28,739 |
|
|
|
— |
|
|
|
28,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
108,266 |
|
|
|
— |
|
|
|
108,266 |
|
|
|
107,367 |
|
|
|
— |
|
|
|
107,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
20,241 |
|
|
|
316 |
|
|
|
20,557 |
|
|
|
33,240 |
|
|
|
500 |
|
|
|
33,740 |
|
Services |
|
|
10,238 |
|
|
|
— |
|
|
|
10,238 |
|
|
|
12,265 |
|
|
|
|
|
|
|
12,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
30,479 |
|
|
|
316 |
|
|
|
30,795 |
|
|
|
45,505 |
|
|
|
500 |
|
|
|
46,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
77,787 |
|
|
|
(316 |
) |
|
|
77,471 |
|
|
|
61,862 |
|
|
|
(500 |
) |
|
|
61,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
50,786 |
|
|
|
2,887 |
|
|
|
53,673 |
|
|
|
51,199 |
|
|
|
3,467 |
|
|
|
54,666 |
|
Research and development |
|
|
18,104 |
|
|
|
1,006 |
|
|
|
19,110 |
|
|
|
17,715 |
|
|
|
1,479 |
|
|
|
19,194 |
|
General and administrative |
|
|
15,164 |
|
|
|
1,039 |
|
|
|
16,203 |
|
|
|
20,689 |
|
|
|
1,550 |
|
|
|
22,239 |
|
Restructuring charges |
|
|
3,274 |
|
|
|
— |
|
|
|
3,274 |
|
|
|
975 |
|
|
|
— |
|
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
87,328 |
|
|
|
4,932 |
|
|
|
92,260 |
|
|
|
90,578 |
|
|
|
6,496 |
|
|
|
97,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(9,541 |
) |
|
|
(5,248 |
) |
|
|
(14,789 |
) |
|
|
(28,716 |
) |
|
|
(6,996 |
) |
|
|
(35,712 |
) |
Other income, net |
|
|
1,420 |
|
|
|
— |
|
|
|
1,420 |
|
|
|
2,021 |
|
|
|
|
|
|
|
2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(8,121 |
) |
|
|
(5,248 |
) |
|
|
(13,369 |
) |
|
|
(26,695 |
) |
|
|
(6,996 |
) |
|
|
(33,691 |
) |
Provision (benefit) for income taxes |
|
|
489 |
|
|
|
— |
|
|
|
489 |
|
|
|
4,095 |
|
|
|
— |
|
|
|
4,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(8,610 |
) |
|
$ |
(5,248 |
) |
|
$ |
(13,858 |
) |
|
$ |
(30,790 |
) |
|
$ |
(6,996 |
) |
|
$ |
(37,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share —basic |
|
$ |
(0.34 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.55 |
) |
|
$ |
(1.36 |
) |
|
$ |
(0.31 |
) |
|
$ |
(1.67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — basic |
|
|
25,323 |
|
|
$ |
— |
|
|
|
25,323 |
|
|
|
22,644 |
|
|
$ |
— |
|
|
|
22,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — diluted |
|
$ |
(0.34 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.55 |
) |
|
$ |
(1.36 |
) |
|
$ |
(0.31 |
) |
|
$ |
(1.67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — diluted |
|
|
25,323 |
|
|
$ |
— |
|
|
|
25,323 |
|
|
|
22,644 |
|
|
$ |
— |
|
|
|
22,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of September 30, |
| |
|
2003 |
|
2002 |
|
2001 |
| |
|
(In thousands) |
| |
|
As reported |
|
As reported |
|
As reported |
| Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash
equivalents, and
short-term investments(3) |
|
$ |
44,878 |
|
|
$ |
80,333 |
|
|
$ |
69,783 |
|
Restricted cash(4) |
|
|
6,000 |
|
|
|
6,000 |
|
|
|
6,000 |
|
Long-term investments(3) |
|
|
34,132 |
|
|
|
1,346 |
|
|
|
— |
|
Total assets |
|
|
148,173 |
|
|
|
126,289 |
|
|
|
124,663 |
|
Long-term liabilities |
|
|
1,735 |
|
|
|
1,315 |
|
|
|
1,167 |
|
Total shareholders’ equity |
|
|
110,429 |
|
|
|
93,685 |
|
|
|
96,488 |
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to
Consolidated Financial Statements. |
| |
| (2) |
|
Amortization of unearned compensation reported in fiscal years 2001 through fiscal 2004 has
been reclassified to conform to the current year’s presentation. Specifically, amounts have
been attributed to the respective categories within operating expenses. |
| |
| (3) |
|
The adjustments recorded in fiscal 2002 and 2001 consist of amortization of unearned
compensation that was a result of the Restatement discussed in Note 2, “Restatement of
Consolidated Financial Statements,” of the Notes to the Consolidated Financial Statements. |
| |
| (4) |
|
Restricted cash represents escrow accounts established in
connection with lease agreements for our facilities. |
Supplemental Unaudited Information Regarding Restatement Adjustments
The supplemental unaudited information presented below has been included to facilitate an
understanding of the components of the Restatement adjustments to retained earnings at September 31, 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cumulative effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
restatement on |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
years prior to 2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
|
1999 |
|
Stock-based
compensation
expense |
|
$ |
20,234 |
|
|
$ |
5,248 |
|
|
$ |
6,996 |
|
|
$ |
7,826 |
|
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has not amended and does not intend to amend any of its previously filed Annual
Reports on Form 10-K for the periods prior to October 1, 2002 affected by the Restatements. The
additional compensation expense of approximately $20.2 million was incurred in fiscal years prior
to the years associated with the audited consolidated financial statements presented herein.
Retained earnings at September 30, 2002 was restated to reflect the after-tax effects of
adjustments to stock-based compensation expenses for fiscal years 1999 through 2002.
19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The statements contained below that are not purely historical are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. These statements include, but are not limited to, statements about our
plans, objectives, expectations, strategies, intentions or other characterizations of future events
or circumstances and are generally identified by the words “expects,” “anticipates,” “intends,”
“plans,” “believes,” “seeks,” “estimates,” and similar expressions. Because these forward-looking
statements are subject to a number of risks and uncertainties, our actual results could differ
materially from those expressed or implied by these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those discussed under the
heading “Risk Factors” below and in other documents we file from time to time with the Securities
and Exchange Commission. All forward-looking statements set forth below are based on information
available to us on the date hereof. Our business and the associated risks may have changed since
the date this report was originally filed with the SEC. We assume no obligation to update any such
forward-looking statements. Further, except for the forward-looking statements included in Item
9A, “Controls and Procedures,” and under the headings “Restatement of Consolidated Financial
Statements, Special Committee and Company Findings, Internal
Controls, Remedial Measures and Related Proceedings” and
“Risk Factors” in this Item 7, all forward-looking statements contained in this Amendment, unless
they are specifically otherwise stated to be made as of a different date, are made as of December
12, 2005, the filing date of the Original Report. In addition, except for the sections of this
Amendment entitled “Restatement of Consolidated Financial Statements, Special Committee and Company
Findings, Internal Controls, Remedial Measures and Related Proceedings” and “Risk Factors”
(included in this Item 7 below), Item 3, “Legal Proceedings,” Item 9A, “Controls and Procedures,”
and Note 2, “Restatement of Consolidated Financial Statements,” and Note 12, “Subsequent Events
Related to Special Committee and Company Investigations and the Restatement (unaudited)”, of the
Notes to Consolidated Financial Statements, this Amendment does not reflect events occurring after
the filing of the Original Report filed on December 12, 2005, other than the Restatement, and we
undertake no obligation to update the forward-looking statements in this Amendment.
The discussion and analysis set forth below in this Item 7 has been amended to reflect the
Restatement as described above in the Explanation of Amendment to this Amendment and in Note 2,
“Restatement of Consolidated Financial Statements,” to the Notes to Consolidated Financial
Statements. For this reason, the data set forth in this section may not be comparable to
discussions and data in our previously filed Annual Reports on Form 10-K.
Restatement of Consolidated Financial Statements, Special Committee and Company Findings, Internal
Controls, Remedial Measures and Related Proceedings
Restatement of Consolidated Financial Statements
On May 16, 2006, the Center for Financial Research and Analysis (“CFRA”) issued a report
entitled “Options Backdating, Which Companies Are At Risk?” (the “CFRA Report”) in which CFRA
reviewed the option prices of 100 public companies and, based upon an analysis of the exercise
prices of option grants with reference to the companies’ stock prices, concluded that 17% of the
subject companies were, in CFRA’s view, “at risk for having backdated option grants during the
period 1997 to 2002.” We were among the 17 companies so identified.
On May 18, 2006, we were contacted by the Securities and Exchange Commission (“SEC”) as part
of an informal inquiry entitled In the Matter of F5 Networks, Inc. (SEC File No. MHO-10462). On
May 19, 2006, we received a grand jury subpoena issued by the U.S. District Court for the Eastern
District of New York requesting documents related to the granting of stock options from 1995
through the present in connection with an inquiry into our stock option practices by the United
States Attorney’s Office for the Eastern District of New York (the “Department of Justice”). We
produced documents in response to these requests and are continuing to cooperate fully with the SEC
regarding these inquiries.
On May 22, 2006, our Board of Directors formed a special committee of outside directors with
broad authority to conduct a review of our stock option practices, including a review of our
underlying stock option documentation and procedures (the “Special Committee”). The Special
Committee was originally composed of three members of our Board of Directors, one of which was also
on the Audit Committee, Karl Guelich, Rich Malone and Gary Ames. In July 2006, the Special
Committee was reconstituted to consist of two independent members of our Board of Directors, Gary
Ames and Deborah Bevier (who joined our Board of Directors on July 14, 2006). The Special
Committee retained the law firm of Wilson Sonsini Goodrich & Rosati P.C. (“Wilson Sonsini”) as its
independent outside legal counsel. Wilson Sonsini engaged Deloitte Financial Advisory Services LLP
as independent accounting experts to aid in its investigation.
20
In the course of responding to the SEC and the Department of Justice’s inquiries, we
determined that there were potential problems with the accounting treatment of certain stock option
grants. On July 20, 2006, we announced that the Audit Committee of our Board of Directors (the
“Audit Committee”) had determined, after consultation with management, that our financial
statements and all earnings releases and similar communications relating to fiscal periods
beginning on or after October 1, 2000, the first day of our
fiscal year 2001, should be restated.
In October 2006, the Special Committee determined that the recorded grant dates for certain
stock options granted during fiscal years 1999 through 2004 should not be relied upon as the
measurement date for accounting purposes and that the accounting treatment used for the vesting of
certain stock options was incorrect. Because the prices at the originally stated grant dates were
lower than the prices on the actual dates of determination, we determined we should have recognized
material amounts of stock-based compensation expense which were not previously accounted for in our
previously issued financial statements. Therefore, the Audit Committee after consultation with
management, concluded that our previously filed unaudited interim and audited financial statement
for the years ended September 30, 2005, 2004, 2003, 2002, 2001, 2000 and 1999, as well as the
unaudited interim financial statements for the quarters ended December 31, 2005 and March 31, 2006,
should be restated because these financial statements contained material misstatements.
Special Committee and Company Findings
On November 8, 2006, we announced that the Special Committee had completed its review of our
stock option practices and reported its final findings to our Board of Directors.
The
Special Committee concluded that there were options grants where the
Company (i) used improper measurement dates in connection with
certain annual stock option grants to employees because the number of
shares certain individual employees were entitled to receive was not
determined until after the original grant date, (ii) granted
options to certain new employees and board members prior to their
start dates, (iii) did not have sufficient documentation to
support certain measurement dates and did not obtain the necessary approvals for stock options issued to certain
individuals, (iv) did not properly account for stock option
grants issued to a consultant who later became an employee, and
(v) did not properly account for stock options of certain
individuals that were modified after the grant date. Based on its
investigation, the Special Committee concluded that it continued to
have confidence in the ability of the Company’s current senior
management to serve in their positions with integrity at the Company.
The Special Committee was unable to reach any conclusions regarding
the intent of former officers, directors and employees. Based on the
Special Committee’s findings, the Company has adopted and is
implementing a number of remedial measures designed to improve its
policies, controls, processes and procedures relating to the granting
and modification of stock-based compensation and will provide
additional training for personnel responsible for administration of
the Company’s equity compensation plans.
As a result of the Special Committee’s investigation, as well as our internal review of our
stock option practices and historical financial statements, we have determined the following:
| |
• |
|
Improper Measurement Dates for Annual Stock Option Grants. In connection with our annual
stock option grants to some employees in 2000, 2001, 2003 and 2004, the number of shares
that certain individual employees were entitled to receive was not determined until after
the original grant date, and therefore the measurement date for such options was subsequent
to the original grant date. In addition, in connection with our annual stock option grant
to employees in 2000, the exercise price was not set in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. As a
result, we have restated our historical financial statements to increase stock-based
compensation expense by approximately $14.3 million recognized over the applicable vesting
periods. |
| |
| |
• |
|
Improper Measurement Dates for Other Stock Option Grants. Certain options to new
employees and board members were granted on dates other than to their
respective start date with us. As a
result, we have restated our historical financial statements to increase stock-based
compensation expense by approximately $1.3 million recognized over the applicable vesting
periods. |
| |
| |
• |
|
Incomplete Documentation or Approval for Stock Option Grants. In 2000 and 2001 we did
not have sufficient documentation to support certain measurement
dates and did not obtain the required approvals for stock options
issued to certain individuals. As a result, we have restated our historical financial
statements to increase stock-based compensation expense by approximately $4.6 million
recognized over the applicable vesting periods. |
| |
| |
• |
|
Stock Options Grants to Non-employees. In 2000, we did not properly account for stock
option grants issued to a consultant who later became an employee. We accounted for the
grants in accordance with APB No. 25 rather than FASB Statement No. 123, Accounting for
Stock-Based Compensation (“FAS 123”) and related interpretations. As a result, we have
restated our historical financial statements to increase stock-based compensation expense
by approximately $3.0 million. |
| |
| |
• |
|
Modifications to Stock Option Grants. From 1999 through 2002, we did not properly
account for stock options for certain individuals that were modified after the grant date.
Some of these modifications were not identified in our financial reporting processes and
were therefore not properly reflected in our financial statements. As a result, we have
restated our historical financial statements to increase stock-based compensation expense
by approximately $843,000 recognized as of the date of the respective modifications. |
As a result of the above, we have recorded additional non-cash stock-based compensation
expense of approximately $24.1 million on stock option grants made from 1999 through 2004. In
addition, we recorded approximately $1.7 million of additional compensation expense in
2005 related to our obligation under pre-existing commitments to reimburse employees for penalties
incurred resulting from receipt of in-the-money option grants. Tax impacts of these additional
expenses included; a reclassification of windfall tax benefits of $4.8 million which were
previously recognized in paid-in-capital and now are required to be recognized as a tax benefit and
additional tax expenses in fiscal year 2004, resulting from non-deductible employee compensation of $2.5 million, which
together result in a net benefit of $2.3 million.
21
As a result of these findings our restated consolidated financial statements reflect a
decrease in net income of approximately $23.5 million for the periods 1999 through 2005. These
charges had no impact on our reported net sales or cash and cash equivalents.
The cumulative effect of the restatement adjustments on our consolidated balance sheet at
September 30, 2005 resulted in a decrease in retained earnings
of $23.5 million partially offset by an increase
in additional paid-in capital of $19.5 million, which results in a net decrease in total shareholders’ equity of
$4.0 million. All the restatements of financial statements,
financial data and related disclosures described in these
Consolidated Financial Statements are collectively referred to
elsewhere in these Consolidated Financial Statements at the
“restatement.”
For explanatory purposes, we have classified the stock-based compensation and other
adjustments that were affected by the Restatement into the aforementioned categories as presented
below. The classified amounts involve certain subjective judgments by management to the extent
particular stock option related accounting errors may fall within more than one category to avoid
double counting the adjustment amounts between categories (e.g., a stock option that is subject to
date changes and/or combined with expenses resulting from consulting, transition or advisory
roles). As such, the table below should be considered a reasonable representation of the magnitude
of expenses in each category.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
(in thousands) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
effect |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
on years prior to |
|
| Adjustments to Stock-Based Compensation by Category |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2003 |
|
Improper measurement dates for annual stock option grants |
|
$ |
464 |
|
|
$ |
719 |
|
|
$ |
1,407 |
|
|
$ |
11,717 |
|
Modifications to stock option grants |
|
|
335 |
|
|
|
356 |
|
|
|
152 |
|
|
|
|
|
Incomplete documentation or approval for stock option grants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,625 |
|
Improper measurement dates for other stock option grants |
|
|
34 |
|
|
|
107 |
|
|
|
272 |
|
|
|
904 |
|
Stock option grants to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments to income before income taxes |
|
|
833 |
|
|
|
1,182 |
|
|
|
1,831 |
|
|
|
20,234 |
|
Payroll related liabilities |
|
|
1,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net income |
|
|
2,533 |
|
|
|
1,182 |
|
|
|
1,831 |
|
|
|
20,234 |
|
Income tax impact of restatement adjustments |
|
|
2,298 |
|
|
|
(4,557 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net income |
|
$ |
4,831 |
|
|
$ |
(3,375 |
) |
|
$ |
1,831 |
|
|
$ |
20,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Controls
Based on the definition of “material weakness” in the Public Company Accounting Oversight
Board’s Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in
Conjunction With an Audit of Financial Statements, the restatement of financial statements in prior
filings with the SEC is a strong indicator of the existence of a “material weakness” in the design
or operation of internal control over financial reporting. Based on this definition, management
has concluded the issues identified above resulted in a material weakness in our internal control
over financial reporting for stock-based compensation as of September 30, 2005 and has disclosed
this to the Audit Committee and to our independent registered public accountants. A further
discussion of this material weakness, as well as management’s remedial measures regarding this
material weakness, is set forth in Part II, Item 9A.
Remedial Measures
In connection with the conclusion of its review, the Special Committee recommended that our
Board of Directors, and its compensation and audit committees, consider and adopt certain remedial
measures related to the issues raised in the Special Committee’s investigation, including:
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• |
|
A “best practices” review and evaluation of our equity compensation controls,
processes and procedures; |
| |
| |
• |
|
A “best practices” review and evaluation of our controls, process and procedures for
documentation of corporate actions, including drafting and finalizing minutes, unanimous
written consents and other similar corporate documentation; |
| |
| |
• |
|
The adoption of a policy requiring that all equity compensation awards to the board
members, officers and employees be granted and priced according to a predetermined
schedule; and |
22
| |
• |
|
The implementation of a cross-functional training program for certain key employees
concerning (i) our equity compensation programs and related improvements to equity
compensation controls, processes and procedures; (ii) the accounting implications of our
equity compensation programs; and (iii) the legal implications our equity compensation
programs. |
In addition, at the recommendation of the Special Committee, we have identified and hired an
interim general counsel to replace our previous general counsel, who has tendered her resignation.
Management along with our Board of Directors has implemented, or is in the process of
implementing, such remedial measures.
Related Proceedings
Internal Revenue Service Audit. We received a notice from the Internal Revenue Service (the
“IRS”) indicating the IRS would be auditing our tax returns for the 2002, 2003, and 2004. We have
produced documents and other information to the IRS and are currently in discussions with the IRS
to resolve all issues arising from this audit. We do not believe this audit and any settlement
with the IRS will have a material adverse impact on our consolidated financial position or results
of operations.
Derivative Suits. On May 24, 2006, a shareholder action captioned Adams v. Amdahl et al. was
filed against certain of our current and former officers and directors in the King County Superior
Court in Washington. The complaint generally alleges that the defendants breached their fiduciary
duties to us in connection with the granting of certain stock options. Five additional shareholder
derivative complaints, based on substantially the same allegations, were subsequently filed in the
Washington federal and state courts. Although litigation is subject to inherent uncertainties, we
do not believe the results of these pending actions will, individually or in the aggregate, have a
material adverse impact on our consolidated financial position or results of operations.
Nasdaq Delisting. On July 20, 2006 we announced that it would be unlikely that the Special
Committee’s review would be completed in time for us to file our Form 10-Q for the quarter ended
June 30, 2006, by the SEC’s deadline of August 14, 2006. In August 2006, we failed to timely file
our Form 10-Q for the period ended June 30, 2006 as a result of the ongoing Special Committee
investigation. On August 14, 2006, we received a written Staff Determination Notice from Nasdaq
stating that we are not in compliance with Nasdaq’s Marketplace Rule 4310(c)(14) because we have
not timely filed our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, and that,
therefore, our securities are subject to delisting. On August 18, 2006, we appealed Nasdaq’s
Staff’s delisting determination to the Panel and requested an oral hearing before the Panel. On
August 23, 2006, Nasdaq’s Staff stayed the delisting action pending a final written decision on our
appeal by the Panel. A hearing before the Panel occurred on September 22, 2006. On November 28,
2006, we received notice that the Panel had granted our request for continued listing on the Nasdaq
Stock Market, subject to certain conditions we expect to satisfy within the time period requested
by the Panel.
There is no assurance that we will not be subject to inquiries related to our stock option
grant practices by other federal, state or foreign regulatory agencies.
Cost of Related Proceedings and Restated Financial Statements. We have incurred substantial
expenses for legal, accounting, tax and other professional services in connection with the Special
Committee investigation, our internal review of our historical stock option practices and financial
statements, the preparation of the restated financial statements, the SEC and Department of Justice
investigation and inquiries from other government agencies, and the related derivative litigation.
We estimate these expenses were approximately $7.0 million in aggregate through the quarter ended
September 30, 2006.
Overview
We are a global provider of software and hardware products and services that help companies
efficiently and securely manage their Internet traffic. Our products enhance the delivery,
optimization and security of application traffic on Internet-based networks. We market and sell our
products primarily through indirect sales channels in the Americas (primarily the United States);
Europe, the Middle East, and Africa (EMEA); Japan and the Asia Pacific region. Enterprise customers
(Fortune 1000 or Business Week Global 1000 companies) in financial services, transportation,
government and telecommunications industries continue to make up the largest percentage of our
customer base.
During the fiscal year 2005, we announced plans to acquire all of the common stock of Swan
Labs, Inc. for cash of $43.0 million. The merger closed on October 4, 2005, subsequent to our year
end. As a result of the transaction, we acquired all the assets of Swan Labs, including its
principal products, WANJet and WebAccelerator. WANJet devices are deployed in data centers and
branch offices to speed up file transfers, email, and the performance of any IP-based application
that runs over a Wide Area Network, or WAN. WebAccelerator works in concert with WANJet to speed up
the performance of IP-based enterprise applications running over WANs.
23
The acquisition of Swan Labs expands our product line and gives us broader access to the WAN
optimization and web acceleration markets.
Our management monitors and analyzes a number of key performance indicators in order to manage
our business and evaluate our financial and operating performance. Those indicators include:
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• |
|
Revenues. The majority of our revenues are derived from sales of our core products;
BIG-IP Local Traffic Manager; BIG-IP Global Traffic Manager; BIG-IP ISP Traffic Manager;
TrafficShield Application Firewall, and FirePass SSL VPN servers. We also derive revenues
from the sales of services including annual maintenance contracts, installation, training
and consulting services. We carefully monitor the sales mix of our revenues within each
reporting period. We believe customer acceptance rates of our new products and feature
enhancements are key indicators of future trends. We also consider overall revenue
concentration by customer and by geographic region as additional indicators of current and
future trends. |
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• |
|
Cost of revenues and gross margins. We strive to control our cost of revenues and
thereby maintain our gross margins. Significant items impacting cost of revenues are
hardware costs paid to our contract manufacturers, third-party software license fees, and
amortization of developed technology, personnel and overhead expenses. Our margins have
remained relatively stable over the past two years; however factors such as sales price,
product mix, inventory obsolescence, returns, component price increases, and warranty costs
could significantly impact our gross margins from quarter to quarter and represent the
significant indicators we monitor on a regular basis. |
| |
| |
• |
|
Operating expenses. Operating expenses are substantially driven by personnel and related
overhead expenses. Existing headcount and future hiring plans are the predominant factors in
analyzing and forecasting future operating expense trends. Other significant operating
expenses that we monitor include marketing and promotions, travel, professional fees,
computer costs related to the development of new products, facilities and depreciation
expenses. |
| |
| |
• |
|
Liquidity and cash flows. Our financial condition remains strong with significant cash
and investments and no long term debt. The increase in cash and investments during the
fiscal year 2005 was primarily due to net income from operations, with operating activities
providing cash of $85.0 million. Capital expenditures during the fiscal year 2005 were
comprised primarily of tenant improvements and information technology infrastructure and
equipment to support the growth of our core business activities. On October 4, 2005,
subsequent to our year end, we acquired all of the common stock of Swan Labs, Inc. for cash
of $43.0 million. We will continue to evaluate possible acquisitions of or investments in
businesses, products, or technologies that we believe are strategic, which may require the
use of cash. |
| |
| |
• |
|
Balance sheet. We view cash, short-term and long-term investments, deferred revenue,
accounts receivable balances and day’s sales outstanding as important indicators of our
financial health. Deferred revenues continued to increase due to the growth in the amount of
annual maintenance contracts purchased on new products and maintenance renewal contracts
related to our existing product installation base. Our day’s sales outstanding for the
fourth quarter of fiscal 2005 was 47. We expect to maintain this metric in the mid-to-high
40’s range going forward. |
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect the more significant estimates
and judgments used in the preparation of our financial statements.
Revenue Recognition. We recognize revenue in accordance with the guidance provided under
Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” and SOP No. 98-9
“Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions,”
Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue Recognition When Right of
Return Exists,” and SEC Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial
Statements,” and SAB No. 104, “Revenue Recognition.”
24
We sell products through distributors, resellers, and directly to end users. We recognize
product revenue upon shipment, net of estimated returns, provided that collection is determined to
be probable and no significant obligations remain. In certain regions where we do not have the
ability to reasonably estimate returns, revenue is recognized upon sale to the end user. In this
situation, we receive a sales report from the channel partner to determine when the sales
transaction to the end user has occurred. Payment terms to domestic customers are generally net 30
days. Payment terms to international customers range from net 30 to 90 days based on normal and
customary trade practices in the individual markets. We have offered extended payment terms ranging
from three to six months to certain customers, in which case, revenue is recognized when payments
are made.
Whenever a software license, hardware, installation and post-contract customer support (PCS)
elements are combined into a package with a single “bundled” price, a portion of the sales price is
allocated to each element of the bundled package based on their respective fair values as
determined when the individual elements are sold separately. Revenues from the license of software
are recognized when the software has been shipped and the customer is obligated to pay for the
software. When rights of return are present and we cannot estimate returns, we recognize revenue
when such rights of return lapse. Revenues for PCS are recognized on a straight-line basis over the
service contract term. PCS includes rights to upgrades, when and if available, a limited period of
telephone support, updates, and bug fixes. Installation revenue is recognized when the product has
been installed at the customer’s site. Consulting services are customarily billed at fixed rates,
plus out-of-pocket expenses, and revenues are recognized when the consulting has been completed.
Training revenue is recognized when the training has been completed.
Reserve for Doubtful Accounts. Estimates are used in determining our allowance for doubtful
accounts and are based upon an assessment of selected accounts and as a percentage of our remaining
accounts receivable by aging category. In determining these percentages, we evaluate historical
write-offs, current trends in the credit quality of our customer base, as well as changes in the
credit policies. We perform ongoing credit evaluations of our customers’ financial condition and do
not require any collateral. If there is deterioration of a major customer’s credit worthiness or
actual defaults are higher than our historical experience, our allowance for doubtful accounts may
not be sufficient.
Reserve for Product Returns. In some instances, product revenue from distributors is subject
to agreements allowing rights of return. Product returns are estimated based on historical
experience and are recorded at the time revenues are recognized. Accordingly, we reduce recognized
revenue for estimated future returns at the time revenue is recorded. When rights of return are
present and we cannot estimate returns, revenue is recognized when such rights lapse. The estimates
for returns are adjusted periodically based upon changes in historical rates of returns, inventory
in the distribution channel and other related factors. It is possible that these estimates will
change in the future or that the actual amounts could vary from our estimates.
Reserve for Warranties. A warranty reserve is established based on our historical experience
and an estimate of the amounts necessary to settle future and existing claims on products sold as
of the balance sheet date. While we believe that our warranty reserve is adequate and that the
judgment applied is appropriate, such amounts estimated to be due and payable could differ
materially from what will actually transpire in the future.
Accounting for Income Taxes. We utilize the liability method of accounting for income taxes
as set forth by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,”
or SFAS 109. Accordingly, we are required to estimate our income taxes in each of the jurisdictions
in which we operate as part of the process of preparing our consolidated financial statements. This
process involves estimating our actual current tax exposure, including assessing the risks
associated with tax audits, together with assessing temporary differences resulting from the
different treatment of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities. Due to the evolving nature and complexity of tax rules combined with
the large number of jurisdictions in which we operate, it is possible that our estimates of our tax
liability could change in the future, which may result in additional tax liabilities and adversely
affect our results of operations, financial condition and cash flows.
Stock-based compensation. We adopted the fair value recognition provisions of Financial
Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment, (“FAS 123R”) on July
1, 2005, and as a result recognized $4.6 million of expense related to stock-based compensation
charges included in operating expenses in the fourth quarter of fiscal 2005. Prior to July 1, 2005,
we accounted for share-based payments under the recognition and measurement provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, as permitted
by FASB Statement No. 123, Accounting for Stock-Based Compensation. In accordance with APB 25 no
compensation cost was required to be recognized for options granted that had an exercise price
equal to the market value of the underlying common stock on the date of grant.
We adopted FAS 123R using the modified-prospective-transition method. Under that transition
method, compensation cost recognized in the fiscal year 2005 includes: a) compensation cost for all
share-based payments granted prior to, but not yet vested as
25
of July 1, 2005, based on the grant-date fair value estimated in accordance with the original
provisions of FAS 123, and b) compensation cost for all share-based payments granted subsequent to
July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of FAS
123R. Other than the restatement, the results for the prior periods have not been restated.
Effective July 1, 2005 we adopted the straight-line attribution method for recognizing
compensation expense. Previously under the disclosure-only provisions of SFAS 123, the Company used
the accelerated method of expense recognition pursuant to FASB Interpretation No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”). For all
unvested options outstanding as of July 1, 2005, the previously measured but unrecognized
compensation expense, based on the fair value at the original grant date, will be recognized on an
accelerated basis over the remaining vesting period. For share-based payments granted subsequent to
July 1, 2005, compensation expense, based on the fair value on the date of grant, will be
recognized on a straight-line basis over the vesting period. As of September 30, 2005, there was
$32.7 million of total unrecognized compensation cost, the majority of which will be recognized
ratably over the next two years. Going forward, stock compensation expenses may increase as we
issue additional equity-based awards to continue to attract and retain key employees.
In addition, the Company recently modified the method in which it issues incentive awards to
its employees through stock-based compensation. In prior years, stock-based compensation consisted
only of stock options. Beginning in the fourth quarter of fiscal 2005, the Company began to grant
restricted stock unit awards instead of stock options. The value of restricted stock units is
determined using the intrinsic value method, which in this case, is based on the number of shares
granted and the quoted price of our common stock on the date of grant. Alternatively, in
determining the fair value of stock options, we use the Black-Scholes option pricing model that
employs the following key assumptions. Expected volatility is based on the annualized daily
historical volatility of our stock price, over the expected life of the option. Expected term of
the option is based on historical employee stock option exercise behavior, the vesting terms of the
respective option and a contractual life of ten years. Our stock price volatility and option lives
involve management’s best estimates at that time, both of which impact the fair value of the option
calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized
over the life of the option.
SFAS 123R also requires that we recognize compensation expense for only the portion of options
or stock units that are expected to vest. Therefore, we apply estimated forfeiture rates that are
derived from historical employee termination behavior. Our estimated forfeiture rate in the fourth
quarter of fiscal 2005 is 5%. If the actual number of forfeitures differs from those estimated by
management, additional adjustments to compensation expense may be required in future periods.
Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(In thousands, except for percentages) |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
219,603 |
|
|
$ |
126,169 |
|
|
$ |
84,197 |
|
Services |
|
|
61,807 |
|
|
|
45,021 |
|
|
|
31,698 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
281,410 |
|
|
$ |
171,190 |
|
|
$ |
115,895 |
|
|
|
|
|
|
|
|
|
|
|
Percentage of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
78.0 |
% |
|
|
73.7 |
% |
|
|
72.6 |
% |
Services |
|
|
22.0 |
|
|
|
26.3 |
|
|
|
27.4 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net Revenues. Total net revenues increased 64.4% in fiscal year 2005 from fiscal year 2004,
compared to an increase of 47.7% in fiscal year 2004 from fiscal year 2003. The improvement was due
to increased demand for our application delivery networking products and higher services revenues
resulting from our increased installed base of products. During fiscal year 2005, each of our
primary geographic regions reported higher revenues compared to the prior year period.
International revenues represented 40.5%, 39.4% and 34.9% of net revenues in fiscal years 2005,
2004 and 2003, respectively. We expect international sales will continue to represent a significant
portion of net revenues, although we cannot provide assurance that international revenues as a
percentage of net revenues will remain at current levels.
Net product revenues increased 74.1% in fiscal year 2005 and 49.8% in fiscal year 2004 as
compared to the previous fiscal year, respectively. The increase in fiscal 2005 was primarily due
to absolute growth in the volume of product sales of our BIG-IP product
26
line as well as incremental revenues derived from sales of our FirePass and TrafficShield
product lines. Sales of our BIG-IP family of application delivery networking products represented
89.1%, 90.3%, and 99.3% of total product revenues in fiscal years 2005, 2004 and 2003,
respectively. The decrease as a percentage of total sales was due to an improvement in sales of our
other products, such as our FirePass products which represented 9.7% of product revenues in fiscal
year 2005.
Net service revenues increased 37.3% in fiscal year 2005 compared to a 42.0% increase for
fiscal year 2004 from the prior year, respectively. The decrease in the growth rate was due to an
increase in the amount of support services provided by our channel partners. The increase of
services revenues in absolute dollars was the result of a growing customer base and continued
growth in service renewals from existing customers.
Ingram Micro Inc., one of our domestic distributors, accounted for 18.6%, 19.1%, and 12.6% of
our total net revenues in fiscal years 2005, 2004 and 2003, respectively. Ingram Micro accounted
for 26.2%, 26.9% and 17.8% of our accounts receivable as of September 30, 2005, 2004 and 2003,
respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated)(1) |
|
|
(as restated)(1) |
|
|
(as restated)(1) |
|
| |
|
(In thousands, except for percentages) |
|
Cost of net revenues and Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
48,990 |
|
|
$ |
28,406 |
|
|
$ |
17,843 |
|
Services |
|
|
16,194 |
|
|
|
10,993 |
|
|
|
9,132 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
65,184 |
|
|
|
39,399 |
|
|
|
26,975 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
216,226 |
|
|
$ |
131,791 |
|
|
$ |
88,920 |
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues and Gross margin (as a percentage of related net revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
22.3 |
% |
|
|
22.5 |
% |
|
|
21.2 |
% |
Services |
|
|
26.2 |
|
|
|
24.4 |
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23.2 |
|
|
|
23.0 |
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
76.8 |
% |
|
|
77.0 |
% |
|
|
76.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
Cost of Net Product Revenues. Cost of net product revenues consist of finished products
purchased from our contract manufacturers, manufacturing overhead, freight, warranty, provisions
for excess and obsolete inventory, and amortization expenses in connection with developed
technology from acquisitions. Cost of net product revenues as a percentage of net product revenues
remained relatively consistent at 22.3% in fiscal year 2005 as compared to 22.5% and 21.2% in
fiscal years 2004 and 2003, respectively. The increase in absolute dollars is consistent with the
increase in product revenues for the corresponding period. Higher indirect product costs including
amortization charges of our acquired technology and warranty costs associated with the growth in
overall product installation base contributed to the percentage increase as compared to fiscal year
2003.
Cost of Net Service Revenues. Cost of net service revenues consist of the salaries and
related benefits of our professional services staff, travel, facilities, and depreciation expenses.
Cost of net service revenues as a percentage of net service revenues increased to 26.2% in fiscal
year 2005 as compared to 24.4% and 28.8% in fiscal years 2004 and 2003, respectively. The increase
in fiscal year 2005 is primarily due to increased salary and benefits attributed to growth in
headcount. Professional services headcount at the end of fiscal year 2005 increased to 147 from 124
at the end of fiscal year 2004. Going forward, we expect to continue to increase our cost of
service revenues to support our expanded product lines and growing customer base.
27
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated)(1) |
|
|
(as restated)(1) |
|
|
(as restated)(1) |
|
| |
|
(In thousands, except for percentages) |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
89,866 |
|
|
$ |
66,446 |
|
|
$ |
54,897 |
|
Research and development |
|
|
31,516 |
|
|
|
24,438 |
|
|
|
19,455 |
|
General and administrative |
|
|
25,486 |
|
|
|
15,761 |
|
|
|
12,210 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
146,868 |
|
|
$ |
106,645 |
|
|
$ |
86,562 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (as a percentage of net revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
31.9 |
% |
|
|
38.8 |
% |
|
|
47.4 |
% |
Research and development |
|
|
11.2 |
|
|
|
14.3 |
|
|
|
16.8 |
|
General and administrative |
|
|
9.1 |
|
|
|
9.2 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
52.2 |
% |
|
|
62.3 |
% |
|
|
74.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
Sales and Marketing. Sales and marketing expenses consist of salaries, commissions and
related benefits of our sales and marketing staff, the costs of our marketing programs, including
public relations, advertising and trade shows, travel, facilities and depreciation expenses.
Stock-based compensation charges for awards to our sales and marketing personnel are included
beginning in the fourth quarter of fiscal year 2005. The decrease in sales and marketing expenses
as a percentage of total net revenues is the result of leveraging our existing sales and
distribution infrastructure to support the increased net revenues. In absolute dollars, sales and
marketing expenses increased 35.2% in fiscal year 2005 and 21.0% in fiscal year 2004 as compared to
the previous fiscal year, respectively. The increases were primarily due to higher commission and
personnel costs, consistent with the increased revenue and headcount for the corresponding period.
Sales and marketing headcount at the end of fiscal 2005 increased to 331 from 229 at the end of
fiscal 2004 and 211 at the end of fiscal 2003. Stock-based compensation charges of $2.4 million
contributed to the overall increase in fiscal year 2005. We expect to continue to increase sales
and marketing expenses in absolute dollars in order to grow revenues and increase our market share.
Research and Development. Research and development expenses consist of the salaries and
related benefits for our product development personnel, prototype materials and expenses related to
the development of new and improved products, facilities and depreciation expenses. In absolute
dollars, research and development expenses increased 29.0% in fiscal year 2005 and 25.6% in fiscal
year 2004 as compared to the previous fiscal year, respectively. The increases in fiscal years 2005
and 2004 were primarily due to higher salary and benefits costs attributed to an increase in
headcount to 217 in fiscal year 2005 from 185 in fiscal year 2004 and 145 in fiscal 2003. The
growth in employee headcount was primarily related to enhancement of our current products and our
ability to develop new, technologically advanced products that meet the changing needs of our
customers. Stock-based compensation charges of $1.5 million contributed to the overall increase in
fiscal year 2005. We expect to continue to increase research and development expenses as our future
success is dependent on the continued development of our products.
General and Administrative. General and administrative expenses consist of the salaries,
benefits and related costs of our executive, finance, information technology, human resource and
legal personnel, third-party professional service fees, bad debt charges, facilities, and
depreciation expenses. The decrease in general and administrative expenses as a percentage of total
net revenues is the result of leveraging our existing corporate infrastructure to support the
increased net revenues. In absolute dollars, general and administrative expenses increased 61.7% in
fiscal year 2005 and increased 29.1% in fiscal year 2004 as compared to the previous fiscal year,
respectively. The increase in fiscal year 2005 is due to increased salary and benefit expenses of
$2.6 million and higher professional service fees of $1.9 million. The increase in personnel costs
is consistent with the growth in headcount. General and administrative headcount at the end of
fiscal 2005 increased to 97 from 75 at the end of fiscal 2004. Stock-based compensation charges of
$2.8 million contributed to the overall increase in fiscal year 2005. The increase in general and
administrative expenses is expected to remain at these increased levels as the Company continues to
build its infrastructure to support the worldwide growth of our business.
28
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated)(1) |
|
|
(as restated)(1) |
|
|
(as restated)(1) |
|
| |
|
(In thousands, except for percentages) |
|
Other Income and Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
69,358 |
|
|
$ |
25,146 |
|
|
$ |
2,358 |
|
Other income, net |
|
|
8,076 |
|
|
|
2,731 |
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
77,434 |
|
|
|
27,877 |
|
|
|
3,109 |
|
Provision (benefit) for income taxes |
|
|
30,532 |
|
|
|
(8,451 |
) |
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
46,902 |
|
|
$ |
36,328 |
|
|
$ |
2,256 |
|
|
|
|
|
|
|
|
|
|
|
Other Income and Income Taxes (as
percentage of net revenue) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
24.6 |
% |
|
|
14.7 |
% |
|
|
2.0 |
% |
Other income, net |
|
|
2.9 |
|
|
|
1.6 |
|
|
|
0.6 |
|
Income before income taxes |
|
|
27.5 |
|
|
|
16.3 |
|
|
|
2.7 |
|
Provision (benefit) for income taxes |
|
|
10.8 |
|
|
|
(4.9 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
16.7 |
% |
|
|
21.2 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
Other Income, Net. Other income, net, consists of interest income and foreign currency
transaction gains and losses. Other income, net, increased 195.7% in fiscal year 2005 and increased
263.6% in fiscal year 2004 as compared to the previous fiscal year, respectively. The significant
increase was due to a combination of higher yields and increased investment balances. The increased
investment balances are the result of cash provided from operating and financing activities during
the fiscal years 2005 and fiscal year 2004. Net proceeds of $113.6 million received from the sale
of common stock in a public offering completed in November of 2003 was the most significant
addition to our investment balances.
Provision for Income Taxes. We recorded a 39.4% provision for income taxes for the fiscal
year 2005. As of fiscal year-end 2005 we do not have a valuation allowance on any of our deferred
tax assets in any of the jurisdictions in which we operate because we believe that the assets are
more likely than not to be realized. In making this determination we have considered projected
future taxable income and ongoing prudent and feasible tax planning strategies in assessing the
appropriateness of a valuation allowance. Our net deferred tax assets as of fiscal year end 2005,
2004 and 2003 were $40.4 million, $31.6 million and $0, respectively. Our world wide effective tax
rate may fluctuate based on a number of factors including variations in projected taxable income in
the various geographic locations in which we operate, changes in the valuation of our net deferred
tax assets, resolution of potential exposures, tax positions that are taken on returns filed in the
various geographic locations in which we operate, introduction of new accounting standards or
changes in tax laws or interpretations thereof in any of the various geographic locations in which
we operate. We have recorded liabilities to address potential exposures related to business and
income tax positions we have taken that could be challenged by taxing authorities. The ultimate
resolution of these potential exposures may be greater or less than the liabilities recorded which
could result in an adjustment to our future tax expense.
In fiscal year 2004, the primary difference between the statutory tax rate and the effective
tax rate was due to previously unrecognized deferred tax assets which were recognized. SFAS 109,
provides for the recognition of deferred tax assets if realization is more likely than not. Based
on available evidence, which includes our historical operating performance and the reported
cumulative net losses in all prior years, we had provided for a full valuation allowance against
our deferred tax assets at the end of fiscal year 2003. Based upon our operating performance in
fiscal year 2004 and projected future taxable income, we determined that our U.S. deferred tax
assets were more likely than not to be realizable. Therefore, the valuation allowance was reversed
and as a result we realized an income tax benefit of $11.9 million. The credit from the release of
the valuation allowance was partially offset by actual U.S. and international tax expenses
resulting in a net benefit for income taxes of $8.5 million in fiscal year 2004. The provision for
income taxes in fiscal year 2003 consisted primarily of taxes payable in foreign jurisdictions.
29
Liquidity and Capital Resources
We have funded our operations with our cash balances, cash generated from operations and
proceeds from public offerings.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
(In thousands) |
Liquidity and Capital Resources |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and investments |
|
$ |
365,015 |
|
|
$ |
222,293 |
|
|
$ |
79,010 |
|
Cash provided by operating activities |
|
|
84,987 |
|
|
|
40,590 |
|
|
|
14,610 |
|
Cash used in investing activities |
|
|
(126,760 |
) |
|
|
(164,713 |
) |
|
|
(38,053 |
) |
Cash provided by financing activities |
|
|
68,867 |
|
|
|
138,468 |
|
|
|
12,833 |
|
Cash and cash equivalents, short-term investments and long-term investments totaled $365.0
million as of September 30, 2005 compared to $222.3 million as of September 30, 2004, representing
an increase of $142.7 million. The increase was due to the cash flow from operations and cash from
employee stock option exercises. In fiscal year 2004, overall cash and investments increased $143.3
million compared to the fiscal year 2003. The increase was primarily due to the net proceeds of
$113.6 million from the sale of 5,175,000 shares of common stock in a public offering completed in
November 2003.
Cash provided by operating activities during fiscal year 2005 was $85.0 million compared to
$40.6 million in fiscal year 2004 and $14.6 million in fiscal year 2003. Cash provided by operating
activities resulted primarily from cash generated from net income, after adjusting for non-cash
charges, changes in operating assets and liabilities and an increase in advance payments from
customers.
Cash used in investing activities was $126.8 million for the fiscal year 2005, $164.7 million
for fiscal year 2004 and $38.1 million for fiscal year 2003. The cash used in the fiscal year 2005
was primarily due to the purchase of investments and property and equipment partially offset by the
sale of investments. The cash used in fiscal year 2004 was due to the purchase of investments,
primarily made possible by the proceeds of our public offering, and the purchase of property and
equipment and the acquisition of MagniFire, partially offset by the sale of investments. The cash
used in fiscal year 2003 was primarily the result of the cash used to acquire substantially all the
assets of uRoam and the purchase of investments and property and equipment partially offset by the
sale of investments.
Cash provided by financing activities was $68.9 million for fiscal year 2005 compared to
$138.5 million for fiscal year 2004 and $12.8 million for the fiscal year 2003. In fiscal years
2005 and 2003, our financing activities consisted of cash proceeds received from the exercise of
stock options and purchases under our employee stock purchase plan. During the fiscal year 2004,
our financing activities included $113.6 million of net proceeds received from a public stock
offering as well as cash received from the exercise of employee stock options and purchases under
our employee stock purchase plan.
We expect that our existing cash and investment balances and cash from operations will be
sufficient to meet our anticipated working capital and capital expenditures for the foreseeable
future.
Obligations and Commitments
The following table summarizes our contractual payment obligations and commitments as of
September 30, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment Obligations by Year |
|
| |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
Total |
|
| |
|
(In thousands) |
|
Operating leases |
|
$ |
7,647 |
|
|
$ |
7,341 |
|
|
$ |
6,700 |
|
|
$ |
6,853 |
|
|
$ |
6,831 |
|
|
$ |
11,915 |
|
|
$ |
47,287 |
|
Purchase
obligations |
|
|
8,322 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,969 |
|
|
$ |
7,341 |
|
|
$ |
6,700 |
|
|
$ |
6,853 |
|
|
$ |
6,831 |
|
|
$ |
11,915 |
|
|
$ |
55,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease our facilities under operating leases that expire at various dates through 2014.
Purchase obligations are comprised of purchase commitments with our contract manufacturers.
The agreement with our primary contract manufacturer allows them to procure component inventory on
our behalf based on our production forecast. We are obligated to purchase component inventory that
the contract manufacturer procures in accordance with the forecast, unless cancellation is given
within applicable lead times.
30
Recent Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF
03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity
securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an investment is other-than-temporarily
impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF
03-1-1, which delays the effective date until additional guidance is issued for the application of
the recognition and measurement provisions of EITF 03-1 to investments in securities that are
impaired. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments.” This FSP addresses the
determination as to when an investment is considered impaired, whether the impairment is other than
temporary and the measurement of an impairment loss. This statement specifically nullifies the
requirements of paragraph 10-18 of EITF 03-1 and references existing other-than-temporary
impairment guidance. The guidance under this FSP is effective for reporting periods beginning after
December 15, 2005 and the Company continued to apply relevant “other-than-temporary” guidance as
provided for in FSP EITF 03-1-1 during fiscal 2005. The Company does not expect the adoption of FSP
FAS 115-1 and FAS 124-1 to have a material effect on the Company’s results of operations or
financial condition.
In May of 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — A
Replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the requirements for the
accounting and reporting of a change in accounting principle. The Statement applies to all
voluntary changes in accounting principle and to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition provisions. This
Statement requires retrospective application to prior periods’ financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not
expect the adoption of this statement to have a material impact on the Company’s financial
condition or results of operations.
31
Risk Factors
In addition to the other information in this report, the following risk factors should be
carefully considered in evaluating our company and its business.
Our success depends on our timely development of new products and features, market acceptance of
new product offerings and proper management of the timing of the life cycle of our products
We expect the application delivery networking market to be characterized by rapid
technological change, frequent new product introductions, changes in customer requirements and
evolving industry standards. Our continued success depends on our ability to identify and develop
new products and new features for our existing products to meet the demands of these changes, and
for those products and features to be accepted by our existing and target customers. If we are
unable to identify, develop and deploy new products and new product features on a timely basis, our
business and results of operations may be harmed.
In September 2004, we announced the release of our next-generation BIG-IP product featuring
the Traffic Management Operating System, or TMOS. This major new version of BIG-IP represented the
culmination of over two years of research and development efforts. TMOS is specifically designed to
facilitate the development and integration of application delivery functions as modules that can be
added to BIG-IP’s core functionality to keep pace with rapidly evolving customer needs. We
currently offer software modules as add-ons for this product and our continued success depends
significantly on our ability to integrate new modules and functionality onto this platform and the
acceptance of the new hardware and software platforms associated with this release by our existing
and target customers.
The current life cycle of our products is typically 12 to 24 months. The introduction of new
products or product enhancements may shorten the life cycle of our existing products, or replace
sales of some of our current products, thereby offsetting the benefit of even a successful product
introduction, and may cause customers to defer purchasing our existing products in anticipation of
the new products. This could harm our operating results by decreasing sales, increasing our
inventory levels of older products and exposing us to greater risk of product obsolescence. We have
also experienced, and may in the future experience, delays in developing and releasing new products
and product enhancements. This has led to, and may in the future lead to, delayed sales, increased
expenses and lower quarterly revenue than anticipated. Also, in the development of our products, we
have experienced delays in the prototyping of our products, which in turn has led to delays in
product introductions. In addition, complexity and difficulties in managing product transitions at
the end-of-life stage of a product can create excess inventory of components associated with the
outgoing product that can lead to increased expenses. Any or all of the above problems could
materially harm our business and operating results.
Our success depends on sales and continued innovation of our BIG-IP product lines
For the fiscal year ended September 30, 2005, we derived 89.1% of our product revenues from
sales of our BIG-IP family of application delivery networking product lines. We expect to derive a
significant portion of our net revenues from sales of our BIG-IP products in the future.
Implementation of our strategy depends upon BIG-IP being able to solve critical network
availability and performance problems of our customers. If BIG-IP is unable to solve these problems
for our customers or if we are unable to sustain the high levels of innovation in BIG-IP’s product
feature set needed to maintain leadership in what will continue to be a competitive market
environment, our business and results of operations will be harmed.
We may not be able to compete effectively in the emerging application delivery networking market
The markets we serve are new, rapidly evolving and highly competitive, and we expect
competition to persist and intensify in the future. Our principal competitors in the application
delivery networking market include Cisco Systems, Inc., Nortel Networks Corporation, Foundry
Networks, Inc., Citrix Systems, Inc., Radware Ltd. and Juniper Networks, Inc. We expect to continue
to face additional competition as new participants enter our market. In addition, larger companies
with significant resources, brand recognition and sales channels may form alliances with or acquire
competing application delivery networking solutions and emerge as significant competitors.
Potential competitors may bundle their products or incorporate an Internet traffic management or
security component into existing products in a manner that discourages users from purchasing our
products.
32
Our quarterly and annual operating results are volatile and may cause our stock price to fluctuate
Our quarterly and annual operating results have varied significantly in the past and will vary
significantly in the future, which makes it difficult for us to predict our future operating
results. In particular, we anticipate that the size of customer orders may increase as we continue
to focus on larger business accounts. A delay in the recognition of revenue, even from just one
account, may have a significant negative impact on our results of operations for a given period. In
the past, a majority of our sales have been realized near the end of a quarter. Accordingly, a
delay in an anticipated sale past the end of a particular quarter may negatively impact our results
of operations for that quarter, or in some cases, that year. Additionally, we have exposure to the
credit risks of some of our customers and sub-tenants. Although we have programs in place that are
designed to monitor and mitigate the associated risk, there can be no assurance that such programs
will be effective in reducing our credit risks adequately. We monitor individual payment capability
in granting credit arrangements, seek to limit the total credit to amounts we believe our customers
can pay, and maintain reserves we believe are adequate to cover exposure for potential losses. If
there is a deterioration of a sub-tenant’s or major customer’s creditworthiness or actual defaults
are higher than expected future resulting losses, if incurred, could harm our business and have a
material adverse effect on our operating results.
Further, our operating results may be below the expectations of securities analysts and
investors in future quarters or years. Our failure to meet these expectations will likely harm the
market price of our common stock.
The average selling price of our products may decrease and our costs may increase, which may
negatively impact gross profits
It is possible that the average selling prices of our products will decrease in the future in
response to competitive pricing pressures, increased sales discounts, new product introductions by
us or our competitors or other factors. Therefore, in order to maintain our gross profits, we must
develop and introduce new products and product enhancements on a timely basis and continually
reduce our product costs. Our failure to do so will cause our net revenue and gross profits to
decline, which will harm our business and results of operations. In addition, we may experience
substantial period-to-period fluctuations in future operating results due to the erosion of our
average selling prices.
It is difficult to predict our future operating results because we have an unpredictable sales
cycle
Our products have a lengthy sales cycle, which is difficult to predict. Historically, our
sales cycle has ranged from approximately two to three months and has tended to lengthen as we have
increasingly focused our sales efforts on the enterprise market. Also, as our distribution strategy
has evolved into more of a channel model, utilizing value-added resellers, distributors and systems
integrators, the level of variability in the length of sales cycle across transactions has
increased and made it more difficult to predict the timing of many of our sales transactions. Sales
of our products require us to educate potential customers in their use and benefits. Sales of our
products are subject to delays from the lengthy internal budgeting, approval and competitive
evaluation processes that large corporations and governmental entities may require. For example,
customers frequently begin by evaluating our products on a limited basis and devote time and
resources to testing our products before they decide whether or not to purchase. Customers may also
defer orders as a result of anticipated releases of new products or enhancements by our competitors
or us. As a result, our products have an unpredictable sales cycle that contributes to the
uncertainty of our future operating results.
Our business may be harmed if our contract manufacturers are not able to provide us with adequate
supplies of our products or if a single source of hardware assembly is lost or impaired
We rely on third party contract manufacturers to assemble our products. We outsource the
manufacturing of our hardware platforms to contract manufacturers who assemble these hardware
platforms to our specifications. We have experienced minor delays in shipments from contract
manufacturers in the past. However, if we experience major delays in the future or other problems,
such as inferior quality and insufficient quantity of product, any one or a combination of these
factors may harm our business and results of operations. The inability of our contract
manufacturers to provide us with adequate supplies of our products or the loss of our contract
manufacturer may cause a delay in our ability to fulfill orders while we obtain a replacement
manufacturer and may harm our business and results of operations. In particular, because we
subcontract substantially all of our manufacturing to a single contract manufacturer, with whom we
do not have a long-term contract, any termination, loss or impairment in our arrangement with this
single source of hardware assembly, or any impairment of their facilities or operations, would harm
our business, financial condition and results of operation.
33
If the demand for our products grows, we will need to increase our raw material and component
purchases, contract manufacturing capacity and internal test and quality control functions. Any
disruptions in product flow may limit our revenue, may harm our competitive position and may result
in additional costs or cancellation of orders by our customers.
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 a
number of single or limited sources. Lead times for these components vary significantly. The
unavailability of suitable components, any interruption or delay in the supply of any of these
hardware components, or the inability to procure a similar component from alternate sources at
acceptable prices within a reasonable time, may delay assembly and sales of our products and,
hence, our revenues, and may harm our business and results of operations.
We may not adequately protect our intellectual property and our products may infringe on the
intellectual property rights of third parties
We rely on a combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure of confidential and proprietary information to protect our intellectual
property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use
of our products is difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States.
Our industry is characterized by the existence of a large number of patents and frequent
claims and related litigation regarding patent and other intellectual property rights. In the
ordinary course of our business, we are involved in disputes and licensing discussions with others
regarding their claimed proprietary rights and cannot assure you that we will always successfully
defend ourselves against such claims. If we are found to infringe the proprietary rights of others,
or if we otherwise settle such claims, we could be compelled to pay damages or royalties and either
obtain a license to those intellectual property rights or alter our products so that they no longer
infringe upon such proprietary rights. Any license could be very expensive to obtain or may not be
available at all. Similarly, changing our products or processes to avoid infringing the rights of
others may be costly or impractical. In addition, we have initiated, and may in the future
initiate, claims or litigation against third parties for infringement of our proprietary rights, to
determine the scope and validity of our proprietary rights or those of our competitors. Any of
these claims, whether claims that we are infringing the proprietary rights of others, or vice
versa, 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. Further, our license
agreements typically require us to indemnify our customers, distributors and resellers for
infringement actions related to our technology, which could cause us to become involved in
infringement claims made against our customers, distributors or resellers. Any of the
above-described circumstances relating to intellectual property rights disputes could result in our
business and results of operations being harmed.
Many of our products include intellectual property licensed from third parties. In the future,
it may be necessary to renew licenses for third party intellectual property or obtain new licenses
for other technology. These third party licenses may not be available to us on acceptable terms, if
at all. The inability to obtain certain licenses, or litigation regarding the interpretation or
enforcement of license rights and related intellectual property issues, could have a material
adverse effect on our business, operating results and financial condition. Furthermore, we license
some third party intellectual property on a non-exclusive basis and this may limit our ability to
protect our intellectual property rights in our products.
We may not be able to sustain or develop new distribution relationships and a reduction or delay in
sales to a significant distribution partner could hurt our business
Our sales strategy requires that we establish and maintain multiple distribution channels in
the United States and internationally through leading industry resellers, systems integrators,
Internet service providers and other channel partners. We have a limited number of agreements with
companies in these channels, and we may not be able to increase our number of distribution
relationships or maintain our existing relationships. If we are unable to establish or maintain our
indirect sales channels, our business and results of operations will be harmed. In addition, one
domestic distributor of our products accounted for 18.6% and 19.1% of our total net revenue for the
fiscal years 2005 and 2004, respectively. A substantial reduction or delay in sales of our products
to this or any other key distribution partner could harm our business, operating results and
financial condition.
34
Undetected software errors may harm our business and results of operations
Software products frequently contain undetected errors when first introduced or as new
versions are released. We have experienced these errors in the past in connection with new products
and product upgrades. We expect that these errors will be found from time to time in new or
enhanced products after commencement of commercial shipments. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant 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 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 harm our business and results of operations.
Our operating results are exposed to risks associated with international commerce
As our international sales increase, our operating results become more exposed to
international operating risks. These risks include risks related to potential recessions in
economies outside the United States, foreign currency exchange rates, managing foreign sales
offices, regulatory, political, or economic conditions in specific countries, military conflict or
terrorist activities, changes in laws and tariffs, inadequate protection of intellectual property
rights in foreign countries, foreign regulatory requirements, and natural disasters. All of these
factors could have a material adverse effect on our business. We intend to continue expanding into
international markets. International sales represented 40.5% and 39.4% of our net revenues for the
fiscal years ended September 30, 2005 and 2004, respectively. In particular, in fiscal year 2005,
we derived 13.7% of our total revenue from the Japanese market. This revenue is dependent on a
number of factors outside our control, including the viability and success of our resellers and the
strength of the Japanese economy.
Changes in governmental regulations could negatively affect our revenues
Our products are subject to various regulations promulgated by the United States and various
foreign governments including, but not limited to, environmental regulations and regulations
implementing export license requirements and restrictions on the import or export of some
technologies, especially encryption technology. Changes in governmental regulation and our
inability or failure to obtain required approvals, permits or registrations could harm our
international and domestic sales and adversely affect our revenues, business and operations.
Acquisitions, including our recent acquisition of Swan Labs, present many risks and we may not
realize the financial and strategic goals that are contemplated at the time of the transaction
With respect to our acquisitions, as well as any other future acquisitions we may undertake,
we may find that the acquired assets do not further our business strategy as expected, or that we
paid more than what the assets are later worth, or that economic conditions change, all of which
may generate future impairment charges. There may be difficulty integrating the operations and
personnel of the acquired business, and we may have difficulty retaining the key personnel of the
acquired business. We may have difficulty in incorporating the acquired technologies or products
with our existing product lines. Our ongoing business and management’s attention may be disrupted
or diverted by transition or integration issues and the complexity of managing geographically and
culturally diverse locations. We may have difficulty maintaining uniform standards, controls,
procedures and policies across locations. We may experience significant problems or liabilities
associated with the product quality, technology and other matters.
Our inability to successfully operate and integrate newly-acquired businesses appropriately,
effectively and in a timely manner, or to retain key personnel of any acquired business, could have
a material adverse effect on our ability to take advantage of further growth in demand for
integrated traffic management and security solutions and other advances in technology, as well as
on our revenues, gross margins and expenses.
35
Our success depends on our key personnel and our ability to attract and retain qualified sales and
marketing, operations, product development and professional services personnel
Our success depends to a significant degree upon the continued contributions of our key
management, product development, sales, marketing and finance personnel, many of whom may be
difficult to replace. The complexity of our application delivery networking products and their
integration into existing networks and ongoing support, as well as the sophistication of our sales
and marketing effort, requires us to retain highly trained professional services, customer support
and sales personnel. Competition for qualified professional services, customer support and sales
personnel in our industry is intense because of the limited number of people available with the
necessary technical skills and understanding of our products. Our ability to retain and hire these
personnel may be adversely affected by volatility or reductions in the price of our common stock,
since these employees are generally granted stock options. The loss of services of any of our key
personnel, the inability to retain and attract qualified personnel in the future or delays in
hiring qualified personnel, may harm our business and results of operations.
We face litigation risks
We are a party to lawsuits in the normal course of our business. Litigation in general, and
intellectual property and securities litigation in particular, can be expensive, lengthy and
disruptive to normal business operations. Moreover, the results of complex legal proceedings are
difficult to predict. Responding to the allegations has been, and will likely continue to be,
expensive and time-consuming for us. An unfavorable resolution of the lawsuits could adversely
affect our business, results of operations, or financial condition.
Our historical stock option practices and the restatement of our prior financial statements
have exposed us to greater risks associated with litigation. In May
2006, several derivative actions were filed against certain current and former directors
and officers based on allegations relating to our historical stock option practices. We cannot
assure you that this current litigation will result in the same conclusions reached by the Special
Committee.
We may in the future be subject to additional litigation arising in relation to our historical
stock option practices and the restatement of our prior period financial statements. Litigation
may be time consuming, expensive and distracting for management from the conduct of our business.
The adverse resolution of any lawsuit could have a material adverse effect on our business,
financial condition and results of operations. We cannot assure you that any future litigation
relating to our historical stock option practices will result in the same conclusions reached by
the Special Committee. Furthermore, if we are subject to adverse findings in any of these matters,
we could be required to pay damages or penalties or have other remedies imposed upon us which could
adversely affect our business, results of operations, or financial condition.
The matters relating to the Special Committee’s review of our historical stock option practices and
the restatement of our consolidated financial statements has resulted in regulatory proceedings
against us and may result in future regulatory proceedings, which could have a material adverse
impact on our financial condition
On November 8, 2006, we announced that the Special Committee had completed its review of our
historical stock option practices. Upon completion of its review, the Special Committee found that
the recorded grant dates for certain stock options granted during fiscal years 1999 to 2004 should
not be relied upon as the measurement date for accounting purposes and the accounting treatment
used for the vesting of certain stock options was incorrect. Based on the Special Committee’s
review, to correct the accounting treatment, we have amended the Original Report and our Quarterly
Reports on Form 10-Q for the three months ended December 31, 2005 and March 31, 2006 to restate the
consolidated financial statements contained in those reports.
We have received notice from both the SEC and the Department of Justice that they are
conducting informal inquiries into our historical stock option practices, and we have continually
cooperated with both agencies. Considerable legal and accounting expenses related to our
historical stock option practices have already been incurred to date and significant expenditures
may continue to be incurred in the future. We may in the future be subject to additional
regulatory proceedings or actions arising in relation to our historical stock option practices and
the restatement of our prior period financial statements. Any potential regulatory proceeding or
action may be time consuming, expensive and distracting for management from the conduct of our
business. The adverse resolution of any potential regulatory proceeding or action could adversely
affect our business, results of operations, or financial condition. We cannot assure you that the
SEC and Department of Justice inquiries, or any future regulatory action relating to our historical
stock option practices, will result in the same conclusions reached by the Special Committee.
Furthermore, if we are subject to adverse findings in any of these matters, we could be required to
pay damages or penalties or have other remedies imposed upon us, including criminal penalties,
which could adversely affect our business, results of operations, or financial condition.
36
As a result of our delayed filing of our Form 10-Q for the quarter ended June 30, 2006, our
inability to maintain our Form S-3 eligibility may adversely affect our ability to raise future
capital
As a result of our delayed filing of our Form 10-Q for the quarter ended June 30, 2006, we
will be ineligible to register our securities on Form S-3 for sale by us or resale by other
security holders until we have timely filed all periodic reports under the Securities Exchange Act
of 1934 for one year from the date the Form 10-Q for the quarter ended June 30, 2006 was due. In
the meantime, we have the ability to use Form S-1 to raise capital or complete acquisitions, which
could increase the transaction costs and adversely affect our ability to raise capital or complete
acquisitions of other companies during this period.
Anti-takeover provisions could make it more difficult for a third party to acquire us
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders. The rights of the
holders of common stock may be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change of control of our company without
further action by our stockholders and may adversely affect the voting and other rights of the
holders of common stock. Further, certain provisions of our bylaws, including a provision limiting
the ability of stockholders to raise matters at a meeting of stockholders without giving advance
notice, may have the effect of delaying or preventing changes in control or management of our
company, which could have an adverse effect on the market price of our common stock. In addition,
our articles of incorporation provide for a staggered board, which may make it more difficult for a
third party to gain control of our board of directors. Similarly, state anti-takeover laws in the
State of Washington related to corporate takeovers may prevent or delay a change of control of our
company.
37
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk. Our cash equivalents consist of high-quality securities, as specified in
our investment policy guidelines. The policy limits the amount of credit exposure to any one issue
or issuer to a maximum of 5% of the total portfolio with the exception of U.S. treasury securities,
commercial paper and money market funds, which are exempt from size limitation. The policy requires
investments in securities that mature in three years or less, with the average maturity being no
greater than one and a half years. These securities are subject to interest rate risk and will
decrease in value if interest rates increase. A decrease of one percent in the average interest
rate would have resulted in a decrease of approximately $2.6 million in our interest income for the
fiscal year 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Maturing in |
| |
|
Three Months |
|
Three Months |
|
Greater Than |
|
|
|
|
| |
|
or Less |
|
to One Year |
|
One Year |
|
Total |
|
Fair Value |
| |
|
(In thousands, except for percentages) |
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
298 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
298 |
|
|
$ |
298 |
|
Weighted average interest rate |
|
|
2.5 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Included in short-term investments |
|
$ |
89,015 |
|
|
$ |
95,299 |
|
|
$ |
— |
|
|
$ |
184,314 |
|
|
$ |
184,314 |
|
Weighted average interest rates |
|
|
2.6 |
% |
|
|
2.3 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Included in long-term investments |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
128,834 |
|
|
$ |
128,834 |
|
|
$ |
128,834 |
|
Weighted average interest rates |
|
|
— |
|
|
|
— |
|
|
|
3.1 |
% |
|
|
— |
|
|
|
— |
|
September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
16,363 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
16,363 |
|
|
$ |
16,363 |
|
Weighted average interest rate |
|
|
1.1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Included in short-term investments |
|
$ |
64,410 |
|
|
$ |
51,190 |
|
|
$ |
— |
|
|
$ |
115,600 |
|
|
$ |
115,600 |
|
Weighted average interest rates |
|
|
1.3 |
% |
|
|
1.8 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Included in long-term investments |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
81,792 |
|
|
$ |
81,792 |
|
|
$ |
81,792 |
|
Weighted average interest rates |
|
|
— |
|
|
|
— |
|
|
|
2.0 |
% |
|
|
— |
|
|
|
— |
|
September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
3,972 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,972 |
|
|
$ |
3,972 |
|
Weighted average interest rate |
|
|
1.1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Included in short-term investments |
|
$ |
29,409 |
|
|
$ |
5,118 |
|
|
|
— |
|
|
$ |
34,527 |
|
|
$ |
34,527 |
|
Weighted average interest rates |
|
|
1.6 |
% |
|
|
2.1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Included in long-term investments |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
34,132 |
|
|
$ |
34,132 |
|
|
$ |
34,132 |
|
Weighted average interest rates |
|
|
— |
|
|
|
— |
|
|
|
2.0 |
% |
|
|
— |
|
|
|
— |
|
Foreign Currency Risk. The majority of our sales and expenses are denominated in U.S. dollars
and as a result, we have not experienced significant foreign currency transaction gains and losses
to date. While we have conducted some transactions in foreign currencies during the fiscal year
ended September 30, 2005 and expect to continue to do so, we do not anticipate that foreign
currency transaction gains or losses will be significant at our current level of operations.
However, as we continue to expand our operations internationally, transaction gains or losses may
become significant in the future. We have not engaged in foreign currency hedging to date. However,
we may do so in the future.
38
Item 8. Financial Statements and Supplementary Data
F5 NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
| |
|
Page |
Consolidated Financial Statements |
|
|
|
|
40 |
|
|
42 |
|
|
43 |
|
|
44 |
|
|
45 |
|
|
46 |
Supplementary Data |
|
78 |
Valuation and Qualifying Accounts and Reserves |
|
78 |
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of F5 Networks, Inc.:
We have completed an integrated audit of F5 Networks, Inc.’s 2005 consolidated financial statements
and of its internal control over financial reporting as of September 30, 2005 and audits of its
2004 and 2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the consolidated financial position of F5 Networks, Inc. and its
subsidiaries at September 30, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2005 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2005,
2004 and 2003 consolidated financial statements.
Internal control over financial reporting
Also, we have audited management’s assessment, included in Management’s Report on Internal Control
over Financial Reporting appearing under Item 9A, that F5 Networks, Inc. did not maintain effective
internal control over financial reporting as of September 30, 2005, because of errors identified
related to the granting and modification of stock options and the related accounting for and
disclosure of stock-based compensation expense, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management’s assessment and on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
40
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weakness has been identified
and included in management’s assessment. As of September 30, 2005, management has concluded that
the Company did not maintain effective controls over the granting and modification of stock options
and the related accounting for and disclosure of stock-based compensation expense. Specifically,
effective controls, including monitoring, were not maintained to ensure the existence,
completeness, accuracy, valuation and presentation of activity related to granting and modification
of stock options. This control deficiency resulted in the misstatement of stock-based compensation
expense, additional paid-in capital and related income tax accounts and related disclosures, and in
the restatement of the Company’s 2005, 2004 and 2003 annual consolidated financial statements and
the interim consolidated financial statements for the first and second quarters of 2006 and all
quarters of 2005 and 2004 and an audit adjustment to the interim consolidated financial statements
for the third quarter of 2006. Further, this control deficiency could result in misstatements of
the aforementioned accounts and disclosures that would result in a material misstatement of the
Company’s annual or interim consolidated financial statements that would not be prevented or
detected. This material weakness was considered in evaluating the nature, timing, and extent of
audit tests applied in our audit of the 2005 consolidated financial statements, and our opinion
regarding the effectiveness of the Company’s internal control over financial reporting does not
affect our opinion on those financial statements.
Management and we previously concluded that the Company maintained effective internal control over
financial reporting as of September 30, 2005. However, management subsequently has determined that
the material weakness described above existed as of September 30, 2005. Accordingly, Management’s
Report on Internal Control over Financial Reporting has been restated and our present opinion on
internal control over financial reporting, as presented herein, is different from that expressed in
our previous report.
In our opinion, management’s assessment that F5 Networks, Inc. did not maintain effective internal
control over financial reporting as of September 30, 2005, is fairly stated, in all material
respects, based on criteria established in Internal Control – Integrated Framework issued by the
COSO. Also, in our opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, F5 Networks, Inc. has not maintained
effective internal control over financial reporting as of September 30, 2005, based on criteria
established in Internal Control – Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
December 9,
2005, except for the effect of the restatement discussed in Note 2 to the consolidated financial
statements and the matter discussed in the penultimate paragraph of Management’s Report on Internal
Control over Financial Reporting, as to which the date is
December 8, 2006
41
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
(as restated) (1) |
|
|
(as restated) (1) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
51,867 |
|
|
$ |
24,901 |
|
Short-term investments |
|
|
184,314 |
|
|
|
115,600 |
|
Accounts receivable, net of allowances of $2,969 and $3,161 |
|
|
41,703 |
|
|
|
22,665 |
|
Inventories |
|
|
2,699 |
|
|
|
1,696 |
|
Deferred tax assets |
|
|
4,175 |
|
|
|
3,174 |
|
Other current assets |
|
|
9,906 |
|
|
|
5,776 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
294,664 |
|
|
|
173,812 |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
3,871 |
|
|
|
6,243 |
|
Property and equipment, net |
|
|
16,158 |
|
|
|
11,954 |
|
Long-term investments |
|
|
128,834 |
|
|
|
81,792 |
|
Deferred tax assets |
|
|
36,212 |
|
|
|
28,446 |
|
Goodwill |
|
|
49,677 |
|
|
|
50,067 |
|
Other assets, net |
|
|
8,323 |
|
|
|
8,279 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
537,739 |
|
|
$ |
360,593 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
7,668 |
|
|
$ |
4,840 |
|
Accrued liabilities |
|
|
23,931 |
|
|
|
16,088 |
|
Deferred revenue |
|
|
36,009 |
|
|
|
25,692 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
67,608 |
|
|
|
46,620 |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
6,650 |
|
|
|
3,856 |
|
Deferred revenue, long-term |
|
|
3,314 |
|
|
|
2,372 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
9,964 |
|
|
|
6,228 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 10,000 shares authorized, no shares outstanding |
|
|
— |
|
|
|
— |
|
Common stock, no par value; 100,000 shares authorized, 38,593 and 34,772
shares issued and outstanding |
|
|
431,897 |
|
|
|
326,278 |
|
Accumulated other comprehensive loss |
|
|
(1,430 |
) |
|
|
(498 |
) |
Unearned compensation |
|
|
— |
|
|
|
(833 |
) |
Retained earnings |
|
|
29,700 |
|
|
|
(17,202 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
460,167 |
|
|
|
307,745 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
537,739 |
|
|
$ |
360,593 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements.
42
F5 NETWORKS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) (1) |
|
|
(as restated) (1) |
|
|
(as restated) (1) |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
219,603 |
|
|
$ |
126,169 |
|
|
$ |
84,197 |
|
Services |
|
|
61,807 |
|
|
|
45,021 |
|
|
|
31,698 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
281,410 |
|
|
|
171,190 |
|
|
|
115,895 |
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
48,990 |
|
|
|
28,406 |
|
|
|
17,843 |
|
Services |
|
|
16,194 |
|
|
|
10,993 |
|
|
|
9,132 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
65,184 |
|
|
|
39,399 |
|
|
|
26,975 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
216,226 |
|
|
|
131,791 |
|
|
|
88,920 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
89,866 |
|
|
|
66,446 |
|
|
|
54,897 |
|
Research and development |
|
|
31,516 |
|
|
|
24,438 |
|
|
|
19,455 |
|
General and administrative |
|
|
25,486 |
|
|
|
15,761 |
|
|
|
12,210 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
146,868 |
|
|
|
106,645 |
|
|
|
86,562 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
69,358 |
|
|
|
25,146 |
|
|
|
2,358 |
|
Other income, net |
|
|
8,076 |
|
|
|
2,731 |
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
77,434 |
|
|
|
27,877 |
|
|
|
3,109 |
|
Provision (benefit) for income taxes |
|
|
30,532 |
|
|
|
(8,451 |
) |
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
46,902 |
|
|
$ |
36,328 |
|
|
$ |
2,256 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
1.26 |
|
|
$ |
1.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — basic |
|
|
37,220 |
|
|
|
33,221 |
|
|
|
26,453 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share — diluted |
|
$ |
1.21 |
|
|
$ |
1.01 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — diluted |
|
|
38,761 |
|
|
|
35,961 |
|
|
|
28,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements.
43
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(as restated) (1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Retained |
|
|
Total |
|
| |
|
Common Stock |
|
|
Unearned |
|
|
Comprehensive |
|
|
Earnings |
|
|
Shareholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Compensation |
|
|
Income/(Loss) |
|
|
(Deficit) |
|
|
Equity |
|
| |
|
(In thousands) |
|
Balance, September 30, 2002 |
|
|
25,730 |
|
|
$ |
128,876 |
|
|
$ |
(93 |
) |
|
$ |
454 |
|
|
$ |
(35,552 |
) |
|
$ |
93,685 |
|
Cumulative effect of restatement (Note 2) |
|
|
— |
|
|
|
22,670 |
|
|
|
(2,436 |
) |
|
|
— |
|
|
|
(20,234 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2002, as
restated |
|
|
25,730 |
|
|
$ |
151,546 |
|
|
$ |
(2,529 |
) |
|
$ |
454 |
|
|
$ |
(55,786 |
) |
|
$ |
93,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options |
|
|
1,424 |
|
|
|
10,827 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,827 |
|
Issuance of stock under employee stock
purchase plan |
|
|
249 |
|
|
|
2,006 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,006 |
|
Unearned compensation |
|
|
— |
|
|
|
942 |
|
|
|
(942 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of unearned compensation |
|
|
— |
|
|
|
— |
|
|
|
1,914 |
|
|
|
— |
|
|
|
— |
|
|
|
1,914 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,256 |
|
|
|
— |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(161 |
) |
|
|
— |
|
|
|
— |
|
Unrealized loss on securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(98 |
) |
|
|
— |
|
|
|
— |
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2003, as
restated |
|
|
27,403 |
|
|
$ |
165,321 |
|
|
$ |
(1,557 |
) |
|
$ |
195 |
|
|
$ |
(53,530 |
) |
|
$ |
110,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options |
|
|
2,032 |
|
|
|
22,349 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,349 |
|
Issuance of stock under employee stock
purchase plan |
|
|
162 |
|
|
|
2,579 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,579 |
|
Issuance of common stock in a public
offering (net of issuance costs of
$6,682) |
|
|
5,175 |
|
|
|
113,636 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
113,636 |
|
Tax benefit from employee stock
transactions |
|
|
— |
|
|
|
21,925 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,925 |
|
Unearned compensation |
|
|
— |
|
|
|
468 |
|
|
|
(468 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of unearned compensation |
|
|
— |
|
|
|
— |
|
|
|
1,192 |
|
|
|
— |
|
|
|
— |
|
|
|
1,192 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36,328 |
|
|
|
— |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
144 |
|
|
|
— |
|
|
|
— |
|
Unrealized loss on securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(837 |
) |
|
|
— |
|
|
|
— |
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2004, as
restated |
|
|
34,772 |
|
|
$ |
326,278 |
|
|
$ |
(833 |
) |
|
$ |
(498 |
) |
|
$ |
(17,202 |
) |
|
$ |
307,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options |
|
|
3,685 |
|
|
|
65,056 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
65,056 |
|
Issuance of stock under employee stock
purchase plan |
|
|
136 |
|
|
|
3,837 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,837 |
|
Tax benefit from employee stock
transactions |
|
|
— |
|
|
|
32,153 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,153 |
|
Amortization of unearned compensation |
|
|
— |
|
|
|
— |
|
|
|
833 |
|
|
|
— |
|
|
|
— |
|
|
|
833 |
|
Stock-based compensation |
|
|
|
|
|
|
4,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,573 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
46,902 |
|
|
|
— |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(161 |
) |
|
|
— |
|
|
|
— |
|
Unrealized loss on securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(771 |
) |
|
|
— |
|
|
|
— |
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005, as
restated |
|
|
38,593 |
|
|
$ |
431,897 |
|
|
$ |
— |
|
|
$ |
(1,430 |
) |
|
$ |
29,700 |
|
|
$ |
460,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements
44
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) (1) |
|
|
(as restated) (1) |
|
|
(as restated) (1) |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
46,902 |
|
|
$ |
36,328 |
|
|
$ |
2,256 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss (gain) on disposition of assets |
|
|
569 |
|
|
|
21 |
|
|
|
(14 |
) |
Realized (gain) loss on sale of investments |
|
|
— |
|
|
|
(3 |
) |
|
|
232 |
|
Stock-based compensation |
|
|
5,406 |
|
|
|
1,192 |
|
|
|
1,914 |
|
Provision for doubtful accounts and sales returns |
|
|
1,419 |
|
|
|
1,189 |
|
|
|
1,148 |
|
Depreciation and amortization |
|
|
6,797 |
|
|
|
5,355 |
|
|
|
5,162 |
|
Deferred income taxes |
|
|
(7,733 |
) |
|
|
(33,886 |
) |
|
|
— |
|
Tax benefit from employee stock option plans |
|
|
32,153 |
|
|
|
21,685 |
|
|
|
— |
|
Changes in operating assets and liabilities, net of amounts acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(20,456 |
) |
|
|
(4,152 |
) |
|
|
354 |
|
Inventories |
|
|
(1,002 |
) |
|
|
(928 |
) |
|
|
(408 |
) |
Other current assets |
|
|
(3,604 |
) |
|
|
(642 |
) |
|
|
(54 |
) |
Other assets |
|
|
(149 |
) |
|
|
(630 |
) |
|
|
(512 |
) |
Accounts payable and accrued liabilities |
|
|
13,426 |
|
|
|
6,303 |
|
|
|
(320 |
) |
Deferred revenue |
|
|
11,259 |
|
|
|
8,758 |
|
|
|
4,852 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
84,987 |
|
|
|
40,590 |
|
|
|
14,610 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
(407,533 |
) |
|
|
(335,231 |
) |
|
|
(157,834 |
) |
Sales of investments |
|
|
290,351 |
|
|
|
205,662 |
|
|
|
149,724 |
|
Investment of restricted cash |
|
|
2,369 |
|
|
|
(168 |
) |
|
|
— |
|
Proceeds from the sale of property and equipment |
|
|
— |
|
|
|
— |
|
|
|
14 |
|
Acquisition of intangible assets, net |
|
|
(2,259 |
) |
|
|
— |
|
|
|
— |
|
Acquisition of businesses, net of cash acquired |
|
|
(395 |
) |
|
|
(29,201 |
) |
|
|
(27,373 |
) |
Purchases of property and equipment |
|
|
(9,293 |
) |
|
|
(5,775 |
) |
|
|
(2,584 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(126,760 |
) |
|
|
(164,713 |
) |
|
|
(38,053 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from secondary offering, net of issuance costs |
|
|
— |
|
|
|
113,636 |
|
|
|
— |
|
Proceeds from the exercise of stock options |
|
|
68,867 |
|
|
|
24,832 |
|
|
|
12,833 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
68,867 |
|
|
|
138,468 |
|
|
|
12,833 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
27,094 |
|
|
|
14,345 |
|
|
|
(10,610 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(128 |
) |
|
|
205 |
|
|
|
160 |
|
Cash and cash equivalents, beginning of year |
|
|
24,901 |
|
|
|
10,351 |
|
|
|
20,801 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
51,867 |
|
|
$ |
24,901 |
|
|
$ |
10,351 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
792 |
|
|
$ |
706 |
|
|
$ |
290 |
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements.
45
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
F5 Networks, Inc., (“the Company”) provides products and services to help companies
efficiently and securely manage their Internet traffic. The Company’s products improve the
performance, availability and security of applications running on Internet-based networks. Internet
traffic between servers running applications and clients using these applications passes through
the Company’s products where the content is inspected to ensure that it is safe and modified as
necessary to ensure that it is delivered securely and in a way that optimizes the performance of
both the network and the applications. The Company also offers a broad range of services such as
consulting, training, installation, maintenance, and other technical support services.
Certain Risks and Uncertainties
The Company’s products and services are concentrated in highly competitive markets
characterized by rapid technological advances, frequent changes in customer requirements and
evolving regulatory requirements and industry standards. Failure to anticipate or respond
adequately to technological advances, changes in customer requirements and changes in regulatory
requirements or industry standards could have a material adverse effect on the Company’s business
and operating results. Additionally, certain other factors could affect the Company’s future
operating results and cause actual results to differ materially from expectations, including but
not limited to, the timely development, introduction and acceptance of additional new products and
features by the Company or its competitors; competitive pricing pressures, increased sales
discounts; the Company’s ability to sustain, develop and effectively utilize distribution
relationships; the Company’s ability to attract, train and retain qualified personnel; the
Company’s ability to expand in international markets, and the unpredictability of the Company’s
sales cycle.
Accounting Principles
The Company’s consolidated financial statements and accompanying notes are prepared on the
accrual basis of accounting in accordance with generally accepted accounting principles in the
United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current
period presentation. The reclassifications had no impact on previously reported net income or
shareholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Estimates are used in accounting for revenue recognition,
reserves for doubtful accounts, product returns, obsolete and excess inventory, warranties,
valuation allowance on deferred tax assets and purchase price allocations. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with purchased maturities of three months
or less to be cash equivalents. The Company invests its cash and cash equivalents in deposits with
three major financial institutions, which, at times, exceed federally insured limits. The Company
has not experienced any losses on its cash and cash equivalents.
46
Investments
The Company classifies its investment securities as available for sale. Investment securities,
consisting of corporate and municipal bonds and notes and United States government securities, are
reported at fair value with the related unrealized gains and losses included as a component of
accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses
and declines in value of securities judged to be other than temporary are included in other income
(expense). The cost of investments for purposes of computing realized and unrealized gains and
losses is based on the specific identification method. Investments in securities with maturities of
less than one year or where management’s intent is to use the investments to fund current
operations are classified as short-term investments. Investments with maturities of greater than
one year are classified as long-term investments.
Concentration of Credit Risk
The Company extends credit to customers and is therefore subject to credit risk. The Company
performs initial and ongoing credit evaluations of its customers’ financial condition and does not
require collateral. An allowance for doubtful accounts is recorded to account for potential bad
debts. Estimates are used in determining the allowance for doubtful accounts and are based upon an
assessment of selected accounts and as a percentage of remaining accounts receivable by aging
category. In determining these percentages, the Company evaluates historical write-offs, and
current trends in customer credit quality, as well as changes in credit policies.
The Company maintains its cash and investment balances with high credit quality financial
institutions.
Fair Value of Financial Instruments
Short-term and long-term investments are recorded at fair value as the underlying securities
are classified as available for sale and marked-to-market at each reporting period. The fair value
is determined using quoted market prices for the securities held.
Inventories
The Company outsources the manufacturing of its pre-configured hardware platforms to contract
manufacturers, who assemble each product to the Company’s specifications. As protection against
component shortages and to provide replacement parts for its service teams, the Company also stocks
limited supplies of certain key product components. The Company reduces inventory to net realizable
value based on excess and obsolete inventories determined primarily by historical usage and
forecasted demand. Inventories consist of hardware and related component parts and are recorded at
the lower of cost or market (as determined by the first-in, first-out method).
Inventories consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended |
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Finished goods |
|
$ |
2,486 |
|
|
$ |
1,452 |
|
Raw materials |
|
|
213 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
$ |
2,699 |
|
|
$ |
1,696 |
|
|
|
|
|
|
|
|
Restricted Cash
Restricted cash represents escrow accounts established in connection with lease agreements for
the Company’s corporate headquarters and, to a lesser extent, our international facilities. Under
the terms of the lease for our corporate headquarters, the amount required to be held in escrow
reduces and eventually eliminates at various dates throughout the duration of the lease term.
During the fiscal year ended September 30, 2005, the amount required to be held in escrow decreased
from $6.0 million to $3.6 million as set forth in the lease agreement for our corporate
headquarters.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and equipment are provided
using the straight-line method over the estimated useful lives of the assets, ranging from two to
five years. Leasehold improvements are amortized over the lesser of the
47
lease term or the estimated useful life of the improvements. The cost of normal maintenance
and repairs is charged to expense as incurred and expenditures for major improvements are
capitalized at cost. Gains or losses on the disposition of assets are reflected in the income
statements at the time of disposal.
Property and equipment consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended |
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Computer equipment |
|
$ |
19,344 |
|
|
$ |
18,499 |
|
Office furniture and equipment |
|
|
5,326 |
|
|
|
5,895 |
|
Leasehold improvements |
|
|
8,772 |
|
|
|
8,272 |
|
|
|
|
|
|
|
|
|
|
|
33,442 |
|
|
|
32,666 |
|
Accumulated depreciation and amortization |
|
|
(17,284 |
) |
|
|
(20,712 |
) |
|
|
|
|
|
|
|
|
|
$ |
16,158 |
|
|
$ |
11,954 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled approximately $4.8 million, $4.0 million, and
$4.7 million for the fiscal years ended September 30, 2005, 2004 and 2003, respectively.
Goodwill
Goodwill represents the excess purchase price over the estimated fair value of net assets
acquired as of the acquisition date. The Company has adopted the requirements of Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). SFAS
No. 142 requires goodwill to be tested for impairment on an annual basis and between annual tests
in certain circumstances, and written down when impaired. Goodwill of $24.2 million was recorded in
connection with the acquisition of uRoam, Inc. in fiscal year 2003 and goodwill of $25.5 million
was recorded in connection with the acquisition of MagniFire Websystems Inc., in fiscal year 2004.
The Company completed its annual impairment test in the second quarter of each fiscal year and
concluded that there was no impairment of goodwill in either fiscal year 2005 or 2004.
Other Assets
Other assets primarily consist of software development costs and acquired technology.
Software development costs are charged to research and development expense until technological
feasibility is established. The Company accounts for internally-generated software development
costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, “Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” 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 ongoing 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 did not capitalize any software development costs in fiscal year
2005. During the fiscal year 2004, the Company capitalized $424,000 of software development costs.
Related amortization costs of $272,000, $328,000, and $298,000 were recorded during the fiscal
years 2005, 2004, and 2003, respectively.
Acquired technology is recorded at cost and amortized over its estimated useful life of five
years. Acquired technology of $5.0 million in fiscal year 2004 and $3.0 million in fiscal year 2003
was recorded in connection with the acquisitions of MagniFire and uRoam, respectively. Related
amortization expense, which is charged to cost of product revenues, totaled $1.6 million, $1.0
million and $100,000 during the fiscal years 2005, 2004 and 2003, respectively.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets whenever events or changes in
business circumstances indicate that the carrying amount of an asset may not be recoverable. When
such events occur, management determines whether there has been an impairment by comparing the
anticipated undiscounted net future cash flows to the related asset’s carrying value. If an
impairment exists, the asset is written down to its estimated fair value.
48
Revenue Recognition
The Company’s products are integrated with software that is essential to the functionality of
the equipment. Accordingly, the Company recognizes revenue in accordance with the guidance provided
under Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” and SOP No. 98-9
“Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions,”
Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue Recognition When Right of
Return Exists,” and SEC Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition.”
The Company sells products through distributors, resellers, and directly to end users. The
Company recognizes product revenue upon shipment, net of estimated returns, provided that
collection is determined to be probable and no significant obligations remain. In certain regions
where the Company does not have the ability to reasonably estimate returns, the Company defers
revenue on sales to its distributors until the Company has received information from the channel
partner indicating that the distributor has sold the product to its customer. Payment terms to
domestic customers are generally net 30 days. Payment terms to international customers range from
net 30 to 90 days based on normal and customary trade practices in the individual markets. The
Company has offered extended payment terms ranging from three to six months to certain customers,
in which case, revenue is recognized when payments are received.
Whenever a software license, hardware, installation and post-contract customer support
(“PCS”), elements are sold together, a portion of the sales price is allocated to each element
based on their respective fair values as determined when the individual elements are sold
separately. Revenues from the license of software are recognized when the software has been shipped
and the customer is obligated to pay for the software. When rights of return are present and the
Company cannot estimate returns, the Company recognizes revenue when such rights of return lapse.
Revenues for PCS are recognized on a straight-line basis over the service contract term. PCS
includes rights to upgrades, when and if available, a limited period of telephone support, updates,
and bug fixes. Installation revenue is recognized when the product has been installed at the
customer’s site. Consulting services are customarily billed at fixed rates, plus out-of-pocket
expenses, and revenues are recognized when the consulting has been completed. Training revenue is
recognized when the training has been completed.
Shipping and Handling
Shipping and handling fees charged to our customers are recognized as product revenue in the
period shipped and the related costs for providing these services are recorded as a cost of sale.
Guarantees and Product Warranties
In the normal course of business to facilitate sales of its products, the Company indemnifies
other parties, including customers, resellers, lessors, and parties to other transactions with the
Company, with respect to certain matters. The Company has agreed to hold the other party harmless
against losses arising from a breach of representations or covenants, or out of intellectual
property infringement or other claims made against certain parties. These agreements may limit the
time within which an indemnification claim can be made and the amount of the claim. The Company has
entered into indemnification agreements with its officers and directors, and the Company’s bylaws
contain similar indemnification obligations to the Company’s agents. It is not possible to
determine the maximum potential amount under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and circumstances involved in each
particular agreement.
The Company offers warranties of one year for hardware, with the option of purchasing
additional warranty coverage in yearly increments. The Company accrues for warranty costs as part
of its cost of sales based on associated material product costs and technical support labor costs.
During the years ended September 30, 2005, 2004 and 2003 warranty expense was $2.2 million, $0.9
million and $0.3 million, respectively.
The following table summarizes the activity related to product warranties (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30 |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Balance, beginning of fiscal year |
|
$ |
1,062 |
|
|
$ |
827 |
|
|
$ |
650 |
|
Provision for warranties issued |
|
|
2,233 |
|
|
|
923 |
|
|
|
291 |
|
Payments |
|
|
(1,730 |
) |
|
|
(688 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of fiscal year |
|
$ |
1,565 |
|
|
$ |
1,062 |
|
|
$ |
827 |
|
|
|
|
|
|
|
|
|
|
|
49
Research and Development
Research and development expenses consist of salaries and related benefits of product
development personnel, prototype materials and expenses related to the development of new and
improved products, and an allocation of facilities and depreciation expense. Research and
development expenses are reflected in the statements of income as incurred.
Advertising
Advertising costs are expensed as incurred. The Company incurred $1.7 million, $1.7 million
and $1.0 million in advertising costs during the fiscal years 2005, 2004 and 2003, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth by
Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109.
Deferred income tax assets and liabilities are determined based upon differences between the
financial statement and income tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The realization of deferred
tax assets is based on historical tax positions and estimates of future taxable income. A valuation
allowance is recorded when it is more likely than not that some of the deferred tax assets will not
be realized.
Foreign Currency
The functional currency for the Company’s foreign subsidiaries is the local currency in which
the respective entity is located, with the exception of F5 Networks, Ltd., in the United Kingdom
that uses the U.S. dollar as its functional currency. An entity’s functional currency is determined
by the currency of the economic environment in which the majority of cash is generated and expended
by the entity. The financial statements of all majority-owned subsidiaries and related entities,
with a functional currency other than the U.S. dollar, have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation.”
All assets and liabilities of the respective entities are translated at year-end exchange rates and
all revenues and expenses are translated at average rates during the respective period. Translation
adjustments are reported as a separate component of accumulated other comprehensive income (loss)
in shareholders equity.
Foreign currency transaction gains and losses are a result of the effect of exchange rate
changes on transactions denominated in currencies other than the functional currency, including
U.S. dollars. Gains and losses on those foreign currency transactions are included in determining
net income or loss for the period of exchange. The net effect of foreign currency gains and losses
were not significant during the fiscal year ended September 30, 2005. Net transaction losses of
$466,000 and $544,000 were charged to operations for the fiscal year ended September 30, 2004 and
2003, respectively.
Segments
The Company complies with the requirements of Statement of Financial Accounting Standards
(SFAS) No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which
establishes annual and interim reporting standards for an enterprise’s operating segments and
related disclosures about its products, services, geographic areas and major customers. Management
has determined that the Company operates in one segment.
Stock-Based Compensation
On July 1, 2005, the Company adopted the fair value recognition provisions of Financial
Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment, (“FAS 123R”). Prior
to July 1, 2005, the Company accounted for share-based payments under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”),
and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based
Compensation (“FAS 123”). In accordance with APB 25 no compensation cost was required to be
recognized for options granted that had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified-prospective-transition method. Under that
transition method, compensation cost recognized in the fiscal year 2005 includes: a) compensation
cost for all share-based payments granted prior to, but not yet vested as of July 1, 2005, based on
the grant-date fair value estimated in accordance with the original provisions of FAS 123, and b)
compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the
grant-date fair value estimated in accordance with the provisions of FAS 123R.
50
Effective July 1, 2005 the Company adopted the straight-line attribution method for
recognizing compensation expense. Previously under the disclosure-only provisions of SFAS 123, the
Company used the accelerated method of expense recognition pursuant to FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”).
For all unvested options outstanding as of July 1, 2005, the previously measured but unrecognized
compensation expense, based on the fair value at the original grant date, will be recognized on an
accelerated basis over the remaining vesting period. For share-based payments granted subsequent to
July 1, 2005, compensation expense, based on the fair value on the date of grant, will be
recognized on a straight-line basis over the vesting period.
The fair value of restricted stock units is based on the price of a share of our common stock
on the date of grant. However, in determining the fair value of stock options, we use the
Black-Scholes option pricing model that employs the following key assumptions.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Option Plan |
|
Employee Stock Purchase Plan |
| |
|
Years Ended September 30, |
|
Years Ended September 30, |
| |
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
2003 |
Risk-free interest rate |
|
|
3.53 |
% |
|
|
3.19 |
% |
|
|
2.33 |
% |
|
|
2.72 |
% |
|
|
1.14 |
% |
|
|
1.23 |
% |
Expected dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected term |
|
2.7 years |
|
2.2 years |
|
4.0 years |
|
0.5 years |
|
0.5 years |
|
0.5 years |
Expected volatility |
|
|
68.17 |
% |
|
|
59.05 |
% |
|
|
49.95 |
% |
|
|
52.48 |
% |
|
|
50.18 |
% |
|
|
72.93 |
% |
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
The Company does not anticipate declaring dividends in the foreseeable future. Expected volatility
is based on the annualized daily historical volatility of our stock price commensurate with the
expected life of the option. Expected term of the option is based on an evaluation of the
historical employee stock option exercise behavior, the vesting terms of the respective option and
a contractual life of ten years. Our stock price volatility and option lives involve management’s
best estimates at that time, both of which impact the fair value of the option calculated under the
Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the
option. SFAS 123R also requires that we recognize compensation expense for only the portion of
options or stock units that are expected to vest. Therefore, the Company applies estimated
forfeiture rates that are derived from historical employee termination behavior. The estimated
forfeiture rate in the fourth quarter of fiscal 2005 is 5%. If the actual number of forfeitures
differs from those estimated by management, additional adjustments to compensation expense may be
required in future periods.
The weighted-average fair value of options granted in the fiscal years 2005, 2004 and 2003 was
$18.68, $8.32 and $7.46, respectively.
51
The following table shows the pro forma effect on the Company’s net income (loss) and net
income (loss) per share for the years ended September 30, 2005, 2004 and 2003, had compensation
expense been determined based upon the fair value at the grant date for awards consistent with the
methodology prescribed by SFAS 123. The Company adopted SFAS 123R on July 1, 2005 the beginning of
its fourth quarter of fiscal 2005; therefore, stock-based compensation expense shown in the pro
forma table relates to expense through June 30, 2005 while the Company was still under the
disclosure only provisions of SFAS 123. Stock-based compensation expense for the fourth quarter of
fiscal 2005 has been included in results of operations. The following pro forma disclosure has been
restated to reflect changes in assumptions and corrections of errors related to both our reported
net income (loss) and to the pro forma stock-based compensation amounts as determined under SFAS
No. 123, identified in connection with our Restatement (See Note 2, “Restatement of Consolidated
Financial Statements”). The pro forma effects may not be representative of expense in future
periods since the estimated fair value of stock options on the date of grant is amortized to
expense over the vesting period, and additional options may be granted or options may be cancelled
in future years.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) (1) |
|
|
(as restated) (1) |
|
|
(as restated) (1) |
|
Net income, as reported |
|
$ |
46,902 |
|
|
$ |
36,328 |
|
|
$ |
2,256 |
|
Add: Stock-based employee
compensation expense under
APB No. 25 included in
reported net income, net of
tax effect |
|
|
833 |
|
|
|
1,192 |
|
|
|
1,914 |
|
Deduct: Total stock-based
employee compensation
expense determined under
the fair value methods,
net of tax effect |
|
|
7,161 |
|
|
|
19,356 |
|
|
|
24,402 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss). |
|
$ |
40,574 |
|
|
$ |
18,164 |
|
|
$ |
(20,232 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported — basic |
|
$ |
1.26 |
|
|
$ |
1.09 |
|
|
$ |
0.09 |
|
Pro forma — basic |
|
$ |
1.09 |
|
|
$ |
0.55 |
|
|
$ |
(0.76 |
) |
As reported — diluted |
|
$ |
1.21 |
|
|
$ |
1.01 |
|
|
$ |
0.08 |
|
Pro forma — diluted |
|
$ |
1.05 |
|
|
$ |
0.51 |
|
|
$ |
(0.76 |
) |
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
Earnings Per Share
Basic net income per share is computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per share is computed by
dividing net income by the weighted average number of common and dilutive common stock equivalent
shares outstanding during the period.
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share data).
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) (1) |
|
|
(as restated) (1) |
|
|
(as restated) (1) |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
46,902 |
|
|
$ |
36,328 |
|
|
$ |
2,256 |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
|
37,220 |
|
|
|
33,221 |
|
|
|
26,453 |
|
Dilutive effect of common shares from stock options and restricted stock units |
|
|
1,541 |
|
|
|
2,740 |
|
|
|
1,722 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
38,761 |
|
|
|
35,961 |
|
|
|
28,175 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.26 |
|
|
$ |
1.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
1.21 |
|
|
$ |
1.01 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
Approximately 0.4 million, 1.4 million, and 2.6 million of common shares potentially issuable
from stock options for the years ended September 30, 2005, 2004 and 2003 are excluded from the
calculation of diluted earnings per share because the exercise price was greater than the market
price.
52
Recent Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF
03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity
securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an investment is other-than-temporarily
impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF
03-1-1, which delays the effective date until additional guidance is issued for the application of
the recognition and measurement provisions of EITF 03-1 to investments in securities that are
impaired. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments.” This FSP addresses the
determination as to when an investment is considered impaired, whether the impairment is other than
temporary and the measurement of an impairment loss. This statement specifically nullifies the
requirements of paragraph 10-18 of EITF 03-1 and references existing other-than-temporary
impairment guidance. The guidance under this FSP is effective for reporting periods beginning after
December 15, 2005. The Company does not expect the adoption of FSP FAS 115-1 and FAS 124-1 to have
a material effect on the Company’s results of operations or financial condition.
In May of 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — A
Replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the requirements for the
accounting and reporting of a change in accounting principle. The Statement applies to all
voluntary changes in accounting principle and to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition provisions. This
Statement requires retrospective application to prior periods’ financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not
expect the adoption of this statement to have a material impact on the Company’s financial
condition or results of operations.
53
2. Restatement of Consolidated Financial Statements
On May 16, 2006, the Center for Financial Research and Analysis (“CFRA”) issued a report
entitled “Options Backdating, Which Companies Are At Risk?” (the “CFRA Report”) in which CFRA
reviewed the option prices of 100 public companies and, based upon an analysis of the exercise
prices of option grants with reference to the companies’ stock prices, concluded that 17% of the
subject companies were, in CFRA’s view, “at risk for having backdated option grants during the
period 1997 to 2002.” The Company was among the 17 companies so identified.
On May 18, 2006, the Company was contacted by the Securities and Exchange Commission (“SEC”)
as part of an informal inquiry entitled In the Matter of F5 Networks, Inc., (SEC File No.
MHO-10462). On May 19, 2006, the Company received a grand jury subpoena issued by the U.S. District
Court for the Eastern District of New York requesting documents related to the granting of stock
options from 1995 through the present in connection with an inquiry into the Company’s stock option
practices by the United States Attorney’s Office for the Eastern District of New York (the
“Department of Justice”). The Company produced documents in response to these requests and is
continuing to cooperate fully with the SEC regarding these inquires.
On May 22, 2006, the Company’s Board of Directors (the “Board of Directors”) formed a special
committee of outside directors with broad authority to conduct a review of the Company’s stock
option practices, including a review of the Company’s underlying stock option documentation and
procedures (the “Special Committee”). At that time, the Special Committee was composed of three
members of the Board of Directors, one of which was also on the Audit Committee, Karl Guelich, Rich
Malone and Gary Ames. In July 2006, the Special Committee was reconstituted to consist of two
independent members of the Board of Directors, Gary Ames and Deborah Bevier (who joined the
Company’s Board of Directors on July 14, 2006). The Special Committee retained the law firm of
Wilson Sonsini Goodrich & Rosati P.C. (“Wilson Sonsini”) as its independent outside legal counsel.
Wilson Sonsini engaged Deloitte Financial Advisory Services LLP as independent accounting experts
to aid in its investigation.
In the course of responding to the SEC and the Department of Justice’s inquiries, the Company
determined that there were potential problems with the accounting treatment of certain stock option
grants. On July 20, 2006, the Company announced that the Audit Committee of the Board of Directors
(the “Audit Committee”) had determined, after consultation with management, that the Company’s
financial statements and all earnings releases and similar communications relating to fiscal
periods beginning on or after October 1, 2000, the first day of
its fiscal year 2001, should be restated.
In October 2006, the Special Committee determined that the recorded grant dates for certain
stock options granted during fiscal years 1999 through 2004 should not be relied upon as the
measurement date for accounting purposes and that the accounting treatment used for the vesting of
certain stock options was incorrect. Because the prices at the originally stated grant dates were
lower than the prices on the actual measurement dates, the Company determined it should have
recognized material amounts of stock-based compensation expense which were not previously accounted
for in the Company’s previously issued financial statements. Therefore, the Audit Committee after
consultation with management concluded that the Company’s previously filed unaudited interim and
audited financial statement for the years ended September 30, 2005, 2004, 2003, 2002, 2001, 2000
and 1999 as well as the unaudited interim financial statements for the first and second quarters
ended December 31, 2005 and 2004 and March 31, 2006 and 2005, should no longer be relied upon
because these financial statements contained material misstatements.
Special Committee and Company Findings
On November 8, 2006, the Company announced that the Special Committee had completed its review
of the Company’s stock option practices and reported its final findings to the Board of Directors.
The
Special Committee concluded that there were options grants where the
Company (i) used improper measurement dates in connection with
certain annual stock option grants to employees because the number of
shares certain individual employees were entitled to receive was not
determined until after the original grant date, (ii) granted
options to certain new employees and board members prior to their
start dates, (iii) did not have sufficient documentation to
support certain measurement dates and did not
obtain the necessary approvals for stock options issued to certain
individuals, (iv) did not properly account for stock option
grants issued to a consultant who later became an employee, and
(v) did not properly account for stock options of certain
individuals that were modified after the grant date. Based on its
investigation, the Special Committee concluded that it continued to
have confidence in the ability of the Company’s current senior
management to serve in their positions with integrity at the Company.
The Special Committee was unable to reach any conclusions regarding
the intent of former officers, directors and employees. Based on the
Special Committee’s findings, the Company has adopted and is
implementing a number of remedial measures designed to improve its
policies, controls, processes and procedures relating to the granting
and modification of stock-based compensation and will provide
additional training for personnel responsible for administration of
the Company’s equity compensation plans.
As a result of the Special Committee’s investigation, as well as the Company’s internal
review of its stock option practices and historical financial statements, the Company has
determined the following:
| |
• |
|
Improper Measurement Dates for Annual Stock Option Grants. In connection with the
Company’s annual stock option grants to certain employees in 2000, 2001, 2003 and 2004, the
number of shares that certain individual employees were entitled to receive was not
determined until after the original grant date, and therefore the measurement date for such
options was subsequent to the original grant date. In addition, in connection with the
Company’s annual stock option grant to employees in 2000, the exercise price was not set in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and
related interpretations. As a result, the Company has restated its historical financial
statements to increase stock-based compensation expense by approximately $14.3 million
recognized over the applicable vesting periods. |
54
| |
• |
|
Improper Measurement Dates for Other Stock Option. Certain options to new employees and
board members were granted on dates other than to their respective
start date with the Company. As a result, the
Company has restated its historical financial statements to increase stock-based
compensation expense by approximately $1.3 million recognized over the applicable vesting
periods. |
| |
| |
• |
|
Incomplete Documentation or Approval for Stock Option Grants. In 2000 and 2001 the
Company did not have sufficient documentation to support certain
measurement dates and did not obtain the required approvals for stock
options. As a result, the Company has restated its
historical financial statements to increase stock-based compensation expense by
approximately $4.6 million recognized over the applicable vesting periods. |
| |
| |
• |
|
Stock Options Grants to Non-employees. In 2000, the Company did not properly accounted
for stock option grants issued to a consultant who later became an employee. The Company
erroneously accounted for the grant in accordance with APB No. 25 rather than FASB
Statement No. 123, Accounting for Stock-Based Compensation (“FAS 123”) and related
interpretations. As a result, the Company has restated its historical financial statements
to increase stock-based compensation expense by approximately $3.0 million. |
| |
| |
• |
|
Modifications to Stock Option Grants. From 1999 through 2002, the Company did not
properly account for stock options for certain individuals that were modified after the
grant date. Some of these modifications were not identified in the Company’s financial
reporting processes and were therefore not properly reflected in its financial statements.
As a result, The Company has restated its historical financial statements to increase
stock-based compensation expense by approximately $843,000 recognized as of the date of the
respective modifications. |
As a result of the above, the Company has recorded additional non-cash stock-based
compensation expense of approximately $24.1 million on stock option grants made from 1999 through
2004. In addition, the Company recorded approximately $1.7 million of additional compensation
expense in 2005 related to its obligation under pre-existing commitments to reimburse employees for
penalties incurred resulting from receipt of in-the-money option grants. Tax impacts of these
additional expenses included; a reclassification of windfall tax benefits of $4.8 million in fiscal year 2004, which
were previously recognized in paid-in-capital and now are required to be recognized as a tax
benefit and additional tax expenses resulting from non-deductible employee compensation of $2.5
million, which together result in a net benefit of $2.3 million.
As a result of these findings the Company’s restated consolidated financial statements reflect
a decrease in net income of approximately $23.5 million for the periods 1999 through 2005. These
charges had no impact on the Company’s reported net sales or cash and cash equivalents.
The cumulative effect of the restatement adjustments on the Company’s consolidated balance
sheet at September 30, 2005 resulted in a decrease in retained earnings of $23.5 million, partially
offset by an increase in additional paid-in capital of $19.5 million, which results in a net
decrease in total shareholders’ equity of $4.0 million. All of the restatements of financial
statements, financial data and related disclosures described in these Consolidated Financial
Statements are collectively referred to elsewhere in these Consolidated Financial Statements as the
“restatement.”
For explanatory purposes, the Company has classified the stock-based compensation and other
adjustments that were affected by the restatement into the aforementioned categories as presented
below. The classified amounts involve certain subjective judgments by management to the extent
particular stock option related accounting errors may fall within more than one category to avoid
double counting the adjustment amounts between categories (e.g., a stock option that is subject to
date changes and/or combined with expenses resulting from consulting, transition or advisory
roles). As such, the table below should be considered a reasonable representation of the magnitude
of expenses in each category.
55
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
(in thousands) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
effect |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
on years |
|
| Adjustments to Stock-Based Compensation by Category |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
prior to 2003 |
|
Improper measurement dates for annual stock option grants |
|
$ |
464 |
|
|
$ |
719 |
|
|
$ |
1,407 |
|
|
$ |
11,717 |
|
Modifications to stock option grants |
|
|
335 |
|
|
|
356 |
|
|
|
152 |
|
|
|
— |
|
Incomplete documentation or approval for stock option grants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,625 |
|
Improper measurement dates for other stock option grants |
|
|
34 |
|
|
|
107 |
|
|
|
272 |
|
|
|
904 |
|
Stock option grants to non-employees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments to income before income taxes |
|
|
833 |
|
|
|
1,182 |
|
|
|
1,831 |
|
|
|
20,234 |
|
Payroll related liabilities |
|
|
1,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net income |
|
|
2,533 |
|
|
|
1,182 |
|
|
|
1,831 |
|
|
|
20,234 |
|
Income tax impact of restatement adjustments |
|
|
2,298 |
|
|
|
(4,557 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net income |
|
$ |
4,831 |
|
|
$ |
(3,375 |
) |
|
$ |
1,831 |
|
|
$ |
20,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In order to further enhance investor understanding of the effects of the matters
described in the section entitled “Special Committee and Company Findings” and to provide context
for the disclosure and the composition of the cumulative adjustment to opening retained earnings we
have provided the information below, which shows the accounting periods to which the stock
compensation adjustments relate. The Company’s financial statements for such periods and the
related SEC reports for such periods have not been amended. Accordingly, for illustrative
purposes, the table below applies the stock compensation adjustments amounts to the captions and
periods shown to facilitate an understanding of the amount by which opening retained earnings has
been adjusted. In addition to the stock compensation adjustment shown in the table below, the
Company has also included the effect of the payroll related liability referred to above and the
related tax effects of all adjustments so as to reconcile to the impact on the Company’s retained earnings
balance as of October 1, 2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
(in thousands) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjustments to Stock-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
on years |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Compensation to Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
prior to |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Statements of Operations |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
|
1999 |
|
Adjustments to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
27 |
|
|
$ |
20 |
|
|
$ |
70 |
|
|
$ |
1,117 |
|
|
$ |
316 |
|
|
$ |
500 |
|
|
$ |
301 |
|
|
$ |
— |
|
Sales and marketing |
|
|
613 |
|
|
|
1,068 |
|
|
|
1,393 |
|
|
|
7,485 |
|
|
|
2,887 |
|
|
|
3,467 |
|
|
|
1,131 |
|
|
|
— |
|
Research and development |
|
|
167 |
|
|
|
77 |
|
|
|
195 |
|
|
|
2,701 |
|
|
|
1,006 |
|
|
|
1,479 |
|
|
|
216 |
|
|
|
— |
|
General and administrative |
|
|
26 |
|
|
|
17 |
|
|
|
173 |
|
|
|
8,931 |
|
|
|
1,039 |
|
|
|
1,550 |
|
|
|
6,178 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes |
|
|
833 |
|
|
|
1,182 |
|
|
|
1,831 |
|
|
|
20,234 |
|
|
|
5,248 |
|
|
|
6,996 |
|
|
|
7,826 |
|
|
|
164 |
|
Payroll related liabilities |
|
|
1,700 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net income |
|
|
2,533 |
|
|
|
1,182 |
|
|
|
1,831 |
|
|
|
20,234 |
|
|
|
5,248 |
|
|
|
6,996 |
|
|
|
7,826 |
|
|
|
164 |
|
Income tax impact of restatement
adjustments |
|
|
2,298 |
|
|
|
(4,557 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net income |
|
$ |
4,831 |
|
|
$ |
(3,375 |
) |
|
$ |
1,831 |
|
|
$ |
20,234 |
|
|
$ |
5,248 |
|
|
$ |
6,996 |
|
|
$ |
7,826 |
|
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These adjustments, along with the stock-based items referenced above, did not affect the
Company’s previously reported cash and cash equivalents and investments balances in prior periods.
The following tables present the effect of the restatement adjustments by financial statement line
item for the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows.
56
Consolidated Balance Sheets as of September 30, 2005 and 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2005 |
|
|
September 30, 2004 |
|
| |
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
| |
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
| |
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
51,867 |
|
|
$ |
— |
|
|
$ |
51,867 |
|
|
$ |
24,901 |
|
|
$ |
— |
|
|
$ |
24,901 |
|
Short-term investments |
|
|
184,314 |
|
|
|
— |
|
|
|
184,314 |
|
|
|
115,600 |
|
|
|
— |
|
|
|
115,600 |
|
Accounts receivable, net |
|
|
41,703 |
|
|
|
— |
|
|
|
41,703 |
|
|
|
22,665 |
|
|
|
— |
|
|
|
22,665 |
|
Inventories |
|
|
2,699 |
|
|
|
— |
|
|
|
2,699 |
|
|
|
1,696 |
|
|
|
— |
|
|
|
1,696 |
|
Deferred tax assets |
|
|
3,935 |
|
|
|
240 |
|
|
|
4,175 |
|
|
|
2,934 |
|
|
|
240 |
|
|
|
3,174 |
|
Other current assets |
|
|
9,906 |
|
|
|
— |
|
|
|
9,906 |
|
|
|
5,776 |
|
|
|
— |
|
|
|
5,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
294,424 |
|
|
|
240 |
|
|
|
294,664 |
|
|
|
173,572 |
|
|
|
240 |
|
|
|
173,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
3,871 |
|
|
|
— |
|
|
|
3,871 |
|
|
|
6,243 |
|
|
|
— |
|
|
|
6,243 |
|
Property and equipment, net |
|
|
16,158 |
|
|
|
— |
|
|
|
16,158 |
|
|
|
11,954 |
|
|
|
— |
|
|
|
11,954 |
|
Long-term investments |
|
|
128,834 |
|
|
|
— |
|
|
|
128,834 |
|
|
|
81,792 |
|
|
|
— |
|
|
|
81,792 |
|
Deferred tax assets |
|
|
36,212 |
|
|
|
— |
|
|
|
36,212 |
|
|
|
28,446 |
|
|
|
— |
|
|
|
28,446 |
|
Goodwill |
|
|
49,677 |
|
|
|
— |
|
|
|
49,677 |
|
|
|
50,067 |
|
|
|
— |
|
|
|
50,067 |
|
Other assets, net |
|
|
8,323 |
|
|
|
— |
|
|
|
8,323 |
|
|
|
8,279 |
|
|
|
— |
|
|
|
8,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
537,499 |
|
|
$ |
240 |
|
|
$ |
537,739 |
|
|
$ |
360,353 |
|
|
$ |
240 |
|
|
$ |
360,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
7,668 |
|
|
$ |
— |
|
|
$ |
7,668 |
|
|
$ |
4,840 |
|
|
$ |
— |
|
|
$ |
4,840 |
|
Accrued liabilities |
|
|
19,648 |
|
|
|
4,283 |
|
|
|
23,931 |
|
|
|
15,948 |
|
|
|
140 |
|
|
|
16,088 |
|
Deferred revenue |
|
|
36,009 |
|
|
|
— |
|
|
|
36,009 |
|
|
|
25,692 |
|
|
|
— |
|
|
|
25,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
63,325 |
|
|
|
4,283 |
|
|
|
67,608 |
|
|
|
46,480 |
|
|
|
140 |
|
|
|
46,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
6,650 |
|
|
|
— |
|
|
|
6,650 |
|
|
|
3,856 |
|
|
|
— |
|
|
|
3,856 |
|
Deferred revenue, long-term |
|
|
3,314 |
|
|
|
— |
|
|
|
3,314 |
|
|
|
2,372 |
|
|
|
— |
|
|
|
2,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
9,964 |
|
|
|
— |
|
|
|
9,964 |
|
|
|
6,228 |
|
|
|
— |
|
|
|
6,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock |
|
|
412,419 |
|
|
|
19,478 |
|
|
|
431,897 |
|
|
|
306,655 |
|
|
|
19,623 |
|
|
|
326,278 |
|
Accumulated other comprehensive loss |
|
|
(1,430 |
) |
|
|
— |
|
|
|
(1,430 |
) |
|
|
(498 |
) |
|
|
— |
|
|
|
(498 |
) |
Unearned compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(833 |
) |
|
|
(833 |
) |
Retained earnings |
|
|
53,221 |
|
|
|
(23,521 |
) |
|
|
29,700 |
|
|
|
1,488 |
|
|
|
(18,690 |
) |
|
|
(17,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
464,210 |
|
|
|
(4,043 |
) |
|
|
460,167 |
|
|
|
307,645 |
|
|
|
100 |
|
|
|
307,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
537,499 |
|
|
$ |
240 |
|
|
$ |
537,739 |
|
|
$ |
360,353 |
|
|
$ |
240 |
|
|
$ |
360,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Consolidated Statement of Operations for the years ended September 30, 2005, 2004 and 2003 (in
thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
| |
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
| |
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
219,603 |
|
|
$ |
— |
|
|
$ |
219,603 |
|
|
$ |
126,169 |
|
|
$ |
— |
|
|
$ |
126,169 |
|
|
$ |
84,197 |
|
|
$ |
— |
|
|
$ |
84,197 |
|
Services |
|
|
61,807 |
|
|
|
— |
|
|
|
61,807 |
|
|
|
45,021 |
|
|
|
— |
|
|
|
45,021 |
|
|
|
31,698 |
|
|
|
— |
|
|
|
31,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
281,410 |
|
|
|
— |
|
|
|
281,410 |
|
|
|
171,190 |
|
|
|
— |
|
|
|
171,190 |
|
|
|
115,895 |
|
|
|
— |
|
|
|
115,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Products |
|
|
48,985 |
|
|
$ |
5 |
|
|
|
48,990 |
|
|
|
28,404 |
|
|
$ |
2 |
|
|
|
28,406 |
|
|
|
17,837 |
|
|
$ |
6 |
|
|
|
17,843 |
|
Services |
|
|
16,172 |
|
|
|
22 |
|
|
|
16,194 |
|
|
|
10,975 |
|
|
|
18 |
|
|
|
10,993 |
|
|
|
9,068 |
|
|
|
64 |
|
|
|
9,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
65,157 |
|
|
|
27 |
|
|
|
65,184 |
|
|
|
39,379 |
|
|
|
20 |
|
|
|
39,399 |
|
|
|
26,905 |
|
|
|
70 |
|
|
|
26,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
216,253 |
|
|
|
(27 |
) |
|
|
216,226 |
|
|
|
131,811 |
|
|
|
(20 |
) |
|
|
131,791 |
|
|
|
88,990 |
|
|
|
(70 |
) |
|
|
88,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
89,253 |
|
|
|
613 |
|
|
|
89,866 |
|
|
|
65,378 |
|
|
|
1,068 |
|
|
|
66,446 |
|
|
|
53,504 |
|
|
|
1,393 |
|
|
|
54,897 |
|
Research and development |
|
|
31,349 |
|
|
|
167 |
|
|
|
31,516 |
|
|
|
24,361 |
|
|
|
77 |
|
|
|
24,438 |
|
|
|
19,260 |
|
|
|
195 |
|
|
|
19,455 |
|
General and administrative |
|
|
23,760 |
|
|
|
1,726 |
|
|
|
25,486 |
|
|
|
15,744 |
|
|
|
17 |
|
|
|
15,761 |
|
|
|
12,037 |
|
|
|
173 |
|
|
|
12,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
144,362 |
|
|
|
2,506 |
|
|
|
146,868 |
|
|
|
105,483 |
|
|
|
1,162 |
|
|
|
106,645 |
|
|
|
84,801 |
|
|
|
1,761 |
|
|
|
86,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
71,891 |
|
|
|
(2,533 |
) |
|
|
69,358 |
|
|
|
26,328 |
|
|
|
(1,182 |
) |
|
|
25,146 |
|
|
|
4,189 |
|
|
|
(1,831 |
) |
|
|
2,358 |
|
Other income, net |
|
|
8,076 |
|
|
|
|
|
|
|
8,076 |
|
|
|
2,731 |
|
|
|
|
|
|
|
2,731 |
|
|
|
751 |
|
|
|
|
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
79,967 |
|
|
|
(2,533 |
) |
|
|
77,434 |
|
|
|
29,059 |
|
|
|
(1,182 |
) |
|
|
27,877 |
|
|
|
4,940 |
|
|
|
(1,831 |
) |
|
|
3,109 |
|
Provision (benefit) for
income taxes |
|
|
28,234 |
|
|
|
2,298 |
|
|
|
30,532 |
|
|
|
(3,894 |
) |
|
|
(4,557 |
) |
|
|
(8,451 |
) |
|
|
853 |
|
|
|
— |
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,733 |
|
|
$ |
(4,831 |
) |
|
$ |
46,902 |
|
|
$ |
32,953 |
|
|
$ |
3,375 |
|
|
$ |
36,328 |
|
|
$ |
4,087 |
|
|
$ |
(1,831 |
) |
|
$ |
2,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
1.39 |
|
|
$ |
(0.13 |
) |
|
$ |
1.26 |
|
|
$ |
0.99 |
|
|
$ |
(0.10 |
) |
|
$ |
1.09 |
|
|
$ |
0.15 |
|
|
$ |
(0.06 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares —
basic |
|
|
37,220 |
|
|
|
— |
|
|
|
37,220 |
|
|
|
33,221 |
|
|
|
— |
|
|
|
33,221 |
|
|
|
26,453 |
|
|
|
— |
|
|
|
26,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share —
diluted |
|
$ |
1.34 |
|
|
$ |
(0.13 |
) |
|
$ |
1.21 |
|
|
$ |
0.92 |
|
|
$ |
0.09 |
|
|
$ |
1.01 |
|
|
$ |
0.14 |
|
|
$ |
(0.06 |
) |
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares —
diluted |
|
|
38,733 |
|
|
|
28 |
|
|
|
38,761 |
|
|
|
35,992 |
|
|
|
(31 |
) |
|
|
35,961 |
|
|
|
28,220 |
|
|
|
(45 |
) |
|
|
28,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Shares used for purposes of computing diluted earnings per share are different in this
Amendment than those in the Company’s Original Report as unearned stock compensation, significant
amounts of which were recorded as part of our restatement and have been presented in shareholders’
equity, is considered proceeds for purposes of applying the treasury stock method to determine
incremental common shares to be included in diluted shares in periods in which the Company has
reported net income.
The following table presents the Company’s net income per share computations for the years
ended September 30, 2005, 2004 and 2003 (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Per share |
|
| |
|
Income |
|
|
Shares |
|
|
amount |
|
| |
|
(as restated) |
|
|
(as restated) |
|
|
(as restated) |
|
Year ended September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,256 |
|
|
|
26,453 |
|
|
$ |
0.09 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to shares issuable under employee stock
option plans |
|
|
— |
|
|
|
1,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
$ |
2,256 |
|
|
|
28,175 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,328 |
|
|
|
33,221 |
|
|
$ |
1.09 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to shares issuable under employee stock
option plans |
|
|
— |
|
|
|
2,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
$ |
36,328 |
|
|
|
35,961 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
46,902 |
|
|
|
37,220 |
|
|
$ |
1.26 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to shares issuable under employee stock
option plans |
|
|
— |
|
|
|
1,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
$ |
46,902 |
|
|
|
38,761 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
59
Consolidated Statement of Cash Flows for the years ended September 31, 2005, 2004 and 2003 (in
thousands except for share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
| |
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
| |
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,733 |
|
|
$ |
(4,831 |
) |
|
$ |
46,902 |
|
|
$ |
32,953 |
|
|
$ |
3,375 |
|
|
$ |
36,328 |
|
|
$ |
4,087 |
|
|
$ |
(1,831 |
) |
|
$ |
2,256 |
|
Adjustments to reconcile
net income to net cash
provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss (gain) on
disposition of assets |
|
|
569 |
|
|
|
— |
|
|
|
569 |
|
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
|
|
(14 |
) |
|
|
— |
|
|
|
(14 |
) |
Realized (gain) loss on
sale of investments |
|
|
–– |
|
|
|
— |
|
|
|
–– |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
232 |
|
|
|
— |
|
|
|
232 |
|
Stock-based compensation |
|
|
4,573 |
|
|
|
833 |
|
|
|
5,406 |
|
|
|
10 |
|
|
|
1,182 |
|
|
|
1,192 |
|
|
|
83 |
|
|
|
1,831 |
|
|
|
1,914 |
|
Provision for doubtful
accounts and sales
returns |
|
|
1,419 |
|
|
|
— |
|
|
|
1,419 |
|
|
|
1,189 |
|
|
|
— |
|
|
|
1,189 |
|
|
|
1,148 |
|
|
|
— |
|
|
|
1,148 |
|
Depreciation and
amortization |
|
|
6,797 |
|
|
|
— |
|
|
|
6,797 |
|
|
|
5,355 |
|
|
|
— |
|
|
|
5,355 |
|
|
|
5,162 |
|
|
|
— |
|
|
|
5,162 |
|
Deferred income taxes |
|
|
(7,733 |
) |
|
|
— |
|
|
|
(7,733 |
) |
|
|
(33,886 |
) |
|
|
— |
|
|
|
(33,886 |
) |
|
|
–– |
|
|
|
— |
|
|
|
–– |
|
Tax benefit from
employee stock option
plans |
|
|
32,298 |
|
|
|
(145 |
) |
|
|
32,153 |
|
|
|
26,382 |
|
|
|
(4,697 |
) |
|
|
21,685 |
|
|
|
–– |
|
|
|
— |
|
|
|
–– |
|
Changes in operating
assets and liabilities,
net of amounts
acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(20,456 |
) |
|
|
— |
|
|
|
(20,456 |
) |
|
|
(4,152 |
) |
|
|
— |
|
|
|
(4,152 |
) |
|
|
354 |
|
|
|
— |
|
|
|
354 |
|
Inventories |
|
|
(1,002 |
) |
|
|
— |
|
|
|
(1,002 |
) |
|
|
(928 |
) |
|
|
— |
|
|
|
(928 |
) |
|
|
(408 |
) |
|
|
— |
|
|
|
(408 |
) |
Other current assets |
|
|
(3,604 |
) |
|
|
— |
|
|
|
(3,604 |
) |
|
|
(642 |
) |
|
|
— |
|
|
|
(642 |
) |
|
|
(54 |
) |
|
|
— |
|
|
|
(54 |
) |
Other assets |
|
|
(149 |
) |
|
|
— |
|
|
|
(149 |
) |
|
|
(630 |
) |
|
|
— |
|
|
|
(630 |
) |
|
|
(512 |
) |
|
|
— |
|
|
|
(512 |
) |
Accounts payable and
accrued liabilities |
|
|
9,283 |
|
|
|
4,143 |
|
|
|
13,426 |
|
|
|
6,163 |
|
|
|
140 |
|
|
|
6,303 |
|
|
|
(320 |
) |
|
|
— |
|
|
|
(320 |
) |
Deferred revenue |
|
|
11,259 |
|
|
|
— |
|
|
|
11,259 |
|
|
|
8,758 |
|
|
|
— |
|
|
|
8,758 |
|
|
|
4,852 |
|
|
|
— |
|
|
|
4,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
by operating
activities |
|
$ |
84,987 |
|
|
$ |
–– |
|
|
$ |
84,987 |
|
|
$ |
40,590 |
|
|
$ |
–– |
|
|
$ |
40,590 |
|
|
$ |
14,610 |
|
|
$ |
–– |
|
|
$ |
14,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
In connection with the preparation of the Company’s restated financial statements, the Company
also determined that the pro forma disclosures for stock-based compensation expense required under
FAS 123, “Accounting for Stock-Based Compensation” included in Note 1 of the Notes to Consolidated
Financial Statements included in the Company’s originally filed Annual Report on Form 10-K/A
(Amendment No. 1), were incorrect. The Company has corrected these errors in Note 1 of these
Consolidated Financial Statements. These corrections do not affect the Company’s consolidated
statements of operations, consolidated balance sheets or consolidated statements of cash flows for
any period.
The following table presents the effect of these corrections on the Company’s pro forma
calculation of its net income and earnings per share for the years ended September 30, 2005, 2004
and 2003 (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
| |
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
|
previously |
|
|
|
|
|
|
As |
|
| |
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
|
reported |
|
|
Adjustments |
|
|
restated |
|
Net income (loss) |
|
$ |
51,733 |
|
|
$ |
(4,831 |
) |
|
$ |
46,902 |
|
|
$ |
32,953 |
|
|
$ |
3,375 |
|
|
$ |
36,328 |
|
|
$ |
4,087 |
|
|
$ |
(1,831 |
) |
|
$ |
2,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock-based employee
compensation expense included in
reported net income |
|
|
— |
|
|
|
833 |
|
|
|
833 |
|
|
|
10 |
|
|
|
1,182 |
|
|
|
1,192 |
|
|
|
83 |
|
|
|
1,831 |
|
|
|
1,914 |
|
Deduct: Stock-based employee
compensation expense determined under
fair value based method for all
awards |
|
|
7,020 |
|
|
|
141 |
|
|
|
7,161 |
|
|
|
18,913 |
|
|
|
443 |
|
|
|
19,356 |
|
|
|
23,371 |
|
|
|
1,031 |
|
|
|
24,402 |
|
| |
|
|
Pro forma net loss |
|
$ |
44,713 |
|
|
$ |
(4,139 |
) |
|
$ |
40,574 |
|
|
$ |
14,050 |
|
|
$ |
4,114 |
|
|
$ |
18,164 |
|
|
$ |
(19,201 |
) |
|
$ |
(1,031 |
) |
|
$ |
(20,232 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic) |
|
$ |
1.39 |
|
|
$ |
(0.13 |
) |
|
$ |
1.26 |
|
|
$ |
0.99 |
|
|
$ |
0.10 |
|
|
$ |
1.09 |
|
|
$ |
0.15 |
|
|
$ |
(0.06 |
) |
|
$ |
0.09 |
|
Net loss per share (basic), pro forma |
|
$ |
1.20 |
|
|
$ |
(0.11 |
) |
|
$ |
1.09 |
|
|
$ |
0.42 |
|
|
$ |
0.13 |
|
|
$ |
0.55 |
|
|
$ |
(0.73 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.72 |
) |
Net income (loss) per share (diluted) |
|
$ |
1.34 |
|
|
$ |
(0.13 |
) |
|
$ |
1.21 |
|
|
$ |
0.92 |
|
|
$ |
0.09 |
|
|
$ |
1.01 |
|
|
$ |
0.14 |
|
|
$ |
(0.06 |
) |
|
$ |
0.08 |
|
Net loss per share (diluted), pro forma |
|
$ |
1.15 |
|
|
$ |
(0.10 |
) |
|
$ |
1.05 |
|
|
$ |
0.39 |
|
|
$ |
0.12 |
|
|
$ |
0.51 |
|
|
$ |
(0.73 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.72 |
) |
61
3. Short-Term and Long-Term Investments
Short-term investments consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
56,352 |
|
|
$ |
— |
|
|
$ |
(275 |
) |
|
$ |
56,077 |
|
Municipal bonds and notes |
|
|
45,500 |
|
|
|
— |
|
|
|
— |
|
|
|
45,500 |
|
U.S. government securities |
|
|
83,061 |
|
|
|
1 |
|
|
|
(325 |
) |
|
|
82,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
184,913 |
|
|
$ |
1 |
|
|
$ |
(600 |
) |
|
$ |
184,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
37,060 |
|
|
$ |
2 |
|
|
$ |
(140 |
) |
|
$ |
36,922 |
|
Municipal bonds and notes |
|
|
59,750 |
|
|
|
— |
|
|
|
(15 |
) |
|
|
59,735 |
|
U.S. government securities |
|
|
19,054 |
|
|
|
— |
|
|
|
(111 |
) |
|
|
18,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
115,864 |
|
|
$ |
2 |
|
|
$ |
(266 |
) |
|
$ |
115,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
61,932 |
|
|
$ |
— |
|
|
$ |
(1,007 |
) |
|
$ |
60,925 |
|
U.S. government securities |
|
|
68,497 |
|
|
|
— |
|
|
|
(588 |
) |
|
|
67,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
130,429 |
|
|
$ |
— |
|
|
$ |
(1,595 |
) |
|
$ |
128,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
45,286 |
|
|
$ |
31 |
|
|
$ |
(328 |
) |
|
$ |
44,989 |
|
U.S. government securities |
|
|
37,007 |
|
|
|
3 |
|
|
|
(207 |
) |
|
|
36,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
82,293 |
|
|
$ |
34 |
|
|
$ |
(535 |
) |
|
$ |
81,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of fixed maturities at September 30, 2005, by contractual
years-to-maturity, are presented below (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Amortized |
|
|
|
|
| |
|
Cost |
|
|
Fair Value |
|
One year or less |
|
$ |
184,913 |
|
|
$ |
184,314 |
|
Over one year through five years |
|
|
130,429 |
|
|
|
128,834 |
|
|
|
|
|
|
|
|
|
|
$ |
315,342 |
|
|
$ |
313,148 |
|
|
|
|
|
|
|
|
The Company invests in securities that are rated investment grade or better. The unrealized
losses on these investments were caused by interest rate increases and not credit quality. The
Company has determined the unrealized losses are temporary as the duration of the decline in value
of investments has been short, the extent of the decline, in both dollars and as a percentage of
costs, is not significant, and the Company has the ability and intent to hold the investments until
it recovers at least substantially all of the cost of the investments.
62
The following table summarizes investments that have unrealized losses as of September 30,
2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than 12 Months |
|
|
12 Months of Greater |
|
|
Total |
|
| |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
| |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
74,686 |
|
|
$ |
796 |
|
|
$ |
33,316 |
|
|
$ |
486 |
|
|
$ |
108,002 |
|
|
$ |
1,282 |
|
U.S. government securities |
|
|
107,912 |
|
|
|
605 |
|
|
|
37,733 |
|
|
|
308 |
|
|
|
145,645 |
|
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
182,598 |
|
|
$ |
1,401 |
|
|
$ |
71,049 |
|
|
$ |
794 |
|
|
$ |
253,647 |
|
|
$ |
2,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Business Combinations
The Company’s acquisitions are accounted for under the purchase method of accounting in
accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” The
total purchase price is allocated to the tangible and intangible assets acquired and the
liabilities assumed based on their estimated fair values. The excess of the purchase price over
those fair values is recorded as goodwill. The fair value assigned to the tangible and intangible
assets acquired and liabilities assumed are based on estimates and assumptions provided by
management, and other information compiled by management, including independent valuations,
prepared by valuation specialists that utilize established valuation techniques appropriate for the
technology industry. In accordance with Statement of Financial Accounting Standards No. 142,
“Goodwill and other Intangible Assets,” goodwill is not amortized but instead is tested for
impairment at least annually.
2004 Acquisition of MagniFire Websystems, Inc.
On May 31, 2004, the Company completed its acquisition of MagniFire Websystems, Inc. a
provider of web application firewall products. As a result of the merger, the Company acquired all
the assets of MagniFire, including MagniFire’s web application firewall product line
(TrafficShield), all property, equipment and other assets that MagniFire used in its business and
assumed certain of the liabilities of MagniFire. The purchase price was $30.5 million including
$1.5 million of transactions costs. The results of operations of MagniFire have been included in
the Company’s consolidated financial statements since June 1, 2004.
The purchase price allocation is as follows (in thousands):
| |
|
|
|
|
Assets acquired |
|
|
|
|
Cash |
|
$ |
895 |
|
Accounts receivable, net |
|
|
152 |
|
Restricted cash |
|
|
76 |
|
Other assets |
|
|
625 |
|
Property and equipment |
|
|
81 |
|
Developed technology |
|
|
5,000 |
|
Goodwill |
|
|
25,488 |
|
|
|
|
|
Total assets acquired |
|
$ |
32,317 |
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Accrued liabilities |
|
$ |
(723 |
) |
Deferred tax liability |
|
|
(1,069 |
) |
Deferred revenue |
|
|
(25 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(1,817 |
) |
|
|
|
|
Net assets acquired |
|
$ |
30,500 |
|
|
|
|
|
Of the total estimated purchase price, $5.0 million was allocated to developed technology. To
determine the value of the developed technology, a combination of cost and market approaches were
used. The cost approach required an estimation of the costs required to reproduce the acquired
technology. The market approach measures the fair value of the technology through an analysis of
recent comparable transactions. The $5.0 million allocated to developed technology is being
amortized on a straight-line basis over an estimated useful life of five years.
At the time of the acquisition, the estimated purchase price was allocated to goodwill in the
amount of $24.8 million, including the Company’s full valuation allowance on deferred taxes. During
the fourth quarter of fiscal year 2004, the Company reversed the valuation allowance and therefore
increased the amount allocated to goodwill by an additional $1.1 million due to the deferred tax
liability that was assumed as a result of the acquisition. During the fourth quarter of fiscal year
2005, the Company adjusted the fair value of certain other assets and as a result decreased the
amount allocated to goodwill by $0.4 million.
63
2003 Acquisition of uRoam, Inc.
On July 23, 2003, the Company acquired substantially all of the assets of uRoam, Inc. (uRoam),
including uRoam’s FirePass product line, and assumed certain liabilities for cash of $25.0 million.
The Company also incurred $2.4 million of direct transaction costs for a total purchase price of
$27.4 million. uRoam’s FirePass server is a comprehensive remote access product that enables users
to access applications in a secure fashion using industry standard Secured Socket Layer technology.
The acquired technology is currently being amortized over its estimated useful life of five years
using the straight-line method. The excess of the purchase price over the fair value of the
identifiable tangible and intangible net assets acquired of $24.2 million was recorded as goodwill.
The results of operations of uRoam have been included in the Company’s consolidated financial
statements from the date of acquisition.
The purchase price allocation is as follows (in thousands):
| |
|
|
|
|
Assets acquired |
|
|
|
|
Accounts receivable, net |
|
$ |
335 |
|
Property and equipment |
|
|
4 |
|
Developed technology |
|
|
3,000 |
|
Goodwill |
|
|
24,188 |
|
|
|
|
|
Total assets acquired |
|
$ |
27,527 |
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Accrued liabilities |
|
$ |
(29 |
) |
Deferred revenue |
|
|
(125 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(154 |
) |
|
|
|
|
Net assets acquired |
|
$ |
27,373 |
|
|
|
|
|
Pro Forma Results
The unaudited pro forma condensed combined consolidated summary financial information below,
presents the combined results of operations as if the acquisitions had occurred on October 1, 2002.
For pro forma reporting purposes, the fiscal year 2004 presentation includes the results of
operations of MagniFire from October 1, 2003 through May 31, 2004, the date of acquisition. The
fiscal year 2003 presentation includes the results of operations of uRoam from October 1, 2002
through July 23, 2003 and the results of MagniFire for the entire year.
Unaudited pro forma financial information is as follows (in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(as restated) (1) |
|
|
(as restated) (1) |
|
Net revenues — pro forma |
|
$ |
171,309 |
|
|
$ |
116,944 |
|
Net income (loss) — pro forma |
|
$ |
28,700 |
|
|
$ |
(7,307 |
) |
Net income (loss) per share — basic — pro forma |
|
$ |
0.86 |
|
|
$ |
(0.28 |
) |
Net income (loss) per share — diluted — pro forma |
|
$ |
0.80 |
|
|
$ |
(0.28 |
) |
(1) See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements.
Net pro forma adjustments (unaudited) of $1.5 million and $2.2 million for the fiscal years
2004 and 2003, respectively, have been made to the combined results of operations reflecting the
amortization of the developed technology acquired and the net change in interest income (expense)
had the respective acquisition taken place at the beginning of the period. The unaudited pro forma
financial information does not reflect integration costs, or cost savings or other synergies
anticipated as a result of the acquisition. This information is not necessarily indicative of the
operating results that would have occurred if the acquisition had been consummated on the date
indicated nor is it necessarily indicative of future operating results of the combined enterprise.
64
5. Balance Sheet Details
Other assets consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended |
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Software development costs |
|
$ |
521 |
|
|
$ |
793 |
|
Acquired technology |
|
|
5,367 |
|
|
|
6,967 |
|
Deposits and other |
|
|
2,435 |
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
$ |
8,323 |
|
|
$ |
8,279 |
|
|
|
|
|
|
|
|
Amortization expense related to other assets was approximately $1.9 million, $1.3 million, and
$0.4 million for the fiscal years ended September 30, 2005, 2004 and 2003, respectively.
Estimated amortization expense for software development costs and acquired technology for the
five succeeding fiscal years is as follows (in thousands):
| |
|
|
|
|
2006 |
|
$ |
1,872 |
|
2007 |
|
$ |
1,849 |
|
2008 |
|
$ |
1,500 |
|
2009 |
|
$ |
667 |
|
2010 |
|
|
— |
|
|
|
|
|
|
|
$ |
5,888 |
|
|
|
|
|
Accrued liabilities consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended |
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Payroll and benefits |
|
$ |
11,572 |
|
|
$ |
9,007 |
|
Sales and marketing |
|
|
1,544 |
|
|
|
1,997 |
|
Restructuring |
|
|
559 |
|
|
|
625 |
|
Warranty |
|
|
1,564 |
|
|
|
1,062 |
|
Income taxes |
|
|
4,265 |
|
|
|
940 |
|
Other |
|
|
4,427 |
|
|
|
2,457 |
|
|
|
|
|
|
|
|
|
|
$ |
23,931 |
|
|
$ |
16,088 |
|
|
|
|
|
|
|
|
65
As of September 30, 2005, restructuring liabilities were $0.6 million and consisted of
obligations under an excess facility operating lease. The excess facility charge was initially
recognized during fiscal 2002 as part of the Company’s decision to discontinue its cache appliance
business and exit its support facility in Washington D.C. The remaining liability approximates the
full amount owed through the remainder of the lease term, expiring in 2007, and actual losses are
not expected to vary from the original estimate.
The activity of the remaining restructuring liability as of September 30, 2005 and 2004 is
presented below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
|
Cash |
|
|
Balance at |
|
| |
|
September 30, |
|
|
Additional |
|
|
Payments and |
|
|
September 30, |
|
| |
|
2004 |
|
|
Charges |
|
|
Write-Offs |
|
|
2005 |
|
Excess facilities |
|
$ |
625 |
|
|
$ |
— |
|
|
$ |
(66 |
) |
|
$ |
559 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
625 |
|
|
$ |
— |
|
|
$ |
(66 |
) |
|
$ |
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
|
Cash |
|
|
Balance at |
|
| |
|
September 30, |
|
|
Additional |
|
|
Payments and |
|
|
September 30, |
|
| |
|
2003 |
|
|
Charges |
|
|
Write-Offs |
|
|
2004 |
|
Excess facilities |
|
$ |
782 |
|
|
$ |
— |
|
|
$ |
(157 |
) |
|
$ |
625 |
|
Other |
|
|
62 |
|
|
|
— |
|
|
|
(62 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
844 |
|
|
$ |
— |
|
|
$ |
(219 |
) |
|
$ |
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long term liabilities consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended |
|
| |
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Income taxes payable |
|
$ |
3,880 |
|
|
$ |
1,720 |
|
Deferred rent and other |
|
|
2,770 |
|
|
|
2,136 |
|
|
|
|
|
|
|
|
|
|
$ |
6,650 |
|
|
$ |
3,856 |
|
|
|
|
|
|
|
|
66
6. Income Taxes
The United States and international components of income (loss) before income taxes are as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) |
|
|
(as restated) |
|
|
(as restated) |
|
| |
|
(1) |
|
|
(1) |
|
|
(1) |
|
United States |
|
$ |
73,797 |
|
|
$ |
26,533 |
|
|
$ |
1,693 |
|
International |
|
|
3,637 |
|
|
|
1,344 |
|
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,434 |
|
|
$ |
27,877 |
|
|
$ |
3,109 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) |
|
|
(as restated) |
|
|
(as restated) |
|
| |
|
(1) |
|
|
(1) |
|
|
(1) |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
33,827 |
|
|
$ |
133 |
|
|
$ |
— |
|
State |
|
|
2,451 |
|
|
|
129 |
|
|
|
45 |
|
Foreign |
|
|
750 |
|
|
|
923 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
37,028 |
|
|
|
1,185 |
|
|
|
702 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(6,129 |
) |
|
|
(9,034 |
) |
|
|
141 |
|
State |
|
|
(653 |
) |
|
|
(602 |
) |
|
|
10 |
|
Foreign |
|
|
286 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(6,496 |
) |
|
|
(9,636 |
) |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,532 |
|
|
$ |
(8,451 |
) |
|
$ |
853 |
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate differs from the U.S. federal statutory rate as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) |
|
|
(as restated) |
|
|
(as restated) |
|
| |
|
(1) |
|
|
(1) |
|
|
(1) |
|
Income tax provision at statutory rate |
|
$ |
27,102 |
|
|
$ |
9,757 |
|
|
$ |
1,088 |
|
State taxes, net of federal benefit |
|
|
1,874 |
|
|
|
706 |
|
|
|
36 |
|
Impact of international operations |
|
|
2,417 |
|
|
|
357 |
|
|
|
91 |
|
Research and development and other credits |
|
|
(2,057 |
) |
|
|
(1,397 |
) |
|
|
(1,017 |
) |
Other |
|
|
3,845 |
|
|
|
(1,498 |
) |
|
|
(60 |
) |
Change in valuation allowance |
|
|
(2,649 |
) |
|
|
(28,062 |
) |
|
|
4,382 |
|
Impact of stock option compensation on valuation allowance |
|
|
— |
|
|
|
11,686 |
|
|
|
(3,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,532 |
|
|
$ |
(8,451 |
) |
|
$ |
853 |
|
|
|
|
|
|
|
|
|
|
|
67
The tax effects of the temporary differences that give rise to the deferred tax assets and
liabilities are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(as restated) |
|
|
(as restated) |
|
|
(as restated) |
|
| |
|
(1) |
|
|
(1) |
|
|
(1) |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards |
|
$ |
25,002 |
|
|
$ |
26,427 |
|
|
$ |
22,318 |
|
Allowance for doubtful accounts |
|
|
915 |
|
|
|
810 |
|
|
|
844 |
|
Accrued compensation and benefits |
|
|
1,140 |
|
|
|
690 |
|
|
|
591 |
|
Inventories and related reserves |
|
|
417 |
|
|
|
210 |
|
|
|
198 |
|
Other accruals and reserves |
|
|
6,097 |
|
|
|
2,248 |
|
|
|
1,773 |
|
Depreciation |
|
|
462 |
|
|
|
838 |
|
|
|
831 |
|
Tax credit carry-forwards |
|
|
7,631 |
|
|
|
5,552 |
|
|
|
4,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,664 |
|
|
|
36,775 |
|
|
|
30,711 |
|
Valuation allowance |
|
|
— |
|
|
|
(2,649 |
) |
|
|
(30,711 |
) |
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchased intangibles and other |
|
|
(1,277 |
) |
|
|
(2,506 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) |
|
$ |
40,387 |
|
|
$ |
31,620 |
|
|
$ |
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated
Financial Statements. |
During the fourth quarter of fiscal year 2005 the Company determined, based on an evaluation
of current operating results and projected future taxable income that the valuation allowance of
$2.6 million pertaining to net operating loss carry-forwards in the United Kingdom was no longer
needed and as a result the related valuation allowance was reversed. In the prior year, the Company
determined that the U.S. deferred tax assets were more likely than not to be realizable and
reversed the related valuation allowance during the fourth quarter of fiscal 2004. The Company had
provided for a full valuation allowance against the deferred tax assets at the end of fiscal year
2003. If the estimates and assumptions used in the Company’s determination change in the future,
the Company could be required to revise the Company’s estimates of the valuation allowances against
the Company’s deferred tax assets and adjust the Company’s provisions for additional income taxes.
At September 30, 2005, the Company had approximately $64.3 million of U.S. net operating loss
carry-forwards resulting from tax benefits associated with employee stock option plans, a portion
of which begins to expire in 2011. The Company also had net operating loss carry-forwards of
approximately $7.4 million related to operations in the United Kingdom that carry-forward
indefinitely. At September 30, 2005, the Company also has federal research credit carry-forwards of
approximately $7.2 million which, if not utilized, will begin to expire in fiscal year 2011 and
state research credit carry-forwards of $349,000 which will begin to expire in fiscal year 2025.
United States income and foreign withholding taxes have not been provided on approximately
$1.8 million of undistributed earnings from the Company’s international subsidiaries. The Company
has not recognized a deferred tax liability for the undistributed earnings of its foreign
subsidiaries because the Company currently does not expect to remit those earnings in the
foreseeable future. Determination of the amount of unrecognized deferred tax liability related to
undistributed earnings of foreign subsidiaries is not practicable because such liability, if any,
is dependent on circumstances existing if and when remittance occurs.
On October 22, 2004, the American Jobs Creation Act of 2004 (AJCA) was signed into law. The
AJCA provides for a temporary 85% dividends received deduction on certain earnings repatriated
during either fiscal year 2005 or fiscal year 2006. The deduction would result in an approximate
5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must
be reinvested in the U.S. pursuant to a domestic reinvestment plan established by a company’s chief
executive officer and approved by the company’s board of directors. Additionally, certain other
significant criteria, as outlined in the AJCA, must also be met. F5 Networks did not elect this
provision in fiscal year 2005, and does not intend to make an election in fiscal year 2006.
7. Shareholders’ Equity
Common Stock
In November 2003, the Company sold 5,175,000 shares, including 675,000 shares sold upon the
exercise of the underwriters’ over-allotment option, of its common stock in a public offering at a
price of $23.25 per share. The proceeds to the Company were $113.6 million, net of offering costs
of $6.7 million.
68
Equity Incentive Plans
In fiscal 2005, the Company modified the method in which it issues incentive awards to its
employees through stock-based compensation. In prior years, stock-based compensation consisted only
of stock options. In 2005, the majority of awards consisted of restricted stock unit awards and to
a lesser degree stock options. Employees vest in restricted stock units and stock options ratably
over the corresponding service term, generally one to four years. The Company’s stock options
expire 10 years from the date of grant. Restricted stock units are payable in shares of the
Company’s common stock as the periodic vesting requirements are satisfied. The value of a
restricted stock unit is based upon the fair market value of the Company’s common stock on the date
of grant. The value of restricted stock units is determined using the intrinsic value method and is
based on the number of shares granted and the quoted price of the Company’s common stock on the
date of grant. Alternatively, the Company uses the Black-Scholes option pricing model to determine
the fair value of its stock options. Compensation expense related to restricted stock units and
stock options is recognized over the vesting period. The Company has adopted a number of
stock-based compensation plans as discussed below.
1998 Equity Incentive Plan. In November 1998, the Company adopted the 1998 Equity Incentive
Plan, or the 1998 Plan, which provides for discretionary grants of non-qualified and incentive
stock options, stock purchase awards and stock bonuses for employees and other service providers.
Upon certain changes in control of the Company, all outstanding and unvested options or stock
awards under the 1998 Plan will vest at the rate of 50%, unless assumed or substituted by the
acquiring entity. As of September 30, 2005, there were options to purchase 1,663,983 shares
outstanding and 58,934 shares available for awards under the 1998 Plan.
1999 Employee Stock Purchase Plan. In May 1999, the board of directors approved the adoption
of the 1999 Employee Stock Purchase Plan, or the Employee Stock Purchase Plan. A total of 2,000,000
shares of common stock have been reserved for issuance under the Employee Stock Purchase Plan. The
Employee Stock Purchase Plan permits eligible employees to acquire shares of the Company’s common
stock through periodic payroll deductions of up to 15% of base compensation. No employee may
purchase more than $25,000 worth of stock, determined at the fair market value of the shares at the
time such option is granted, in one calendar year. The Employee Stock Purchase Plan has been
implemented in a series of offering periods, each 6 months in duration. The price at which the
common stock may be purchased is 85% of the lesser of the fair market value of the Company’s common
stock on the first day of the applicable offering period or on the last day of the respective
purchase period. As of September 30, 2005 there were 1,012,549 shares available for awards under
the Employee Stock Purchase Plan.
2000 Equity Incentive Plan. In July 2000, the Company adopted the 2000 Employee Equity
Incentive Plan, or the 2000 Plan, which provides for discretionary grants of non-qualified stock
options, stock purchase awards and stock bonuses for non-executive employees and other service
providers. A total of 3,500,000 shares of common stock have been reserved for issuance under the
2000 Plan. Upon certain changes in control of the Company, all outstanding and unvested options or
stock awards under the 2000 Plan will vest at the rate of 50%, unless assumed or substituted by the
acquiring entity. As of September 30, 2005, there were options to purchase 1,144,991 shares
outstanding and 55,853 shares available for awards under the 2000 Plan.
New Hire Incentive Plans. In October 2000, the Company adopted a non-qualified stock option
plan, or the Pancottine Plan, in connection with the hiring of Jeff Pancottine, the Company’s
Senior Vice President and General Manager, Security Business Unit. The Pancottine Plan provided for
a grant of 200,000 non-qualified stock options for Mr. Pancottine. As of September 30, 2005, there
were no options outstanding and no shares available for awards under the Pancottine Plan. In May
2001, the Company adopted a non-qualified stock option plan, or the Coburn Plan, in connection with
the hiring of Steve Coburn, the Company’s former Senior Vice President of Finance and Chief
Financial Officer. The Coburn Plan provided for a grant of 200,000 non-qualified stock options for
Mr. Coburn. As of September 30, 2005, there were no options outstanding and no shares available for
awards under the Coburn Plan. In October 2003, the company adopted a non-qualified stock option
plan, or the Hull Plan, in connection with the hiring of Thomas Hull, the Company’s Senior Vice
President of Worldwide Sales. The Hull plan provided for a grant of 225,000 non-qualified stock
options for Mr. Hull. As of September 30, 2005, there were options to purchase 170,000 shares
outstanding and no shares available for awards under the Hull Plan. In August 2004, the Company
adopted a non-qualified stock option plan, or the Triebes Plan, in connection with the hiring of
Karl Triebes, the Company’s Senior Vice President of Product Development and Chief Technology
Officer. The Triebes Plan provided for a grant of 300,000 non-qualified stock options for Mr.
Triebes. As of September 30, 2005, there were options to purchase 250,000 shares outstanding and no
shares available for awards under the Triebes Plan. Upon certain changes in control of the Company,
100% of all outstanding and unvested options remaining under the Hull Plan and the Triebes Plan
will vest and become immediately exercisable.
Acquisition Incentive Plans. In July 2003, the Company adopted the uRoam Acquisition Equity
Incentive Plan, or the uRoam Plan, in connection with the hiring of the former employees of uRoam,
Inc. A total of 250,000 shares of common stock were reserved
69
for issuance under the uRoam Plan. The plan provided for discretionary grants of non-qualified
and incentive stock options, stock purchase awards and stock bonuses. The Company has not granted
any stock purchase awards or stock bonuses under this plan. As of September 30, 2005 there were
options to purchase 38,044 shares outstanding and no shares available for awards under the uRoam
Plan. In July 2004, the Company adopted the MagniFire Acquisition Equity Incentive Plan, or the
MagniFire Plan, in connection with the hiring of the former employees of MagniFire Websystems, Inc.
A total of 415,000 shares of common stock were reserved for issuance under the MagniFire Plan. The
plan provides for discretionary grants of non-qualified and incentive stock options, stock purchase
awards and stock bonuses. The Company has not granted any stock purchase awards or stock bonuses
under this plan. As of September 30, 2005 there were options to purchase 234,606 shares outstanding
and no shares available for awards under the MagniFire Plan. Options that expire under the uRoam
Plan or the MagniFire Plan, whether due to termination of employment or otherwise, are not
available for future grant.
2005 Equity Incentive Plan. In December 2004, the Company adopted the 2005 Equity Incentive
Plan, or the 2005 Plan, which provides for discretionary grants of non-statutory stock options and
stock units for employees, including officers, and other service providers. A total of 1,700,000
shares of common stock have been reserved for issuance under the 2005 Plan. Upon certain changes in
control of the Company, the surviving entity will either assume or substitute all outstanding Stock
Awards under the 2005 Plan. During the fiscal year 2005, the Company issued 37,500 stock options
and 721,184 stock units under the 2005 Plan. As of September 30, 2005, there were options to
purchase 37,500 shares outstanding and 944,316 shares available for awards under the 2005 Plan.
The restricted stock units were granted during the fourth quarter of fiscal 2005 with a per
share weighted average fair value of $44.60. The restricted stock units granted in fiscal 2005 vest
quarterly over a two year period. A summary of restricted stock unit activity under the 2005 Plan
is as follows:
| |
|
|
|
|
| |
|
Outstanding Stock |
| |
|
Units |
Balance, September 30, 2004 |
|
|
— |
|
Units granted |
|
|
721,184 |
|
Units vested |
|
|
— |
|
Units cancelled |
|
|
(3,000 |
) |
|
|
|
|
|
Balance, September 30, 2005 |
|
|
718,184 |
|
|
|
|
|
|
A summary of stock option activity under all of the Company’s plans is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
Number of |
|
|
Exercise Price |
|
| |
|
Shares |
|
|
Per Share |
|
Balance, September 30, 2002 |
|
|
7,240,850 |
|
|
$ |
17.30 |
|
Options granted |
|
|
2,195,300 |
|
|
|
15.24 |
|
Options exercised |
|
|
(1,423,550 |
) |
|
|
7.60 |
|
Options cancelled |
|
|
(504,771 |
) |
|
|
25.65 |
|
|
|
|
|
|
|
|
Balance, September 30, 2003 |
|
|
7,507,829 |
|
|
|
17.92 |
|
Options granted |
|
|
2,230,515 |
|
|
|
24.79 |
|
Options exercised |
|
|
(2,031,552 |
) |
|
|
11.00 |
|
Options cancelled |
|
|
(353,232 |
) |
|
|
26.07 |
|
|
|
|
|
|
|
|
Balance, September 30, 2004 |
|
|
7,353,560 |
|
|
|
21.52 |
|
Options granted |
|
|
224,100 |
|
|
|
43.73 |
|
Options exercised |
|
|
(3,684,558 |
) |
|
|
17.66 |
|
Options cancelled |
|
|
(297,786 |
) |
|
|
34.08 |
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
3,595,316 |
|
|
$ |
25.82 |
|
|
|
|
|
|
|
|
70
The weighted-average fair values per share at the date of grant for options granted with
exercise prices equal to market for were $18.68, $9.36, and $7.67 for the fiscal year 2005, 2004,
and 2003, respectively. The weighted-average fair values per share at the date of grant for options
granted with exercise prices less than market were, $7.41 and $8.05 for the fiscal years 2004 and
2003, respectively. The total intrinsic value for options outstanding at September 30, 2005 was $63.5 million,
representing the difference between the fair value
of the Company’s common stock underlying these options at
September 30, 2005 and the related exercise
prices.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Contractual |
|
|
Exercise |
|
|
|
|
|
|
Average |
|
| |
|
Number of |
|
|
Life |
|
|
Price per |
|
|
Number of |
|
|
Price per |
|
| Range of Exercise Prices |
|
Shares |
|
|
(In Years) |
|
|
Share |
|
|
Shares |
|
|
Share |
|
$0.25 — $12.79 |
|
|
546,577 |
|
|
|
5.58 |
|
|
$ |
8.57 |
|
|
|
523,220 |
|
|
$ |
8.49 |
|
$12.84 — $22.17 |
|
|
1,024,994 |
|
|
|
7.64 |
|
|
$ |
17.27 |
|
|
|
701,237 |
|
|
$ |
15.72 |
|
$22.43 — $24.75 |
|
|
475,736 |
|
|
|
8.49 |
|
|
$ |
23.24 |
|
|
|
108,153 |
|
|
$ |
23.47 |
|
$25.01 — $33.20 |
|
|
907,854 |
|
|
|
8.16 |
|
|
$ |
27.38 |
|
|
|
732,558 |
|
|
$ |
26.57 |
|
$33.34 — $120.88 |
|
|
640,155 |
|
|
|
5.90 |
|
|
$ |
53.96 |
|
|
|
476,846 |
|
|
$ |
56.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25 — $120.88 |
|
|
3,595,316 |
|
|
|
7.26 |
|
|
$ |
25.82 |
|
|
|
2,542,014 |
|
|
$ |
25.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
The total intrinsic value for options exercisable at September 30,
2005 was $46.2 million, representing the difference between the fair value of the
Company’s common stock underlying these options at September 30, 2005 and the related exercise prices.
As of September 30, 2005, equity based awards (including stock option and stock units)
available for future issuance is as follows:
| |
|
|
|
|
| |
|
Awards |
| |
|
Available for |
| |
|
Grant |
Balance, September 30, 2002 |
|
|
1,714,262 |
|
Granted |
|
|
(2,195,300 |
) |
Exercised |
|
|
— |
|
Cancelled |
|
|
504,771 |
|
Additional shares reserved (terminated), net |
|
|
1,155,000 |
|
|
|
|
|
|
Balance, September 30, 2003 |
|
|
1,178,733 |
|
Granted |
|
|
(2,230,515 |
) |
Exercised |
|
|
— |
|
Cancelled |
|
|
353,232 |
|
Additional shares reserved (terminated), net |
|
|
820,070 |
|
|
|
|
|
|
Balance, September 30, 2004 |
|
|
121,520 |
|
Granted |
|
|
(945,284 |
) |
Exercised |
|
|
— |
|
Cancelled |
|
|
300,786 |
|
Additional shares reserved (terminated), net |
|
|
1,582,081 |
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
1,059,103 |
|
|
|
|
|
|
The Company recognized $4.6 million of pre-tax stock compensation expense following the early
adoption of FAS 123R in the fourth quarter of fiscal year 2005. As of September 30, 2005, there was
$32.7 million of total unrecognized compensation cost, related to unvested stock options and
restricted stock units, the majority of which will be recognized ratably over the next two years.
An assumption of a five percent forfeiture rate is utilized when arriving at the amount of stock
compensation expense.
8. Commitments and Contingencies
Operating Leases
The majority of the Company’s operating lease payments relate to the Company’s two building
corporate headquarters in Seattle, Washington. The lease on the first building commenced in July
2000; and the lease on the second building commenced in September 2000. The lease for both
buildings expire in 2012. The second building has been fully subleased until 2012. The Company also
leases additional office space for product development and sales and support personnel in the
United States and internationally.
72
Future minimum operating lease payments, net of sublease income, are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross |
|
|
|
|
|
|
Net |
|
| |
|
Lease |
|
|
Sublease |
|
|
Lease |
|
| |
|
Payments |
|
|
Income |
|
|
Payments |
|
2006 |
|
$ |
7,647 |
|
|
$ |
3,350 |
|
|
$ |
4,297 |
|
2007 |
|
|
7,341 |
|
|
|
3,460 |
|
|
|
3,881 |
|
2008 |
|
|
6,700 |
|
|
|
3,570 |
|
|
|
3,130 |
|
2009 |
|
|
6,853 |
|
|
|
3,681 |
|
|
|
3,172 |
|
2010 |
|
|
6,831 |
|
|
|
3,791 |
|
|
|
3,040 |
|
Thereafter |
|
|
11,915 |
|
|
|
7,239 |
|
|
|
4,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,287 |
|
|
$ |
25,091 |
|
|
$ |
22,196 |
|
|
|
|
|
|
|
|
|
|
|
Rent expense under non-cancelable operating leases amounted to approximately $5.6 million,
$4.8 million, and $4.5 million for the fiscal years ended September 30, 2005, 2004, and 2003,
respectively.
Litigation
In July and August 2001, a series of putative securities class action lawsuits were filed in
United States District Court, Southern District of New York against certain investment banking
firms that underwrote the Company’s initial and secondary public offerings, the Company and some of
the Company’s officers and directors. These cases, which have been consolidated under In re F5
Networks, Inc. Initial Public Offering Securities Litigation, No. 01 CV 7055, assert that the
registration statements for the Company’s June 4, 1999 initial public offering and September 30,
1999 secondary offering failed to disclose certain alleged improper actions by the underwriters for
the offerings. The consolidated, amended complaint alleges claims against the Company and those of
its officers and directors named in the complaint under Sections 11 and 15 of the Securities Act of
1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Other lawsuits
have been filed making similar allegations regarding the public offerings of more than 300 other
companies. All of these various consolidated cases have been coordinated for pretrial purposes as
In re Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. In October 2002,
the directors and officers were dismissed without prejudice. The issuer defendants filed a
coordinated motion to dismiss these lawsuits in July 2002, which the Court granted in part and
denied in part in an order dated February 19, 2003. The Court declined to dismiss the Section 11
and Section 10(b) and Rule 10b-5 claims against the Company. In June 2004, a stipulation of
settlement for the claims against the issuer defendants, including the Company, was submitted to
the Court. On August 31, 2005, the Court granted preliminary approval of the settlement. The
settlement is subject to a number of conditions, including final approval by the Court. If the
settlement does not occur, and litigation against the Company continues, the Company believes it
has meritorious defenses and intend to defend the case vigorously. Securities class action
litigation could result in substantial costs and divert our management’s attention and resources.
Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate
outcome of the litigation, and any unfavorable outcome could have a material adverse impact on the
Company’s business, financial condition and operating results.
As of September 30, 2005, the Company was not aware of any additional pending legal
proceedings that, individually or in the aggregate, would have had a material adverse effect on the
Company’s business, operating results, or financial condition. The Company may in the future be
party to litigation arising in the ordinary course of business, including claims that the Company
allegedly infringes upon third-party trademarks or other intellectual property rights. Such claims,
even if not meritorious, could result in the expenditure of significant financial and managerial
resources.
9. Employee Benefit Plans
The Company has a 401(k) savings plan whereby eligible employees may voluntarily contribute a
percentage of their compensation. The Company may, at its discretion, match a portion of the
employees’ eligible contributions. Contributions by the Company to the plan during the years ended
September 30, 2005, 2004, and 2003 were approximately $1.2 million, $1.0 million and $0.9 million,
respectively. Contributions made by the Company vest over four years.
10. Geographic Sales and Significant Customers
Operating segments are defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. The
Company is organized as, and operates in, one reportable segment: the development, marketing and
selling of a comprehensive suite of application networking solutions that helps customers
efficiently and securely manage application traffic on
73
their Internet-based networks. The Company manages its business based on four geographic
regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (EMEA);
Japan; and Asia Pacific. The Company’s chief operating decision-making group reviews financial
information presented on a consolidated basis accompanied by information about revenues by
geographic region. The Company’s foreign offices conduct sales, marketing and support activities.
The Company’s management evaluates performance based primarily on revenues in the geographic
locations in which the Company operates. Revenues are attributed by geographic location based on
the location of the customer. The Company’s assets are primarily located in the United States and
not allocated to any specific region. Therefore, geographic information is presented only for net
product revenue.
The following presents revenues by geographic region (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Americas |
|
$ |
167,322 |
|
|
$ |
103,603 |
|
|
$ |
75,409 |
|
EMEA |
|
|
47,198 |
|
|
|
25,606 |
|
|
|
16,880 |
|
Japan |
|
|
38,435 |
|
|
|
26,801 |
|
|
|
16,039 |
|
Asia Pacific |
|
|
28,455 |
|
|
|
15,180 |
|
|
|
7,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
281,410 |
|
|
$ |
171,190 |
|
|
$ |
115,895 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues from international customers are primarily denominated in U.S. dollars and
totaled $114.1 million, $67.6 million, and $40.5 million for the years ended September 30, 2005,
2004 and 2003, respectively. One domestic distributor accounted for 18.6%, 19.1% and 12.6% of total
net revenue for the fiscal years 2005, 2004 and 2003, respectively. This distributor accounted for
26.2%, 26.9% and 17.8% of accounts receivable as of September 30, 2005, 2004 and 2003,
respectively.
11. Subsequent Events
On October 4, 2005, the Company acquired all of the capital stock of Swan Labs, Inc. (Swan
Labs), a privately held Delaware corporation headquartered in San Jose, California for $43.0
million in cash. The Company also incurred $3.2 million of direct transaction costs for a total
purchase price of approximately $46.2 million. Swan Labs provides WAN (Wide Area Network)
optimization and application acceleration products and services. The addition of Swan Labs is
intended to allow the Company to quickly enter the WAN optimization market, broaden the Company’s
customer base, and augment its existing product line.
12. Subsequent Events Related to the Special Committee and Company Investigations and the
Restatement
On May 16, 2006, the CFRA issued the CFRA Report, in which CFRA reviewed the option prices of
100 public companies and, based upon an analysis of the exercise prices of option grants with
reference to the companies’ stock prices, concluded that 17% of the subject companies were, in
CFRA’s view, “at risk for having backdated option grants during the period 1997 to 2002.” The
Company was among the 17 companies so identified.
On May 18, 2006, the Company was contacted by the SEC as part of an informal inquiry entitled
In the Matter of F5 Networks, Inc. (SEC File No. MHO-10462). On May 19, 2006, the Company received
a grand jury subpoena issued by the U.S. District Court for the Eastern District of New York
requesting documents related to the granting of stock options from 1995 through the present in
connection with an inquiry into the Company’s stock option practices by the Department of Justice.
The Company produced documents in response to these requests.
On May 22, 2006, the Board of Directors formed the Special Committee with broad authority to
investigate and address the Company’s stock option practices. The Special Committee was originally
composed of three members of the Board of Directors, one of which was also on the Audit Committee,
Karl Guelich, Rich Malone and Gary Ames. In July 2006, the Special Committee was reconstituted to
consist of two independent members of the Board of Directors, Gary Ames and Deborah Bevier (who
joined the Company’s Board of Directors on July 14, 2006). The Company continues to fully
cooperate with the SEC and the Department of Justice, and has provided such agencies with extensive
documentation relating to the Special Committee’s and the Company’s inquiries as discussed in Note
2 to these Consolidated Financial Statements. The SEC and the Department of Justice inquiries are
ongoing. The Company does not know the remedial, civil or criminal penalties or monetary terms that
either the SEC or the Department of Justice may seek.
The Company received a notice from the Internal Revenue Service (“IRS”) indicating the IRS
would be auditing its tax returns for the 2002, 2003, and 2004. The Company has produced documents
and other information to the IRS and is currently in discussions
74
with the IRS to resolve all issues arising from this audit. The Company does not believe this
audit and any settlement with the IRS will have a material adverse impact on its consolidated
financial position or results of operations.
On May 24, 2006, a shareholder action captioned Adams v. Amdahl et al. was filed against
certain of the Company’s current and former officers and directors in the King County Superior
Court in Washington. The complaint generally alleges that the defendants breached their fiduciary
duties to the Company in connection with the granting of certain stock options. Five additional
shareholder derivative complaints, based on substantially the same allegations, were subsequently
filed in the Washington federal and state courts. Although litigation is subject to inherent
uncertainties, the Company does not believe the results of these pending actions will, individually
or in the aggregate, have a material adverse impact on its consolidated financial position or
results of operations.
75
13. Quarterly Results of Operations
The following table presents the Company’s selected unaudited quarterly results of operations
restated for the eight quarters ended September 30, 2005 from previously reported information filed
on Form 10-Q and Form 10-K, as a result of the Restatement of our financial results discussed in
this Form 10-K/A.
See Note 2, of the Notes to Consolidated Financial Statements for more detailed information
regarding the restatement of our consolidated financial statements for the years ended September
30, 2005, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
Sept 30, 2005 |
|
|
June 30, 2005 |
|
|
March 31, 2005 |
|
|
Dec. 31, 2004 |
|
| |
|
(In thousands, except per share data) |
|
| |
|
As |
|
|
|
|
|
|
As |
|
|
As |
|
|
|
|
|
|
As |
|
|
As |
|
|
|
|
|
|
As |
|
|
As |
|
|
|
|
|
As |
|
| |
|
reported |
|
|
Adjustment |
|
|
restated |
|
|
reported |
|
|
Adjustment |
|
|
restated |
|
|
reported |
|
|
Adjustment |
|
|
restated |
|
|
reported |
|
|
Adjustment |
|
|
restated |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
62,762 |
|
|
$ |
— |
|
|
$ |
62,762 |
|
|
$ |
57,112 |
|
|
$ |
— |
|
|
$ |
57,112 |
|
|
$ |
53,332 |
|
|
$ |
— |
|
|
$ |
53,332 |
|
|
$ |
46,397 |
|
|
$ |
— |
|
|
$ |
46,397 |
|
Services |
|
|
17,845 |
|
|
|
— |
|
|
|
17,845 |
|
|
|
15,952 |
|
|
|
— |
|
|
|
15,952 |
|
|
|
14,398 |
|
|
|
— |
|
|
|
14,398 |
|
|
|
13,612 |
|
|
|
— |
|
|
|
13,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
80,607 |
|
|
|
— |
|
|
|
80,607 |
|
|
|
73,064 |
|
|
|
— |
|
|
|
73,064 |
|
|
|
67,730 |
|
|
|
— |
|
|
|
67,730 |
|
|
|
60,009 |
|
|
|
— |
|
|
|
60,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
13,886 |
|
|
|
— |
|
|
|
13,886 |
|
|
|
12,751 |
|
|
|
1 |
|
|
|
12,752 |
|
|
|
11,820 |
|
|
|
2 |
|
|
|
11,822 |
|
|
|
10,528 |
|
|
|
2 |
|
|
|
10,530 |
|
Services |
|
|
4,572 |
|
|
|
— |
|
|
|
4,572 |
|
|
|
4,306 |
|
|
|
6 |
|
|
|
4,312 |
|
|
|
3,908 |
|
|
|
7 |
|
|
|
3,915 |
|
|
|
3,386 |
|
|
|
9 |
|
|
|
3,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
18,458 |
|
|
|
— |
|
|
|
18,458 |
|
|
|
17,057 |
|
|
|
7 |
|
|
|
17,064 |
|
|
|
15,728 |
|
|
|
9 |
|
|
|
15,737 |
|
|
|
13,914 |
|
|
|
11 |
|
|
|
13,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
62,149 |
|
|
|
— |
|
|
|
62,149 |
|
|
|
56,007 |
|
|
|
(7 |
) |
|
|
56,000 |
|
|
|
52,002 |
|
|
|
(9 |
) |
|
|
51,993 |
|
|
|
46,095 |
|
|
|
(11 |
) |
|
|
46,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
25,521 |
|
|
|
54 |
|
|
|
25,575 |
|
|
|
23,207 |
|
|
|
12 |
|
|
|
23,219 |
|
|
|
20,885 |
|
|
|
103 |
|
|
|
20,988 |
|
|
|
19,640 |
|
|
|
444 |
|
|
|
20,084 |
|
Research and
development |
|
|
9,039 |
|
|
|
27 |
|
|
|
9,066 |
|
|
|
7,547 |
|
|
|
37 |
|
|
|
7,584 |
|
|
|
7,789 |
|
|
|
45 |
|
|
|
7,834 |
|
|
|
6,974 |
|
|
|
58 |
|
|
|
7,032 |
|
General and
administrative |
|
|
7,067 |
|
|
|
271 |
|
|
|
7,338 |
|
|
|
5,833 |
|
|
|
483 |
|
|
|
6,316 |
|
|
|
5,854 |
|
|
|
487 |
|
|
|
6,341 |
|
|
|
5,006 |
|
|
|
485 |
|
|
|
5,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
41,627 |
|
|
|
352 |
|
|
|
41,979 |
|
|
|
36,587 |
|
|
|
532 |
|
|
|
37,119 |
|
|
|
34,528 |
|
|
|
635 |
|
|
|
35,163 |
|
|
|
31,620 |
|
|
|
987 |
|
|
|
32,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
|
20,522 |
|
|
|
(352 |
) |
|
|
20,170 |
|
|
|
19,420 |
|
|
|
(539 |
) |
|
|
18,881 |
|
|
|
17,474 |
|
|
|
(644 |
) |
|
|
16,830 |
|
|
|
14,475 |
|
|
|
(998 |
) |
|
|
13,477 |
|
Other income, net |
|
|
2,925 |
|
|
|
|
|
|
|
2,925 |
|
|
|
2,123 |
|
|
|
|
|
|
|
2,123 |
|
|
|
1,641 |
|
|
|
|
|
|
|
1,641 |
|
|
|
1,387 |
|
|
|
|
|
|
|
1,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes |
|
|
23,447 |
|
|
|
(352 |
) |
|
|
23,095 |
|
|
|
21,543 |
|
|
|
(539 |
) |
|
|
21,004 |
|
|
|
19,115 |
|
|
|
(644 |
) |
|
|
18,471 |
|
|
|
15,862 |
|
|
|
(998 |
) |
|
|
14,864 |
|
Provision (benefit)
for income taxes |
|
|
7,796 |
|
|
|
392 |
|
|
|
8,188 |
|
|
|
7,566 |
|
|
|
745 |
|
|
|
8,311 |
|
|
|
7,003 |
|
|
|
504 |
|
|
|
7,507 |
|
|
|
5,869 |
|
|
|
657 |
|
|
|
6,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15,651 |
|
|
$ |
(744 |
) |
|
$ |
14,907 |
|
|
$ |
13,977 |
|
|
$ |
(1,284 |
) |
|
$ |
12,693 |
|
|
$ |
12,112 |
|
|
$ |
(1,148 |
) |
|
$ |
10,964 |
|
|
$ |
9,993 |
|
|
$ |
(1,655 |
) |
|
$ |
8,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share —basic |
|
$ |
0.41 |
|
|
$ |
(0.02 |
) |
|
$ |
0.39 |
|
|
$ |
0.37 |
|
|
$ |
(0.04 |
) |
|
$ |
0.33 |
|
|
$ |
0.33 |
|
|
$ |
(0.03 |
) |
|
$ |
0.30 |
|
|
$ |
0.28 |
|
|
$ |
(0.05 |
) |
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares — basic |
|
|
38,479 |
|
|
|
— |
|
|
|
38,479 |
|
|
|
37,918 |
|
|
|
— |
|
|
|
37,918 |
|
|
|
36,905 |
|
|
|
— |
|
|
|
36,905 |
|
|
|
35,577 |
|
|
|
— |
|
|
|
35,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share — diluted |
|
$ |
0.39 |
|
|
$ |
(0.02 |
) |
|
$ |
0.37 |
|
|
$ |
0.35 |
|
|
$ |
(0.03 |
) |
|
$ |
0.32 |
|
|
$ |
0.31 |
|
|
$ |
(0.03 |
) |
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
$ |
(0.04 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares — diluted |
|
|
40,015 |
|
|
|
(1 |
) |
|
|
40,014 |
|
|
|
39,418 |
|
|
|
15 |
|
|
|
39,433 |
|
|
|
38,921 |
|
|
|
18 |
|
|
|
38,939 |
|
|
|
37,818 |
|
|
|
30 |
|
|
|
37,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
Sept 30, 2004 |
|
|
June 30, 2004 |
|
|
March 31, 2004 |
|
|
Dec. 31, 2003 |
|
| |
|
(In thousands, except per share data) |
|
| |
|
As |
|
|
|
|
|
|
As |
|
|
As |
|
|
|
|
|
|
As |
|
|
As |
|
|
|
|
|
|
As |
|
|
As |
|
|
|
|
|
|
As |
|
| |
|
reported |
|
|
Adjustment |
|
|
restated |
|
|
reported |
|
|
Adjustment |
|
|
restated |
|
|
reported |
|
|
Adjustment |
|
|
restated |
|
|
reported |
|
|
Adjustment |
|
|
restated |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
37,536 |
|
|
$ |
— |
|
|
$ |
37,536 |
|
|
$ |
32,537 |
|
|
$ |
— |
|
|
$ |
32,537 |
|
|
$ |
29,720 |
|
|
$ |
— |
|
|
$ |
29,720 |
|
|
$ |
26,376 |
|
|
$ |
— |
|
|
$ |
26,376 |
|
Services |
|
|
12,683 |
|
|
|
— |
|
|
|
12,683 |
|
|
|
11,706 |
|
|
|
— |
|
|
|
11,706 |
|
|
|
10,927 |
|
|
|
— |
|
|
|
10,927 |
|
|
|
9,705 |
|
|
|
— |
|
|
|
9,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50,219 |
|
|
|
— |
|
|
|
50,219 |
|
|
|
44,243 |
|
|
|
— |
|
|
|
44,243 |
|
|
|
40,647 |
|
|
|
— |
|
|
|
40,647 |
|
|
|
36,081 |
|
|
|
— |
|
|
|
36,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
8,489 |
|
|
|
2 |
|
|
|
8,491 |
|
|
|
7,267 |
|
|
|
|
|
|
|
7,267 |
|
|
|
6,799 |
|
|
|
|
|
|
|
6,799 |
|
|
|
5,849 |
|
|
|
|
|
|
|
5,849 |
|
Services |
|
|
3,055 |
|
|
|
9 |
|
|
|
3,064 |
|
|
|
2,832 |
|
|
|
4 |
|
|
|
2,836 |
|
|
|
2,626 |
|
|
|
2 |
|
|
|
2,628 |
|
|
|
2,462 |
|
|
|
3 |
|
|
|
2,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,544 |
|
|
|
11 |
|
|
|
11,555 |
|
|
|
10,099 |
|
|
|
4 |
|
|
|
10,103 |
|
|
|
9,425 |
|
|
|
2 |
|
|
|
9,427 |
|
|
|
8,311 |
|
|
|
3 |
|
|
|
8,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38,675 |
|
|
|
(11 |
) |
|
|
38,664 |
|
|
|
34,144 |
|
|
|
(4 |
) |
|
|
34,140 |
|
|
|
31,222 |
|
|
|
(2 |
) |
|
|
31,220 |
|
|
|
27,770 |
|
|
|
(3 |
) |
|
|
27,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
17,597 |
|
|
|
207 |
|
|
|
17,804 |
|
|
|
16,907 |
|
|
|
(37 |
) |
|
|
16,870 |
|
|
|
15,920 |
|
|
|
433 |
|
|
|
16,353 |
|
|
|
14,954 |
|
|
|
465 |
|
|
|
15,419 |
|
Research and
development |
|
|
6,764 |
|
|
|
51 |
|
|
|
6,815 |
|
|
|
6,253 |
|
|
|
12 |
|
|
|
6,265 |
|
|
|
5,900 |
|
|
|
6 |
|
|
|
5,906 |
|
|
|
5,444 |
|
|
|
8 |
|
|
|
5,452 |
|
General and
administrative |
|
|
4,463 |
|
|
|
10 |
|
|
|
4,473 |
|
|
|
4,069 |
|
|
|
4 |
|
|
|
4,073 |
|
|
|
3,855 |
|
|
|
1 |
|
|
|
3,856 |
|
|
|
3,357 |
|
|
|
2 |
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
28,824 |
|
|
|
268 |
|
|
|
29,092 |
|
|
|
27,229 |
|
|
|
(21 |
) |
|
|
27,208 |
|
|
|
25,675 |
|
|
|
440 |
|
|
|
26,115 |
|
|
|
23,755 |
|
|
|
475 |
|
|
|
24,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
|
9,851 |
|
|
|
(279 |
) |
|
|
9,572 |
|
|
|
6,915 |
|
|
|
17 |
|
|
|
6,932 |
|
|
|
5,547 |
|
|
|
(442 |
) |
|
|
5,105 |
|
|
|
4,015 |
|
|
|
(478 |
) |
|
|
3,537 |
|
Other income, net |
|
|
891 |
|
|
|
|
|
|
|
891 |
|
|
|
848 |
|
|
|
|
|
|
|
848 |
|
|
|
808 |
|
|
|
|
|
|
|
808 |
|
|
|
184 |
|
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes |
|
|
10,742 |
|
|
|
(279 |
) |
|
|
10,463 |
|
|
|
7,763 |
|
|
|
17 |
|
|
|
7,780 |
|
|
|
6,355 |
|
|
|
(442 |
) |
|
|
5,913 |
|
|
|
4,199 |
|
|
|
(478 |
) |
|
|
3,721 |
|
Provision (benefit)
for income taxes |
|
|
(5,039 |
) |
|
|
(4,559 |
) |
|
|
(9,598 |
) |
|
|
347 |
|
|
|
— |
|
|
|
347 |
|
|
|
400 |
|
|
|
— |
|
|
|
400 |
|
|
|
398 |
|
|
|
2 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15,781 |
|
|
$ |
4,280 |
|
|
$ |
20,061 |
|
|
$ |
7,416 |
|
|
$ |
17 |
|
|
$ |
7,433 |
|
|
$ |
5,955 |
|
|
$ |
(442 |
) |
|
$ |
5,513 |
|
|
$ |
3,801 |
|
|
$ |
(480 |
) |
|
$ |
3,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share —basic |
|
$ |
0.46 |
|
|
$ |
0.12 |
|
|
$ |
0.58 |
|
|
$ |
0.22 |
|
|
$ |
— |
|
|
$ |
0.22 |
|
|
$ |
0.18 |
|
|
$ |
(0.02 |
) |
|
$ |
0.16 |
|
|
$ |
0.13 |
|
|
$ |
(0.02 |
) |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares — basic |
|
|
34,593 |
|
|
|
— |
|
|
34,593 |
|
|
|
34,382 |
|
|
|
— |
|
|
|
34,382 |
|
|
|
33,768 |
|
|
|
— |
|
|
|
33,768 |
|
|
|
30,159 |
|
|
|
— |
|
|
|
30,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share — diluted |
|
$ |
0.43 |
|
|
$ |
0.12 |
|
|
$ |
0.55 |
|
|
$ |
0.20 |
|
|
$ |
0.00 |
|
|
$ |
0.20 |
|
|
$ |
0.16 |
|
|
$ |
(0.01 |
) |
|
$ |
0.15 |
|
|
$ |
0.11 |
|
|
$ |
(0.01 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares — diluted |
|
|
36,779 |
|
|
|
(21 |
) |
|
|
36,758 |
|
|
|
36,969 |
|
|
|
(37 |
) |
|
|
36,932 |
|
|
|
36,946 |
|
|
|
(29 |
) |
|
|
36,917 |
|
|
|
33,121 |
|
|
|
(40 |
) |
|
|
33,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The Company adopted FAS123R on July 1, 2005, and as a result recognized $4.6 million of
compensation expense related to stock-based compensation charges included in operating
expenses in the fourth quarter of fiscal 2005. |
| |
| (2) |
|
During the fourth quarter of fiscal 2004, the Company reversed the valuation allowance
on U.S. deferred tax assets and as a result realized an income tax benefit of $11.9
million. The credit from the reversal of the valuation allowance was partially offset by
actual U.S. and international tax expenses during the period. |
77
F5 NETWORKS, INC.
SUPPLEMENTARY DATA
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charges to |
|
Charges to |
|
|
|
|
|
Balance |
| |
|
Beginning |
|
Costs and |
|
Other |
|
|
|
|
|
at End |
| Description |
|
of Period |
|
Expenses |
|
Accounts |
|
Deductions |
|
of Period |
| |
|
(In thousands) |
Year Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,594 |
|
|
$ |
653 |
|
|
$ |
— |
|
|
$ |
(500 |
) |
|
$ |
1,747 |
|
Allowance for sales returns |
|
$ |
1,567 |
|
|
$ |
766 |
|
|
$ |
626 |
|
|
$ |
(1,737 |
) |
|
$ |
1,222 |
|
Income tax valuation allowance |
|
$ |
2,649 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(2,649 |
) |
|
$ |
— |
|
Year Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,524 |
|
|
$ |
150 |
|
|
$ |
— |
|
|
$ |
(80 |
) |
|
$ |
1,594 |
|
Allowance for sales returns |
|
$ |
1,525 |
|
|
$ |
1,009 |
|
|
$ |
1,566 |
|
|
$ |
(2,533 |
) |
|
$ |
1,567 |
|
Income tax valuation allowance |
|
$ |
30,711 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(28,062 |
) |
|
$ |
2,649 |
|
Year Ended September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
3,836 |
|
|
$ |
(650 |
) |
|
$ |
— |
|
|
$ |
(1,662 |
) |
|
$ |
1,524 |
|
Allowance for sales returns |
|
$ |
1,616 |
|
|
$ |
347 |
|
|
$ |
745 |
|
|
$ |
(1,183 |
) |
|
$ |
1,525 |
|
Income tax valuation allowance |
|
$ |
26,329 |
|
|
$ |
— |
|
|
$ |
4,382 |
|
|
$ |
— |
|
|
$ |
30,711 |
|
78
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are
designed to ensure that required information is recorded, processed, summarized and reported within
the required timeframe, as specified in the rules set forth by the Securities Exchange Commission.
Our disclosure controls and procedures are also designed to ensure that information required to be
disclosed is accumulated and communicated to management, including the Chief Executive Officer and
Chief Accounting Officer, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Chief Executive Officer and Chief Accounting
Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30,
2005 and, based on this evaluation, the CEO and CAO had previously concluded that our disclosure
controls and procedures were effective as of September 30, 2005. As a result of the findings of the
Special Committee as well as our internal review of our historical stock option practices and our
need to restate the 2005, 2004 and 2003 annual consolidated financial statements and the interim
consolidated financial statements for the first and second quarters of 2006 and all quarters of
2005, as described in Note 2 to our consolidated financial statements, we determined that there was a material weakness in our
internal control over financial reporting as of September 30, 2005, as more fully described below
in “Management’s Report on Internal Control over Financial Reporting (restated)”. For these
reasons, we have now concluded that our disclosure controls and procedures were not effective as of
September 30, 2005.
Management’s Report on Internal Control over Financial Reporting (restated)
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over financial reporting
also can be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features
of the financial reporting process. Therefore, it is possible to design into the process safeguards
to reduce, though not eliminate, this risk.
Management conducted an assessment of the effectiveness of our internal control over financial
reporting as of September 30, 2005 based on the framework established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). A material weakness is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
Management identified the following material weakness in our internal control over financial
reporting as of September 30, 2005:
| |
• |
|
We did not maintain effective controls over our granting and modification of stock
options and the related accounting for and disclosure of stock-based compensation expense.
Specifically, effective controls, including monitoring, were not designed and in place to
ensure the existence, completeness, accuracy, valuation and presentation of activity
related to our granting and modification of stock options. This control deficiency
resulted in the misstatement of our stock-based compensation expense, additional paid-in
capital and related income tax accounts and related disclosures, and in the restatement of
our 2005, 2004 and 2003 annual consolidated financial statements and the interim
consolidated financial statements for the first and second quarters of 2006 and all
quarters of 2005 and 2004 and an audit adjustment to the interim consolidated financial statements |
79
| |
|
|
for the third quarter of 2006. Further, this control deficiency could result in
misstatements of the aforementioned accounts and disclosures that would result in a material
misstatement of our annual or interim consolidated financial statements that would not be
prevented or detected. Accordingly, management has determined this control deficiency
constitutes a material weakness. |
In Management’s Report on Internal Control over Financial Reporting included in the Annual
Report on Form 10-K for the year ended September 30, 2005, our management had previously concluded
that we maintained effective internal control over financial reporting as of September 30, 2005. In
connection with the restatement discussed under the heading “Restatement of Consolidated Financial
Statements” in Note 2 to our consolidated financial statements, our management has subsequently
concluded that the material weakness described above existed as of September 30, 2005. As a result,
we have now concluded that we did not maintain effective internal control over financial reporting
as of September 30, 2005, based on the criteria in Internal Control — Integrated Framework issued
by the COSO. Accordingly, Management’s Report on Internal Control over Financial Reporting has been
restated.
Management’s assessment of the effectiveness of our internal control over financial reporting
as of September 30, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report appearing on
page 41.
Remediation of Material Weakness
Management is committed to remediating the material weakness described above by implementing
changes to our internal control over financial reporting.
On July 1, 2005, we adopted the fair value recognition provision of FAS 123(R). We also began
granting restricted stock unit awards instead of stock- options in the fourth quarter of fiscal 2005
as our primary form of stock-based compensation. FAS 123(R) requires the recognition as expense of
all stockbased compensation. In connection with the adoption of FAS 123(R) we revised certain of
our policies, processes, procedures and controls relating to grants of stock-based compensation.
Although improvements were made to our internal control over financial reporting as they
relate to the granting and modification of stock-based compensation, in connection with the
adoption of FAS 123(R), as of September 30, 2005, we had not fully remediated the material weakness
describe above.
Subsequent to the initiation of our investigation into our stock-option granting practices in
May 2006, we considered the effectiveness of both the design and operation of our internal control
over financial reporting, as they relate to the granting and modification of stock-based
compensation. We implemented a number or significant improvements in our internal control over
financial reporting during the fourth quarter of 2006. In particular, we developed and implemented
the following policies, processes, procedures and controls over the granting and modification of
stock-based compensation:
| |
• |
|
Review and approval of all stock-based compensation awards by the accounting and finance
function. |
| |
| |
• |
|
Enhanced and standardized documentation required to be maintained for the granting of
all such stock-based compensation awards. |
| |
| |
• |
|
Enhanced and standardized documentation required to be maintained for the exercise
and/or cancellation of all such stock-based compensation awards. |
| |
| |
• |
|
A quarterly review and reconciliation of all such stock-based compensation awards by the
accounting and finance function. |
| |
| |
• |
|
Formal communication to all relevant personnel involved in the stock-based compensation
process regarding the importance of the accounting and legal
implications of our stock-based compensation process. |
As of September 30, 2006, management has implemented these additional policies, procedures and
controls. Additionally, we have evaluated the design of these new controls, which have been placed
into operation for a sufficient period of time, and tested their
operating effectiveness. We consider that the steps identified and implemented above have improved the
effectiveness
of our internal control over financial reporting and, as of September 30, 2006, have
remediated the material weakness described above.
80
On November 8, 2006, we announced the Special Committee had completed its review of our stock
option practices and reported its findings to our Board of Directors. In connection with the
conclusion of its review, the Special Committee recommended that our Board of Directors, and its
compensation and audit committees, consider and adopt certain
additional remedial measures and best practices
related to the issues raised in the Special Committees investigation. We are in the process of
implementing these recommendations.
Changes in Internal Control over Financial Reporting
As described above, there were no changes to our internal control
over financial reporting during the fourth quarter of fiscal 2005 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
We filed a definitive Proxy Statement with the SEC on January 20, 2006 regarding our Annual
Shareholders Meeting held on March 2, 2006 (the “Proxy Statement”). Certain information required by
this item is incorporated herein by reference to the Proxy Statement. Also see “Directors and
Executive Officers of the Registrant” in Part I of this Amendment.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated herein by reference to the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the Proxy
Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the Proxy
Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) |
|
Documents filed as part of this report are as follows: |
| |
| |
1. |
|
Consolidated Financial Statements: |
| |
| |
|
|
See Index to Consolidated Financial Statements included under Item 8 in Part II of this
Amendment. |
| |
| |
2. |
|
Exhibits: |
| |
| |
|
|
Amendment Annual Report on Form 10-K and are described in the Exhibit Index immediately
preceding the first exhibit. |
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
|
|
| |
|
F5 NETWORKS, INC. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ JOHN MCADAM
John McAdam
|
|
|
|
|
|
|
Chief Executive Officer and President |
|
|
|
|
|
|
|
|
|
Dated:
December 11, 2006 |
|
|
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| |
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
By:
|
|
/s/ JOHN MCADAM
|
|
Chief Executive Officer, President, and Director
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
John McAdam
|
|
(principal executive officer) |
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ JOHN RODRIGUEZ
|
|
Senior Vice President, Chief Accounting Officer
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
John Rodriguez
|
|
(principal financial officer) |
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ GARY AMES
|
|
Director
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
Gary Ames |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ KEITH D. GRINSTEIN
|
|
Director
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
Keith D. Grinstein |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ KARL D. GUELICH
|
|
Director
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
Karl D. Guelich |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ ALAN J. HIGGINSON
|
|
Director
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
Alan J. Higginson |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ RICH MALONE
|
|
Director
|
|
December 11, 2006 |
|
|
|
|
|
|
|
|
|
Rich Malone |
|
|
|
|
82
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Exhibit Description |
2.1
|
|
—
|
|
Agreement and Plan of Merger dated as of May 31, 2004, by and among the Registrant, Fire5, Inc., a wholly owned
subsidiary of the Registrant, MagniFire Websystems, Inc., and Lucent Venture Partners III LLC(1) |
|
|
|
|
|
2.2
|
|
—
|
|
Agreement and Plan of Merger, dated September 6, 2005, among F5 Networks, Inc., Sparrow Acquisition Corp., Swan
Labs Corporation and the other parties referred to therein.(2) |
|
|
|
|
|
3.1
|
|
—
|
|
Second Amended and Restated Articles of Incorporation of the Registrant(3) |
|
|
|
|
|
3.2
|
|
—
|
|
Amended and Restated Bylaws of the Registrant(3) |
|
|
|
|
|
4.1
|
|
—
|
|
Specimen Common Stock Certificate(3) |
|
|
|
|
|
10.1
|
|
—
|
|
Amended and Restated Office Lease Agreement dated April 3, 2000, between the Registrant and 401 Elliott West
LLC(4) |
|
|
|
|
|
10.2
|
|
—
|
|
Sublease Agreement dated March 30, 2001 between the Registrant and Cell Therapeutics, Inc.(5) |
|
|
|
|
|
10.3
|
|
—
|
|
uRoam Acquisition Equity Incentive Plan(6) |
|
|
|
|
|
10.4
|
|
—
|
|
Form of Indemnification Agreement between the Registrant and each of its directors and certain of its officers(3) |
|
|
|
|
|
10.5
|
|
—
|
|
1998 Equity Incentive Plan, as amended(7) |
|
|
|
|
|
10.6
|
|
—
|
|
Form of Option Agreement under the 1998 Equity Incentive Plan(3) |
|
|
|
|
|
10.7
|
|
—
|
|
Amended and Restated Directors’ Nonqualified Stock Option Plan(3) |
|
|
|
|
|
10.8
|
|
—
|
|
Form of Option Agreement under the Amended and Restated Directors’ Nonqualified Stock Option Plan(3) |
|
|
|
|
|
10.9
|
|
—
|
|
Amended and Restated 1996 Stock Option Plan(3) |
|
|
|
|
|
10.10
|
|
—
|
|
Form of Option Agreement under the Amended and Restated 1996 Stock Option Plan(3) |
|
|
|
|
|
10.11
|
|
—
|
|
1999 Non-Employee Directors’ Stock Option Plan(3) |
|
|
|
|
|
10.12
|
|
—
|
|
Form of Option Agreement under 1999 Non-Employee Directors’ Stock Option Plan(3) |
|
|
|
|
|
10.13
|
|
—
|
|
NonQualified Stock Option Agreement between John McAdam and the Registrant dated July 24, 2000(8) |
|
|
|
|
|
10.14
|
|
—
|
|
2000 Employee Equity Incentive Plan(9) |
|
|
|
|
|
10.15
|
|
—
|
|
Form of Option Agreement under the 2000 Equity Incentive Plan(10) |
|
|
|
|
|
10.16
|
|
—
|
|
NonQualified Stock Option Agreement between M. Thomas Hull and the Registrant dated October 20, 2003(11) |
|
|
|
|
|
10.17
|
|
—
|
|
1999 Employee Stock Purchase Plan, as amended(12) |
|
|
|
|
|
10.18
|
|
—
|
|
MagniFire Acquisition Equity Incentive Plan(13) |
|
|
|
|
|
10.19
|
|
—
|
|
NonQualified Stock Option Agreement between Karl Triebes and the Registrant dated August 16, 2004(13) |
|
|
|
|
|
10.20
|
|
—
|
|
Incentive Compensation Plan for Executive Officers(13) |
|
|
|
|
|
10.21
|
|
—
|
|
2005 Equity Incentive Plan(14) |
|
|
|
|
|
10.22
|
|
—
|
|
Form of Restricted Stock Unit agreement under the 2005 Equity Incentive Plan (with acceleration upon change of
control)(15) |
|
|
|
|
|
10.23
|
|
—
|
|
Form of Restricted Stock Unit agreement under the 2005 Equity Incentive Plan (no acceleration upon change of
control)(15) |
|
|
|
|
|
21.1*
|
|
—
|
|
Subsidiaries of the Registrant |
83
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Exhibit Description |
31.1*
|
|
—
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2*
|
|
—
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.1*
|
|
—
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
| * |
|
Filed herewith. |
| |
| (1) |
|
Incorporated by reference from Current Report on Form 8-K dated May 31, 2004 and filed with
the SEC on June 2, 2004. |
| |
| (2) |
|
Incorporated by reference from Current Report on Form 8-K dated October 4, 2005 and filed
with the SEC on October 5, 2005. |
| |
| (3) |
|
Incorporated by reference from Registration Statement on Form S-1, File No. 333-75817. |
| |
| (4) |
|
Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30,
2003. |
| |
| (5) |
|
Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30,
2001. |
| |
| (6) |
|
Incorporated by reference from Registration Statement on Form S-8, File No. 333-109895. |
| |
| (7) |
|
Incorporated by reference from Registration Statement on Form S-8, File No. 333-104169. |
| |
| (8) |
|
Incorporated by reference from Annual Report on Form 10-K for the year ended September 30,
2000. |
| |
| (9) |
|
Incorporated by reference from Registration Statement on Form S-8, File No. 333-51878. |
| |
| (10) |
|
Incorporated by reference from Annual Report on Form 10-K for the year ended September 30,
2001. |
| |
| (11) |
|
Incorporated by reference from Registration Statement on Form S-8, File No. 333-112022. |
| |
| (12) |
|
Incorporated by reference from Registration Statement on Form S-8, File No. 333-116187. |
| |
| (13) |
|
Incorporated by reference from Annual Report on Form 10-K for the year ended September 30,
2004. |
| |
| (14) |
|
Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended March 31,
2005. |
| |
| (15) |
|
Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30,
2005. |
84