<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 000-29573
ARROWPOINT COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3364184
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
50 NAGOG PARK
ACTON, MA 01720
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(978) 206-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 [_] No [X]/1/
As of April 30, 2000, there were 35,045,467 shares of the registrant's common
stock outstanding./2/
(1) The Registrant has been subject to the filing requirements of the
Securities Exchange Act of 1934 since the effective date of its
Registration Statement on Form S-1 (March 30, 2000) and has filed all
required reports since such effective date.
(2) This share number assumes the conversion of all outstanding shares of the
Registrant's preferred stock into common stock, which was effectuated on
April 5, 2000.
<PAGE> 2
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 8
Factors That May Affect Future Results 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,571 $ 10,731
Accounts receivable, net 7,999 4,745
Inventory 3,745 2,864
Prepaid expenses 521 541
-------- --------
Total current assets 26,836 18,881
-------- --------
Property and Equipment, net 5,615 4,134
Other Assets 652 191
-------- --------
Total assets $ 33,103 $ 23,206
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Loans payable $ -- $ 1,147
Accounts payable 3,814 3,323
Accrued expenses 2,410 1,590
Deferred revenue 3,015 2,470
-------- --------
Total current liabilities 9,239 8,530
-------- --------
Commitments and Contingencies:
Redeemable convertible preferred stock, $.01 par value;
12,500,000 shares authorized, 9,844,735 shares issued and
outstanding at March 31, 2000 and December 31, 1999 34,534 34,534
Stockholders' deficit:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued and outstanding -- --
Convertible preferred stock, $.01 par value; 699,837 shares
authorized at March 31, 2000, 657,263 shares issued and
outstanding at March 31, 2000 13,871 --
Common stock, $.001 par value; 200,000,000 shares authorized,
at March 31, 2000, 8,514,571 shares and 8,351,330
shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 9 8
Additional paid-in capital 35,780 20,483
Treasury stock, at cost (224,334 shares at March 31, 2000 and
December 31, 1999) (36) (36)
Deferred compensation (21,297) (15,300)
Accumulated deficit (38,997) (25,013)
-------- --------
Total stockholders' deficit (10,670) (19,858)
-------- --------
$ 33,103 $ 23,206
======== ========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
<PAGE> 4
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
2000 1999
--------------------------------
(unaudited)
<S> <C> <C>
Revenue $ 9,547 $ 737
Cost of Revenue 3,553 501
------------ ------------
Gross margin 5,994 236
Operating Expenses:
Sales and marketing 7,735 1,298
Research and development 2,308 1,342
General and administrative 934 350
Stock-based compensation 2,758 104
------------ ------------
Total operating expenses 13,735 3,094
------------ ------------
Operating loss (7,741) (2,858)
Interest Income 274 119
Interest Expense (36) (19)
------------ ------------
Net loss $ (7,503) $ (2,758)
------------ ------------
Beneficial conversion feature of Series E
preferred stock (6,480) --
------------ ------------
Net loss available to common stockholders $ (13,983) $ (2,758)
============ ============
Net Loss Per Share:
Basic and diluted $ (3.34) $ (1.07)
============ ============
Pro Forma basic and diluted $ (0.56) $ (0.13)
============ ============
Shares Used In Computing Net Loss Per Share:
Basic and diluted 4,189,643 2,588,111
Pro Forma basic and diluted 25,193,639 20,474,975
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
<PAGE> 5
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
----------------------------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (7,503) $ (2,758)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 540 220
Amortization of deferred compensation 2,758 104
Changes in operating assets and liabilities:
Accounts receivable (3,254) (1,087)
Inventory (881) (366)
Prepaid expenses 20 (54)
Other assets (461) (2)
Accounts payable 491 36
Accrued expenses 820 274
Deferred revenue 545 715
-------- --------
Net cash used in operating activities (6,925) (2,918)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,021) (366)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from sale of Series D redeemable convertible
preferred stock -- 15,289
Net proceeds from sale of Series E convertible preferred stock 13,871 --
Proceeds from sale of common stock 62 42
Proceeds from loan payable 635 81
Payments on loan payable (1,782) (38)
-------- --------
Net cash provided by financing activities 12,786 15,374
-------- --------
Net Increase in Cash and Cash Equivalents 3,840 12,090
-------- --------
Cash and Cash Equivalents, beginning of period 10,731 4,339
-------- --------
Cash and Cash Equivalents, end of period $ 14,571 $ 16,429
======== ========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
<PAGE> 6
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by ArrowPoint Communications, Inc. (the Company or ArrowPoint), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The condensed consolidated balance sheet as of December 31, 1999
has been derived from the audited financial statements as of that date, but does
not include all disclosures required by generally accepted accounting
principles. ArrowPoint believes the disclosures included in the unaudited
condensed consolidated financial statements, when read in conjunction with the
Company's December 31, 1999 consolidated financial statements and the notes
thereto included in ArrowPoint's Registration Statement on Form S-1 declared
effective by the Securities and Exchange Commission on March 30, 2000, are
adequate to make the information presented not misleading.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of financial position, results of operations and cash flows as
of the dates and for the periods presented. These adjustments are of a normal,
recurring nature. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected for
future quarters or the year ending December 31, 2000.
(2) INVENTORY
Inventory is stated at the lower of cost or market, determined on a
FIFO (first-in, first-out) basis and consisted of the following:
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
Raw materials $ 193,706 $ 170,882
Work-in-process 232,067 256,094
Finished goods 3,318,972 2,437,156
----------- -----------
$ 3,744,745 $ 2,864,072
=========== ===========
(3) REVENUE RECOGNITION
The Company recognizes revenue from product sales to end users, resellers
and OEMs upon product shipment, provided that there are no uncertainties
regarding acceptance, there is persuasive evidence of an arrangement, the sales
price is fixed or determinable and collection of the related receivable is
probable. If uncertainties exist, the Company recognizes revenue when those
uncertainties are resolved. The Company's distributors have limited rights of
return and therefore the Company recognizes revenue on product sales to
distributors when the rights of return lapse, provided that there are no
uncertainties regarding acceptance, there is persuasive evidence of an
arrangement, the sales price is fixed or determinable and collection of the
related receivable is probable. If uncertainties exist, the Company recognizes
revenue when those uncertainties are resolved. In multiple element arrangements
that contain product and service elements, the Company uses the residual method
when fair value does not exist for one of the delivered elements in the
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. The Company has established
vendor specific objective evidence of fair value for support services.
Accordingly, product revenue is recognized under the residual method in
arrangements in which the product is sold with support services. Service revenue
is recognized as the services are performed or ratably over the terms of the
service contracts. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue. Warranty costs
are estimated and recorded by the Company at the time of product revenue
recognition.
6
<PAGE> 7
ARROWPOINT COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" for
all periods presented. In accordance with SFAS No. 128, basic and diluted net
loss per common share were determined by dividing net loss available for common
stockholders by the weighted average common shares outstanding during the
period, less shares subject to repurchase. Basic and diluted net loss per share
are the same because all outstanding common stock options have been excluded as
they are considered antidilutive because the Company has recorded a net loss for
all periods presented.
In accordance with the SEC Staff Accounting Bulletin No. 98, "Earnings Per
Share in an Initial Public Offering", the Company has determined that there were
no nominal issuances of the Company's common stock prior to the Company's
initial public offering.
The Company's historical capital structure is not indicative of its capital
structure after the initial public offering due to the automatic conversion of
all shares of preferred stock into common stock concurrent with the closing of
the Company's initial public offering on April 5, 2000. Accordingly, pro forma
net loss per share is presented for the three months ended March 31, 2000 and
1999, assuming the conversion of all outstanding shares of preferred stock into
common using the if-converted method from the respective dates of issuance.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of pro forma basic and diluted
net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
-----------------------------------
<S> <C> <C>
Weighted average common shares outstanding 4,189,643 2,588,111
Add: Weighted average common shares issued upon the
conversion of preferred stock 21,003,996 17,886,864
--------------- ---------------
Pro forma basic and diluted weighted average common
shares outstanding 25,193,639 20,474,975
=============== ===============
</TABLE>
(5) SERIES E CONVERTIBLE PREFERRED STOCK
In January 2000, the Company amended its certificate of incorporation to
authorize 699,837 shares of Series E convertible preferred stock (Series E
Preferred Stock). Also, in January 2000, the Company sold 657,263 shares of
Series E Preferred Stock at $21.14 per share for net proceeds to the Company of
$13,871,000. All shares of Series E Preferred Stock were automatically converted
into 1,314,526 shares of the Company's common stock upon the closing of the
Company's initial public offering. In connection with the sale of Series E
Preferred Stock, the Company recorded a charge to accumulated deficit of
$6,480,000 in the quarter ended March 31, 2000. This amount represents the fair
value of the beneficial conversion feature of Series E Preferred Stock. This
amount has been accounted for like a dividend to preferred stockholders and, as
a result, increased the Company's net loss available to common stockholders and
the related net loss per share for the quarter ended March 31, 2000.
(6) INITIAL PUBLIC OFFERING
On April 5, 2000, ArrowPoint completed the sale of 5,750,000 shares of
common stock (including the exercise of the over-allotment option of 750,000
shares) in an underwritten initial public offering at a price of $34.00 per
share. Cash proceeds from the offering, net of underwriters' discount and
offering expenses, totaled approximately $180,400,000. Upon the closing of the
initial public offering, all outstanding shares of Series A Preferred Stock
(consisting of 5,750,000 shares), Series B Preferred Stock (consisting of
2,213,828 shares), Series C Preferred Stock (consisting of 278,464 shares),
Series D Preferred Stock (consisting of 1,602,443 shares), and Series E
Preferred Stock (consisting of 657,263 shares) were converted, on a two-for-one
basis, into 21,003,996 shares of common stock.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion contains a number of forward-looking statements, which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below under "Factors That May Affect
Future Results", that could cause actual results to differ materially from
historical results or those anticipated. In this report, the words "may",
"will", "should", "expects", "scheduled", "plans", "intends", "anticipates",
"believes", "estimates", "potential", or "continue" or the negative of these
terms or other comparable terminology identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and the notes thereto included in Item 1 of
this Quarterly Report, the Company's Registration Statement on Form S-1 declared
effective by the Securities and Exchange Commission on March 30, 2000, and
"Factors That May Affect Future Results" in this document.
OVERVIEW
We provide intelligent Web switches that enable our customers to deploy a
global Web network architecture to optimize e-commerce transactions and the
delivery of Web content. Using patented technology, our switches intelligently
route requests for Web content or transactions to the network server that is
best able to handle the request at that moment. We derived our revenue through
March 31, 2000 from both the sale of our CS-100 and CS-800 web switches and the
sale of technical support contracts. Our customers consist of end-users,
distributors, resellers, and original equipment manufacturers, known as OEMs. We
expanded our international activities in Europe, Latin America and the
Asia/Pacific market significantly in 1999 and in the quarter ended March 31,
2000, and plan to continue to do so in 2000.
We have incurred significant net losses since inception and, as of March
31, 2000, had an accumulated deficit of $39.0 million. We have not achieved
profitability on a quarterly or annual basis, and anticipate that we will
continue to incur net losses through 2000. We expect to increase our sales and
marketing, research and development and general and administrative expenses and,
as a result, we will need to generate significant revenue to achieve and
maintain profitability. Although we have achieved rapid growth in revenue in
recent periods, we may not be able to sustain these growth rates in the future.
We recorded a total of $26.4 million of deferred compensation costs since
our inception through March 31, 2000. These amounts represent the difference
between the exercise price or purchase price of stock options granted or stock
sold to our employees and the deemed fair value of our common stock at the time
of grant or sale. We are amortizing these amounts over the vesting period of the
options and restricted stock awards, which is generally five years. We recorded
stock-based compensation expense of $2.8 million for the quarter ended March 31,
2000 and $104,000 for the quarter ended March 31, 1999.
We recorded a charge to accumulated deficit of approximately $6.5 million
in the quarter ended March 31, 2000. This amount represents the value of the
beneficial conversion feature of the Series E convertible preferred stock. This
amount has been accounted for like a dividend to preferred stockholders and, as
a result, increased the Company's net loss available to common stockholders and
the related net loss per share for the quarter ended March 31, 2000.
In light of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. This is particularly true of companies
such as ours that operate in new and rapidly evolving markets.
RESULTS OF OPERATIONS
REVENUE
We have derived revenue from the sale of our CS-100 and CS-800 products and
related technical support contracts and services. Revenue increased by $8.8
million from $737,000 in the first quarter of 1999 to $9.5 million in the first
quarter of 2000. This increase was due primarily to an increase in the quantity
of our products sold. Substantially all of the increase in revenue was comprised
of product revenue with the majority of the increase attributable to new
customers. Revenue derived from customers located outside of the United States
was 48% in the first quarter of 2000, as compared to 61% in the first quarter of
1999.
8
<PAGE> 9
COST OF REVENUE
Cost of revenue consists of material, assembly, test and overhead costs
incurred to produce our products. Cost of revenue increased by $3.1 million from
$501,000 in the first quarter of 1999 to $3.6 million in the first quarter of
2000. Gross margin increased from 32% in the first quarter of 1999 to 63% in the
first quarter of 2000 due to higher production volumes that resulted in cost
efficiencies for both material and overhead costs.
SALES AND MARKETING
Sales and marketing expenses consist primarily of compensation, travel,
recruiting, advertising, and field sales office expenses. Our sales and
marketing expenses increased by $6.4 million from $1.3 million in the first
quarter of 1999 to $7.7 million in the first quarter of 2000. This increase was
due primarily to investing in our sales and marketing infrastructure, both
domestically and internationally. These investments included an increase in our
sales, marketing and customer support resulting in an increase in compensation
expenses, an increase in recruiting expenses, an increase in travel expenses,
increased field sales office expenses, and marketing activities, including
advertising, trade shows and other promotional expenses from the first quarter
of 1999 to the first quarter of 2000. Sales and marketing expenses decreased
from 176% of revenue in the first quarter of 1999 to 81% of revenue in the first
quarter of 2000. We expect sales and marketing expenses to increase on an
absolute dollar basis in future periods.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of compensation,
depreciation and office expenses. Our research and development expenses
increased by $1.0 million from $1.3 million in the first quarter of 1999 to $2.3
million in the first quarter of 2000. This increase was due primarily to an
increase in our software engineers and other technical staff resulting in an
increase in compensation expenses, and depreciation expense. Research and
development expenses decreased from 182% of revenue in the first quarter of 1999
to 24% of revenue in the first quarter of 2000. We believe continued investment
in research and development is essential to attaining our strategic objectives,
and as a result, we expect research and development expenses to increase on an
absolute dollar basis in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
general and administrative personnel, depreciation, and professional fees. Our
general and administrative expenses increased by $584,000 from $350,000 in the
first quarter of 1999 to $934,000 in the first quarter of 2000. This increase
was due primarily to an increase in general and administrative personnel
resulting in increased compensation expense. General and administrative costs
decreased from 47% of revenue in the first quarter of 1999 to 10% of revenue in
the first quarter of 2000. We expect general and administrative expenses to
increase on an absolute dollar basis in future periods.
INTEREST INCOME, NET
Net interest income increased by $138,000 from $100,000 in the first
quarter of 1999 to $238,000 in the first quarter of 2000. This increase was due
primarily to increased cash and cash equivalents balances as a result of our
Series E preferred stock financing in January 2000.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through March 31, 2000, we financed our operations and
capital expenditures primarily through the sale of approximately $48.4 million
in equity securities and borrowings of $1.7 million. On April 5, 2000 ArrowPoint
received cash proceeds, net of underwriters' discount and offering expenses,
totaling approximately $180.4 million upon the closing of its initial public
offering.
We have a $2 million equipment line of credit and a $5 million accounts
receivable line of credit with Fleet National Bank with interest rates of
approximately 9.5% as of March 31, 2000. In March 2000 equipment line borrowings
of $1.7 million were repaid and at March 31, 2000, we had no borrowings under
the equipment or accounts receivable lines of credit.
Cash used in our operating activities was $2.9 million for the quarter
ended March 31, 1999, and $6.9 million for the quarter ended March 31, 2000.
These net cash outflows resulted from operating losses as well as increases in
accounts receivable and inventory due to increased sales. They were partially
offset by an increase in the amortization of deferred compensation of $2.8
million along with increases in accounts payable, accrued expenses and deferred
revenues.
9
<PAGE> 10
Cash used in investing activities was $366,000 for the quarter ended March
31, 1999, and $2.0 million for the quarter ended March 31, 2000, substantially
all of which was used for the purchase of property and equipment, primarily
computers and test equipment for our development and manufacturing activities.
We expect capital expenditures to continue to increase through the year 2000,
due to the costs of expansion and expenditures for computers and test equipment.
As of March 31, 2000, we had obligations outstanding under various
operating leases. In August 1999 we agreed to lease approximately 45,000 square
feet, as our headquarters, in a facility located in Acton, Massachusetts for a
term of five years. The annual cost of this lease is approximately $817,000,
subject to annual adjustments. Although we have no other material commitments,
we anticipate a substantial increase in our lease commitments consistent with
anticipated growth in our operations, infrastructure and personnel. In the
future we may also require a larger inventory of products in order to provide
better availability to customers and achieve purchasing efficiencies. We expect
that the net proceeds from our recent public offering, our existing cash
balances and amounts available under our credit facilities will be sufficient to
meet our currently anticipated working capital and capital expenditures for at
least the next 18 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
FINANCIAL PERFORMANCE
The public market for the stock of Internet infrastructure solutions
companies is extremely volatile and our failure to meet market expectations
could result in a substantial decline in our stock price. Moreover, our limited
operating history may make it difficult to value and evaluate our business and
our future prospects.
We have incurred substantial losses to date and may not be able to achieve
or maintain profitability. Our failure to become profitable within the timeframe
expected by investors may adversely affect the market price of our common stock.
Our operating results are difficult to forecast and may fluctuate from
quarter to quarter. If our quarterly revenue or operating results fall below the
expectations of investors or securities analysts, the price of our stock could
be adversely affected.
We expect to derive a substantial percentage of our revenue in 2000 from
sales outside the U.S. Our significant international business exposes us to a
number of risks that we do not face in our U.S. business, including longer
accounts receivable collection cycles, foreign currency exchange rate
fluctuations, and economic or political instability in certain international
markets.
COMPETITION AND MARKET ACCEPTANCE
The market for Internet infrastructure solutions is new, rapidly evolving
and intensely competitive. If we fail to compete successfully in this market,
our revenue could decline and we could experience additional losses. In
addition, if Internet infrastructure solutions do not achieve widespread
commercial acceptance, we will not be able to sell our products and our ability
to increase revenue will be adversely impacted.
The market for Internet infrastructure solutions is characterized by
rapidly changing technologies, frequent new product introductions and evolving
customer requirements and industry standards. In order to remain competitive in
our markets, we will need to introduce on a timely basis new products that offer
significantly improved performance and features, at lower prices. If we are
unable to do so, our sales and competitive position will suffer.
RAPID GROWTH
Our company is growing rapidly and we may be unable to manage our growth
effectively. Our failure to effectively manage our recent and anticipated growth
could have a material adverse impact on the quality of our products, our ability
to retain key personnel and our financial performance.
The growth of our business and revenue depends in large part upon our
ability to attract and retain sufficient numbers of highly skilled employees,
particularly our executive officers and qualified sales and engineering
personnel. If we are unable to hire and retain the skilled personnel we need, we
will not be able to grow our business and our revenue as we anticipate.
10
<PAGE> 11
DEPENDENCE ON THIRD PARTIES
We purchase several or our key components from single vendors. If we are
unable to obtain sufficient quantities of these components, we would be unable
to manufacture and ship our products on a timely basis, resulting in lost or
delayed revenue, increased costs and damage to our reputation.
We subcontract the manufacturing of our products to a single contract
manufacturer. If that manufacturer is unable or unwilling to manufacture a
sufficient number of our products, we may not be able to timely fill customer
orders. In addition, our reliance on a single manufacturer exposes to other
risks, including reduced control over manufacturing capacity, product quality
and manufacturing costs.
INTELLECTUAL PROPERTY
Claims by other companies that our products infringe their patents or other
intellectual property rights could hinder or block our ability to sell our
products, subject us to significant monetary liability and divert the time and
attention of our management and engineers.
We are involved in litigation with Arrow Electronics over our use of the
name ArrowPoint. An adverse outcome in this litigation could cause us to change
our corporate name, incur costs and damage our competitive position in the
market.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. Government obligations with contractual maturities of less than
one year. We do not expect to have any material loss from our marketable
security investments and therefore believe that our potential interest rate
exposure is not material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as a defendant in a civil suit filed in the United
States District Court for the Southern District of New York by Arrow
Electronics, Inc. on July 19, 1999. In the lawsuit, Arrow Electronics asserts
trademark infringement and associated state law claims. In particular, Arrow
Electronics alleges that customers are likely to be confused between Arrow
Electronics and ArrowPoint, and by use of the Internet domain name
arrowpoint.com. Arrow Electronics is seeking an injunction precluding the
Company from using the name ArrowPoint and requiring the Company to relinquish
registration of the domain name arrowpoint.com. The Company has filed an answer
denying all material allegations asserted in the complaint. The case is
presently in the early stages of discovery. The Company intends to vigorously
defend this lawsuit, including its right to use the ArrowPoint trademark and the
arrowpoint.com domain name. Arrow Electronics is not seeking the recovery of
monetary damages from the Company. Although the Company is unable to estimate
the costs associated with changing its corporate name, the Company believes that
an adverse outcome in this suit would not have a material impact on its
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 30, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (No. 333-95509) was declared effective by the
Securities and Exchange Commission. On April 5, 2000, ArrowPoint completed the
sale of 5,750,000 shares of common stock at a price of $34.00 per share,
generating gross offering proceeds of $195,500,000. The managing underwriters
were Goldman Sachs & Co., Deutsche Banc Alex. Brown, and J.P. Morgan Securities
Inc. After deducting approximately $13,700,000 in underwriting discounts and
$1,400,000 in other related expenses, the net proceeds of the offering were
approximately $180,400,000, and were received by ArrowPoint upon the closing of
the initial public offering on April 5, 2000.
We did not use any of the funds from the initial public offering during the
quarter ended March 31, 2000.
For the three months ended March 31, 2000, we issued 163,241 shares of
common stock pursuant to the exercise of stock options at exercise prices
ranging from $0.05 to $0.75. All of these stock options were granted under our
1997 Stock Incentive Plan prior to our initial public offering. Our issuance of
shares of our common stock upon the exercise of these options was exempt from
registration pursuant to rule 701 promulgated under the Securities Act of 1933,
as amended.
11
<PAGE> 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders on February 18, 2000, our stockholders
approved the following matters:
1. the election of Chin-Cheng Wu, Louis J. Volpe, Paul J. Ferri, Edward
T. Anderson and James A. Dolce Jr. as directors of the Company;
2. amendment to the certificate of incorporation to:
* increase the number of authorized shares of common stock,
$.001 par value per share, to 200,000,000 shares;
* provide for 5,000,000 authorized shares of preferred stock,
$.01 par value per share, that may be issued from time to
time by the Board in one or more series;
* amend the provisions relating to the indemnification of
officers and directors of the Company;
* provide that the Company will have a staggered Board;
* provide that stockholders may not take action by written
consent and may not call a special meeting of stockholders;
3. an increase in the number of shares issuable under the Company's 1997
Stock Incentive Plan from 11,000,000 shares to 19,000,000 shares;
4. the adoption of the 2000 Non-Employee Director Stock Option Plan under
which an aggregate of 300,000 shares of common stock may be issued;
5. the adoption of the 2000 Employee Stock Purchase Plan under which an
aggregate of 400,000 shares of common stock, subject to automatic
increase as described in the Plan, may be issued;
6. an amended and restated certificate of incorporation that would be
effective following the closing of the Company's initial public
offering that would:
* eliminate all references to the Series Convertible Preferred
Stock; and
* establish the authorized capitalization of the Company at
200,000,000 shares of common stock, $.001 par value per
share and 5,000,000 shares of undesignated preferred stock,
$.01 par value per share.
At the Company's special meeting of stockholders held on February 18, 2000,
the following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
PROPOSAL FOR AGAINST ABSTAIN
-------- --- ------- -------
<S> <C> <C> <C>
Matter 1 12,894,712 N/A N/A
Matter 2 12,894,212 N/A 500
Matter 3 12,894,712 N/A N/A
Matter 4 12,894,712 N/A N/A
Matter 5 12,894,712 N/A N/A
Matter 6 12,894,212 N/A 500
</TABLE>
ITEM 5. OTHER INFORMATION - NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K- NONE.
12
<PAGE> 13
SIGNATURE
Pursuant to the requirements 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.
ArrowPoint Communications, Inc.
Dated: May 1, 2000 /s/ Cynthia M. Deysher
----------------------------------------
Vice President Operations and Chief
Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
13
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<NAME> ARROWPOINT COMMUNICATIONS
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 14,571
<SECURITIES> 0
<RECEIVABLES> 8,311
<ALLOWANCES> 312
<INVENTORY> 3,745
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<PP&E> 7,858
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48,405
0
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