<PAGE>
As filed with the Securities and Exchange Commission on November 8, 1999.
Registration No. 333-87997
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CACHEFLOW INC.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 7373 91-1715963
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
650 Almanor Avenue
Sunnyvale, California 94086
(408) 220-2200
(Address, including zip code, and telephone number,
including area code, of the Registrant's principal executive offices)
---------------
BRIAN M. NESMITH
President and Chief Executive Officer
CacheFlow Inc.
650 Almanor Avenue
Sunnyvale, California 94086
(408) 220-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Robert V. Gunderson, Jr. William H. Hinman, Jr.
Daniel E. O'Connor Shearman & Sterling
Gunderson Dettmer Stough 1550 El Camino Real
Villeneuve Franklin & Hachigian, LLP Menlo Park, California 94025
155 Constitution Drive (650) 330-2200
Menlo Park, California 94025
(650) 321-2400
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE CHART
<TABLE>
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<CAPTION>
Proposed
Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Scurities to be Registerede Registered(1) Per Share(2) Offering Price(1) Registration Fee(3)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.0001 par value per
share................................ 5,750,000 $13.00 $74,750,000 $20,780.50
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
(3) $13,900 of the Registration Fee was paid in connection with the original
filing on September 28, 1999 and $6,880.50 of the Registration Fee was
paid in connection with the filing on November 3, 1999.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued November 8, 1999
5,000,000 Shares
[CACHEFLOW LOGO APPEARS HERE]
COMMON STOCK
-----------
CacheFlow Inc. is offering shares of its common stock. This is our initial
public offering and no public market currently exists for our shares. We
anticipate that the initial public offering price will be between $11 and $13
per share.
-----------
We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "CFLO."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions CacheFlow
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total........................ $ $ $
</TABLE>
CacheFlow Inc. has granted the underwriters the right to purchase up to an
additional 750,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 1999.
-----------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE>
In the upper left corner is a picture of CacheFlow's 100 Series product.
Below the picture of the product is text that reads "CacheFlow 100 Series". In
the upper right corner is a picture of CacheFlow's 500 Series product. Below
the picture of the product is text that reads "CacheFlow 500 Series". In the
lower left corner is a picture of CacheFlow's 3000 Series product. Below the
picture of the product is text that reads "CacheFlow 3000 Series". In the lower
right corner is a picture of CacheFlow's 5000 Series product. Below the picture
of the product is text that reads "CacheFlow 5000 Series". In the center of the
page is the CacheFlow logo.
[ART WORK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements................. 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Consolidated Financial
Data............................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 31
Management......................... 43
Certain Transactions............... 53
Principal Stockholders............. 55
Description of Capital Stock....... 57
Shares Eligible for Future Sale.... 60
Underwriters....................... 62
Legal Matters...................... 65
Experts............................ 65
Additional Information............. 65
Change in Independent Accountants.. 65
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
----------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes appearing
elsewhere in this prospectus.
CacheFlow designs, develops and markets appliances that accelerate and
manage the flow of information over the Internet through a process called
Internet caching. In its most basic form, an Internet cache stores information
physically closer to users, eliminating the need to retrieve this information
from its source each time it is requested. We sell Internet caching appliances,
which are specialized devices that are designed, or purpose-built, for high-
performance Internet caching. All of our caching appliances are based on
CacheOS, our proprietary high-performance operating system. We assemble our
Internet caching appliances using components purchased from third-party
manufacturers. Our Internet caching appliances enable our Internet service
provider and enterprise customers to improve web response times, deliver up-to-
date web content, easily manage and administer their networks and reduce
overall network costs. In addition, our Internet caching appliances are
designed to provide better network security than early approaches to caching.
The number of Internet users, Internet access devices and web pages
worldwide is expected to continue to grow rapidly. This growth, coupled with
the increasing complexity of web content, is expected to significantly increase
the amount of information transmitted across the Internet and corporate
intranets. The physical infrastructure of the Internet must therefore
accommodate sharply increased, often repetitive, traffic, as well as highly
unpredictable and event-driven usage patterns. Advances in communications
technology have improved the Internet's ability to move information, but these
technologies do not reduce the amount of information that must be moved from
its source on the Internet to the user, shorten the physical distance between
source and user, or enable the analysis or control of web content. Web servers,
which are used to publish information on the Internet, are becoming overloaded
by a growing number of content requests, and slow web response time remains a
continuing problem that can have a significant financial impact on corporate
enterprises and Internet service providers. While early approaches to caching
reduced the physical distance between content and user and removed much of the
repetitive traffic from the network, these approaches did not fully address the
varied requirements of Internet service providers, enterprises and users. Due
to increasing network traffic volumes, rising network complexity and heightened
user expectations for Internet performance, we believe that the market for
Internet caching appliances will grow rapidly. According to GartnerGroup, this
market is projected to grow from $92 million in 1999 to over $1 billion in
2003.
As of August 31, 1999, we had approximately 100 customers, including
Internet service providers such as Road Runner and germany.net, as well as
corporate enterprises such as Delta Airlines and Xerox. Our business strategy
is to be the leading provider of Internet caching solutions by continuing to
deliver high-performance, innovative Internet caching appliances. To implement
our strategy, we intend to take advantage of our focus on Internet caching to
target specific markets that are particularly well-suited for our appliances.
Using our technological expertise, we intend to continue to develop both the
software and hardware elements of our appliances. We intend to extend our
distribution channels by expanding our direct sales force and establishing
relationships with additional resellers, systems integrators and original
equipment manufacturers. We also intend to increase our investments in a broad
range of marketing and educational programs to build and establish the
CacheFlow brand.
We were incorporated in Delaware in March 1996. Our principal executive
offices are located at 650 Almanor Avenue, Sunnyvale, California 94086, and our
telephone number is (408) 220-2200.
We have a history of operating losses, and as of July 31, 1999, had an
accumulated deficit of approximately $26.7 million. We have never achieved
profitability in any quarter and anticipate that our operating expenses will
increase substantially in the future.
4
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
In this prospectus, "CacheFlow," "we," "us" and "our" refer to CacheFlow
Inc. Unless otherwise indicated, all information contained in this prospectus:
. assumes that the underwriters' over-allotment option is not exercised;
and
. reflects the two-for-one split of our common stock and preferred stock
effected in June 1999.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered...... 5,000,000 shares
Common stock to be
outstanding after this
offering................. 32,671,031 shares
Use of proceeds........... For working capital and general corporate purposes.
Proposed Nasdaq National
Market symbol............ CFLO
</TABLE>
The information above is based on shares outstanding as of July 31, 1999,
and assumes the conversion of all then outstanding shares of preferred stock
into 14,341,912 shares of common stock upon the completion of this offering.
This information also includes 672,850 shares issuable upon exercise of
warrants that expire upon the closing of this offering. This information does
not include shares of Series D Preferred Stock issued on November 1, 1999, that
will convert into 280,953 shares of common stock upon completion of this
offering. This information also does not include 3,401,251 shares subject to
outstanding options as of July 31, 1999, and 141,842 shares issuable upon
exercise of outstanding warrants as of July 31, 1999, which warrants do not
expire upon the closing of this offering. Between August 1, 1999 and November
1, 1999, we granted options to purchase an additional 4,460,730 shares of
common stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
April 30, July 31,
----------------- --------------------
1998 1999 1998 1999
------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net sales............................ $ -- $ 7,036 $ 809 $ 3,612
Gross profit......................... -- 3,739 211 2,232
Operating expenses................... 5,740 16,744 2,584 8,753
Operating loss....................... (5,740) (13,005) (2,373) (6,521)
Net loss............................. (5,507) (13,202) (2,302) (6,557)
Basic and diluted net loss per common
share............................... $ (1.43) $ (2.17) $ (.47) $ (.80)
Weighted average shares used in
computing basic and diluted net loss
per common share.................... 3,842 6,093 4,938 8,236
Pro forma basic and diluted net loss
per common share.................... $ (.79) $ (.30)
Shares used in computing pro forma
basic and diluted net loss per
common share........................ 16,626 21,967
</TABLE>
The pro forma basic and diluted share calculations above and the pro forma
column below give effect to the conversion of all shares of preferred stock
outstanding on July 31, 1999 into 14,341,912 shares of common stock upon the
completion of this offering, as if the conversion occurred at the date of
original issuance. The pro forma basic and diluted share calculations above and
the pro forma column below also reflect the cash exercise of warrants to
purchase 672,850 shares at a weighted average exercise price of $1.48 per share
prior to completion of the offering. The pro forma column below also reflects
the issuance of 280,953 shares of Series D Preferred Stock at $11.00 per share
on November 1, 1999, the conversion of these shares into 280,953 shares of
common stock upon completion of this offering, and the cash exercise of vested
options to purchase 677,380 shares of common stock at a weighted average
exercise price of $4.00 per share prior to completion of this offering. The pro
forma as adjusted column below gives effect to this offering and the
application of the proceeds at an assumed initial public offering price of
$12.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of July 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $17,825 $24,621 $78,721
Working capital............................... 16,475 23,676 77,776
Total assets.................................. 24,019 30,815 84,915
Long-term obligations, net of current portion
............................................. 2,806 2,806 2,806
Total liabilities............................. 7,986 7,986 7,986
Total stockholders' equity.................... 16,033 22,829 76,929
</TABLE>
RECENT DEVELOPMENTS
For the quarter ended October 31, 1999, we had net sales of $4.8 million, an
increase of $1.2 million, or 34%, from the quarter ended July 31, 1999. The
increase in net sales was attributable to higher unit sales of our products,
including our recently released 3000 Series products. Net sales from
international operations were $1.9 million, or approximately 40% of net sales.
Direct and indirect sales accounted for approximately 73% and 27% of our net
sales in the quarter. One of our customers, Road Runner, accounted for
approximately 17% of our net sales. Gross margin for the quarter was
approximately 61%. Our operating loss for the quarter was $17.6 million, which
included a $12.3 million stock compensation charge. In the opinion of
management, this unaudited consolidated financial information was prepared on
the same basis as the audited consolidated financial statements contained in
this prospectus and includes all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
this information. Consolidated results of operations for the quarter ended
October 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year.
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this prospectus before investing in our common stock. Our business,
financial condition and results of operations could be seriously harmed by any
of the following risks. The trading price of our common stock could decline
due to any of these risks, and you may lose all or part of your investment.
Risks Related to Our Business
We only began selling our products in May 1998 and, as a result, you may
have difficulty evaluating our business and operating results.
We were founded in March 1996 and did not sell any products or services
until May 1998. The market for our products is unproven. Our limited operating
history makes an evaluation of our future prospects very difficult. We expect
to encounter risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. Many of these risks are
described in more detail in this "Risk Factors" section. Our business will be
seriously harmed if we do not successfully execute our business strategy or if
we do not successfully address the risks we face.
We have a history of losses, expect to incur future losses and may never
achieve profitability, which could result in the decline of the market price
of our common stock.
We incurred net losses of $1.4 million from our inception in March 1996
through April 30, 1997, $5.5 million for the fiscal year ended April 30, 1998,
$13.2 million for the fiscal year ended April 30, 1999, and $6.6 million for
the quarter ended July 31, 1999. As of July 31, 1999, we had an accumulated
deficit of approximately $26.7 million. We have not had a profitable quarter
since our inception and we expect to continue to incur net losses in the
future. To date, we have funded our operations from the sale of equity
securities and through bank loans and equipment leases.
We expect to continue to incur significant operating expenses and, as a
result, we will need to generate significant revenues if we are to achieve
profitability. We may never achieve profitability. We expect to incur
substantial non-cash costs relating to the amortization of deferred
compensation, which will contribute to our net losses. As of July 31, 1999, we
had an aggregate of $21.3 million of deferred compensation to be amortized.
Between August 1, 1999 and November 1, 1999, we recorded additional deferred
compensation of $27.2 million with respect to stock option grants made during
this period.
Because we expect our sales to fluctuate and our costs are relatively fixed
in the short term, our ability to forecast our quarterly operating results is
limited, and if our quarterly operating results are below the expectations of
analysts or investors, the market price of our common stock may decline.
Our net sales and operating results are likely to vary significantly from
quarter to quarter. We believe that quarter-to-quarter comparisons of our
operating results should not be relied upon as indicators of future
performance. It is likely that in some future quarter or quarters, our
operating results will be below the expectations of public market analysts or
investors. When this occurs, the price of our common stock could decrease
significantly. A number of factors are likely to cause variations in our net
sales and operating results, including factors described in this "Risk
Factors" section and elsewhere in this Prospectus.
We cannot reliably forecast our future quarterly sales for several reasons,
including:
. sales in any quarter are dependent on orders booked and shipped in that
quarter, and we often operate with very little order backlog;
. we have a limited operating history, and the market in which we compete
is relatively new and rapidly evolving;
7
<PAGE>
. we expect that, for the foreseeable future, most of our sales will come
from a small number of customers, so delays or cancellations of orders
by a few customers can significantly impact net sales within a quarter;
and
. our sales cycle varies substantially from customer to customer.
A high percentage of our expenses, including those related to research and
development, sales and marketing, general and administrative functions and
amortization of deferred compensation, are essentially fixed in the short
term. As a result, if our net sales are less than forecasted, our quarterly
operating results are likely to be seriously harmed.
We expect increased competition and, if we do not compete effectively, we
could experience a loss in our market share and sales.
The market for Internet caching solutions is intensely competitive,
evolving and subject to rapid technological change. The intensity of
competition is expected to increase in the future. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any one of which could seriously harm our business. We may not be able
to compete successfully against current or future competitors and we cannot be
certain that competitive pressures we face will not seriously harm our
business. Our competitors vary in size and in the scope and breadth of the
products and services they offer. We primarily encounter competition from a
variety of companies, including Cisco Systems, Inktomi, Network Appliance,
Novell and various others using publicly available, free software. In
addition, because there are relatively low barriers to entry in the Internet
caching market, we expect additional competition from other established and
emerging companies as the market for Internet caching continues to develop and
expand.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. As a result, our competitors may be able
to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
marketing, promotion and sale of their products than we can. Current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the market
acceptance of their products. In addition, our competitors may be able to
replicate our products, make more attractive offers to existing and potential
employees and strategic partners, more quickly develop new products or enhance
existing products and services, or bundle Internet caching appliances in a
manner that we cannot provide. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of industry consolidation.
Our variable sales cycle makes it difficult to predict the timing of a sale
or whether a sale will be made, which makes our quarterly operating results
less predictable.
Because customers have differing views on the strategic importance of
implementing Internet caching appliances, the time required to educate
customers and sell our products can vary widely. As a result, the evaluation,
testing, implementation and acceptance procedures undertaken by customers can
vary, resulting in a variable sales cycle, which typically ranges from two to
six months. While our customers are evaluating our products and before they
place an order with us, we may incur substantial sales and marketing expenses
and expend significant management efforts. Sales cycles for our products that
are sold to enterprises have traditionally been longer than sales cycles for
our products that are sold to Internet service providers, or ISPs. We expect
that sales to enterprises will increase as a percentage of our total sales
over time, and, accordingly, we expect that the average sales cycle for our
products will increase. In addition, purchases of our products are frequently
subject to unplanned processing and other delays, particularly with respect to
larger customers for whom our products represent a very small percentage of
their overall purchase activity. Large customers typically require approvals
at a number of management levels within their organizations, and, therefore,
frequently have longer sales cycles.
8
<PAGE>
We are entirely dependent on market acceptance of our Internet caching
appliance product family and, as a result, a decline in sales or lack of
market acceptance of these products could cause our sales to fall.
To date, our Internet caching appliance product family and related services
have accounted for all of our net sales. We anticipate that revenues from our
current product family and services will continue to constitute substantially
all of our net sales for the foreseeable future. As a result, a decline in the
prices of, or demand for, our current product family and services, or their
failure to achieve broad market acceptance, would seriously harm our business.
The CacheFlow 100 Series, 500 Series, 3000 Series and 5000 Series products are
the only products that we currently sell. Our CacheFlow 1000 Series and 2000
Series products, which have historically accounted for a substantial portion
of our net sales, have been discontinued and replaced by our recently
introduced CacheFlow 3000 Series products. We introduced our 3000 Series
product in September 1999 and our 5000 Series product in June 1999. We cannot
be certain that our CacheFlow 3000 Series or 5000 Series products will achieve
any significant degree of market acceptance.
If we are unable to introduce new products and services that achieve market
accceptance quickly, we could lose existing and potential customers and our
sales would decrease.
We need to develop and introduce new products and enhancements to existing
products on a timely basis that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs
of our customers. We intend to extend the offerings under our product family
in the future, both by introducing new products and by introducing
enhancements to our existing products. However, we may experience difficulties
in doing so, and our inability to timely and cost-effectively introduce new
products and product enhancements, or the failure of these new products or
enhancements to achieve market acceptance, could seriously harm our business.
Life cycles of our products are difficult to predict, because the market for
our products is new and evolving and characterized by rapid technological
change, frequent enhancements to existing products and new product
introductions, changing customer needs and evolving industry standards. The
introduction of competing products that employ new technologies and emerging
industry standards could render our products and services obsolete and
unmarketable or shorten the life cycles of our products and services. The
emergence of new industry standards might require us to redesign our products.
If our products are not in compliance with industry standards that become
widespread, our customers and potential customers may not purchase our
products.
Because we depend on several third-party manufacturers to build portions of
our products, we are susceptible to manufacturing delays and sudden price
increases, which could prevent us from shipping customer orders on time, if at
all, and may result in the loss of sales and customers.
We rely on several third-party manufacturers to build portions of our
products. If we are unable to manage our relationships with these
manufacturers effectively or if these manufacturers fail to meet our future
requirements for timely delivery, our business would be seriously harmed. We
have no written agreement with any of these manufacturers and they fulfill our
supply requirements on the basis of individual purchase orders from us.
Accordingly, these manufacturers are not obligated to continue to fulfill our
supply requirements, and the prices we are charged for these components could
be increased on short notice. Any interruption in the operations of any one of
these manufacturers would adversely affect our ability to meet our scheduled
product deliveries to our customers, which could cause the loss of existing or
potential customers and would seriously harm our business. In addition, the
products that these manufacturers build for us may not be sufficient in
quality or in quantity to meet our needs. Our delivery requirements could
exceed the capacity of these manufacturers, which would likely result in
manufacturing delays, which could result in lost sales and the loss of
existing and potential customers. We cannot be certain that these
manufacturers or any other manufacturer will be able to meet the technological
or delivery requirements of our current products or any future products that
we may develop and introduce. The inability of these manufacturers or any
other of our contract manufacturers in the future to provide us with adequate
supplies of high-quality products, or the loss of any of our contract
manufacturers in the future, would cause a delay in our ability to fulfill
customer orders while we attempt to obtain a replacement manufacturer. Delays
associated with our attempting to replace or our inability to replace one of
our manufacturers would seriously harm our business.
9
<PAGE>
We may experience production delays, quality control problems and assembly
capacity constraints in assembling our products, which could result in a
decline of sales.
We currently conduct all final assembly and testing of our products at our
headquarters in Sunnyvale, California. We plan to transition final assembly to
third parties in the future. If we are unable to identify a third-party final
assembler, we would be required to make additional capital investments in new
or existing assembly facilities. To the extent any capital investments are
required, our gross margins and, as a result, our business could be seriously
harmed. We may experience production interruptions or quality control problems
in connection with any transition of final assembly, either of which would
seriously harm our business. Either we or any third-party assembler may
experience substantial assembly capacity constraints. In the event of any
capacity constraints we may be unable to accept certain orders from, and
deliver products in a timely manner to, our customers. This could result in
the loss of existing or potential customers and would seriously harm our
business.
Because some of the key components in our products come from limited
sources of supply, we are susceptible to supply shortages or supply changes,
which could disrupt or delay our scheduled product deliveries to our customers
and may result in the loss of sales and customers.
We currently purchase several key parts and components used in the
manufacture of our Internet caching appliances from limited sources of supply.
For example, we purchase custom power supplies and Intel hardware for use in
all of our Internet caching appliances. The introduction by Intel or others of
new versions of their hardware, particularly if not anticipated by us, could
require us to expend significant resources to incorporate this new hardware
into our products. In addition, if Intel or others were to discontinue
production of a necessary part or component, we would be required to expend
significant resources in locating and integrating replacement parts or
components from another vendor. Qualifying additional suppliers for limited
source components can be time-consuming and expensive. Any of these events
would be disruptive to us and could seriously harm our business. Further,
financial or other difficulties faced by these suppliers or unanticipated
demand for these parts or components could limit the availability of these
parts or components. Any interruption or delay in the supply of any of these
parts or components, or the inability to obtain these parts or components from
alternate sources at acceptable prices and within a reasonable amount of time,
would seriously harm our ability to meet our scheduled product deliveries to
our customers.
Our use of rolling forecasts could lead to excess or inadequate inventory,
which could seriously harm our business.
We use rolling forecasts based on anticipated product orders, product order
history and backlog to determine our materials requirements. Lead times for
the parts and components that we order vary significantly and depend on
factors such as the specific supplier, contract terms and demand for a
component at a given time. If actual orders do not match our forecasts, we may
have excess or inadequate inventory of some materials and components, which
would increase our costs or prevent or delay product shipments and could
seriously harm our business.
We are dependent upon key personnel and we must attract, assimilate and
retain other highly qualified personnel in the future or our ability to
execute our business strategy or generate sales could be harmed.
Our business could be seriously disrupted if we do not maintain the
continued service of our senior management, research and development and sales
personnel. All of our employees are employed on an "at-will" basis. Our
ability to conduct our business also depends on our continuing ability to
attract, hire, train and retain a substantial number of highly skilled
managerial, technical, sales, marketing and customer support personnel. New
hires frequently require extensive training before they achieve desired levels
of productivity, so a high employee turnover rate could seriously impair our
ability to operate and manage our business. We are particularly dependent on
hiring additional personnel to increase our direct sales and research and
development organizations. Competition for personnel is intense, especially in
the San Francisco Bay Area, and we may fail to retain our key employees, or
attract, assimilate or retain other highly qualified personnel in the future.
If so, our business would be seriously harmed.
10
<PAGE>
Our management team is new, and our business could be seriously harmed if
integration of our management team into our company is not successful.
We have recently experienced significant transition in our management team.
Brian NeSmith, our President and Chief Executive Officer, joined us in March
1999. Stuart Aaron, our Vice President of Marketing and Product Management,
joined us in April 1999. Terry Printy, our Vice President of Customer Support,
joined us in June 1999. Alan Robin, our Senior Vice President of Sales, and
Michael Johnson, our Vice President and Chief Financial Officer, joined us in
July 1999. Nai-Ting Hsu, our Senior Vice President of Research and
Development, joined us in October 1999. Our business could be seriously harmed
if integration of our management team into our company is not successful. We
expect that it will take time for our new management team to integrate into
our company and it is too early to predict whether these changes will be
successful.
The Nokia IP litigation could divert our management's focus and could be
costly and time-consuming to defend, and a judgment against us could harm our
business.
On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. In essence, Nokia claims that we and Messrs. NeSmith and Robin acted
improperly in hiring Nokia's employees. Nokia also claims that Mr. NeSmith has
violated a non-competition provision contained in his employment agreement
with Nokia. Nokia is seeking compensatory and punitive damages and orders
prohibiting the defendants from disclosing or using Nokia's trade secrets or
confidential information and acting in a manner that violates Messrs.
NeSmith's and Robin's contractual and fiduciary duties to Nokia. This
litigation was only recently filed and we are presently evaluating these
claims. We and the other defendants have filed an answer to this complaint
denying the allegations and believe that there are meritorious defenses to the
asserted claims. We intend to defend the litigation vigorously. However, the
outcome of litigation is inherently unpredictable and the results of the
litigation may not be favorable to us or the other defendants and could
include monetary damages and a court order restricting our ability to hire
Nokia's employees. Regardless of the ultimate outcome, the litigation could
result in substantial expense to us and significant diversion of effort by our
managerial and other personnel.
In order to manage our growth and expansion, we will need to improve and
implement new systems, procedures and controls, which could be time-consuming
and costly.
We have expanded our operations rapidly since the inception of our company
and we currently intend to continue this expansion. This expansion of our
operations has placed and is expected to continue to place a significant
strain upon our management systems and financial and operational resources. If
we are unable to effectively manage future growth and expansion, our business
will be seriously harmed. We currently have research and development
facilities in Sunnyvale, California; Redmond, Washington and Waterloo,
Ontario, Canada. The coordination and management of these product development
organizations that are located at different sites requires significant
management attention and coordination, particularly from our managerial and
engineering organizations. If we are unable to coordinate and manage these
separate development organizations, our business will be seriously harmed.
Our ability to compete effectively and to manage future expansion of our
operations will require us to continue to improve our financial and management
controls, reporting systems and procedures on a timely basis, and expand,
train and manage our employee work force. The number of our employees
increased from 40 at April 30, 1998 to 126 at August 31, 1999, and we plan to
further increase our headcount. We believe that our existing managerial and
other systems will not be adequate to support our anticipated growth, and we
are currently planning to implement a new enterprise resource planning
software system that will replace substantially all of our business and
manufacturing systems. We may encounter difficulties in transitioning to the
new enterprise resource planning software system. Even after we implement this
system, our personnel, systems, procedures and controls may be inadequate to
support our future operations.
11
<PAGE>
Because we depend on a limited number of customers, our quarterly operating
results may decline substantially if we are unable to complete one or more
large sales.
To date, a significant portion of our net sales has resulted from a small
number of customers placing relatively large orders. For the fiscal year ended
April 30, 1999, three customers accounted for approximately 33% of our net
sales. For the quarter ended July 31, 1999, two customers accounted for
approximately 22% of our net sales. We anticipate that our operating results
for any given period will continue to depend to a significant extent on large
orders from a small number of customers. As a result, our quarterly operating
results may fluctuate significantly if we are unable to complete one or more
substantial sales in a quarter.
Because some of our customers require additional ongoing service, we may
incur costs in obtaining additional support personnel to manage an increased
volume of customers to maintain our sales.
Some of our products are designed for use by customers with limited
internal information technology support. Sales to these customers often
require additional sales and support personnel to manage an increased volume
of customer requests. If we are unable to provide additional sales and support
personnel to manage these accounts, our sales to small customers would
decline. These customers often have limited information technology budgets and
resources, and can therefore present increased credit risks.
If we fail to expand our direct and indirect sales channels, our sales will
not grow.
We need to substantially expand our direct sales operations, both
domestically and internationally, in order to increase market awareness and
sales of our products and services. Our products and services require a
sophisticated sales effort targeted at senior management of our customers. We
have recently expanded our direct sales force and plan to hire additional
sales personnel. New hires will require extensive training and typically take
several months to achieve productivity. Competition for qualified sales
personnel is intense, and we might not be able to hire the kind and number of
sales personnel we are targeting. If we fail to increase our direct sales
capabilities as we have planned, our business will be seriously harmed.
We also need to expand our indirect sales channels, and if we fail to do so
our ability to market and sell our products could be seriously harmed. We
depend on our indirect sales channels, which include resellers, systems
integrators and original equipment manufacturers, for a significant percentage
of our net sales. For example, for the fiscal year ended April 30, 1999,
approximately 41% of our net sales resulted from sales through indirect sales
channels. For the quarter ended July 31, 1999, approximately 39% of our net
sales resulted from sales through indirect channels. Our agreements with our
indirect channel partners are generally not exclusive and in many cases may be
terminated by either party without cause. Many of these indirect channel
partners do not have minimum purchase or resale requirements and carry
products that are competitive with our products. These resellers may not give
a high priority to the marketing of our products or may not continue to carry
our products. They may give a higher priority to other products, including the
products of competitors. We may not retain any of our current indirect channel
partners or successfully recruit new indirect channel partners. Events or
occurrences of this nature could seriously harm our business.
If we are unable to expand our customer service and support organization,
we may not be able to retain our existing customers or attract new customers,
and our sales may decline.
We currently have a small customer service and support organization and
will need to increase our capabilities to support new customers and the
expanding needs of our existing customers. If we are unable to expand our
customer service and support organization, we may not be able to retain our
existing customers or attract new customers.
We may not be able to enter into new international markets or generate a
significant level of sales from the international markets in which we
currently operate.
For the fiscal year ended April 30, 1999, we derived approximately 44% of
our net sales from customers outside of the United States and Canada. For the
quarter ended July 31, 1999, sales to customers outside of the
12
<PAGE>
United States and Canada accounted for approximately 48% of our net sales. We
expect international customers to continue to account for a significant
percentage of net sales in the future, but we may fail to maintain or increase
international market demand for our products. Also, because our international
sales are currently denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make
our products more expensive and, therefore, potentially less competitive in
international markets, and this would decrease our international sales. Our
ability to expand international sales depends on our ability to expand our
international operations, including establishing manufacturing assembly
capabilities overseas, hire international personnel and recruit additional
international resellers. To the extent we are unable to do so in a timely
manner, our growth, if any, in international sales will be limited and our
business could be seriously harmed. In addition, if we fail to expand and
improve our worldwide operating systems, our ability to accurately forecast
sales demand, manage our supply chain and record and report financial and
management information will be adversely affected, seriously harming our
business.
Undetected software or hardware errors could cause us to incur significant
warranty and repair costs and negatively impact the market acceptance of our
products.
Our products may contain undetected software or hardware errors. These
errors 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. The occurrence of these
problems could result in the delay or loss of market acceptance of our
products and would likely seriously harm our business. All of our products
operate on our internally developed CacheOS operating system. As a result, any
error in CacheOS will affect all of our products. We have experienced minor
errors in the past in connection with new products. We expect that errors will
be found from time to time in new or enhanced products after commencement of
commercial shipments.
We could be subject to product liability claims, which are time-consuming
and costly to defend.
Our customers install our Internet caching appliances directly into their
network infrastructures. Any errors, defects or other performance problems
with our Internet caching appliance products could negatively impact our
customers' internal networks, resulting in financial or other damages to our
customers. Our customers may then seek damages from us for their losses.
Although our license agreements typically contain provisions designed to limit
our exposure to claims, unfavorable judicial decisions could negate these
limitation of liability provisions. We have not experienced any product
liability claims to date. However, a product liability claim brought against
us, even if not successful, would likely be time-consuming and costly. A
product liability claim could seriously harm our business reputation.
Our business could be affected by Year 2000 issues, which could disrupt or
delay our scheduled product deliveries to customers or affect customer demand
for our products and result in the loss of sales and customers.
The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results. Our
products and internal systems and those of our suppliers and customers may be
affected by Year 2000 issues. If they are, our business would likely be
harmed. For a discussion of our efforts regarding Year 2000 issues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness."
If the protection of our proprietary technology is inadequate, our
competitors may gain access to our technology, and our market share could
decline.
We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. If we are unable to do so, our business
would be seriously harmed. For a discussion of our efforts to protect our
proprietary technology, see "Business--Intellectual Property and Other
Proprietary Rights."
13
<PAGE>
If we are unable to raise additional capital, our ability to effectively
manage our growth or enhance our products could be harmed.
At July 31, 1999, we had approximately $17.8 million in cash and cash
equivalents. We believe that this amount, combined with proceeds from this
offering, will enable us to meet our capital requirements for at least the
next twelve months. However, if cash is used for acquisitions or other
unanticipated uses, we may need additional capital. The development and
marketing of new products and the expansion of indirect channels and
associated support personnel will require a significant commitment of
resources. In addition, if the market for Internet caching appliances develops
at a slower pace than anticipated or if we fail to establish significant
market share and achieve a meaningful level of sales, we could be required to
raise substantial additional capital. We cannot be certain that additional
capital will be available to us on favorable terms, or at all. If we are
unable to raise additional capital when we require it, our business would be
seriously harmed.
Risks Related to the Internet Caching Appliance Industry
The market for Internet caching appliances is new and unpredictable, and if
this market does not develop as we anticipate, our sales may not grow.
Sales of our products depend on increased demand for Internet caching
appliances. The market for Internet caching appliances is a new and rapidly
evolving market. If the market for Internet caching appliances fails to grow
as we anticipate, or grows more slowly than we anticipate, our business will
be seriously harmed. Because this market is new, we cannot predict its
potential size or future growth rate. Our ability to generate net sales in
this emerging market will depend on, among other things, our ability to:
. educate potential end users and indirect channel partners about the
benefits of Internet caching appliances;
. continue to develop our direct sales channel; and
. establish and maintain relationships with leading indirect channel
partners.
The legal environment in which we operate is uncertain and claims against
us could cause our business to suffer.
Our Internet caching appliances operate in part by storing material
available on the Internet and making this material available to end users from
our appliance. This creates the potential for claims to be made against us,
either directly or through contractual indemnification provisions with
customers, for defamation, negligence, copyright or trademark infringement,
personal injury, invasion of privacy or other legal theories based on the
nature, content or copying of these materials. It is also possible that if any
information provided through any of our products contains errors, third
parties could make claims against us for losses incurred in reliance on this
information. Our insurance may not cover potential claims of this type or be
adequate to protect us from all liability that may be imposed.
The adoption of laws that impose taxes on Internet commerce could adversely
affect our business.
Tax authorities at the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. Many of our customers are engaged in Internet commerce, and
any taxes imposed on them may adversely impact their businesses and may result
in order cancellations or postponements of product purchases by them, which
would seriously harm our business. Laws regarding the Internet remain largely
unsettled and the adoption or modification of laws or regulations relating to
the Internet, or interpretations of existing law, could seriously harm our
business.
Because the sales of our products are dependent on the increased use and
widespread adoption of the Internet, if use of the Internet does not develop
as we anticipate, our sales may not grow.
Sales of our products depend on the increased use and widespread adoption
of the Internet. Our business would be seriously harmed if the use of the
Internet does not increase as anticipated or if our ISP customers' Internet-
related services are not well received by the marketplace. The acceptance and
use of the Internet in international markets, where we derive a large portion
of our net sales, are in earlier stages of development than in the United
States. If the Internet fails to gain sufficient acceptance in international
markets, our business could
14
<PAGE>
be seriously harmed. The resolution of various issues concerning the Internet
will likely affect use and adoption of the Internet. These issues include
security, reliability, capacity, congestion, cost, ease of access and quality
of service. Even if these issues are resolved, if the market for Internet-
related products and services fails to develop, or develops at a slower pace
than anticipated, our business would be seriously harmed.
Governmental regulation of the communications industry may negatively
affect our customers and result in decreased demand for our products, which
would cause a decline in our sales.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products that our
customers sell. Future regulations set forth by the FCC or other regulatory
bodies may adversely affect Internet-related industries. Regulation of our
customers may seriously harm our business. For example, FCC regulatory
policies that affect the availability of data and Internet services may impede
our customers' penetration into some markets. In addition, international
regulatory bodies are beginning to adopt standards for the communications
industry. The delays that these governmental processes entail may cause order
cancellations or postponements of product purchases by our customers, which
would seriously harm our business.
Risks Related to the Securities Markets
Our stock price may be volatile and, as a result, you may have difficulty
evaluating the value of our stock, and the market price of our stock may
decline.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of the common stock
after this offering. The market price of the common stock may fluctuate
significantly in response to the following factors:
. variations in our quarterly operating results;
. changes in financial estimates or investment recommendations by
securities analysts;
. changes in market valuations of Internet-related and networking
companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer;
. additions or departures of key personnel; and
. fluctuations in stock market prices and volumes.
Our stock price volatility may make us susceptible to class action
litigation, which is time-consuming and costly to defend.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of the
company's securities. We may in the future be the target of similar
litigation. If we become engaged in securities class action litigation, our
management's attention and resources may be diverted and we may incur
substantial costs, resulting in serious harm to our business.
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. These factors may cause our actual results to
differ materially from any forward-looking statement.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "intends," "would," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to CacheFlow from the sale of the 5,000,000 shares of
common stock offered are estimated to be $54.1 million, at an assumed initial
public offering price of $12.00 and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, the net proceeds of
this offering are estimated to be $62.5 million. The primary purposes of this
offering are to obtain additional equity capital, create a public market for
our common stock, and facilitate future access to public markets. We expect to
use the net proceeds for general corporate purposes, including working
capital. A portion of the net proceeds may also be used to repay debt
obligations of CacheFlow, which totaled $4.6 million as of July 31, 1999. A
portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to ours. We have
no current plans, agreements or commitments and are not currently engaged in
any negotiations with respect to any of these types of transactions. Pending
any of these uses, we will invest the net proceeds of this offering in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future. The terms of our line of
credit prohibit the payment of dividends on our capital stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1999:
. our actual capitalization;
. our capitalization on a pro forma basis, after giving effect to the
issuance of 280,953 shares of Series D Preferred Stock at $11.00 per
share on November 1, 1999, the conversion of all outstanding shares of
preferred stock into 14,622,865 shares of common stock upon the
completion of this offering, the cash exercise of options to purchase
677,380 shares of common stock at a weighted average exercise price of
$4.00 per share prior to completion of the offering, and the cash
exercise of warrants to purchase 672,850 shares of preferred stock,
which warrants expire upon the closing of this offering, at a weighted
average exercise price of $1.48 per share prior to completion of the
offering and the conversion of these shares of preferred stock into
common stock upon completion of the offering; and
. our capitalization on a pro forma as adjusted basis, to additionally
reflect this offering and the application of the proceeds at an assumed
initial public offering price of $12.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
July 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited)
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Long-term obligations, net of current portion.. $ 2,806 $ 2,806 $ 2,806
Stockholders' equity...........................
Preferred stock, $.0001 par value; 30,000,000
shares authorized actual; 10,000,000 shares
authorized pro forma and pro forma as
adjusted; 14,341,912 shares issued and
outstanding actual; no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 1 -- --
Common stock, $.0001 par value; 60,000,000
shares authorized actual; 200,000,000 shares
authorized pro forma and pro forma as
adjusted; 12,656,269 shares issued and
outstanding actual; 28,629,364 shares issued
and outstanding pro forma; 33,629,364 issued
and outstanding pro forma as adjusted........ 1 3 3
Additional paid-in capital.................... 65,071 71,866 125,966
Note receivable from stockholder.............. (1,017) (1,017) (1,017)
Deferred stock compensation................... (21,314) (21,314) (21,314)
Accumulated deficit........................... (26,709) (26,709) (26,709)
-------- -------- --------
Total stockholders' equity................... 16,033 22,829 76,929
-------- -------- --------
Total capitalization....................... $ 18,839 $ 25,635 $ 79,735
======== ======== ========
</TABLE>
The information above excludes 3,401,251 shares of common stock issuable
upon exercise of outstanding options under our 1996 Stock Option Plan as of
July 31, 1999 with a weighted average exercise price of $1.21 per share,
141,842 shares of common stock issuable upon exercise of outstanding warrants
as of July 31, 1999 with a weighted average exercise price of $3.42 per share,
and 33,217 shares of common stock reserved for issuance under our 1996 Stock
Option Plan as of July 31, 1999. On August 27, 1999, we amended our 1996 Stock
Option Plan to increase the number of shares authorized for issuance
thereunder by 3,000,000 shares. On October 13, 1999, we amended our 1996 Stock
Option Plan to increase the number of shares authorized for issuance
thereunder by 1,500,000 shares. Between August 1 and November 1, 1999, we
granted options to purchase 4,460,730 shares of common stock. On September 24,
1999, we adopted our 1999 Stock Incentive Plan as a successor plan to replace
our 1996 Stock Option Plan, whereby 5,000,000 shares were reserved for
issuance thereunder. No options will be granted under the 1996 Stock Option
Plan after this offering. In addition, on September 24, 1999, we adopted our
Employee Stock Purchase Plan and reserved 2,500,000 shares of common stock for
issuance under this plan and our 1999 Non-Employee Director Option Plan and
reserved 500,000 shares of common stock for issuance under this plan. See
"Management--1999 Stock Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Director Option Plan."
18
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of July 31,
1999 was $22.5 million, or $.78 per share. Pro forma net tangible book value
per share represents the amount of our stockholders' equity, less intangible
assets, divided by the pro forma number of shares of common stock outstanding
after giving effect to the issuance of 280,953 shares of Series D Preferred
Stock at $11.00 per share on November 1, 1999, the conversion of all
outstanding shares of preferred stock into 14,622,865 shares of common stock
upon the completion of this offering, the cash exercise of options to purchase
677,380 shares of common stock at a weighted average exercise price of $4.00
per share prior to completion of the offering, and the cash exercise of
warrants to purchase 672,850 shares of preferred stock prior to completion of
the offering and the conversion of these shares of preferred stock into common
stock.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving
effect to our sale of 5,000,000 shares of common stock in this offering at an
assumed initial offering price of $12.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses and the application of the net proceeds therefrom, our pro forma as
adjusted net tangible book value as of July 31, 1999, would have been $76.6
million, or $2.28 per share. This represents an immediate increase in net
tangible book value of $1.50 per share to existing stockholders and an
immediate dilution in net tangible book value of $9.75 per share to investors
purchasing shares of common stock in this offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Pro forma net tangible book value per share as of July 31,
1999......................................................... $ .78
Increase per share attributable to new investors.............. 1.50
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................ 2.28
------
Net tangible book value dilution per share to new investors... $ 9.72
======
</TABLE>
The following table sets forth as of July 31, 1999, after giving effect to
the issuance of 280,953 shares of Series D Preferred Stock at $11.00 per share
on November 1, 1999, the conversion of all outstanding shares of preferred
stock into 14,622,865 shares of common stock upon the completion of this
offering, the cash exercise of options to purchase 677,380 shares of common
stock at a weighted average exercise price of $4.00 per share prior to
completion of the offering and the cash exercise of warrants to purchase
672,850 shares of preferred stock prior to completion of the offering and the
conversion of these shares of preferred stock into common stock, the
difference between the existing stockholders and the investors purchasing
shares in this offering at the assumed initial offering price of $12.00 per
share with respect to the number of shares purchased from us, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 28,629,364 85.1% $ 43,380,521 42.0% $ 1.52
New investors........... 5,000,000 14.9 60,000,000 58.0 12.00
---------- ----- ------------ -----
Totals................ 33,629,364 100.0% $103,380,521 100.0%
========== ===== ============ =====
</TABLE>
As of July 31, 1999, there were options outstanding to purchase a total of
3,401,251 shares of common stock at a weighted average exercise price of $1.21
per share under our 1996 Stock Option Plan. In addition, as of July 31, 1999,
there were outstanding warrants to purchase a total of 141,842 shares of
common stock at a weighted average exercise price of $3.42 per share. Between
August 1, 1999 and November 1, 1999, we granted options to purchase 4,460,730
shares of common stock at a weighted average exercise price of $3.02 per
share. To the extent outstanding options or warrants are exercised, there will
be further dilution to new investors.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere
in this prospectus. The consolidated statement of operations data for the
period from inception, March 13, 1996, to April 30, 1997 and for each of the
two years in the period ended April 30, 1999, and the consolidated balance
sheet data at April 30, 1998 and 1999, are derived from, and are qualified by
reference to, the audited consolidated financial statements included in this
prospectus. The consolidated balance sheet data at April 30, 1997 are derived
from audited consolidated financial statements not included in this
prospectus. The selected consolidated financial data at July 31, 1999 and for
the three months ended July 31, 1998 and July 31, 1999 have been derived from
our unaudited consolidated financial statements included in this prospectus.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of this
information. Consolidated results of operations for the three months ended
July 31, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year.
<TABLE>
<CAPTION>
Period from Three Months
March 13, 1996 Year Ended Ended
(Inception) to April 30, July 31,
April 30, ----------------- ----------------
1997 1998 1999 1998 1999
-------------- ------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales.................. $ -- $ -- $ 7,036 $ 809 $ 3,612
Cost of goods sold......... -- -- 3,297 598 1,380
------- ------- -------- ------- -------
Gross profit............... -- -- 3,739 211 2,232
Operating expenses:
Research and development.. 1,055 2,396 4,034 755 1,613
Sales and marketing....... 130 1,655 6,865 1,335 3,481
General and
administrative........... 310 1,630 2,069 275 667
Stock compensation........ 4 59 3,776 219 2,992
------- ------- -------- ------- -------
Total operating
expenses.............. 1,499 5,740 16,744 2,584 8,753
------- ------- -------- ------- -------
Operating loss............. (1,499) (5,740) (13,005) (2,373) (6,521)
Other income (expense),
net....................... 56 233 (197) 71 (36)
------- ------- -------- ------- -------
Net loss................... $(1,443) $(5,507) $(13,202) $(2,302) $(6,557)
======= ======= ======== ======= =======
Basic and diluted net loss
per share................. $ (.73) $ (1.43) $ (2.17) $ (.47) $ (.80)
Shares used in computing
basic and diluted net loss
per share................. 1,965 3,842 6,093 4,938 8,236
Pro forma basic and diluted
net loss per share........ $ (.79) $ (.30)
Shares used in computing
pro forma basic and
diluted net loss per
share..................... 16,626 21,967
</TABLE>
<TABLE>
<CAPTION>
As of April 30, As of
----------------------- July 31,
1997 1998 1999 1999
------ ------ ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term
investments................................ $3,605 $7,349 $ 2,291 $17,825
Working capital............................. 3,589 6,955 787 16,475
Total assets................................ 3,769 8,461 6,716 24,019
Long-term obligations, net of current
portion.................................... -- 7 3,211 2,806
Total liabilities........................... -- 861 7,060 7,986
Accumulated deficit......................... (1,443) (6,950) (20,152) (26,709)
Total stockholders' equity (deficit)........ 3,702 7,600 (344) 16,033
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus.
Overview
We design, develop, market and support high-performance Internet caching
appliances. From our inception in March 1996 through April 30, 1998, we were
considered to be in the development stage. Our activities were related
primarily to conducting research and development, developing our initial
product, recruiting personnel, building sales channels, establishing the
market for our initial product, raising capital and purchasing operating
assets.
We began commercial shipment of our first products in May 1998. Since that
time, we have introduced other Internet caching appliances, which have a
variety of hardware configurations designed for the different price,
performance, capacity and reliability requirements of our customers. The list
prices of our caching appliances increase as they become more highly
configured. Substantially all of our net sales through July 31, 1999 were
attributable to sales of our Internet caching appliance products. We
anticipate that these products will continue to account for a substantial
portion of our future net sales for the foreseeable future.
We market our products through our direct sales force, which is
complemented by indirect sales channels consisting of resellers, systems
integrators and original equipment manufacturers. Customers that purchase our
products through our direct sales force generally do so by delivering a
purchase order. Direct and indirect sales accounted for approximately 59% and
41% of our net sales for the fiscal year ended April 30, 1999, and
approximately 61% and 39% of our net sales for the quarter ended July 31,
1999. Sales through indirect channels have lower gross margin than direct
sales. As a result, we expect that our total gross margin on product sales
will decline if the portion of sales that are made through indirect channels
increases.
Net sales from international operations were $3.1 million, or approximately
44% of net sales, for the fiscal year ended April 30, 1999, and $1.7 million,
or approximately 48% of net sales, for the quarter ended July 31, 1999. The
majority of international sales were made in Europe and Asia by a combination
of our direct sales force and indirect channels. We treat sales to customers
in Canada as part of North American sales, and not as international sales. Our
international sales are denominated in United States dollars.
For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for more than ten percent of our net
sales, for an aggregate of approximately 33% of our net sales. For the quarter
ended July 31, 1999, Road Runner and Global One Communications each accounted
for more than ten percent of our net sales, for an aggregate of approximately
22% of our net sales.
We generally record product revenue upon shipment, net of allowances for
estimated sales returns and uncollectable customer accounts. Maintenance
contract revenue is initially deferred when a maintenance contract is
purchased by the customer and recorded evenly over the life of the contract.
To date, maintenance contract revenue has not been a significant portion of
our net sales.
We recorded deferred stock compensation of approximately $4,000, $157,000
and $13.7 million for the period from inception, March 13, 1996, to April 30,
1997 and for the years ended April 30, 1998 and 1999, and $14.2 million for
the quarter ended July 31, 1999. These amounts represent the difference
between the exercise price and the deemed fair value of stock option and
warrant grants to employees, consultants, directors and third parties. Related
stock compensation expense is recorded over the related option vesting period,
generally two to four years, or immediately if there is no vesting period. We
recorded stock compensation expense of approximately $4,000, $59,000 and $3.8
million for the period from inception to April 30, 1997 and for the years
21
<PAGE>
ended April 30, 1998 and 1999, and $3.0 million for the quarter ended July 31,
1999 using a graded vesting method. Based on grants from August 1 through
November 1, 1999, we expect to record additional deferred stock compensation
of approximately $27.2 million. As a result of the cumulative effect of stock
compensation, we expect stock compensation expense, which is primarily
attributable to amortization of deferred compensation charges, to impact our
reported results through April 30, 2004. In addition, we intend to record a
charge of approximately $604,000 for the quarter ended October 31, 1999
related to warrants. Based on option grants through November 1, 1999, we
expect stock compensation expense to be approximately $28.8 million for the
fiscal year ending April 30, 2000.
We have incurred net losses in each quarter since inception. As of July 31,
1999, we had an accumulated deficit of $26.7 million. Our net loss was $5.5
million for the fiscal year ended April 30, 1998, $13.2 million for the fiscal
year ended April 30, 1999, and $6.6 million for the quarter ended July 31,
1999. These losses resulted from significant costs incurred in the development
and sale of our products and services. We expect to experience significant
growth in our operating expenses, particularly research and development and
sales and marketing expenses. As a result, we expect to incur additional
losses and continued negative cash flow from operations for the foreseeable
future.
Our limited operating history makes the prediction of future operating
results difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies at an early state of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties.
Selected Quarterly Results of Operations
Because we have a limited operating history, we believe that year-to-year
comparisons prior to 1999 are less meaningful than an analysis of recent
quarterly operating results. Accordingly, we are first providing a discussion
and analysis of our results of operations for the five quarters ended July 31,
1999.
22
<PAGE>
The following tables set forth, in dollars and as a percentage of revenues,
consolidated statements of operations data for each of the five quarters ended
July 31, 1999. This information has been derived from our unaudited
consolidated financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements contained in this prospectus and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of this information. You should read this information
in conjunction with our consolidated financial statements and notes to the
consolidated financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
Jul. Oct. Jan. Apr. Jul.
31, 31, 31, 30, 31,
1998 1998 1999 1999 1999
------- ------- ------- ------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net sales................... $ 809 $ 1,082 $ 2,201 $ 2,944 $ 3,612
Cost of goods sold.......... 598 652 890 1,157 1,380
------- ------- ------- ------- -------
Gross profit................ 211 430 1,311 1,787 2,232
Operating expenses:
Research and development... 755 958 978 1,343 1,613
Sales and marketing........ 1,335 1,719 1,654 2,157 3,481
General and
administrative............ 275 685 510 599 667
Stock compensation......... 219 587 871 2,099 2,992
------- ------- ------- ------- -------
Total operating
expenses............... 2,584 3,949 4,013 6,198 8,753
------- ------- ------- ------- -------
Operating loss.............. (2,373) (3,519) (2,702) (4,411) (6,521)
Other income (expense),
net........................ 71 33 (115) (186) (36)
------- ------- ------- ------- -------
Net loss.................... $(2,302) $(3,486) $(2,817) $(4,597) $(6,557)
======= ======= ======= ======= =======
As a Percentage of Net
Sales:
Net sales................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......... 73.9 60.3 40.4 39.3 38.2
------- ------- ------- ------- -------
Gross margin................ 26.1 39.7 59.6 60.7 61.8
Operating expenses:
Research and development... 93.3 88.5 44.4 45.6 44.7
Sales and marketing........ 165.0 158.9 75.1 73.3 96.4
General and
administrative............ 34.0 63.3 23.1 20.3 18.5
Stock compensation......... 27.1 54.3 39.6 71.3 82.8
------- ------- ------- ------- -------
Total operating
expenses............... 319.4 365.0 182.2 210.5 242.4
------- ------- ------- ------- -------
Operating loss.............. (293.3) (325.2) (122.8) (149.8) (180.6)
Other income (expense),
net........................ 8.8 3.0 (5.2) (6.3) (1.0)
------- ------- ------- ------- -------
Net loss.................... (284.5)% (322.2)% (128.0)% (156.1)% (181.6)%
======= ======= ======= ======= =======
</TABLE>
Net Sales
Net sales increased in each of the five quarters ended July 31, 1999, from
$809,000 for the quarter ended July 31, 1998 to $3.6 million for the quarter
ended July 31, 1999. The increase was attributable to higher sales volumes
resulting from the introduction of new products and growth in our customer
base as we expanded our sales force. We offer products in both fixed and
expandable configurations. In particular, the growth in net sales was
attributable to increased sales of expandable configuration systems,
principally the 1000, 2000 and 5000 Series products, which have higher average
selling prices than smaller configuration systems. We expect our net sales to
increase as a result of continued growth in our sales force, broader
acceptance of our products in the marketplace, and the introduction of new
products, although prior growth rates of our net sales will not be sustained
in the future.
23
<PAGE>
Gross Profit
Gross profit increased in each of the five quarters ended July 31, 1999,
from $211,000 for the quarter ended July 31, 1998 to $2.2 million for the
quarter ended July 31, 1999. The increase in gross profit was attributable to
higher sales volumes and the introduction of new products. Gross margin
increased from approximately 26.1% for the quarter ended July 31, 1998 to
39.7% for the quarter ended October 31, 1998 to approximately 60% for the
three consecutive quarters ended July 31, 1999. The increase in gross margin
to approximately 60% resulted from economies of scale from higher unit
production and costs savings achieved by outsourcing component manufacturing.
Our gross margin has been and will continue to be affected by a variety of
factors, including competition, fluctuations in demand for our products, the
timing and size of customer orders and product implementations, the mix of
direct and indirect sales, the mix and average selling prices of products, new
product introductions and enhancements, component costs, manufacturing costs
and product configuration.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and benefits, and prototype and test equipment costs.
Our research and development expenses increased in each of the five quarters
ended July 31, 1999, from $755,000 for the quarter ended July 31, 1998 to $1.6
million for the quarter ended July 31, 1999. The increases in research and
development expenses were primarily attributable to increased staffing and
associated support for engineers required to expand and enhance our product
line, and, to a lesser extent, expenses related to prototype and test
equipment units. Research and development headcount increased from 19 at July
31, 1998 to 35 at July 31, 1999. The decrease in research and development
expenses as a percentage of net sales in the quarter ended January 31, 1999
reflects the fact that our net sales during the period increased more rapidly
than our research and development expenses. We believe that significant
investments in research and development will be required to remain competitive
and expect that research and development expenses will continue to increase in
absolute dollars. Through July 31, 1999, all research and development costs
have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and benefits, commissions, advertising and promotional expenses, and
customer service and support costs. Our sales and marketing expenses generally
increased over the five quarters ended July 31, 1999, from $1.3 million for
the quarter ended July 31, 1998 to $3.5 million for the quarter ended July 31,
1999. Sales and marketing expenses declined slightly in the quarter ended
January 31, 1999, due to lower marketing expenses in the period. The overall
increases in sales and marketing expenses were a result of the expansion of
our sales and marketing organization as we hired people and added sales and
support facilities worldwide. Sales and marketing headcount increased from 25
at July 31, 1998 to 53 at July 31, 1999. The decrease in sales and marketing
expenses as a percentage of net sales in the quarter ended January 31, 1999
reflects the fact that our net sales during this period increased more rapidly
than our sales and marketing expenses. We expect to continue to increase our
sales and marketing expenses significantly in absolute dollars in an effort to
expand domestic and international markets, introduce new products, and
establish and expand new distribution channels.
General and Administrative. Our general and administrative expenses
increased from $275,000 for the quarter ended July 31, 1998 to $667,000 for
the quarter ended July 31, 1999. General and administrative expenses of
$685,000 were higher for the quarter ended October 31, 1998, due to recruiting
costs and costs related to our move to new corporate offices. The overall
increases in general and administrative expenses were primarily attributable
to increased staffing and associated expenses necessary to manage and support
our growth. General and administrative headcount increased from 7 at July 31,
1998 to 13 at July 31, 1999. The decrease in general and administrative
expenses as a percentage of net sales in the quarter ended January 31, 1999
reflects the fact that our net sales during this period increased more rapidly
than our general and administrative expenses. We expect general and
administrative expenses to increase in absolute dollars as we continue to
increase staffing to manage expanding operations and facilities and incur the
additional expenses associated with operating as a public company.
24
<PAGE>
Stock Compensation. Stock compensation expense increased from $219,000 for
the quarter ended July 31, 1998 to $3.0 million for the quarter ended July 31,
1999. Given the balance of deferred stock compensation on the balance sheet
and recent grant history, we expect stock compensation expense to increase in
absolute dollars as this deferral is recognized.
Other Income (Expense), Net. Other income (expense), net consists of
interest income, income expense and other non-operating expenses. Other income
(expense), net was net other income of $71,000 and $33,000 in the quarters
ended July 31, 1998 and October 31, 1998, and net other expense of $115,000,
$186,000 and $36,000 in the quarters ended January 31, 1999, April 30, 1999
and July 31, 1999. The decreases in other income (expense), net through April
30, 1999 were attributable to increased interest costs as a result of
incurring additional borrowings and lower cash balances. The decrease in other
expense, net during the quarter ended July 31, 1999 related to our increased
cash balances associated with closing our Series C Preferred Stock financing.
Results of Operations
For the period from our inception in March 1996 through April 30, 1998, we
did not record any net sales. The following table sets forth, as a percentage
of net sales, consolidated statements of operations data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months
Ended July
31,
Year Ended ---------------
April 30, 1999 1998 1999
-------------- ------ ------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales...................................... 100.0% 100.0% 100.0%
Cost of goods sold............................. 46.9 73.9 38.2
------ ------ ------
Gross margin................................... 53.1 26.1 61.8
Operating expenses:
Research and development...................... 57.3 93.3 44.7
Sales and marketing........................... 97.6 165.0 96.4
General and administrative.................... 29.4 34.0 18.5
Stock compensation............................ 53.6 27.1 82.8
------ ------ ------
Total operating expenses................... 237.9 319.4 242.4
------ ------ ------
Operating loss................................. (184.8) (293.3) (180.6)
Other income (expense), net.................... (2.8) 8.8 (1.0)
------ ------ ------
Net loss....................................... (187.6)% (284.5)% (181.6)%
====== ====== ======
</TABLE>
Comparison of Quarters Ended July 31, 1999 and 1998
Net Sales. Net sales increased from $809,000 for the quarter ended July 31,
1998 to $3.6 million for the quarter ended July 31, 1999. The increase was
attributable to higher volumes resulting from the introduction of new products
and growth in our customer base as we expanded our sales force. In particular,
the higher unit sales volumes reflects the introduction of the 500, 2000 and
5000 Series products, as well as increased unit sales of 1000 Series products.
During the quarter ended July 31, 1998, three customers accounted for
approximately 51% of our net sales, and during the quarter ended July 31,
1999, two customers accounted for approximately 22% of our net sales.
Gross Profit. Gross profit increased from $211,000 for the quarter ended
July 31, 1998 to $2.2 million for the quarter ended July 31, 1999. Gross
margin increased from approximately 26.1% for the quarter ended July 31, 1998
to approximately 61.8% for the quarter ended July 31, 1999. The increase in
gross profit was primarily attributable to the introduction of new products
and their growing acceptance in the marketplace and higher sales volumes. The
increase in gross margin was principally due to the resulting economies of
scale from higher unit production and cost savings achieved by outsourcing
component manufacturing.
25
<PAGE>
Research and Development. Research and development expenses increased from
$755,000 for the quarter ended July 31, 1998 to $1.6 million for the quarter
ended July 31, 1999. The increase in research and development expenses in
absolute dollars was primarily attributable to increased staffing and
associated support for engineers required to expand and enhance our product
line, and, to a lesser extent, expenses related to prototype and test
equipment units. Research and development headcount increased from 19 at July
31, 1998 to 35 at July 31, 1999. As a percentage of net sales, research and
development expenses decreased from 93.3% for the quarter ended July 31, 1998
to 44.7% for the quarter ended July 31, 1999. The decrease in research and
development expenses as a percentage of net sales reflects the fact that our
net sales during the period increased more rapidly than our research and
development expenses.
Sales and Marketing. Sales and marketing expenses increased from $1.3
million for the quarter ended July 31, 1998 to $3.5 million for the quarter
ended July 31, 1999. The increase in sales and marketing expenses in absolute
dollars was related to the expansion of our sales and marketing organization
as we hired people and added sales and support facilities worldwide. Sales and
marketing headcount increased from 25 at July 31, 1998 to 53 at July 31, 1999.
As a percentage of net sales, sales and marketing expenses decreased from
165.0% for the quarter ended July 31, 1998 to 96.4% for the quarter ended July
31, 1999. The decrease in sales and marketing expenses as a percentage of net
sales reflects the fact that our net sales during the period increased more
rapidly than our sales and marketing expenses.
General and Administrative. General and administrative expenses increased
from $275,000 for the quarter ended July 31, 1998 to $667,000 for the quarter
ended July 31, 1999. The increase in general and administrative expenses in
absolute dollars was primarily attributable to increased staffing and
associated expenses necessary to manage and support our growth. General and
administrative headcount increased from 7 at July 31, 1998 to 13 at July 31,
1999. As a percentage of net sales, general and administrative expenses
decreased from 34.0% for the quarter ended July 31, 1998 to 18.5% for the
quarter ended July 31, 1999. The decrease in general and administrative
expenses as a percentage of net sales reflects the fact that our net sales
during the period increased more rapidly than our general and administrative
expenses.
Stock Compensation. Stock compensation expense increased from $219,000 for
the quarter ended July 31, 1998 to $3.0 million for the quarter ended July 31,
1999.
Other Income (Expense), Net. Other income (expense), net decreased from net
other income of $71,000 for the quarter ended July 31, 1998, to net other
expense of $36,000 for the quarter ended July 31, 1999. The decrease was
primarily attributable to increased interest costs as a result of incurring
additional borrowings.
Comparison of Period from Inception, March 13, 1996, to April 30, 1997 and
Fiscal Years Ended April 30, 1998 and 1999
Net Sales. We did not generate any sales for the period from inception to
April 30, 1998. Net sales for the fiscal year ended April 30, 1999 were $7.0
million. The increase was attributable to the introduction of new products,
principally expandable configuration systems, notably the 1000, 2000 and 5000
Series products, and growth in our customer base as we expanded our sales
force. During the fiscal year ended April 30, 1999, three customers accounted
for approximately 33% of our net sales.
Gross Profit. We did not generate any sales for the period from inception
to April 30, 1998. The increase in gross profit and gross margin in the year
ended April 30, 1999 was attributable to generating sales in fiscal 1999.
Research and Development. Research and development expenses increased from
$1.1 million for the period from inception to April 30, 1997 to $2.4 million
for the fiscal year ended April 30, 1998 to $4.0 million for the fiscal year
ended April 30, 1999. The increases in research and development expenses were
primarily attributable to increased staffing and associated support for
engineers required to expand and enhance our product line, and, to a lesser
extent, expenses related to prototype and test equipment units.
26
<PAGE>
Sales and Marketing. Sales and marketing expenses increased from $130,000
for the period from inception to April 30, 1997 to $1.7 million for the fiscal
year ended April 30, 1998 to $6.9 million for the fiscal year ended April 30,
1999. The increases in sales and marketing expenses were related to the
expansion of our sales and marketing organization as we hired people and added
sales and support facilities worldwide.
General and Administrative. General and administrative expenses increased
from $310,000 for the period from inception to April 30, 1997 to $1.6 million
for the fiscal year ended April 30, 1998 to $2.1 million for the fiscal year
ended April 30, 1999. The increases in general and administrative expenses
were primarily attributable to increased staffing and associated expenses
necessary to manage and support our growth.
Stock Compensation. Stock compensation expense increased from $4,000 for
the period from inception to April 30, 1997 to $59,000 for the fiscal year
ended April 30, 1998, to $3.8 million for the fiscal year ended April 30,
1999.
Other Income (Expense), Net. Other income (expense), net increased from net
other income of $56,000 for the period from inception to April 30, 1997 to net
other income of $233,000 for the fiscal year ended April 30, 1998, and
decreased to net other expense of $197,000 for the fiscal year ended April 30,
1999. The increase from the period from inception to April 30, 1997 to the
fiscal year ended April 30, 1998 was primarily attributable to increased
investment income from cash received from equity financings. The decrease from
the fiscal year ended April 30, 1998 to the fiscal year ended April 30, 1999
was primarily attributable to increased interest costs as a result of
incurring additional borrowings.
Income Taxes
Income taxes consist of federal, state and local taxes, when applicable. We
expect significant consolidated net losses for the foreseeable future, which
should generate net operating loss carryforwards. However, our ability to use
net operating losses may be subject to annual limitations. Under the
provisions of the Internal Revenue Code, substantial changes in our ownership
may limit the amount of net operating loss carryforwards that could be
utilized annually in the future to offset taxable income. In addition, income
taxes may be payable during this time due to operating income and the
imposition of federal or state minimum taxes. We recognized no provision for
taxes, because we operated at a loss throughout the years ended April 30,
1997, 1998 and 1999, and for the quarter ended July 31, 1999.
Liquidity and Capital Resources
Since inception, we have financed our operations and the purchase of
property and equipment through private sales of preferred stock, with net
proceeds of $33.4 million, as well as through bank loans and equipment leases.
At July 31, 1999, we had $17.8 million in cash and cash equivalents and
$16.9 million in working capital.
Net cash used in operating activities was $1.4 million for the period from
inception to April 30, 1997, $5.1 million for the fiscal year ended April 30,
1998, $9.7 million for the fiscal year ended April 30, 1999, and $3.9 million
for the quarter ended July 31, 1999. We used cash primarily to fund our net
losses from operations.
Net cash used in investing activities was $3.5 million for the period from
inception to April 30, 1997, $971,000 for the fiscal year ended April 30, 1999
and $472,000 for the quarter ended July 31, 1999. Net cash provided by
investing activities was $2.8 million for fiscal year ended April 30, 1998.
Net cash used in investing activities was primarily attributable to purchases
of property, plant and equipment and short-term investments. Net cash provided
by investing activities was primarily attributable to the proceeds from the
sale of short-term investments. We expect that, in the future, any cash in
excess of current requirements will be invested in investment grade, interest-
bearing securities.
Net cash provided by financing activities was $5.1 million for the period
from inception to April 30, 1997, $9.4 million for the fiscal year ended April
30, 1998, $5.6 million for the fiscal year ended April 30, 1999 and
27
<PAGE>
$20.0 million for the quarter ended July 31, 1999. Subsequent to July 31,
1999, we raised approximately $5.9 million of capital through the sale of
280,953 shares of Series D Preferred Stock at $11.00 per share and through the
cash exercise of options granted to a board member and consultant to purchase
702,380 shares of common stock at $4.00 per share.
Capital expenditures were $123,000 for the period from inception to April
30, 1997, $623,000 for the fiscal year ended April 30, 1998, $971,000 for the
fiscal year ended April 30, 1999, and $472,000 for the quarter ended July 31,
1999. Our capital expenditures consisted of purchases of plant, equipment and
software. Current capital commitments are approximately $700,000, principally
for a new enterprise resource planning system. We expect that our capital
expenditures will continue to increase in the future.
We currently have two credit facilities. In November 1998, we amended our
then existing credit facility to increase the amount available thereunder from
$400,000 to $3.0 million. This credit facility, which expires in November 1999
and bears interest at the prime interest rate plus .75%, had $1.2 million
available for borrowing as of July 31, 1999. In November 1998, we entered into
an additional credit facility consisting of a $3.5 million three-year term
loan and a $350,000 equipment line of credit. The term loan and equipment line
of credit are secured by all of our assets and bear interest at 13.0% and
11.4% and mature in November 2002 and May 2000. As of July 31, 1999, all
amounts under the term loan had been borrowed, and all amounts under the
equipment line of credit were available for borrowing. Both of our credit
facilities require us to maintain compliance with financial covenants that,
among other things, specify minimum financial ratios and prohibit us from
paying dividends on our capital stock. We may pay off these credit facilities
after the offering.
We believe that working capital together with the net proceeds from the
sale of the common stock in this offering will be sufficient to meet our
working capital and capital expenditure requirements for at least the next
twelve months. Thereafter, we may find it necessary to obtain additional
equity or debt financing. In the event additional financing is required, we
may not be able to raise it on acceptable terms or at all.
Year 2000 Readiness
The "Year 2000 issue" refers generally to the problems that some software
and hardware may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results.
We believe that our current products are Year 2000 compliant when
configured and used as described in the product documentation. Our product is
installed as a part of a network and its performance may be harmed by other
network connected devices that may not be Year 2000 compliant. We continue to
respond to customer questions about prior versions of our products on a case-
by-case basis.
We have defined Year 2000 compliant as the ability to:
. correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
. store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and data
storage specify the century; and
. recognize Year 2000 as a leap year.
We have tested software obtained from third parties, including licensed
software, shareware and freeware that is incorporated into our products, and
we have received assurances from our vendors that licensed software is Year
2000 compliant. Despite testing by us and current and potential customers, and
assurances from
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developers of products incorporated into our products, our products may
contain undetected errors or defects associated with Year 2000 date functions.
Known or unknown errors or defects in our products could result in delay or
loss of net sales, diversion of development resources, damage to our
reputation, or increased service and warranty costs, any of which could
seriously harm our business. Some commentators have predicted significant
litigation regarding Year 2000 compliance issues, and we are aware of these
lawsuits against software vendors. Because of the unprecedented nature of this
litigation, it is uncertain whether or to what extent we may be affected by
it.
We have completed an assessment of our material internal information and
other technology systems, including both our own software products and third-
party software and hardware technologies. We have received assurances from our
third-party software vendors that their systems are Year 2000 compliant. In
addition, we intend to seek assurances from the vendors of any future software
we purchase, including our planned purchase of a new enterprise resource
planning system. We are not currently aware of any material operational issues
or costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.
We do not intend to seek any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business could be
seriously harmed.
We do not intend to seek any information concerning the Year 2000
compliance status of our component suppliers. Our component suppliers may
experience significant interruptions in their manufacturing operations, which
could result in significant delays in their ability to supply us with the
components necessary for our Internet caching appliances. As a result, our
business could be seriously harmed.
We have not separately accounted for Year 2000 costs in the past. To date,
these costs have not been material. We will incur additional costs related to
the Year 2000 efforts for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer satisfaction. In addition, we may experience
significant problems and costs with Year 2000 compliance that could seriously
harm our business.
Based upon our examination of our internal technology systems, we do not
believe it will be necessary to develop a contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. If we find it necessary to develop a contingency plan
the cost of developing and implementing a contingency plan may be significant.
Finally, we are subject to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failure interruptions.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or FAS 133. The new standard establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
will be effective for the Company's fiscal year ending April 30, 2002. We do
not expect FAS 133 to have a material effect on our consolidated financial
condition or results of operations.
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Qualitative and Quantitative Disclosures about Market Risk
We develop products in the United States and sell them in North America,
Asia and Europe. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Since all of our sales are currently made in
United States dollars, a strengthening of the dollar could make our products
less competitive in foreign markets. If any of the events described above were
to occur, our net sales could be seriously impacted, since a significant
portion of our net sales are derived from international operations. Net sales
from international operations represented 44% of total net sales for the
fiscal year ended April 30, 1999 and 48% of total net sales for the quarter
ended July 31, 1999. Our interest income is sensitive to changes in the
general level of United States interest rates, particularly since the majority
of our investments are cash and cash equivalents. Due to the nature of our
cash and cash equivalents, we have concluded that they do not expose us to
material risk.
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BUSINESS
The prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
these forward-looking statements.
Overview
We design, develop and market Internet caching appliances that are
specifically designed, or purpose-built, to accelerate and manage the flow of
information over the Internet. Our products enable our customers to improve
the performance of their networks and reduce network costs, while enhancing
network security. As of August 31, 1999, we had sold a total of approximately
575 of our Internet caching appliances to approximately 100 customers. End
users of our products include large and small Internet service providers, or
ISPs, and corporate enterprises.
Industry Background
The Internet has emerged as one of the fastest growing communications media
in history, and is dramatically changing the way businesses and individuals
communicate and conduct commerce. International Data Corporation, or IDC,
estimates that there were approximately 97 million users of the Internet at
the end of 1998, and projects that the number of Internet users will grow to
over 319 million by 2002. IDC also projects that the number of Internet access
devices worldwide will grow from an estimated 120 million in 1998 to over 515
million by the end of 2002. Similarly, the amount of content available on the
Internet is increasing rapidly. IDC estimates that the number of web pages
worldwide will grow from approximately 829 million in 1998 to over 7.7 billion
by 2002.
The volume of data transmitted across the Internet and corporate intranets
is also growing as a result of increasingly complex content. Web sites and e-
mail messages, for example, increasingly incorporate graphics as well as audio
and video elements which require much larger files than simple text. Each time
an Internet user requests web page content, the request, access and
transmission of this content must follow a network path from the user to the
source of the content on the Internet, or the origin server, and back. This
process is repeated serially for each object that a web page contains. Popular
web pages typically contain ten to twenty objects, requiring multiple
transmissions per web page. This serial request of content significantly
lengthens web response time. In addition, with users anywhere accessing
information anywhere, traffic patterns are unpredictable.
The physical infrastructure of the Internet today must therefore
accommodate sharply increased volumes of data traffic, which includes a high
degree of redundant data, as well as highly unpredictable and event-driven
usage patterns. Advances in communications technology such as high-speed
routers, switches and broadband access technologies have improved the Internet
infrastructure and its ability to efficiently transport information. However,
these technologies do not reduce the volume of data that must be moved from
origin server to user, nor the physical distance between source and user.
Further, these improvements do not allow for the analysis or control of the
actual content. As a result, servers are still overloaded by the growing
number of requests, and web response time remains a continuing problem despite
the advent of broadband technologies and other improvements in data
transmission capacity.
Slow web response time and web server outages can have a significant
financial impact on corporate enterprises and ISPs. As enterprises
increasingly depend on the Internet to conduct business, web server
availability and performance become increasingly important for generating
revenue and communicating with customers and vendors. The availability and
performance of web servers, which are used to publish information on the
Internet, and the quality of a customer's web site experience directly impact
revenue for a business engaged in electronic commerce, or e-commerce. Delayed
web server response times decrease productivity and can threaten the revenue-
generating or communications capabilities of the Internet. Users who have
difficulty accessing a web site may stop using it or find an alternative site.
In the case of ISPs, slow web response times may frustrate their customers,
encouraging them to cancel their service.
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In response to these problems, early software-based caching technologies
were introduced. By storing frequently requested Internet content physically
closer to users, these solutions reduced the distance over which web content
must travel, and removed much of the redundant traffic from the network,
improving network efficiency. However, they did not adequately address the
disparate requirements of ISPs, enterprises and users. Specifically, these
solutions have failed to address market demand for:
. reduced web response time, including download times for non-cached
content;
. simple administration and management;
. reduced network costs;
. secure networks; and
. up-to-date, or fresh, web content.
For example, traditional software-based caching solutions based on general-
purpose operating systems, where source code is widely available and well
understood, can be costly, difficult to implement and manage and vulnerable to
security breaches. Caching solutions based on publicly available, free
software, or freeware, generally provide inferior performance, security and
features because they lack consistent, dedicated programming efforts. More
recently, some vendors have chosen to modify hardware-based solutions, such as
filers or routers, from their original purpose to become caching solutions.
Because these hardware-based solutions were initially designed for other
purposes, they can be slower than other alternatives, more cumbersome to
operate and less efficient. Finally, these traditional hardware and software
caching solutions have no mechanism to ensure that information stored in and
served from the cache is up-to-date.
In recent years, the increasing complexity within networks required the
introduction of dedicated routing and switching appliances in order to achieve
desired network performance and reliability levels. Similarly, increasing
traffic volumes, network complexity and user expectations for the performance
of the Internet require the introduction of a specifically-designed, dedicated
Internet caching appliance to reduce web response time, provide extensive
administration and management capabilities, reduce network costs, ensure data
security and deliver up-to-date or fresh content. As a result, the Internet
caching appliance market is expected to grow rapidly. According to
GartnerGroup, this market is expected to grow from approximately $92 million
in 1999 to over $1 billion in 2003, representing a compounded annual growth
rate of approximately 85%.
The CacheFlow Solution
CacheFlow designs, develops and markets Internet caching appliances that
accelerate and manage the flow of information over the Internet. We sell
Internet caching appliances, which are specialized devices that are designed,
or purpose-built, for high-performance Internet caching. At the foundation of
each CacheFlow product is CacheOS, our high-performance operating system
designed specifically to manage and accelerate the delivery of Internet
content. We assemble our Internet caching appliances using components
purchased from third party manufacturers. As purpose-built appliances, our
products enhance network performance by reducing the number of redundant
requests for information that must be processed and delivered, reducing the
load on the Internet and corporate networks. Our products improve response
time for Internet users and provide network administrators and managers a high
degree of control over the access, flow and delivery of Internet content. The
principal benefits of our Internet caching appliances include:
High Performance. Our purpose-built appliances were designed from inception
for high-performance Internet caching. Our appliances provide high data
throughput and reduce latency, or the time between initiating a request for
data and the completion of the actual data transfer. Even uncached content is
accelerated, since our appliances simultaneously retrieve numerous objects
from the origin server, the source of the content on the Internet, in many
cases doubling the speed of content delivery. Our appliances are designed to
be network-aware, content-aware elements of the network that improve network
efficiency and speed web response times.
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Ease of Installation and Management. Our products are designed for easy
installation and maintenance, reducing the cost and time required for
implementation and use. In many cases, our Internet caching appliances can be
installed in under thirty minutes. All of our products provide customers with
a range of management features, functions, user interfaces and modes of
operation. In addition, our appliances support relevant networking standards,
enabling our appliances to interact with existing networking equipment.
Attractive Return on Investment. By allowing content to be served from a
cache located closer to the user, instead of the origin server on the
Internet, enterprises and ISPs employing our Internet caching appliances
require less network capacity and can reduce data transmission costs. Our
customers better utilize the capacity of their existing network since
redundant traffic is removed from the network and served from the cache.
Enterprises engaged in e-commerce can reduce the need to purchase additional
servers since our Internet caching appliances eliminate a significant amount
of traffic that could otherwise overload their existing servers, requiring
incremental server capacity. Our products also help to improve the
productivity of Internet users by reducing web response time. Faster
downloading of web content increases productivity and end-user satisfaction.
Security. Our appliances run on a proprietary and purpose-built operating
system. CacheOS is designed to be less vulnerable to unauthorized entry than
caches based on more commonly understood, general-purpose operating systems,
such as Windows NT, UNIX or NetWare. In addition, CacheOS employs
authentication and filtering capabilities that prohibit unauthorized users
from accessing or penetrating through the cache.
Broad Product Suite. Enterprises and ISPs have varying capacity,
reliability and data throughput needs, depending on the size and nature of
their operations. We offer a wide range of products to meet different price,
performance and reliability requirements, and provide an upgrade path to our
customers as they expand their networks. Our products can be deployed in a
variety of environments, ranging from small or remote network locations to
large ISPs or enterprise headquarters.
Delivery of Fresh Web Content. Moving content closer to the user increases
network efficiency, but creates the risk that the content delivered is not up-
to-date, or fresh. Internet caching appliances store content, but do not
originate or own that content, so in order to provide fresh content, caches
must monitor the source of content for changes. Unlike traditional caches that
have no mechanisms to monitor and ensure freshness, our Internet caching
appliances actively update content through efficient and sophisticated
algorithms that monitor user activity and the frequency with which source
content is changed without requiring additional capacity or adversely
affecting response time. These algorithms are managed through a control
mechanism that allows the network administrator to easily set the level of
freshness delivered by the cache. The algorithms are self-adapting based on
the administrative settings.
Ability to Manage the Flow of Content. Our Internet caching appliances are
installed at points in the Internet infrastructure where they interact with
the content being requested, the user requesting that content and the network
infrastructure itself. Our appliances are able to take advantage of their
placement at this network juncture to provide a range of additional value-
added services, including content filtering, user tracking and control of
cached content.
The CacheFlow Strategy
Our objective is to be the leading provider of Internet caching solutions
by delivering high-performance, innovative Internet caching appliances. Key
elements of our strategy include the following:
Apply our Internet Caching Focus to Targeted Market Segments. Since our
inception, we have focused exclusively on developing Internet caching
appliances. We believe this exclusive focus helps us to rapidly identify and
target attractive market opportunities. We are directing our product
development, marketing and sales activities at specific market segments that
we believe represent attractive opportunities based on a demonstrated need for
caching, the opportunity to sell to numerous customers and the level of
existing competition. To date, we have focused on four market segments: e-
commerce, international access, replacements
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for proxy servers, which are devices used to control access to web content,
and broadband. We intend to use our customer relationships in these market
segments to further penetrate these segments as well as other related markets.
Enhance Capabilities of our Appliances. We intend to use our technological
expertise to meet the needs of the evolving Internet caching market. We plan
to continue to develop both the software and hardware elements of our solution
to gain and maintain a competitive advantage and expand the market for our
products. Our additional efforts to enhance the capabilities of our appliances
include adding more functionality to control the flow of content, customizing
hardware and software to enhance performance and developing enhancements to
improve ease of deployment.
Broaden Distribution Channels. We intend to extend our distribution
channels to meet the anticipated growth in demand for Internet caching
appliances. We plan to continue to expand both our direct and indirect sales
channels in order to continue to extend our marketing reach and increase our
volume distribution. In particular, we plan to enter into relationships with
additional resellers, systems integrators and original equipment manufacturers
to increase penetration of the enterprise and ISP markets.
Build the CacheFlow Brand. We intend to establish CacheFlow as the premier
brand in the Internet caching appliance market. We believe that brand
awareness is important to increase market acceptance of Internet caching
appliances generally and to identify us as a leading provider of Internet
caching appliance solutions. We intend to continue to educate customers,
resellers, systems integrators and original equipment manufacturers about the
value of implementing caching appliances. We believe a thorough process of
explanation and education of our products will help to promote brand
recognition and to further an overall acceptance and understanding of caching
appliances. To this end, we intend to increase our investments in a broad
range of marketing and educational programs.
Products
Our products are designed to meet the different price, performance,
capacity and reliability requirements of our customers and potential
customers. Embedded in each of our caching appliances is our CacheOS operating
system. Because CacheOS acts as a common platform across our product line, all
of our products support a consistent set of software features and functions, a
common easy-to-manage user interface and common operational characteristics.
Internet Caching Appliances
We began commercial shipment of our first Internet caching appliances in
May 1998. Our current product family is separated into four product series:
. 100 Series--The CacheFlow 110 Internet caching appliance, the sole model
within the 100 Series, is designed for use by small ISPs and corporate
branch or remote offices. The CacheFlow 110 is designed to support
Internet traffic loads of up to 1.5 million bits per second or the
equivalent speed of a T-1 connection.
. 500 Series--The CacheFlow 500 Series includes our 515, 525 and 545
Internet caching appliances, which are specifically designed to support
ISPs and enterprises with Internet connections up to 15 million bits per
second. The CacheFlow 500 Series is typically deployed in front of web
servers, which are used to publish information on the Internet, and
firewalls, which are network security systems, and is used for
accelerating the delivery of content to ISP and enterprise users.
. 3000 Series--The CacheFlow 3000 Series is comprised of high-performance
Internet caching appliances designed specifically to support ISPs and
enterprises with Internet connections from 10 to 45 million bits per
second or the equivalent speed of a T-3 connection. Our 3000 Series is
expandable, providing our customers with the ability to add capacity to
the appliance as their needs grow.
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. 5000 Series--The CacheFlow 5000 Series is comprised of high-performance
Internet caching appliances designed for high scalability and
reliability. The CacheFlow 5000 is highly scalable, designed to support
traffic loads ranging from 45 million bits per second or the equivalent
speed of a T-3 connection, to more than 155 million bits per second, the
equivalent speed of an OC-3 connection. Our 5000 Series can contain up
to three separate AC or DC power supplies to allow uninterrupted
operation and is expandable, providing our customers with the ability to
add capacity to the appliances as their needs grow.
We expect that each of the 500, 3000 and 5000 Series products will generate
a significant percentage of our net sales for at least the next twelve months.
CacheOS
CacheOS is the operating system that runs all of our Internet caching
appliances. Unlike general operating systems, such as Windows NT, UNIX and
NetWare, CacheOS was developed specifically to enable Internet caching and,
therefore, does not contain the millions of lines of code necessary to support
the many features required of a general operating system. As a result, our
Internet caching appliances run more efficiently. Because we developed CacheOS
internally, our Internet caching appliances are more secure than caching
devices that run on operating systems whose source code is more commonly
understood. In addition, our operating system enables redundancies, such as
storing multiple copies of images on each disk within the appliance and
keeping a copy of CacheOS on each disk, so that if one disk fails, the next
can automatically reboot the appliance. These redundancies allow our caching
appliances to be highly reliable.
CacheOS is designed with a variety of features that improve network
performance and administration.
. Object Pipelining reduces web response time by enabling the simultaneous
retrieval of multiple objects on a page.
. Adaptive Probabilistic Refresh improves content freshness without
sacrificing response time by tracking and checking that content is up-
to-date, independently of user requests, based on the probability that
the content will be requested and the probability that the content has
changed.
. Value-based Deletion reduces web response time and improves network
efficiency by deleting excess content stored in the cache, based on the
probability that the content will be requested and the time required to
retrieve that content.
. Security is enhanced because CacheOS is a specialized, internally-
developed operating system, which is designed to be less vulnerable to
unauthorized entry than caches based on more commonly understood,
general purpose operating systems. In addition, CacheOS enhances cache
management security for network administrators.
. Transparent and Proxy Mode Support provides administrators with
increased deployment flexibility by allowing CacheOS to simultaneously
service direct requests from client browsers and redirected requests
from other network elements.
. Filtering prevents viewing of restricted content and provides increased
security by allowing administrators to control the content that users
can access.
. Authentication prevents unauthorized access to the cache and increases
security by requiring users to identify themselves and verifying access
privileges before granting users access to the cache.
. Easy Installation and Maintenance. CacheOS installs quickly and easily
into customers' networks and is easy-to-maintain, is reliable and has a
low cost of ownership.
Customers and Applications
We began commercial shipment of our first Internet caching appliances in
May 1998 and, as of August 31, 1999, we had sold a total of approximately 575
of our Internet caching appliances to approximately 100 customers. Our
customers include both large and small ISPs, as well as enterprises. We sell
our products both
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domestically and internationally. Net sales from international operations were
$3.1 million, or approximately 44% of net sales, for the fiscal year ended
April 30, 1999, and $1.7 million, or approximately 48% of net sales, for the
quarter ended July 31, 1999.
The following end-user customers and resellers have purchased or leased
over $50,000 of our products. All of these categories of customers generate a
significant percentage of our net sales.
<TABLE>
<CAPTION>
Internet Service Providers Enterprises Resellers
- -------------------------- ----------------- ---------------
<S> <C> <C>
Clear Communications Delta Airlines BTN Internetworking
Datacom Caribe Force 3 Colt Telecom
germany.net Goldman Sachs Dynavar Networking
Global One Communications Hewlett-Packard Lidcam Technology
Helsinki Telephone Hughes Network Systems Lucent Technologies
Infonie Lucent Technologies Nissho Electronics
MTS Advanced Xerox Phitech
Road Runner Solunet
Servint Corp. Internet Services Stark Technology
Swisscom Sumitronics
</TABLE>
For the year ended April 30, 1999, Sumitronics, Global One Communications
and Nissho Electronics each accounted for over ten percent of our net sales,
for an aggregate of approximately 33% of our net sales. For the quarter ended
July 31, 1999, Road Runner and Global One Communications each accounted for
over ten percent of our net sales, for an aggregate of approximately 22% of
our net sales.
Customers have purchased and used our products for a variety of different
applications. ISPs typically use our products to help meet the performance
potential of broadband technology, to effectively use network capacity and to
gain efficiencies in web and applications hosting. Enterprises typically use
our products for handling e-commerce related traffic and as a replacement for
proxy servers. The following are our principal target markets, with current
Cacheflow customers used as representative case studies:
E-commerce
Many organizations have come to rely on their web sites as a means of
attracting new customers and generating additional revenue. Increased business
use of the Internet, coupled with the widespread adoption of e-commerce by
consumers, has resulted in large amounts of traffic flowing to e-commerce
sites. Many organizations' current network infrastructures are incapable of
handling this increase in traffic, resulting in overburdened firewalls, which
are network security systems, and e-commerce servers, which are used to
process commercial transactions over the Internet, resulting in fewer
transactions per day for the e-commerce site. Furthermore, slower response
times and poor quality of service can lead consumers to become dissatisfied
with the e-commerce experience and either stop making web purchases or go to a
competitor's web site where performance is better, which can result in a loss
of potential revenues.
Customer Case Study: Delta Airlines. Delta Airlines, a leading worldwide
airline company, was looking for a solution to scale the performance of its
online travel service. Delta wanted to increase capacity for special
promotions, offer surge protection against peak traffic loads, and accommodate
an overall increase in usage of its e-commerce site without sacrificing
performance, manageability or control. Delta contemplated deploying additional
web servers and firewalls, but instead chose our Internet caching appliances.
Because of the level of security afforded by our proprietary operating system,
Delta was able to deploy our products outside its corporate firewall and in
front of its web site. By servicing user requests for content outside the
firewall, our products were able to reduce traffic on Delta's servers,
firewall and network, helping to reduce operating costs. As a result, Delta
was able to increase the capacity of its site and improve the response time
for its customers, without the need for additional firewalls or web servers.
According to Delta, approximately 92% of user requests for content from
Delta's web site are now being served from our products.
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International Access
As the Internet has evolved as a network for shared data, content has
become accessible to end users throughout the world. In many cases, this
content does not originate from web sites located near the user requesting the
information, resulting in slower response times to end users and significant
network transmission costs to ISPs. Because most Internet content originates
in the United States, these issues are particularly acute for international
users.
Customer Case Study: germany.net. germany.net, a large ISP in Germany,
needed a way to meet growing customer demand for faster access to the
Internet. germany.net found that much of the content its customers were
accessing was hosted on web servers located outside of Germany, resulting in
increasingly slow response times and high network transmission costs. At the
same time, germany.net wanted to minimize its operating costs. germany.net had
been running cache software on Unix servers, which required daily maintenance.
To improve quality of service for existing customers and provide the
infrastructure to scale with new customer additions, while preserving valuable
network capacity, germany.net deployed our Internet caching appliances. They
reported an immediate improvement in performance, including web sites where
content was being requested for the first time. Because our products request
all objects on a particular web site simultaneously, the host web server does
not need to be re-contacted each time a separate object is requested, enabling
germany.net to deliver noticeably reduced response times for its customers.
Proxy Server Replacement
The amount of data traffic over many enterprise networks has increased
significantly. For many enterprises, exchanging and accessing information over
their intranets and from the Internet is a strategically important tool in
increasing productivity. With this dependence on remote sources of
information, enterprises face a number of risks, including end user access of
inappropriate content, unauthorized outside entities gaining access to their
networks, unpredictable network traffic volumes, and new traffic types that,
if not controlled, could have adverse effects on network capacity and
performance. Proxy servers are devices that allow the network administrator to
implement corporate policies to control the flow of information in and out of
the network. However, the growth in data traffic in large enterprises has
outpaced the growth in proxy server capacity, forcing many network
administrators to choose between accommodating growth and maintaining control.
Customer Case Study: Xerox. Xerox, a global leader in the document
processing business, was experiencing significant growth in the amount of data
traffic over its network, and wanted to enhance its ability to deliver
critical web-based data to its employees in a timely manner. Increasing
intranet and Internet usage by Xerox employees worldwide was resulting in
congestion in its network and slower response times for its employees. This
problem was compounded by the fact that Xerox was transporting several
terabytes of information every day. Recognizing that the moving and sharing of
data was critical in enhancing employee productivity, both at corporate
headquarters and among remote offices, Xerox needed a reliable solution that
would scale with its employees' growing usage and would enable it to better
manage traffic over its network. Xerox chose our Internet caching appliances
to accomplish these objectives. By placing our caching appliances between
their internal network and the Internet, they were able to handle many of the
requests that otherwise would have been routed to its proxy servers. According
to Xerox, it has experienced immediate and significant productivity gains as
well as significant improvements in network efficiency and response time.
Broadband
Broadband ISPs offer high-speed Internet access, enabling the delivery of a
wide range of new content and the ability to make the Internet a truly
interactive medium. However, while these solutions offer faster access speeds
from the user to their ISP, they do not shorten the physical distance between
user and web content or reduce network traffic congestion on the Internet
itself. Therefore, faster access speeds do not necessarily result in
significantly faster response times when accessing web content that originated
across the Internet. Customer expectation of high-speed Internet access
remains largely unfulfilled, posing a challenge for broadband ISPs competing
to attract and retain customers.
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Customer Case Study: Road Runner. Road Runner, a leading provider of high-
speed Internet service delivered over cable infrastructure, was looking for
product solutions to enhance network performance. Because the broadband market
is viewed as new and highly competitive, it was critical for Road Runner to
continue to deliver high-quality service in order to attract new customers and
retain existing customers. In addition, Road Runner wanted to ensure a high
level of performance for the web content that Road Runner itself hosts. Road
Runner also required a network infrastructure product that was reliable and
would enable them to scale with their growing customer base. At the same time,
Road Runner sought a product solution that was easy to configure and deploy,
and that was secure. As a result, Road Runner chose our Internet caching
appliances. According to Road Runner, the speed of our appliances has helped
Road Runner attract world-class content providers and because Road Runner has
been able to redirect much of its traffic through our appliances, response
time for its customers has improved significantly.
Technology
CacheFlow's Internet caching appliances are high-performance, self-tuning
systems that are easy to install and manage and are produced in a variety of
storage configurations. At the core of our technology is our proprietary
special-purpose operating system, CacheOS, which we created specifically to be
the foundation for a family of high-performance Internet caching appliances.
CacheOS is designed to enable our wide range of products, from small shared
caches to very large caches, to manage and accelerate the delivery of Internet
content. Our appliances' high performance, ease of installation and
management, security, and ability to deliver up-to-date or fresh content are
made possible by proprietary technologies.
Efficient, Purpose-Built Operating System. CacheOS is designed to be faster
and more reliable than a general-purpose operating system. CacheOS operates at
higher speeds because it does not need to provide the general-purpose services
of a standard operating system. CacheOS efficiently supports large numbers of
users, enables fast recovery of lost data and minimizes redundant data
storage. CacheOS is designed to be less vulnerable to security attacks than
caches based on more commonly understood, general-purpose operating systems
such as Windows NT, UNIX or NetWare. CacheOS can be remotely managed and
monitored using a Java-enabled Internet browser. In addition, geographically
distributed caches can be centrally administered using custom-designed
scripts. CacheOS can be configured to automatically send e-mail alerts and
important operational statistics. New releases of CacheOS software can be
installed remotely over the network, with only a minimal interruption of
service. Additionally, CacheOS is designed to provide high availability. In
the event of a system failure, CacheOS detects the failure and is generally
able to restart in less than 20 seconds.
Web Object Storage System. CacheOS uses a high-performance system designed
specifically for storing and retrieving web objects on disk. The method of
storing objects on disk is critical for achieving high performance with a
large number of users. It determines how quickly a cached object can be
accessed when a client requests it, how rapidly new objects can be acquired
from the origin web server and the rate at which client requests can be
serviced. A small number of objects, such as log files, configuration settings
and CacheOS are stored on each disk. They are stored on each disk on the
system to provide a high degree of fault tolerance and redundancy. All other
stored objects are stored in such a way that they can be removed to create
space for new, incoming objects. The object cache is not a file system, and
uses no directories. Objects are located on disk using an efficient algorithm
that ensures that any object can be retrieved in a single disk read. This is
designed to provide rapid delivery of objects from disks, which improves
response time.
Object Pipelining. CacheOS uses a technology known as object pipelining to
speed the delivery of web content, even when it is not stored in the cache.
This technology improves web page response time and reduces page load times.
Without object pipelining, web browsers request embedded objects serially, a
few at a time. Pipelining reduces web page download times by retrieving all
objects from the origin server simultaneously and in parallel.
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<PAGE>
Adaptive Probabilistic Refresh. CacheOS performs refresh checks without
increasing response time for client requests. The delivery of web content is
not delayed by a "freshness" check for any content changes at the origin
server prior to content delivery. CacheOS uses adaptive object refresh
algorithms, which increase the likelihood that objects being served from the
cache are up-to-date, or fresh. These algorithms adapt by observing how often
objects change and how popular each object is, in order to minimize the
traffic required to keep content up-to-date. Because the cache actively
maintains the freshness of its objects, end users receive up-to-date web
content with fast response times.
Sales and Marketing
We utilize a combination of our direct sales force, resellers, systems
integrators and original equipment manufacturers as appropriate for each of
our target markets. We support our distribution channels with systems
engineers and customer support personnel that provide technical service and
support to our customers. We have entered into agreements with resellers and
network equipment providers such as Lucent Technologies, Nissho Electronics
and Sumitronics. We intend to pursue relationships with additional resellers
and original equipment manufacturers to implement our distribution strategy
and to expand our customer base. We have been expanding our sales force
rapidly, and, as of August 31, 1999, we employed 69 persons in sales,
marketing and customer support.
Our marketing efforts focus on increasing the market awareness of our
products and technology and promoting the CacheFlow brand. Our strategy is to
create this awareness by distinguishing our products based on their high level
of performance. We have a number of marketing programs to support the sale and
distribution of our products and to inform existing and potential customers
within our target market segments about the capabilities and benefits of our
products. Our marketing efforts include participation in industry tradeshows,
preparation of competitive analyses, sales training, maintenance of our web
site, advertising and public relations.
Research and Development
Following our inception in March 1996, we developed the first version of
CacheOS, which was specifically designed as the operating platform for our
Internet caching appliances. Our research and development efforts are focused
on developing technological improvements to and new versions of our Internet
caching appliances. Our research and development team consists of engineers
with extensive backgrounds in operating systems, algorithms, computer science
and network engineering. We believe that the experience and capabilities of
our research and development professionals represents a competitive advantage
for CacheFlow. As of August 31, 1999, we employed 36 persons in research and
development.
We have worked closely with several of our customers in developing and
enhancing our products. Our current research and development efforts are
primarily focused on three strategic initiatives:
. developing Internet caching appliances to address price/performance
points for which we do not currently offer products;
. improving the performance of our Internet caching appliances, including
data throughput and response time; and
. adding new features and strengthening the existing features of our
Internet caching appliances to give them enhanced capabilities.
We expect that most of the enhancements to our existing and future products
will be developed internally. However, we currently license some technologies
and will continue to evaluate externally developed solutions for integration
into our products.
Manufacturing
We currently outsource the manufacturing of all of the subassemblies and
components of our Internet caching appliances, including printed circuit
boards, custom power supplies, chassis, cables and subassemblies,
39
<PAGE>
to third parties, and we perform final assembly and testing in-house. This
approach allows us to reduce investment in manufacturing capital and to take
advantage of the expertise of our vendors. Our internal manufacturing
operations consist primarily of prototype development, materials planning and
procurement, final assembly, testing and quality control. We plan to
subcontract final assembly to third parties in the future. Our standard parts
and components are generally available from more than one vendor. We typically
obtain these components through purchase orders and do not have contractual
relationships or guaranteed supply arrangements with these suppliers. If one
of these vendors ceased to provide us with necessary parts and components, we
would likely encounter delays in product production as we make the transition
to another vendor. As of August 31, 1999, we employed 7 persons in
manufacturing.
Competition
The market for Internet caching solutions is intensely competitive,
evolving and subject to rapid technological change. Our competitors vary in
size and in the scope and breadth of the products and services they offer. Our
competitors' solutions are generally based on a hardware appliance, publicly
available, free software or proprietary software. We primarily encounter
competition from Cisco Systems, Inktomi, Network Appliance, Novell and various
others using publicly available, free software. In addition, because there are
relatively low barriers to entry in the Internet market, we expect additional
competition from other established and emerging companies as the market for
Internet caching continues to develop and expand.
We believe that the principal competitive factors affecting our market are
product quality and performance, product features, ability to implement
solutions and customer service. We also believe that solutions specifically
designed for Internet caching have a competitive advantage over solutions that
are derived from products designed for other uses. Although we believe that
our products currently compete favorably with respect to these factors we may
not be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Intellectual Property and Other Proprietary Rights
We depend significantly on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology,
we rely primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, copyright and trademark laws and patents. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult.
In addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. Our means of
protecting our proprietary rights may not be adequate and our competitors may
independently develop similar technology, duplicate our products or design
around patents that may be issued to us or our other intellectual property.
We currently have four United States patent applications on file and
pending before the United States Patent and Trademark Office. We also
currently have four PCT International Applications on file to reserve rights
in foreign jurisdictions under appropriate international treaties.
We cannot assure you that any U.S. or international patent will be issued
from these applications. Even if patents are issued, we cannot assure you that
we will be able to detect any infringement or, if infringement is detected,
that issued patents will be enforceable or that any damages awarded to us will
be sufficient to adequately compensate us.
There can be no assurance or guarantee that any products, services or
technologies that we are presently developing, or will develop in the future,
will result in intellectual property that is protectable under law, whether in
the United States or a foreign jurisdiction, that this intellectual property
will produce competitive advantage for us or that the intellectual property of
competitors will not restrict our freedom to operate, or put us at a
competitive disadvantage.
40
<PAGE>
We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in
CacheOS to perform key functions. For example, we license subscription
filtering technology from Secure Computing. If we are unable to continue to
license any of this software on commercially reasonable terms, we will face
delays in releases of our software or will be required to drop this
functionality from our software until equivalent technology can be identified,
licensed or developed, and integrated into our current product. Any of these
delays could seriously harm our business.
There has been a substantial amount of litigation in the technology
industry regarding intellectual property rights. It is possible that in the
future third parties may claim that we or our current or potential future
products infringe their intellectual property. We expect that companies in the
Internet and networking industries will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all, which
could seriously harm our business.
CacheFlow is a registered trademark in the United States. We also have
filed applications to register the following trademarks in the United States:
"CacheOS," "Content Aware Network Aware," "Content Aware," "Network Aware,"
"Accelerating the Intranet," "Accelerating the Web" and "Internet
Accelerator." The above mentioned trademark applications are subject to review
by the United States Patent and Trademark Office, may be opposed by private
parties and may not issue.
Litigation
On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., Brian NeSmith, our President and Chief
Executive Officer and a director, and Alan Robin, our Senior Vice President of
Sales, as defendants. Messrs. NeSmith and Robin were officers and employees of
Ipsilon Networks, Inc., which was acquired by Nokia in December 1997.
Following the acquisition, Messrs. NeSmith and Robin became employees of
Nokia. In essence, Nokia claims that we and Messrs. NeSmith and Robin acted
improperly in hiring Nokia's employees. Nokia also claims that Mr. NeSmith has
violated a non-competition provision contained in his employment agreement
with Nokia. Nokia is seeking compensatory and punitive damages and orders
prohibiting the defendants from disclosing or using Nokia's trade secrets or
confidential information and acting in a manner that violates Messrs.
NeSmith's and Robin's contractual and fiduciary duties to Nokia. This
litigation was only recently filed and we are presently evaluating these
claims. We and the other defendants have filed an answer to this complaint
denying the allegations and believe that there are meritorious defenses to the
asserted claims and intend to defend the litigation vigorously. However, the
outcome of litigation is inherently unpredictable and the results of the
litigation may not be favorable to us or the other defendants and could
include monetary damages and a court order restricting our ability to hire
Nokia's employees. Regardless of the ultimate outcome, the litigation could
result in substantial expense to us and significant diversion of effort by our
managerial and other personnel.
Employees
As of August 31, 1999, we had a total of 126 employees, including 36 in
research and development, 69 in sales, marketing and customer support, 7 in
manufacturing and 14 in general and administrative. Of these employees, 111
were located in North America with 15 located internationally. None of our
employees is represented by collective bargaining agreements, nor have we
experienced any work stoppages. We consider our relations with our employees
to be good.
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Our future operating results depend significantly upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. Competition for these personnel is
intense, and we may not be able to retain them in the future. Our future
success also depends upon our continuing ability to attract and retain highly
qualified individuals. We may experience difficulties managing our expected
growth and performance if we are unable to attract and retain qualified
personnel.
Facilities
We lease approximately 39,000 square feet for our headquarters facility in
Sunnyvale, California, under a lease that expires on August 31, 2005. We also
lease space for research and development in Redmond, Washington and Waterloo,
Ontario, Canada. In addition, we lease space for sales and support in nine
metropolitan areas in North America as well as Dusseldorf, London, Stockholm,
Sydney, Taipei and Tokyo.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of November 1, 1999,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Brian M. NeSmith........ 37 President and Chief Executive Officer, Director
Michael A. Malcolm...... 54 Chairman of the Board, Director
Stuart G. Aaron......... 30 Vice President, Marketing and Product Management
Douglas A. Crow......... 38 Vice President, Product Development
Nai-Ting Hsu............ 51 Senior Vice President, Research and Development
Michael J. Johnson...... 47 Vice President, Chief Financial Officer and Secretary
Ray G. Myers............ 64 Vice President, Manufacturing
Terry L. Printy......... 44 Vice President, Customer Support
Alan L. Robin........... 43 Senior Vice President, Sales
Ian Telford............. 52 President of CacheFlow Canada
Rangaswamy Vasudevan.... 49 Chief Technology Officer
William S. Warner....... 40 Vice President, Business Development
Marc Andreessen......... 28 Director
David W. Hanna(2)....... 60 Director
Stuart G.
Phillips(1)(2)......... 41 Director
Andrew S. Rachleff(1)... 40 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Brian NeSmith has served as President and Chief Executive Officer and a
director of CacheFlow since March 1999. From December 1997 to March 1999, Mr.
NeSmith served as Vice President of Nokia IP, Inc., a security router company,
which acquired Ipsilon Networks, Inc., an IP switching company, where Mr.
NeSmith served as Chief Executive Officer from May 1995 to December 1997. From
October 1987 to April 1995, Mr. NeSmith held several positions at Newbridge
Networks Corporation, a networking equipment manufacturer, including vice
president and general manager of the VIVID group. Mr. NeSmith holds a B.S. in
electrical engineering from the Massachusetts Institute of Technology.
Michael Malcolm has served as Chairman of the board of directors of
CacheFlow since March 1996. From June 1997 to December 1998, Mr. Malcolm also
served as President and Chief Executive Officer of CacheFlow. From April 1992
to October 1994, Mr. Malcolm served as President and Chief Executive Officer
of Network Appliance Inc., a network filer company. Mr. Malcolm holds a B.S.
in mechanical engineering from the University of Denver and M.A. and Ph.D.
degrees in computer science from Stanford University.
Stuart Aaron has served as Vice President of Marketing and Product
Management of CacheFlow since April 1999. From July 1993 to April 1999, Mr.
Aaron held several marketing and product management positions at Newbridge
Networks Corporation, a networking equipment manufacturer. Prior to that time,
Mr. Aaron worked as an industry analyst with the Network Strategies Practice
of Ernst & Young LLP where he specialized in Internetworking and Network
Management. Mr. Aaron holds a B.S. in electrical engineering from Cornell
University.
Douglas Crow has served as Vice President of Product Development of
CacheFlow since May 1996. From June 1992 to May 1996, Mr. Crow served as
Development Manager of Wall Data Inc., a host connectivity software company.
Mr. Crow holds a B.S. in computer science from the University of Washington.
Nai-Ting Hsu has served as Senior Vice President of Research and
Development at CacheFlow since October 1999. From May 1997 to October 1999,
Dr. Hsu served as Vice President and General Manager of the Consumer Network
Division, Senior Vice President of Asia Pacific, and Senior Vice President and
General Manager of the Consumer Products Division of C-Cube Microsystems Inc.,
a digital video compression company, which acquired DiviCom Inc., a digital
television company, where Dr. Hsu served as Vice President
43
<PAGE>
of Engineering from April 1995 until its acquisition by C-Cube. From May 1991
until April 1995, Dr. Hsu served as Vice President of Engineering at MasPar
Inc., a massive parallel computing company. Dr. Hsu holds a B.S. in Electrical
Engineering from National Chiao Tung University, Taiwan, and M.S. and Ph.D.
degrees in Computer Sciences from the University of Wisconsin, Madison.
Michael Johnson has served as Vice President and Chief Financial Officer of
CacheFlow since July 1999. From May 1998 to July 1999, Mr. Johnson served as
Vice President of Finance and Chief Financial Officer of AdiCom Wireless,
Inc., a developer of CDMA based wireless access systems. From May 1994 to
April 1998, Mr. Johnson served as Controller and Chief Accounting Officer of
Ascend Communications Inc., a provider of wide area networking systems. Mr.
Johnson holds a B.S. in business administration from California State
University Hayward and is also a Certified Public Accountant.
Ray Myers has served as Vice President of Manufacturing of CacheFlow since
October 1997. From May 1993 to April 1996, Mr. Myers served as Vice President
of Manufacturing of Network Appliance Inc., a network filer company. Mr. Myers
holds a B.S. in physics from Colorado College and a B.S. in business finance
from San Jose State University.
Terry Printy has served as Vice President of Customer Support of CacheFlow
since June 1999. From January 1999 to May 1999, Mr. Printy served as Vice
President of Worldwide Services of Nokia IP, Inc., a security router company.
From October 1990 to April 1998, Mr. Printy served as Vice President and
General Manager of Worldwide Service at Network General Corporation, a
protocol analysis company.
Alan Robin has served as Senior Vice President of Sales at CacheFlow since
July 1999. From January 1997 to July 1999, Mr. Robin served as Vice President
of Sales of Ipsilon Networks, Inc., an IP switching company, and then of Nokia
IP, Inc., a security router company, which acquired Ipsilon Networks, Inc. in
December 1997. From January 1991 to January 1997, Mr. Robin held a number of
sales and sales management positions at Wellfleet/Bay Networks, a networking
company. Mr. Robin holds an A.B. in chemistry from Kenyon College and a M.B.A
in finance from Fairleigh Dickenson University.
Ian Telford has served as President of CacheFlow Canada since May 1, 1999.
From March 1995 to April 1999, Mr. Telford served as Chief Executive Officer
of Scaleable Software Solutions, Inc., a company he co-founded that
specializes in operating system and file development. From December 1983 to
January 1991, Mr. Telford held a variety of positions at Waterloo Microsystems
Inc., a software company specializing in the production of PC Network
Operating Systems, and then at Hayes Microcomputer Products (Canada) Limited,
which acquired the assets of Waterloo Microsystems in January of 1991. Mr.
Telford holds a B.S. in industrial chemistry from The City University, London,
England.
Rangaswamy Vasudevan has served as Chief Technology Officer of CacheFlow
since August 1997. From April 1989 to July 1997, Mr. Vasudevan served as a
Senior Engineer and a Sun Distinguished Engineer at Sun Microsystems, Inc., a
manufacturer of network computing equipment. Mr. Vasudevan holds a Bachelor of
Technology in electrical engineering from the Indian Institute of Technology
and a Ph.D. in computer science from the University of Waterloo.
William Warner has served as Vice President of Business Development of
CacheFlow since August 1999. He also served as Vice President of Sales at
CacheFlow from September 1997 to August 1999. From March 1987 to April 1997,
Mr. Warner served as Director of the Telecommunications Industry Group of
Silicon Graphics, Inc., a manufacturer of computer equipment. Mr. Warner holds
a B.S. in political science and business from the University of Kansas.
Marc Andreessen has served as a director of CacheFlow since October 1999.
Mr. Andreessen has served as the Chairman of Loudcloud, Inc., a provider of
Internet services to electronic commerce companies, since October 1999. From
March 1999 to September 1999, Mr. Andreessen served as Chief Technology
Officer of America Online, Inc., an Internet technology and interactive
services company. Mr. Andreessen co-founded
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Netscape Communications Corp., a provider of software and Website resources,
in April 1994. From September 1994 to March 1999, when Netscape Communications
Corp. was acquired by America Online, Inc., Mr. Andreessen served as a
director and Executive Vice President of Products of Netscape Communications
Corp. Mr. Andreessen holds a B.S. in computer science from the University of
Illinois.
David Hanna has served as a director of CacheFlow since October 1996. From
December 1998 to March 1999, Mr. Hanna also served as our President and Chief
Executive Officer. Since March 1998, Mr. Hanna has served as President and
Chief Executive Officer of Sage Software, Inc., a financial software company.
Mr. Hanna served as President and Chief Executive Officer of State of The Art,
Inc., a financial software developer, from November 1993 until March 1998. Mr.
Hanna currently serves as President of The Hanna Group, which provides
operational and strategic consulting to both small, high-tech companies and to
larger organizations requiring growth restoration and restructuring. In
addition, Mr. Hanna serves as Chairman of Hanna Capital Management Inc., which
provides financial management services to high-net-worth individuals. He is
Chief Executive Officer of Hanna Ventures, which invests in networking,
communications, and internet/intranet companies. Mr. Hanna also serves on the
boards of directors of several privately held companies. Mr. Hanna holds a
B.S. in business administration from the University of Arizona.
Stuart Phillips has served as a director of CacheFlow since January 1997.
Since June 1997, Mr. Phillips has been a General Partner at U.S. Venture
Partners, a venture capital firm. From October 1993 to June 1997, Mr. Phillips
served as Vice President of Central Engineering at Cisco Systems Inc., an
internetworking company. Mr. Phillips also serves on the boards of directors
of several privately held companies. He holds a B.S. in electronics from the
University of Wales at Cardiff, U.K.
Andrew Rachleff has served as a director of CacheFlow since October 1997.
In May 1995, Mr. Rachleff co-founded Benchmark Capital, a venture capital
firm, and has served as a general partner since that time. Prior to co-
founding Benchmark Capital, Mr. Rachleff spent ten years as a general partner
with Merrill, Pickard, Anderson & Eyre, a venture capital firm. Mr. Rachleff
also serves on the boards of directors of NorthPoint Communications Group,
Inc., a competitive local exchange carrier, and several privately held
companies. Mr Rachleff holds a B.S. in economics from the University of
Pennsylvania and an M.B.A. from Stanford University.
Board of Directors
CacheFlow currently has authorized six directors. Each director holds
office until the next annual meeting of stockholders or until his or her
successor is duly elected and qualified. The officers serve at the discretion
of the board. There are no family relationships among the directors and
officers of CacheFlow.
Board Committees
The audit committee consists of Stuart Phillips and Andrew Rachleff. The
audit committee makes recommendations to the board of directors regarding the
selection of independent accountants, reviews the results and scope of audit
and other services provided by our independent accountants and reviews and
evaluates the our audit and control functions.
The compensation committee consists of David Hanna and Stuart Phillips. The
compensation committee makes recommendations regarding our stock plans and
makes decisions concerning salaries and incentive compensation for our
employees and consultants.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee of our board of directors
are Messrs. Hanna and Phillips and they were appointed on September 24, 1999.
Mr. Phillips was not at any time an officer or employee of ours; Mr. Hanna
served as our President and Chief Executive Officer from December 11, 1998 to
March 2,
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1999. No member of the Compensation Committee of our board of directors serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or Compensation Committee. During the fiscal year ended April 30,
1999 and through September 24, 1999, our board of directors served many of the
functions traditionally served by a compensation committee, including approval
of officer compensation and option grants. During that period, Mr. Hanna and
Mr. Malcolm served on our board of directors. Mr. Malcolm served as our
President and Chief Executive Officer from June 1997 to December 1998.
Director Compensation
Directors currently do not receive any cash compensation from CacheFlow for
their services as members of the board of directors, although members are
reimbursed for expenses in connection with attendance at board of directors
and committee meetings. Directors are eligible to participate in CacheFlow's
stock plans, and beginning in 1999, employee directors will also be able to
participate in CacheFlow's 1999 Stock Incentive Plan and non-employee
directors will receive periodic option grants under CacheFlow's 1999 Director
Option Plan. See "Management--1999 Stock Incentive Plan" and "--1999 Director
Option Plan."
Options were granted during the fiscal year to Messrs. Hanna and Malcolm
and those options are disclosed in the table below entitled Option Grants in
Last Fiscal Year. Mr. Andreessen received an option to purchase 25,000 shares
of common stock at an exercise price of $4.00 per share in connection with his
service as a member of our board of directors. The option is immediately
exercisable. The shares purchasable upon exercise of these options are subject
to repurchase by us at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in these shares. The
repurchase right lapses as to 25% of the option shares on the one year
anniversary of the grant date, and lapses in a series of 36 equal monthly
installments after the one year anniversary date of the grant date.
Executive Compensation
The following table sets forth information with respect to compensation for
the fiscal year ended April 30, 1999 paid by us for services by each of the
individuals who served as our Chief Executive Officer during the fiscal year,
Mr. Hanna, who served as our Chief Executive Officer from December 11, 1998 to
March 2, 1999, and each of the four other executive officers whose total
salary and bonuses for the fiscal year exceeded $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
---------------- Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Brian M. NeSmith, President and Chief Executive
Officer........................................ $ 8,978 $ -- 2,000,000
Michael A. Malcolm, Chairman.................... 197,854 -- 1,000,000
Douglas A. Crow, Vice President, Product
Development.................................... 133,626 -- --
David Hanna, Director (1)....................... 21,708 -- 250,000
Kelly Herrell, Former Vice President,
Marketing...................................... 148,765 -- --
Rangaswamy Vasudevan, Chief Technical Officer... 149,907 -- --
William S. Warner, Vice President, Business
Development.................................... 149,889 40,000 --
</TABLE>
- --------
(1) Consulting fees were paid to Hanna Group for services rendered by Mr.
Hanna.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options during the
fiscal year ended April 30, 1999 to each of the individuals named in the
Summary Compensation Table. We have not granted stock appreciation
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<PAGE>
rights. Each of the options listed in the table is immediately exercisable.
The shares purchasable upon exercise of these options are subject to
repurchase by CacheFlow at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in these shares. For Mr.
Malcolm, the repurchase right on half of his option shares lapses and he vests
as to these option shares in a series of 36 equal monthly installments from
October 14, 1998. The repurchase right on the second half of his options
lapses and he vests as to these option shares in a series of six equal monthly
installments from October 14, 1998. For Mr. NeSmith, the repurchase right on
his option lapses and he vests as to 25% of the option shares upon completion
of one year of service from the date of grant and the balance in a series of
equal monthly installments over the next 36 months of service thereafter. In
addition, he vests in an additional 25% of the option shares upon a merger and
other corporate transactions.
We have calculated the percentage of total options granted to employees
based on an aggregate of 5,371,400 options granted to our employees during the
12 months ended April 30, 1999. The exercise price for each option was equal
to the fair market value of our common stock as determined by our board of
directors on the date of grant. The exercise price may be paid in cash, in
shares of our common stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with the exercise.
We have calculated the potential realizable value based on the term of the
option at the time of grant and we assumed stock price appreciation of 5% and
10% over the assumed initial public offering price of $12.00 per share for the
full ten-year term of the options pursuant to the rules of the Securities and
Exchange Commission; this does not represent our prediction of our stock price
performance.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Exercise Stock Price Appreciation
Underlying Granted Price for Option Term
Options to Employees in Per Expiration -------------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- --------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Brian M. NeSmith........ 2,000,000 37.0% $.50 3/1/09 $ 15,093,471 $ 38,249,819
Michael A. Malcolm...... 1,000,000 18.4 .50 10/13/08 7,546,736 19,124,910
Douglas A. Crow......... -- -- -- -- -- --
David Hanna............. 250,000 4.6 .50 3/1/09 1,886,684 4,781,227
Kelly Herrell........... -- -- -- -- -- --
Rangaswamy Vasudevan.... -- -- -- -- -- --
William S. Warner....... -- -- -- -- -- --
</TABLE>
In addition to the options listed above, on July 26, 1999, Mr. Johnson, our
Vice President and Chief Financial Officer, received an option to purchase
250,000 shares and an option to purchase 65,000 shares at an exercise price of
$2.00 per share. On July 26, 1999, Mr. Robin, our Senior Vice President of
Sales, received an option to purchase 250,000 shares and an option to purchase
222,000 shares at an exercise price of $2.00 per share. On June 21, 1999, Mr.
Printy, our Vice President of Customer Support, received an option to purchase
75,000 shares at an exercise price of $2.00 per share. On August 27, 1999, we
granted options to Mr. Crow for 240,000 shares, Mr. Telford for 123,000
shares, and Mr. Printy for 37,500 shares at an exercise price of $4.00 per
share. On September 27, 1999, we granted an option to Mr. NeSmith for 200,000
shares at an exercise price of $5.50 per share. On October 13, 1999, we
granted options to Mr. Malcolm for 100,000 shares and Dr. Hsu for 420,000
shares at an exercise price of $6.00 per share. All of these options are
immediately exercisable and the shares purchasable upon exercise of these
options are subject to repurchase by us at the original exercise price paid
per share upon the optionee's cessation of service prior to vesting in these
shares. The repurchase right lapses as to 25% of the option shares upon
completion of one year of service from the date of grant and the balance in a
series of equal monthly installments over the next 36 months of service
thereafter, except that the option granted to Mr. Crow and some of the options
granted to Mr. Telford begin to vest in 2000 or 2001.
47
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for each of the officers named in the
Summary Compensation Table the number of options exercised during the fiscal
year ended April 30, 1999 and the number and value of securities underlying
unexercised options that are held by the officers named in the Summary
Compensation Table as of April 30, 1999. With respect to options exercised,
value realized refers to the fair market value of the purchased shares on the
option exercise date, less the exercise price paid for these shares. Since our
options are immediately exercisable at grant, any shares purchased under those
options will be subject to repurchase by us, at the original exercise price
paid per share, upon the optionee's cessation of service with CacheFlow prior
to vesting in these shares. Accordingly, we have chosen to report the number
of the underlying shares that are vested and the number unvested as of April
30, 1999. The heading "Vested" refers to shares no longer subject to
repurchase; the heading "Unvested" refers to shares subject to repurchase as
of April 30, 1999. The amounts under "Value of Unexercised in-the-Money
Options" were calculated by determining the difference between the exercise
price and the assumed initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities Underlying in-the-Money
Unexercised Options Options at
Shares at April 30, 1999 April 30, 1999
Acquired on Value ------------------------ -----------------
Name Exercise Realized Vested Unvested Vested Unvested
- ---- ----------- -------- ------------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Brian M. NeSmith........ 2,000,000 $ -- -- -- $ -- $ --
Michael A. Malcolm...... -- -- -- -- -- --
Douglas A. Crow......... -- -- 20,000 -- 235,000 --
David Hanna............. 250,000 -- -- -- -- --
Kelly Herrell........... 490,000 85,750 -- -- -- --
Rangaswamy Vasudevan.... 470,000 82,250 -- -- -- --
William S. Warner....... 490,000 85,750 -- -- -- --
</TABLE>
Change of Control Arrangements
The compensation committee of the board of directors, as plan administrator
of the 1999 Stock Incentive Plan, has the authority to provide for accelerated
vesting of the shares of common stock subject to outstanding options held by
the officers named in the Summary Compensation Table and any other person in
connection with certain changes in control of CacheFlow. In connection with
our adoption of the 1999 Stock Incentive Plan, we have provided that upon a
change in control of CacheFlow, each outstanding option and all shares of
restricted stock will generally become fully vested unless the surviving
corporation assumes the option or award or replaces it with a comparable
award. In addition, an option or award will become fully exercisable and fully
vested if the holder's employment or service is involuntarily terminated
within 18 months following the change in control.
Except for Mr. NeSmith, Mr. Johnson, and Mr. Robin, none of the officers
named in the Summary Compensation Table has an employment agreement with
CacheFlow, and their employment may be terminated at any time. CacheFlow has
entered into an agreement with Mr. NeSmith, dated February 24, 1999, which
provides that his salary shall be $175,000 per year. The agreement provides
for the grant of an option to Mr. NeSmith to purchase shares of our common
stock at the fair market value on the grant date. The agreement also provides
that we will extend a loan to Mr. NeSmith of up to $800,000. The agreement
also provides for acceleration of vesting of option shares as if Mr. NeSmith
remained employed for one additional year in the event of a change in control
of CacheFlow.
We have entered into an agreement with Mr. Johnson, our Vice President and
Chief Financial Officer, dated June 4, 1999, which provides that his salary
shall be $170,000 per year. The agreement provides for the grant of an option
to Mr. Johnson to purchase shares of common stock at the fair market value on
the grant date. The agreement also provides for acceleration of vesting of
option shares as if Mr. Johnson remained employed for one additional year in
the event that he is not offered the same or similar position following a
change in control of CacheFlow.
48
<PAGE>
CacheFlow has entered into an agreement with Mr. Robin, our Senior Vice
President of Sales, dated July 12, 1999, which provides for a salary of
$150,000 per year and a target commission of up to $125,000 per year. Under
the agreement, he is also eligible for cash bonuses of $200,000 each payable
60 days after his start date and on August 1, 2000. The agreement provides for
the grant of an option to Mr. Robin to purchase shares of our common stock at
the fair market value on the grant date. The agreement also provides for
payment of severance pay in the amount of six months base salary plus bonus in
the event that Mr. Robin's employment is terminated without cause. The
agreement also provides for acceleration of vesting of option shares as if Mr.
Robin remained employed for one additional year in the event that his
employment is terminated without cause; after three years of employment,
vesting acceleration declines by one month for each month of service and does
not apply after four years of employment. The agreement also provides for
acceleration of vesting of option shares as if Mr. Robin remained employed for
one additional year in the event that he is not offered the same or similar
position following a change in control of CacheFlow.
1999 Stock Incentive Plan
Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
on September 24, 1999 to be effective on the effective date of this offering.
We also intend to ask our stockholders to approve this plan. We have reserved
5,000,000 shares of our common stock for issuance under the 1999 Stock
Incentive Plan. This includes any shares not yet granted under our 1996 Stock
Option Plan on the date of this offering which will be available only under
the 1999 Stock Incentive Plan after this offering. On January 1 of each year,
starting with the year 2000, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock
that are outstanding at that time or, if less, by 2,000,000 shares. In
general, if options or shares awarded under the 1999 Stock Incentive Plan are
forfeited, then those options or shares will again become available for awards
under the 1999 Stock Incentive Plan. We have not yet granted any options under
the 1999 Stock Incentive Plan.
No further option grants will be made under the 1996 Stock Option Plan
after this offering. The options outstanding after this offering under the
1996 Stock Option Plan will continue to be governed by their existing terms,
unless the Board elects to extend one or more features of the 1999 Stock
Incentive Plan to those options or to other outstanding shares. The Board has
elected to extend the change in control acceleration feature of the 1999 Stock
Incentive Plan to all outstanding options and unvested shares. Previously,
options granted under the 1996 Stock Option Plan provided that vesting of the
shares would accelerate upon an acquisition only if not assumed by the
acquiring entity.
Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation
of our 1999 Stock Incentive Plan. The committee has the discretion to
determine who will receive an award, what type of award it will be, how many
shares will be covered by the award, what the vesting requirements will be, if
any, and what the other features and conditions of each award will be. The
compensation committee may also reprice outstanding options and modify
outstanding awards in other ways.
Eligibility. The following groups of individuals are eligible to
participate in the 1999 Stock Incentive Plan:
. employees;
. members of our board of directors who are not employees; and
. consultants.
Types of Award. The 1999 Stock Incentive Plan provides for the following
types of award:
. incentive stock options to purchase shares of our common stock;
. nonstatutory stock options to purchase shares of our common stock;
. restricted shares of our common stock;
. stock appreciation rights and stock units.
49
<PAGE>
Options and Stock Appreciation Rights. An optionee who exercises an
incentive stock option may qualify for favorable tax treatment under Section
422 of the Internal Revenue Code of 1986. On the other hand, nonstatutory
stock options do not qualify for this favorable tax treatment. The exercise
price for incentive stock options granted under the 1999 Stock Incentive Plan
may not be less than 100% of the fair market value of our common stock on the
option grant date. In the case of nonstatutory stock options, the minimum
exercise price is 85% of the fair market value of our common stock on the
option grant date. Optionees may pay the exercise price by using:
. cash;
. shares of common stock that the optionee already owns;
. a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
. an immediate sale of the option shares through a broker designated by
us; or
. a loan from a broker designated by us, secured by the option shares.
A participant who exercises a stock appreciation right shall receive the
increase in value of our common stock over the base price. The base price for
stock appreciation rights granted under the 1999 Stock Incentive Plan shall be
determined by the compensation committee. The settlement value of the stock
appreciation right may be paid in cash or shares of common stock.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options and stock
appreciation rights will vest over a four-year period following the date of
grant. Options and stock appreciation rights generally expire 10 years after
they are granted. The Compensation Committee may provide for a longer term
except that options and stock appreciation rights generally expire earlier if
the participant's service terminates earlier. The 1999 Stock Incentive Plan
provides that no participant may receive options or stock appreciation rights
covering more than 1,500,000 shares in the same year, except that a newly
hired employee may receive options or stock appreciation rights covering up to
2,000,000 shares in the first year of employment.
Restricted Shares. Restricted shares may be awarded under the 1999 Stock
Incentive Plan in return for:
. cash;
. a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
. services already provided to us; and
. in the case of treasury shares only, services to be provided to us in
the future.
Restricted shares vest at the time or times determined by the compensation
committee. Stock units may be awarded under the 1999 Stock Incentive Plan. No
cash consideration shall be required of the award recipients. Stock units may
be granted in consideration of a reduction in the recipient's other
compensation or in consideration of services rendered. Each award of stock
units may or may not be subject to vesting and vesting, if any, shall occur
upon satisfaction of the conditions specified by the compensation committee.
Settlement of vested stock units may be made in the form of cash, shares of
common stock or a combination of both.
Change in Control. If a change in control of CacheFlow occurs, an option or
restricted stock award under the 1999 Stock Incentive Plan will generally
become fully vested. However, if the surviving corporation assumes the option
or award or replaces it with a comparable award, then vesting will not
accelerate. An option or award will become fully exercisable and fully vested
if the holder's employment or service is involuntarily terminated within 18
months following the change in control. A change in control includes:
. a merger of CacheFlow after which our own stockholders own 50% or less
of the surviving corporation or its parent company;
. a sale of all or substantially all of our assets;
50
<PAGE>
. a proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
. an acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to CacheFlow, such as a holding
company owned by our stockholders.
Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires
it. The 1999 Stock Incentive Plan will continue in effect indefinitely, unless
the board decides to terminate the plan earlier.
Employee Stock Purchase Plan
Share Reserve and Administration. Our board of directors adopted our
Employee Stock Purchase Plan on September 24, 1999, to be effective on the
effective date of this offering. We also intend to ask our stockholders to
approve this plan. Our Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code. We have reserved 2,500,000
shares of our common stock for issuance under the plan. In addition, on
January 31 of each year, starting with the year 2000, the number of shares in
the reserve will automatically increase by 500,000 shares or a lesser number
if determined by our board of directors. The plan will be administered by the
compensation committee of our board of directors.
Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months
per year. Eligible employees may begin participating in the Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts
24 months. Overlapping offering periods start on August 1 and February 1 of
each year. However, the first offering period will start on the effective date
of this offering and end on January 31, 2002.
Amount of Contributions. Our Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on July 31 and January
31 of each year. Each participant may purchase up to 2,000 shares on any
purchase date. But the value of the shares purchased in any calendar year,
measured as of the beginning of the applicable offering period, may not exceed
$25,000.
Purchase Price. The price of each share of common stock purchased under our
Employee Stock Purchase Plan will be 85% of the lower of:
. the fair market value per share of common stock on the date immediately
before the first day of the applicable offering period, or
. the fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
. the price per share to the public in this offering, or
. the fair market value per share of common stock on the purchase date.
Other Provisions. Employees may end their participation in the Employee
Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with CacheFlow. If a change in control of CacheFlow
occurs, our Employee Stock Purchase Plan will end and shares will be purchased
with the payroll deductions accumulated to date by participating employees,
unless the plan is assumed by the surviving corporation or its parent. Our
board of directors may amend or terminate the Employee Stock Purchase Plan at
any time. Our Chief Executive Officer may also amend some provisions of the
plan. If our board increases the number of shares of common stock reserved for
issuance under the plan, except for the automatic increases described above,
it must seek the approval of our stockholders.
51
<PAGE>
1999 Director Option Plan
Share Reserve. Our board of directors adopted our 1999 Director Option Plan
on September 24, 1999. The 1999 Director Option Plan became effective on the
date of its adoption. We also intend to ask our stockholders to approve this
plan. We have reserved 500,000 shares of our common stock for issuance under
the plan. In addition, on January 31 of each year, starting with the year
2000, the number of shares in the reserve will automatically increase by
100,000 shares or a lesser number if determined by our board of directors. In
general, if options granted under the 1999 Director Option Plan are forfeited,
then those options will again become available for grants under the plan. The
Director Option Plan will be administered by the compensation committee of our
board of directors, although all grants under the plan are automatic and non-
discretionary.
Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Director Option Plan. Each
non-employee director who first joins our board after the effective date of
the 1999 Director Option Plan will receive an initial option for 25,000
shares. For new directors, that grant will occur when the director takes
office. The initial options vest in four equal annual installments over the
four-year period following the date of grant.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a
director after that meeting will automatically be granted an annual option for
5,000 shares of our common stock. However, a new non-employee director who is
receiving the initial option will not receive the annual option in the same
calendar year. The annual options are fully vested on the first anniversary of
the date of grant.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the
option grant date. A director may pay the exercise price by using cash, shares
of common stock that the director already owns, or an immediate sale of the
option shares through a broker designated by us. The non-employee directors'
options have a 10-year term, except that they expire one year after a director
leaves the board, if earlier. If a change in control of CacheFlow occurs, a
non-employee director's option granted under the 1999 Director Option Plan
will become fully vested.
Amendments or Termination. Our board may amend or terminate the 1999
Director Option Plan at any time. If our board amends the plan, it does not
need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Director Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.
52
<PAGE>
CERTAIN TRANSACTIONS
Since our inception on March 13, 1996, we have sold preferred stock to the
following persons who are our principal stockholders, executive officers or
directors.
<TABLE>
<CAPTION>
Shares of Shares of Shares of Shares of
Series A Series B Series C Series D
Investor Preferred Stock Preferred Stock Preferred Stock Preferred Stock
- -------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Entities affiliated with
Benchmark Capital ..... 3,222,858 796,462 738,068 --
Entities affiliated with
U.S. Venture Partners.. -- 2,654,868 455,622 --
Entities affiliated with
Technology Crossover
Ventures............... -- -- 1,890,816 --
Michael A. Malcolm...... 777,144 221,240 801,116 --
Persons and entities
affiliated with David
W. Hanna............... 800,002 367,258 209,432 --
Ray G. Myers............ 75,374 -- 43,716 --
Joseph J. Pruskowski.... 58,572 -- -- --
Entities affiliated with
Marc Andreessen........ -- -- -- 280,953
</TABLE>
Shares held by all affiliated persons and entities have been aggregated.
Share numbers and purchase price information are reflected on an as if
converted into shares of common stock basis. See "Principal Stockholders" for
more detail on shares held by these purchasers.
Andrew S. Rachleff, one of our directors, is an affiliate of each of the
entities affiliated with Benchmark Capital, one of our principal stockholders.
Stuart G. Phillips, one of our directors, is an affiliate of each of the
entities affiliated with U.S. Venture Partners, one of our principal
stockholders. Technology Crossover Ventures is one of our principal
stockholders. Michael A. Malcolm is one of our directors, our chairman and one
of our principal stockholders. David W. Hanna is one of our directors and, in
the aggregate, he and the persons and entities affiliated with him are one of
our principal stockholders. Mr. Myers is one of our officers. Mr. Pruskowski
is one of our principal stockholders. Mr. Andreessen is one of our directors.
The shares of our preferred stock were sold to raise capital to finance our
operating activities. The shares of Series A Preferred Stock were issued and
sold in a series of private transactions between October 29, 1996, and
November 13, 1996, to a limited number of individuals and institutional
investors at a per share purchase price of $.875, resulting in aggregate
proceeds to us of $5.1 million. The shares of Series B Preferred Stock were
issued and sold in a series of private transactions between December 24, 1997
and February 18, 1998, to a limited number of individuals and institutional
investors at a per share purchase price of $2.26, resulting in aggregate
proceeds to us of $9.4 million. The shares of Series C Preferred Stock were
issued and sold in a private transaction on May 28, 1999, to a limited number
of individuals and institutional investors at a per share purchase price of
$4.575, resulting in aggregate proceeds to us of $20.0 million. The shares of
Series D Preferred Stock were issued and sold in a private transaction to an
entity affiliated with Marc Andreessen at a per share purchase price of
$11.00, resulting in aggregate proceeds to us of $3.1 million.
We loaned $999,900 to Brian M. NeSmith, our President and Chief Executive
Officer, on April 13, 1999, pursuant to a full-recourse promissory note that
is due April 12, 2004 and bears interest at the rate of 4.99% per annum. We
also loaned $800,000 to Mr. NeSmith on August 31, 1999 to purchase a primary
residence, pursuant to a non-recourse, interest free promissory note that is
due August 30, 2004. The $800,000 note is secured by Mr. NeSmith's primary
residence. The promissory notes are also secured by 2,000,000 shares of our
common stock owned by Mr. NeSmith.
In connection with loans extended to CacheFlow from April 1996 through June
1996 by various persons and entities including Messrs. Malcolm, Myers and
Pruskowski, CacheFlow issued a warrant to purchase 114,285 shares of Series A
Preferred Stock to Mr. Malcolm, a warrant to purchase 28,571 shares of Series
A Preferred Stock to Mr. Myers and a warrant to purchase 28,571 shares of
Series A Preferred Stock to Mr. Pruskowski. Each of these warrants has an
exercise price of $.875 per share.
53
<PAGE>
In connection with entering into a consulting agreement with CacheFlow on
October 13, 1999, Mr. Andreessen was granted an option to purchase 677,380
shares of common stock. The option has an exercise price of $4.00 per share.
In addition, we have granted options to some of our directors and executive
officers. See "Management--Option Grants in the Last Fiscal Year," "Principal
Stockholders" and "Director Compensation."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will continue to be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of July 31, 1999, and as adjusted to reflect the sale
of shares offered hereby held by:
. each person who we know to own beneficially more than five percent of
our common stock;
. each of the individuals named in the Summary Compensation Table;
. each of our directors; and
. all directors and executive officers as a group.
The number of shares of common stock outstanding after this offering
includes 5,000,000 shares of common stock being offered for sale in this
offering. The percentage of beneficial ownership for the following table is
based on 27,671,031 shares of common stock outstanding as of July 31, 1999,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock upon the completion of this offering and the cash
exercise of warrants to purchase 672,850 shares of preferred stock prior to
completion of the offering and the conversion of these shares of preferred
stock into common stock, and assuming no other exercises of stock options or
warrants after July 31, 1999 and no exercise of the underwriters' over-
allotment option. The number of shares of common stock outstanding after the
offering excludes shares of Series D Preferred Stock issued on November 1,
1999, which will convert into 280,953 shares of common stock upon the
completion of this offering. The number of shares beneficially owned and the
percent beneficially owned set forth in the table below assumes that existing
stockholders, officers and directors do not purchase any shares in the
offering. See "Underwriters."
We closed our Series D Preferred Stock financing on November 1, 1999 and
sold 280,953 shares of Series D Preferred Stock. The sole investor in the
Series D Preferred Stock financing was an entity affiliated with Marc
Andreessen. In addition, Mr. Andreessen joined us as a board member and
consultant on October 13, 1999 and received options to purchase 702,380 shares
of common stock. Nai-Ting Hsu joined us as our Senior Vice President of
Research and Development on October 12, 1999 and received options to purchase
420,000 shares of common stock. The principal stockholders table does not
reflect the Series D Preferred Stock financing or Mr. Andreessen's or Dr.
Hsu's options.
In accordance with the rules of the Securities and Exchange Commission,
beneficial ownership includes voting or investment power with respect to
securities and includes the shares issuable pursuant to stock options and
warrants that are exercisable within 60 days of July 31, 1999. Shares issuable
pursuant to stock options and warrants are deemed outstanding for computing
the percentage of the person holding the options and warrants but are not
outstanding for computing the percentage of any other person.
To our knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Owned Beneficially Owned
------------ ----------------------
Before After
Name and Address of Beneficial Owner Number Offering Offering
- ------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Michael A. Malcolm..................... 5,163,785 18.7% 15.8%
650 Almanor Avenue
Sunnyvale, California 94086
Entities affiliated with Benchmark
Capital(1)............................ 4,757,388 17.2 14.6
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
Entities affiliated with U.S. Venture
Partners(2)........................... 3,110,490 11.2 9.5
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Joseph J. Pruskowski(3)................ 2,520,243 9.1 7.7
18109 236th Avenue NE
Woodinville, Washington 98072
Brian M. NeSmith(4).................... 2,000,000 7.2 6.1
650 Almanor Avenue
Sunnyvale, California 94086
Entities affiliated with Technology
Crossover Ventures(5)................. 1,890,816 6.8 5.8
575 High Street, Suite 400
Palo Alto, California 94301
Douglas A. Crow(6)..................... 620,000 2.2 1.9
William S. Warner...................... 490,000 1.8 1.5
Rangaswamy Vasudevan................... 470,000 1.7 1.4
Andrew S. Rachleff(1).................. 4,757,388 17.2 14.6
Stuart G. Phillips(7).................. 3,280,490 11.9 10.0
David W. Hanna(8)...................... 1,626,692 5.9 5.0
All directors and executive officers as
a group (14 persons)(9)............... 19,556,065 69.1 58.7
</TABLE>
55
<PAGE>
- --------
(1) Consists of 4,176,178 shares held by Benchmark Capital Partners, L.P. and
581,210 shares held by Benchmark Founders' Fund, L.P. Mr. Rachleff, one of
our directors, is a managing member of Benchmark Capital Management Co.,
L.L.C., which is the general partner of each of Benchmark Capital
Partners, L.P. and Benchmark Founders' Fund, L.P. Mr. Rachleff disclaims
beneficial ownership of the shares held by Benchmark Capital Partners,
L.P. and Benchmark Founders' Fund, L.P. except to the extent of his
economic interest in the funds. The persons having voting or investment
power with respect to the securities held by entities affiliated with
Benchmark Capital include David M. Beirne, Bruce W. Dunlevie, Kevin R.
Harvey, Robert C. Kagle, Andrew S. Rachleff and Steven M. Spurlock.
(2) Consists of 2,799,438 shares held by U.S. Venture Partners V, L.P.,
155,526 shares held by USVP V International, L.P., 87,094 shares held by
2180 Associates Fund V, L.P. and 68,432 shares held by USVP V Entrepreneur
Partners, L.P. Mr. Phillips, one of our directors, is a general partner of
Presidio Management Group V, L.L.C., which is the general partner of each
of U.S. Venture Partners V, L.P., USVP V International, L.P., 2180
Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P. Mr.
Phillips disclaims beneficial ownership of the shares held by U.S. Venture
Partners V, L.P., USVP V International, L.P., 2180 Associates Fund V, L.P.
and USVP V Entrepreneur Partners, L.P., except to the extent of his
economic interest in the funds. The persons having voting or investment
power with respect to the securities held by entities affiliated with U.S.
Venture Partners include Irwin Federman, Marc A. Friend, Jason E. Green,
Steven M. Krausz, Lucio L. Lanza, Stuart R. Phillips, Jonathan D. Root and
Philip M. Young.
(3) Includes 33,100 shares held by Mr. Pruskowski's spouse.
(4) Excludes options immediately exercisable for 200,000 shares granted after
July 31, 1999.
(5) Consists of 13,730 shares held by TCV III (GP), 65,216 shares held by TCV
III, L.P., 1,733,374 shares held by TCV III (Q), L.P. and 78,496 shares
held by TCV III Strategic Partners, L.P. Jay C. Hoag and Richard H.
Kimball are the managing members of Technology Crossover Management III,
L.L.C., which is the general partner of each of TCV III (GP), TCV III,
L.P., TCV III (Q), L.P. and TCV III Strategic Partners, L.P. Messrs. Hoag
and Kimball each disclaim beneficial ownership of the shares held by TCV
III (GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners,
L.P., except to the extent of their respective economic interest in the
funds. The persons having voting or investment power with respect to the
securities held by entities affiliated with Technology Crossover Ventures
are Messrs. Hoag and Kimball.
(6) Includes options immediately exercisable for 20,000 shares.
(7) Includes 170,000 shares owned individually by Mr. Phillips, 2,799,438
shares held by U.S. Venture Partners V, L.P., 155,526 shares held by USVP
V International, L.P., 87,094 shares held by 2180 Associates Fund V, L.P.
and 68,432 shares held by USVP V Entrepreneur Partners, L.P. Mr. Phillips,
one of our directors, is a general partner of Presidio Management Group V,
L.L.C., which is the general partner of each of U.S. Venture Partners V,
L.P., USVP V International, L.P., 2180 Associates Fund V, L.P. and USVP V
Entrepreneur Partners, L.P. Mr. Phillips disclaims beneficial ownership of
the shares held by U.S. Venture Partners V, L.P., USVP V International,
L.P., 2180 Associates Fund V, L.P. and USVP V Entrepreneur Partners, L.P.,
except to the extent of his economic interest in the funds.
(8) Consists of 928,384 shares owned individually by Mr. Hanna, 342,858 shares
held by K-H Investors (1996-B), L.P., 101,770 shares held by K-H Investors
(1998-A), L.P., 122,000 shares held by Hanna Ventures-CacheFlow III, L.P.,
87,432 shares held by the David William Hanna Trust dated
October 30, 1989, and 44,248 shares held by Mr. Hanna's spouse. Mr. Hanna,
one of our directors, is an affiliate of K-H Investors (1996-B), L.P., K-H
Investors (1998-A), L.P. and Hanna Ventures-CacheFlow III, L.P. Mr. Hanna
disclaims beneficial ownership of the shares held by these entities,
except to the extent of his economic interest in the funds.
(9) Includes options immediately exercisable for 630,800 shares.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will consist of 200,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock,
par value $.0001 per share, after giving effect to the amendment and
restatement of our amended and restated certificate of incorporation to delete
references to Series A, Series B, Series C and Series D Preferred Stock, which
will occur immediately following the closing of this offering.
Common Stock
As of July 31, 1999, there were 27,671,031 shares of common stock
outstanding that were held of record by approximately 85 stockholders, after
giving effect to the conversion of all then outstanding shares of preferred
stock into 14,341,912 shares of common stock upon the completion of this
offering and the cash exercise of warrants to purchase 672,850 shares of
preferred stock prior to completion of the offering and the conversion of
these shares of preferred stock into common stock. There will be 32,671,031
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and assuming no other exercise after July 31, 1999 of
outstanding options or warrants, after giving effect to the sale of the shares
of common stock in this offering. The number of shares of common stock
outstanding as of July 31, 1999 excludes shares of Series D Preferred Stock
issued on November 1, 1999 that will convert into 280,953 shares of common
stock upon the completion of this offering. Upon the closing of this offering,
our amended and restated certificate of incorporation will authorize
200,000,000 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of legally available funds. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up
of CacheFlow, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, our amended and restated certificate of
incorporation will authorize 10,000,000 shares of preferred stock. The board
of directors has the authority to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of any series,
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of CacheFlow without further action by the stockholders. For example,
the board of directors could issue preferred stock that has the power to
prevent a change of control transaction. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently have no plans to issue any of the preferred stock.
Warrants
As of July 31, 1999, there were warrants outstanding to purchase 141,842
shares of common stock at an exercise price of $3.42 per share, assuming the
conversion of all of our preferred stock into common stock.
Warrants to purchase 562,850 shares of Series A Preferred Stock at an
exercise price of $.875 expire upon the closing of this offering, and we
anticipate that these warrants will be exercised prior to this offering and
the
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<PAGE>
underlying shares of preferred stock converted into common stock upon the
closing of this offering. Warrants to purchase 110,000 shares of Series C
Preferred Stock at an exercise price of $4.575 expire upon the closing of this
offering, and we anticipate that these warrants will be exercised prior to
this offering and the underlying shares of preferred stock converted into
common stock upon the closing of this offering.
Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law
Amended and Restated Certificate of Incorporation
The amended and restated certificate of incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage potential acquisition
proposals and could delay or prevent a change of control of CacheFlow because
a potential acquisition of CacheFlow could not be approved by the stockholders
without a duly called meeting. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation and Delaware
Law."
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to various exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of
the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by one of these entities or
persons.
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Registration Rights
After this offering, the holders of approximately 23,284,762 shares of
outstanding common stock will be entitled to rights with respect to the
registration of these shares under the Securities Act. The holders of
registration rights are those investors that purchased shares of our Series A,
Series B and Series C Preferred Stock, as well as some of our present and
former officers. Under the terms of the agreements between us and the holders
of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of the registration and are entitled to include these
shares in the registration. Some of the stockholders benefiting from these
rights may also require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock,
and we are required to use our best efforts to effect a registration. Further,
holders may require us to file additional registration statements on Form S-3.
These rights are subject to conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in
these registrations in some circumstances.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of existing contractual and legal
restrictions on resale, as described below, sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this offering, we will have 32,671,031 shares of common
stock outstanding, assuming no exercise of options and warrants outstanding
after July 31, 1999 other than warrants to purchase 672,850 shares of
preferred stock that we assume will be exercised prior to the closing of the
offering and the conversion of all these shares of preferred stock into common
stock. Of these shares, the 5,000,000 shares sold in this offering will be
freely transferable without restriction or registration under the Securities
Act, except for any shares purchased by one of our existing "affiliates," as
that term is defined by the Securities Act, which shares will be subject to
the resale limitations of Rule 144 adopted under the Securities Act. The
remaining 27,671,031 shares of common stock existing are "restricted
securities" as defined in Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 of the Securities Act. As a result of the
contractual restrictions described below and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows: (A) no restricted securities will be eligible for immediate sale on
the date of this prospectus, (B) 22,626,595 restricted securities will be
eligible for sale upon expiration of lock-up agreements 180 days after the
date of this prospectus subject to Rule 144 or Rule 701, (C) 4,371,586
restricted securities will be eligible for sale as of May 28, 2000, and (D)
672,850 restricted securities will be eligible for sale between August 24,
2000 and the date that is one year after the effective date of the offering.
The number of shares of common stock outstanding after the offering excludes
shares of Series D Preferred Stock issued on November 1, 1999, which will
convert into 280,953 shares of common stock upon the completion of this
offering. These shares will be available for sale on November 1, 2000.
Lock-Up Agreements
We, our executive officers, directors and our stockholders have agreed not
to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to limited exceptions that are described in detail in
the "Underwriters" section. However, these contractual restrictions may be
released prior to expiration of the lock-up period. In addition, existing
stockholders have agreed not to exercise any registration rights they may have
for a similar period of 180 days.
Rule 144
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person, or persons whose shares are
aggregated, who owns shares that were purchased from us, or any affiliate at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of our then
outstanding shares of common stock, 326,710 shares immediately after this
offering, or the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person, or persons whose shares are aggregated, who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale,
and who owns shares within the definition of "restricted securities" under
Rule 144 that were purchased from us, or any affiliate, at least two years
previously, would be entitled to sell these shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
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Rule 701
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, or the Exchange Act,
pursuant to written compensatory benefit plans or written contracts relating
to the compensation of these persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of these
options, including exercises after the date of this prospectus. Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its minimum holding period requirements.
Registration Rights
After this offering pursuant to this prospectus, the holders of
approximately 23,284,762 shares of common stock, or their transferees, will be
entitled to various rights with respect to the registration of these shares
under the Securities Act. Registration of these shares under the Securities
Act would result in these shares becoming freely tradable without restriction
under the Securities Act, except for shares purchased by affiliates,
immediately upon the effectiveness of the registration. See "Description of
Capital Stock--Registration Rights."
Stock Options and Warrants
As of July 31, 1999, options to purchase a total of 3,401,251 shares of
common stock pursuant to our 1996 Stock Option Plan were outstanding and
exercisable. All of the shares subject to options are subject to lock-up
agreements. As of July 31, 1999, warrants to purchase up to 141,842 shares of
common stock, assuming the conversion of all of our preferred stock into
common stock, were outstanding and exercisable. An additional 33,217 shares of
common stock were available for future option grants under our 1996 Stock
Option Plan. On August 27, 1999, we amended our 1996 Stock Option Plan to
increase the number of shares authorized for issuance thereunder by 3,000,000
shares. On October 13, 1999, we amended our 1996 Stock Option Plan to increase
the number of shares authorized for issuance thereunder by 1,500,000 shares.
Between August 1, 1999 and November 1, 1999, we granted options to purchase
4,460,730 shares of common stock. On September 24, 1999, we adopted, subject
to stockholder approval, our 1999 Stock Incentive Plan to replace the 1996
Stock Option Plan, and reserved 5,000,000 shares for issuance thereunder, plus
an additional number of shares equal to 5% of the shares outstanding on the
first day of January 2000 and each year thereafter. We will not grant any
options under our 1996 Stock Option Plan after the completion of this
offering. In addition, on September 24, 1999, we adopted, subject to
stockholder approval, our Employee Stock Purchase Plan, and reserved
2,500,000 shares of common stock for issuance thereunder, plus an additional
500,000 shares on January 31 of 2000 and each year after 2000 and our 1999
Director Option Plan, and reserved 500,000 shares of common stock for issuance
thereunder, plus an additional 100,000 shares on January 1 of 2000 and each
year thereafter. See "Management--1999 Stock Incentive Plan," "--Employee
Stock Purchase Plan," "--1999 Director Option Plan," "Description of Capital
Stock--Warrants" and Notes 3, 4 and 9 of Notes to Financial Statements.
We intend to file registration statements under the Securities Act covering
approximately 5,000,000 shares of common stock subject to outstanding options
or issuable pursuant to our 1999 Stock Incentive Plan and 500,000 shares of
common stock issuable pursuant to our 1999 Director Option Plan, and 2,500,000
shares of common stock issuable pursuant to our Employee Stock Purchase Plan.
We expect to file the registration statement covering shares issuable pursuant
to the Employee Stock Purchase Plan within 5 days of the effective date of
this offering and to file the registration statement covering shares offered
pursuant to the 1999 Stock Incentive Plan and 1999 Director Option Plan within
approximately 30 days after the closing of this offering. Shares registered
under these registration statements will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open
market, except to the extent that these shares are subject to vesting
restrictions with us or the contractual restrictions described above. See
"Management--1999 Stock Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Director Option Plan."
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UNDERWRITERS
Under the terms and subject to conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation
and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are
acting as representatives, have severally agreed to purchase, and CacheFlow
has agreed to sell to the underwriters, the respective number of shares of
common stock set forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Credit Suisse First Boston Corporation.............................
Dain Rauscher Wessels..............................................
---------
Total.............................................................. 5,000,000
=========
</TABLE>
The underwriters and the representatives are collectively referred to as
the underwriters and the representatives. The underwriters are offering the
shares of common stock subject to their acceptance of the shares from
CacheFlow. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered by us in this offering are subject to the approval of legal
matters by their counsel and to other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by us
in this offering, other than those covered by the over allotment option
described below, if any of these shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to various dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any underwriter may allow, and these dealers may reallow, a
concession not in excess of $ per share to other underwriters or to various
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
CacheFlow has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
750,000 additional shares of common stock at the public offering price set
forth on the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose
of covering over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. To the extent this
option is exercised, each underwriter will become obligated, subject to
limited conditions to purchase approximately the same percentage of these
additional shares of common stock as the number set forth next to each
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of the underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $ million, the total underwriters' discounts and
commissions would be $ million and total proceeds to CacheFlow would be
$ million.
The underwriters have informed CacheFlow that the underwriters do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
CacheFlow has filed an application for our common stock to be quoted on the
Nasdaq National Market under the symbol "CFLO."
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At the request of CacheFlow, the underwriters will reserve up to 100,000
shares of common stock to be offered hereby for sale, at the initial public
offering price, to customers, distributors, suppliers and other persons. In
addition, the underwriters have agreed to reserve additional 250,000 shares of
common stock pursuant to an agreement we have with the holders of our Series C
Preferred Stock. The number of shares of common stock available for sale to
the general public will be reduced to the extent these persons purchase such
reserved shares. Any reserved shares that are not so purchased will be offered
by the underwriters to the general public on the same basis as the other
shares offered in this prospectus.
In connection with our Series C Preferred Stock financing, we agreed to use
our best efforts to cause the managing underwriters of our initial public
offering to establish a directed share program whereby the managing
underwriters would offer the Series C Preferred Stock investors the
opportunity to purchase shares of our common stock in our initial public
offering. The number of shares to be offered to the Series C Preferred Stock
investors pursuant to the directed share program is 250,000, and is subject to
reduction under some circumstances. The Series C Preferred Stock investors
have no obligation to purchase any of the shares offered to them. We intend
that all offers to purchase shares pursuant to the directed share program will
be made in compliance with all federal and state securities laws, including
Rule 134 of the Securities Act of 1933, as amended, and all applicable rules
and regulations promulgated by the National Association of Securities Dealers,
Inc.
CacheFlow, our directors and executive officers and our stockholders and
option holders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, he, she or
it will not, for the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
. enter into any swap or similar agreement that transfers, in whole or in
part, any of the consequences of ownership of the common stock.
The restrictions described in the previous paragraph do not apply to:
. the issuance by CacheFlow of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing;
. transactions by any person other than CacheFlow relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
. the granting of stock options pursuant to existing CacheFlow employee
benefit plans, provided that the options do not become exercisable and
the options do not vest during the such 180-day period; or
. gifts, distributions or transfers to trusts, in some circumstances
provided that transferees in transactions described in this clause enter
into lock-up agreements similar to those described in the previous
paragraph.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the 5,000,000 shares of common stock CacheFlow has
agreed to sell them. This over-allotment would create a short position in the
common stock for the underwriters' account. To cover over-allotments or to
stabilize the price of the common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in the offering if the syndicate
repurchases previously distributed shares of common stock in transactions to
cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
common stock above independent market levels. The underwriters are not
required to engage in these activities and may end any of these activities at
any time.
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CacheFlow and the underwriters have agreed to indemnify each other against
some liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. the future prospects of CacheFlow and its industry in general;
. sales, earnings and other financial operating information of CacheFlow
in recent periods; and
. the price earnings ratios, price sales ratios, market prices of
securities and other financial and operating information of companies
engaged in activities similar to those of CacheFlow.
The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors.
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LEGAL MATTERS
The validity of the issuance of the common stock offered will be passed
upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. Members of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP participating in the consideration of legal matters
relating to this offering beneficially own 91,452 shares of our common stock,
assuming the conversion of all of our preferred stock into common stock. Legal
matters in connection with this offering will be passed upon for the
underwriters by Shearman & Sterling, Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of April 30, 1998 and 1999, and for each of the three
years in the period ended April 30, 1999 as set forth in their report dated
September 24, 1999. We have included our consolidated financial statements in
the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report given on their authority as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of the contract or document
filed as an exhibit to the registration statement. Each of these statements is
qualified in all respects by reference to that exhibit. The registration
statement, including exhibits and schedules, may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission's principal office after
payment of fees prescribed by the Commission. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective August 27, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our board of directors on August 27, 1999. Prior to August 27, 1999, our
former auditors, which included two separate audit firms, issued reports on
the year ended April 30, 1998 and the period from inception, March 13, 1996,
to April 30, 1997. The reports of our former auditors did not contain an
adverse opinion or disclaimer of opinion qualified or modified as to audit
scope or accounting principle. The auditor's opinion for the year ended April
30, 1998 did contain an uncertainty as to substantial doubt regarding our
ability to continue as a going concern. In connection with the audits for the
period from inception, March 13, 1996, through April 30, 1997 and the year
ended April 30, 1998 and the period through August 27, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former
auditors, would have caused them to make reference thereto in their report.
Our former auditors have not audited or reported on any of the financial
statements or information included in this prospectus. Prior to August 27,
1999, we have not consulted with Ernst & Young LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our
financial statements. We have requested that our former auditors furnish us
with letters addressed to the Securities and Exchange Commission stating
whether or not they agree with the above statements. Copies of these letters
are filed as an exhibit to the registration statement of which this prospectus
forms a part.
65
<PAGE>
CACHEFLOW INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CacheFlow Inc.
We have audited the accompanying consolidated balance sheets of CacheFlow
Inc. as of April 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended April 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CacheFlow Inc. at April 30, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Walnut Creek, California
September 24, 1999
F-2
<PAGE>
CACHEFLOW INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
April 30, Equity at
----------------- July 31, July 31,
1998 1999 1999 1999
------- -------- ----------- -------------
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 7,349 $ 2,291 $ 17,825
Accounts receivable, net of
allowance for doubtful accounts
and sales returns of $121 and
$300 at April 30, and July 31,
1999, respectively............. -- 1,353 1,957
Inventories..................... 407 932 1,721
Prepaid expenses and other
current assets................. 53 60 152
------- -------- --------
Total current assets.............. 7,809 4,636 21,655
Property and equipment, net....... 642 1,351 1,706
Other assets...................... 10 729 658
------- -------- --------
Total assets................... $ 8,461 $ 6,716 $ 24,019
======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable................ $ 429 $ 1,464 $ 1,910
Borrowings under line of
credit......................... -- 643 639
Accrued payroll and related
benefits....................... 145 420 558
Deferred revenue................ -- 367 559
Other accrued liabilities....... 214 166 320
Current portion of long-term
obligations.................... 66 789 1,194
------- -------- --------
Total current liabilities......... 854 3,849 5,180
Long-term obligations, less
current portion.................. 7 3,211 2,806
------- -------- --------
Total liabilities................. 861 7,060 7,986
Commitments
Stockholders' equity (deficit):
Preferred stock, $0.0001 par
value, issuable in series:
30,000 shares authorized at
April 30, 1998 and 1999 and
July 31, 1999 (10,000 shares
pro forma), respectively;
9,970, 9,970, and 14,342 shares
issued and outstanding at April
30 and July 31, 1998 and 1999
and July 31, 1999 (none pro
forma), respectively; aggregate
liquidation preference of
$14,457 and $34,457 at April 30
and July 31, 1999 (none
pro forma), respectively....... 1 1 1 $ --
Common stock, $0.0001 par value,
60,000 shares authorized at
April 30, 1998 and 1999 and
July 31, 1999 (200,000 shares
pro forma), respectively;
6,017, 12,894 and 12,656 shares
issued and outstanding at April
30, 1998 and 1999 and July 31,
1999 (26,998 shares pro forma),
respectively................... 1 1 1 2
Additional paid-in capital...... 14,646 30,877 65,071 65,071
Note receivable from
stockholder.................... -- (1,004) (1,017) (1,017)
Deferred stock compensation..... (98) (10,067) (21,314) (21,314)
Accumulated deficit............. (6,950) (20,152) (26,709) (26,709)
------- -------- -------- -------
Total stockholders' equity
(deficit)..................... 7,600 (344) 16,033 16,033
------- -------- -------- -------
Total liabilities and
stockholders' equity
(deficit)..................... $ 8,461 $ 6,716 $ 24,019 $24,019
======= ======== ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales........................ $ -- $ -- $ 7,036 $ 809 $ 3,612
Cost of goods sold............... -- -- 3,297 598 1,380
------- ------- -------- ------- -------
Gross profit..................... -- -- 3,739 211 2,232
Operating expenses:
Research and development....... 1,055 2,396 4,034 755 1,613
Sales and marketing............ 130 1,655 6,865 1,335 3,481
General and administrative..... 310 1,630 2,069 275 667
Stock compensation............. 4 59 3,776 219 2,992
------- ------- -------- ------- -------
Total operating expenses......... 1,499 5,740 16,744 2,584 8,753
------- ------- -------- ------- -------
Operating loss................... (1,499) (5,740) (13,005) (2,373) (6,521)
Interest income.................. 82 258 160 73 131
Interest expense................. (26) (25) (357) (2) (167)
------- ------- -------- ------- -------
Net loss......................... $(1,443) $(5,507) $(13,202) $(2,302) $(6,557)
======= ======= ======== ======= =======
Basic and diluted net loss per
common share.................... $ (0.73) $ (1.43) $ (2.17) $ (0.47) $ (0.80)
======= ======= ======== ======= =======
Shares used in computing basic
and diluted net loss per common
share........................... 1,965 3,842 6,093 4,938 8,236
======= ======= ======== ======= =======
Pro forma basic and diluted net
loss per common share
(unaudited)..................... $ -- $ -- $ (0.79) $ -- $ (0.30)
======= ======= ======== ======= =======
Shares used in computing pro
forma basic and diluted net loss
per common share (unaudited).... -- -- 16,626 -- 21,967
======= ======= ======== ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Preferred Note Total
Stock Common Stock Additional Receivable Deferred Stockholders'
------------- -------------- Paid-In From Stock Accumulated Equity
Shares Amount Shares Amount Capital Stockholder Compensation Deficit (Deficit)
------ ------ ------ ------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders...... -- $ -- 6,600 $ 1 $ 32 $ -- $ -- $ -- $ 33
Issuance of Series A
preferred stock, net of
issuance costs......... 5,831 1 -- -- 5,101 -- -- -- 5,102
Issuance of common
stock to third parties
for services........... -- -- 84 -- 4 -- -- -- 4
Exercise of stock
options by employees... -- -- 500 -- 6 -- -- -- 6
Net and comprehensive
loss................... -- -- -- -- -- -- -- (1,443) (1,443)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at April 30,
1997.................... 5,831 1 7,184 1 5,143 -- -- (1,443) 3,702
Issuance of Series B
preferred stock, net of
issuance costs......... 4,139 -- -- -- 9,329 -- -- -- 9,329
Exercise of stock
options by employees... -- -- 340 -- 25 -- -- -- 25
Issuance of common
stock to third parties
for services........... -- -- 93 -- 7 -- -- -- 7
Repurchase of common
stock.................. -- -- (1,600) -- (8) -- -- -- (8)
Deferred stock
compensation........... -- -- -- -- 150 -- (150) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- -- 52 -- 52
Net and comprehensive
loss................... -- -- -- -- -- -- -- (5,507) (5,507)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at April 30,
1998.................... 9,970 1 6,017 1 14,646 -- (98) (6,950) 7,600
Exercise of stock
options by employees... -- -- 6,843 -- 2,049 -- -- -- 2,049
Issuance of common
stock to third parties
for services........... -- -- 34 -- 20 -- -- -- 20
Stock compensation..... -- -- -- -- 156 -- -- -- 156
Issuance of warrants in
connection with debt
issuance............... -- -- -- -- 437 -- -- -- 437
Note receivable from
stockholder for the
exercise of stock
options................ -- -- -- -- -- (999) -- -- (999)
Interest on note
receivable from
stockholder for the
exercise of stock
options................ -- -- -- -- -- (5) -- -- (5)
Deferred stock
compensation........... -- -- -- -- 13,569 -- (13,569) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- -- 3,600 -- 3,600
Net and comprehensive
loss................... -- -- -- -- -- -- -- (13,202) (13,202)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at April 30,
1999.................... 9,970 1 12,894 1 30,877 (1,004) (10,067) (20,152) (344)
Issuance of Series C
preferred stock, net of
issuance costs
(unaudited)............ 4,372 -- -- -- 19,976 -- -- -- 19,976
Exercise of stock
options by employees
(unaudited)............ -- -- 25 -- 7 -- -- -- 7
Issuance of common
stock to third parties
for services
(unaudited)............ -- -- 8 -- 16 -- -- -- 16
Repurchase of common
stock from employees
(unaudited)............ (271) (28) (28)
Interest on note
receivable from
stockholder for the
exercise of stock
options (unaudited).... -- -- -- -- -- (13) -- -- (13)
Deferred stock
compensation
(unaudited)............ -- -- -- -- 14,223 (14,223) -- --
Amortization of
deferred stock
compensation
(unaudited)............ -- -- -- -- -- -- 2,976 -- 2,976
Net and comprehensive
loss (unaudited)....... -- -- -- -- -- -- -- (6,557) (6,557)
------ ---- ------ --- ------- ------- -------- -------- --------
Balances at July 31,
1999 (unaudited)........ 14,342 $ 1 12,656 $ 1 $65,071 $(1,017) $(21,314) $(26,709) $ 16,033
====== ==== ====== === ======= ======= ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
CACHEFLOW INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended April 30, Ended July 31,
-------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss........................ $(1,443) $(5,507) $(13,202) $(2,302) $(6,557)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization.. 13 91 261 45 117
Stock compensation............. 4 59 3,776 219 2,992
Interest on notes converted to
preferred stock............... 22 -- -- -- --
Interest on note receivable
from stockholder.............. -- -- (5) -- (13)
Debt issuance costs............ -- -- 437 -- --
Changes in operating assets and
liabilities:
Accounts receivable........... -- -- (1,353) (741) (604)
Inventories................... (38) (369) (525) (51) (789)
Prepaid expenses and other
current assets............... (13) (40) (7) (35) (92)
Other assets.................. (3) (7) (719) (179) 71
Accounts payable.............. 67 362 1,035 (187) 446
Accrued liabilities........... -- 359 594 278 484
------- ------- -------- ------- -------
Net cash used in operating
activities..................... (1,391) (5,052) (9,708) (2,953) (3,945)
Investing activities
Purchases of property and
equipment...................... (123) (623) (971) (151) (472)
Purchases of short-term
investments.................... (3,410) -- -- -- --
Proceeds from sale of short-term
investments.................... -- 3,410 -- -- --
------- ------- -------- ------- -------
Net cash provided by (used in)
investing activities........... (3,533) 2,787 (971) (151) (472)
Financing activities
Proceeds from issuance of
preferred stock................ 4,095 9,329 -- -- 19,976
Proceeds from issuance of common
stock.......................... 39 25 1,051 300 7
Repurchase of employee stock.... -- (8) -- -- (28)
Borrowings from line of credit.. -- -- 643 -- --
Proceeds from issuance of debt
obligations.................... 985 128 4,000 -- --
Payments on debt obligations.... -- (55) (73) (21) (4)
------- ------- -------- ------- -------
Net cash provided by financing
activities..................... 5,119 9,419 5,621 279 19,951
------- ------- -------- ------- -------
Net increase (decrease) in cash
and cash equivalents........... 195 7,154 (5,058) (2,825) 15,534
Cash and cash equivalents at
beginning of period............ -- 195 7,349 7,349 2,291
------- ------- -------- ------- -------
Cash and cash equivalents at end
of period...................... $ 195 $ 7,349 $ 2,291 $ 4,524 $17,825
======= ======= ======== ======= =======
Supplemental disclosures of cash
flow information
Cash paid for interest.......... $ 4 $ 10 $ 375 $ 2 $ 167
======= ======= ======== ======= =======
Noncash financing activities
Warrants issued in connection
with long-term debt agreements
and strategic customer
arrangements................... $ -- $ -- $ 437 $ -- $ --
======= ======= ======== ======= =======
Conversion of debt to preferred
stock.......................... $ 985 $ -- $ -- $ -- $ --
======= ======= ======== ======= =======
Issuance of note receivable to
stockholder for the exercise of
stock options and related
interest....................... $ -- $ -- $ (1,004) $ -- $ (13)
======= ======= ======== ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three months
ended July 31, 1999 is unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
CacheFlow Inc. (the "Company") was organized and incorporated in the state
of Delaware on March 16, 1996. The Company operates in one segment to design,
develop, market and support high-performance Internet caching appliances.
Unaudited Interim Financial Information
The accompanying consolidated financial statements and related notes as of
July 31, 1999 and for the quarters ended July 31, 1998 and 1999 are unaudited,
but include all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of its
consolidated financial position, operating results, and cash flows for the
interim date and periods presented. Results for the quarter ended July 31,
1999 are not necessarily indicative of results for the entire fiscal year or
future periods.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated. From inception in March 1996 through April
30, 1998, the Company was considered to be in the development stage. The
Company's sales activities were initiated in the first quarter of fiscal 1999.
The accompanying statements of operations, stockholders' equity (deficit), and
cash flows for the year ended April 30, 1997 include $33,000 received upon
issuance of the initial capital stock of the Company and $7,000 expended
during the period from March 13, 1996 (inception) to April 30, 1996 for
general and administrative expenses. Due to the insignificance of the balances
as of April 30, 1996 and activity for the period from March 13, 1996
(inception) to April 30, 1996, financial statements have not been presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market investments at April 30, 1998 and 1999.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, and trade
receivables. The Company maintains its demand deposit accounts and its money
market accounts primarily with one financial institution. The Company has
partially financed its operations through long-term debt with a lending
institution. Management believes the financial risks associated with these
financial instruments are minimal. The Company generally does not require
collateral for sales to customers. For the year ended April 30, 1999, three
customers individually accounted for over 10% of our net sales, for an
aggregate of approximately 33% of our net sales. For the three months ended
July 31, 1999, two customers individually accounted for over 10% of our net
sales, for an aggregate of approximately 22% of our net sales.
F-7
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Supply
The Company currently purchases several key parts and components used in
the manufacture of its Internet caching appliance products from limited
sources of supply.
Concentrations of Sales
The Company's Internet caching appliance product family and related
services have accounted for all of the Company's net sales for the year ended
April 30, 1999 and three month period ended July 31, 1999.
Inventories
Inventories consist of raw materials, work-in-process and finished goods.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three to five
years, or the lease term of the respective assets.
Revenue Recognition
The Company generally recognizes product revenue at the time of shipment,
net of allowances for estimated sales returns and uncollectible customer
accounts. Maintenance contract revenue is deferred and recorded evenly over
the term of the contract. Maintenance contract revenue for the year ended
April 30, 1999 and the three months ended July 31, 1999 was $25,000 and
$54,000, respectively.
Warranty Reserves
The Company's products generally carry a one-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses
for warranty obligations are generally accrued at the same time as related
product revenue is recognized.
Income Taxes
The Company uses the liability method to account for income taxes as
required by the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Research and Development
Costs to develop the Company's products are expensed as incurred in
accordance with the FASB's Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," which establishes accounting
and reporting standards for research and development.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with the
FASB's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the years ended April
30, 1997, 1998 and 1999 does not differ from the reported net loss.
F-8
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for its stock options and equity awards in accordance
with the provisions of the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and has elected to follow the
"disclosure only" alternative prescribed by the FASB's Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
Fair Value of Financial Instruments
The fair value of long-term debt obligations are estimated based on current
interest rates available to the Company for debt instruments with similar
terms, degrees of risk, and remaining maturities. The carrying values of these
obligations approximate their fair values.
Net Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128), for all periods presented.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods
presented. To date, the Company has not had any issuances or grants for
nominal consideration.
In accordance with FAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted average number of shares of
common stock issued to founders, investors and employees that are subject to
repurchase. Pro forma basic and diluted net loss per common share, as
presented in the consolidated statements of operations, have been computed as
described above and also give effect, under Securities and Exchange Commission
guidance, to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance. The shares used in
calculating the pro forma basic and diluted net loss per common share amounts
also include warrants to purchase series A and C preferred stock as such
warrants expire upon the completion of the Company's initial public offering
of its common stock. The Company assumes the warrants will be exercised prior
to or in connection with the completion of the initial public offering because
these warrants expire upon completion of the offering and the exercise prices
are significantly lower than the estimated offering price. The weighted
average share amounts exclude warrants to purchase series B preferred stock as
such warrants will remain outstanding after the initial public offering is
complete.
F-9
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
Year Ended April 30, July 31,
-------------------------- --------------------
1997 1998 1999 1998 1999
------- ------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss.................... $(1,443) $(5,507) $(13,202) $ (2,302) $ (6,557)
======= ======= ======== ========= =========
Weighted-average shares of
common stock outstanding.. 6,297 7,340 9,214 8,378 12,692
Less: Weighted-average
shares subject to
repurchase................ 4,332 3,498 3,121 3,440 4,456
------- ------- -------- --------- ---------
Weighted-average shares
used in computing basic
and diluted net loss per
common share.............. 1,965 3,842 6,093 4,938 8,236
======= ======= ======== ========= =========
Basic and diluted net loss
per common share.......... $ (0.73) $ (1.43) $ (2.17) $ (0.47) $ (0.80)
======= ======= ======== ========= =========
Pro forma:
Shares used above........... 1,965 3,842 6,093 4,938 8,236
Pro forma adjustment to
reflect the weighted effect
of the assumed conversion
of preferred stock......... 9,970 13,059
Pro forma adjustment to
reflect weighted effect of
assumed exercise and
conversion of preferred
stock warrants............. 563 673
-------- ---------
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited)................ 16,626 21,967
======== =========
Pro forma basic and diluted
net loss per common share
(unaudited)................ $ (0.79) $ (0.30)
======== =========
</TABLE>
The Company has excluded all preferred stock, warrants for preferred stock,
outstanding stock options and shares subject to repurchase from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of shares excluded
from the calculations of diluted net loss per common share were (in thousands)
7,244, 14,548, 16,980, 14,892, and 22,263 for the three years ended April 30,
1997, 1998 and 1999, and for the three months ended July 31, 1998 and 1999,
respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
for 1997, 1998 and 1999 were $13,000, $84,000 and $270,000, respectively, and
are included in sales and marketing expenses.
Unaudited Pro Forma Stockholders' Equity (Deficit)
If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity (deficit) at July 31, 1999, as
adjusted for the assumed conversion of preferred stock based on the shares of
preferred stock outstanding at July 31, 1999, is disclosed on the consolidated
balance sheet.
Segment Information
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company operates in one segment to design, develop, market
and support high-performance Internet caching appliances.
F-10
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which will be effective for the
Company's fiscal year ending April 30, 2002. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the consolidated balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has not evaluated the impact of FAS
133; however, it believes the adoption of FAS 133 will not have a material
effect on the consolidated financial position, results of operations, or cash
flows as the Company has not entered into any derivative contracts.
2. Balance Sheet Details
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
--------- July 31,
1998 1999 1999
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials.......................................... $407 $610 $1,263
Work-in-process........................................ -- 45 124
Finished goods......................................... -- 277 334
---- ---- ------
$407 $932 $1,721
==== ==== ======
</TABLE>
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 30,
------------- July 31,
1998 1999 1999
----- ------ -----------
(unaudited)
<S> <C> <C> <C>
Computer and office equipment.................... $ 588 $1,224 1,535
Furniture and fixtures........................... 2 23 89
Software......................................... 156 469 564
----- ------ ------
746 1,716 2,188
Less accumulated depreciation and amortization... (104) (365) (482)
----- ------ ------
$ 642 $1,351 $1,706
===== ====== ======
</TABLE>
Certain computer and office equipment are recorded under capital leases
that aggregated $29,000 as of April 30 and July 31, 1999 (none were
outstanding as of April 30, 1998). Accumulated amortization on the assets
recorded under capital leases aggregated $8,000 and $13,000 as of April 30 and
July 31, 1999, respectively.
3. Stockholders' Equity (Deficit)
Stock Split
In June 1999, the Company's Board of Directors and stockholders approved a
2-for-1 stock split of the Company's authorized, issued and outstanding common
and preferred stock. All common and preferred share and per share amounts in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect the 2-for-1 stock split.
F-11
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock
Preferred stock consisted of the following series (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Shares Issued and
Shares Authorized at Outstanding at Per Share
---------------------- -------------------------- ------------------------- Aggregate
April 30, April 30, Liquidation
------------- July 31, ----------------- Preference
July 31, Noncumulative Liquidation at July 31,
Series 1998 1999 1999 1998 1999 1999 Dividend Preference 1999
------ ------ ------ -------- ----- ----------- -------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... 6,394 6,394 6,394 5,831 5,831 5,831 $0.070 $0.875 $ 5,102
B....................... 4,400 4,400 4,400 4,139 4,139 4,139 $0.225 $2.260 9,355
C....................... -- -- 4,500 -- -- 4,372 $0.460 $4.575 20,000
Undesignated............ 19,206 19,206 14,706 -- -- -- -- -- --
------ ------ ------ ----- ----- ------ -------
30,000 30,000 30,000 9,970 9,970 14,342 $34,457
====== ====== ====== ===== ===== ====== =======
</TABLE>
The holders of Series A, B, and C preferred stock are entitled to annual
noncumulative dividends per share as shown above when and if declared by the
board of directors. In the event of any voluntary or involuntary liquidation
of the Company, Series A, B, and C preferred stockholders are entitled to a
liquidation preference per share as shown above plus any declared but unpaid
dividends, all in preference to the holders of the common stock. If upon
occurrence of such event, the asset and funds thus distributed among the
holders of the preferred stock shall be insufficient to permit the payment to
such holders, then the entire assets and funds of the corporation legally
available for distribution shall distribute ratably among the holders of
Series A, B, and C preferred stock in proportion to the aggregate preferential
amounts each such holder is otherwise entitled to receive. Upon the completion
of a distribution, the holders of the common stock will ratably receive any
and all remaining assets of the Company. No dividends on the Company's
preferred stock have been declared.
The holders of Series A, B and C preferred stock have the right, at any
time after the date of issuance, to convert each of their shares into common
shares. The initial conversion ratio is one-to-one for shares of Series A, B,
and C preferred shares but is subject to adjustments for dilution. The holders
of each share of preferred stock have the right to one vote for each share of
common stock into which the preferred stock can be converted.
Preferred shares automatically convert into shares of common stock at the
conversion price in effect upon the earlier of the Company's sale of its
common stock in a public offering with cash proceeds to the Company of at
least $20,000,000 or upon the agreement of both the holders of a majority of
the outstanding shares of Series A, B, and C preferred stock, voting together
as a class, and the holders of a majority of the outstanding shares of Series
C preferred stock. In September 1999, the Company's Board of Directors
approved a decrease in authorized shares of preferred stock from 30,000,000 to
10,000,000 upon the completion of the Company's initial public offering of its
common stock.
Warrants
In October and November of 1996, the Company issued a total of 562,850
warrants to purchase Series A preferred stock at an exercise price of $0.875
per share. The warrants were immediately exercisable and expire at the earlier
of April 30, 2000 or at the completion of the Company's initial public
offering of its common stock.
In connection with the long-term debt agreements entered into in November
1998, the Company issued warrants to purchase 141,842 shares of Series B
preferred stock at an exercise price of $3.42 per share. The value of the
Series B warrants was estimated using the Black-Scholes option pricing model
with the following assumptions: weighted-average risk free interest rate of
6.0%, weighted-average contractual life of 0.22 years, 60% volatility and no
dividend yield. The Company calculated a value of $507,000 and this amount is
recorded as deferred issuance costs in other assets. This amount is being
amortized over the term of the agreement to interest expense.
F-12
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1999, the Company entered into a strategic relationship with a
customer. As part of the arrangement the Company issued warrants to purchase
110,000 shares of Series C preferred stock at an exercise price of $4.575 per
share. A portion of the warrants were immediately exercisable and the
remaining warrants became exercisable in September 1999. The warrants expire
at the earlier of April 30, 2002 or at the completion of the Company's initial
public offering of its common stock. In April 1999, the Company recorded a
charge of $17,000 based on the fair value of the warrants. The Company intends
to record an additional charge of approximately $604,000 in the three months
ending October 31, 1999, which represents the fair value of the warrants. The
fair value of the warrants was determined using the Black-Scholes model.
Common Stock
The Company has entered into Stock Purchase Agreements in connection with
the sale of common stock to employees, consultants and directors. The Company
typically has the right to repurchase, at the original issue price, a
declining percentage of certain of the shares of common stock issued based on
the employees, consultants, and directors service periods. The repurchase
right generally declines on a percentage basis over four years based on the
length of the founder's and each respective employee's continued employment
with the Company, and the director's membership on the Board of Directors
under this agreement. As of April 30, 1997, 1998 and 1999 and July 31, 1999,
4,289,583, 1,467,082, 4,963,456 and 4,214,276 shares, respectively, of common
stock issued under these agreements were subject to repurchase. In September
1999, the Company's Board of Directors approved an increase in authorized
shares of common stock from 60,000,000 to 200,000,000 upon the completion of
the Company's initial public offering of its common stock.
Shares of Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consisted of the following (in
thousands):
<TABLE>
<CAPTION>
April 30, July
------------- 31,
1998 1999 1999
------ ------ ------
<S> <C> <C> <C>
Common stock reserved for:
Preferred stock....................................... 9,970 9,970 14,342
1996 stock option plan................................ 7,501 2,058 2,435
Preferred stock warrants.............................. 563 814 814
------ ------ ------
18,034 12,842 17,591
====== ====== ======
</TABLE>
Note Receivable from Stockholder
In April 1999, the Company entered into a note for $999,900 with an officer
of the Company for the purchase of common stock. The note bears interest at
4.99% and the note and related interest are payable in full on April 13, 2004.
The note is secured by 2 million shares of common stock of the Company owned
by the officer. The note was issued with full recourse and is also secured by
all of the assets owned by the officer.
4. Stock Option Plan
In 1996, the Company established the 1996 Stock Option Plan (the 1996 Plan)
under which stock options may be granted to employees, directors and
consultants of the Company and authorized 1,000,000 shares of common stock
thereunder. Through various amendments, the Board of Directors and
stockholders approved the increase in the number of shares authorized for
issuance under the 1996 Plan to 9,241,000. Under the 1996 Plan, nonstatutory
stock options may be granted to employees and consultants, and incentive stock
options (ISO) may
F-13
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be granted only to employees. In the case of an ISO that is granted to an
employee who, at the time of the grant of such option, owns stock representing
more than 10% of the total combined voting power of all classes of stock of
the Company, the per share exercise price shall not be less than 110% of the
fair market value per share on the date of grant or, granted to any other
employee, the per share exercise price shall not be less than 100% of the fair
value per share on the date of grant. The exercise price for non-qualified
options may not be less than 85% of the fair value of common stock at the
option grant date. At April 30, 1998 and 1999 and July 31, 1999, the Company
had 269,000, 4,327,000, and 3,705,000 shares, respectively, which were subject
to repurchase rights under the 1996 Plan. No shares were repurchased under the
1996 plan during fiscal 1997, 1998 and 1999. For the three months ended July
31, 1999, 271,000 shares were repurchased under the 1996 Plan at the original
issuance price.
Options issued under the 1996 Plan are immediately exercisable, and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter.
The 1996 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1996 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.
Stock option activity under the 1996 Plan and options issued outside the
1996 Plan were as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Weighted-Average
Number of Exercise Price
Shares Per Share
--------- ----------------
<S> <C> <C>
Options granted................................. 850 $0.06
------
Balance at April 30, 1997......................... 850 $0.06
Options granted................................. 3,386 $0.09
Options exercised............................... (340) $0.08
Options canceled................................ (150) $0.08
------
Balance at April 30, 1998......................... 3,746 $0.09
Options granted................................. 5,371 $0.61
Options exercised............................... (6,843) $0.37
Options canceled................................ (406) $0.34
------
Balance at April 30, 1999......................... 1,868 $0.51
Options granted (unaudited)..................... 1,592 $2.00
Options exercised (unaudited)................... (25) $0.28
Options canceled (unaudited).................... (34) $0.75
------
Balance at July 31, 1999 (unaudited).............. 3,401 $1.21
======
</TABLE>
At July 31, 1999, 33,000 shares were available for future option grants
under the 1996 Plan.
F-14
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at April 30, 1999 (in thousands except per share amounts).
<TABLE>
<CAPTION>
Options Outstanding Options exercisable
- ----------------------------------------------------------------- ----------------------------------
Range of Number of Options Weighted Average Weighted Average Number of Options Weighted Average
Exercise Outstanding at Contractual Life Exercise Exercisable at Exercise
Prices April 30, 1999 (Years) Price April 30, 1999 Price
-------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.075-$0.25 442 8.5 $0.15 263 $0.12
$0.375-$1.00 1,426 9.5 0.61 134 0.38
- ------------ ----- --- ----- --- -----
$0.075-$1.00 1,868 9.3 $0.51 397 $0.21
</TABLE>
For the three years ended April 30, 1997, 1998 and 1999 and the three
months ended July 31, 1999, the Company recorded deferred stock compensation
of $150,000, $13,569,000, and $14,223,000, respectively, representing the
difference between the exercise price and the deemed fair value of the
Company's common stock on the date such stock options were granted. For the
years ended April 30, 1998 and 1999 and the three months ended July 31, 1999,
the Company recorded amortization of deferred stock compensation of $52,000,
$3,600,000 and $2,976,000, respectively. At April 30, 1998 and 1999 and July
31, 1999, the Company had $98,000, $10,067,000 and $21,314,000, respectively,
of remaining unamortized deferred compensation. Such amounts are included as a
reduction of stockholders' equity (deficit) and are being amortized using a
graded method over the vesting period of each respective option.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding results of operations and net loss per
share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
under the fair value method of FAS 123. The fair value for each option granted
was estimated at the date of grant using the minimum value option pricing
model with the following weighted-average assumptions: a risk-free interest
rate of 6.00%, no dividend yield, and an exercisable life of five years for
the years ended April 30, 1997, 1998 and 1999.
The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Pro forma net loss............................. $(1,444) $(5,520) $(13,261)
======= ======= ========
Pro forma basic and diluted net loss per common
share......................................... $ (0.73) $ (1.43) $ (2.18)
======= ======= ========
</TABLE>
The per share weighted average grant date fair value of options granted,
which is the value assigned to the options under FAS 123, was $0.02, $0.02,
and $0.14 for options granted for the years ended April 30, 1997, 1998 and
1999, respectively.
F-15
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma impact of options on the net loss for the years ended April
30, 1997, 1998 and 1999 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of
additional stock option grants.
5. Income Taxes
There has been no provision for U.S. federal, state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
April 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating losses....................................... $2,148 $5,384
Other...................................................... 344 729
------ ------
Total deferred tax assets.................................... 2,492 6,113
Valuation allowance.......................................... (2,492) (6,113)
------ ------
Net deferred tax assets...................................... $ -- $ --
====== ======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $1,982,000 and $3,621,000 during 1998 and
1999, respectively.
As of April 30, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,140,000, which expire in
fiscal years 2011 through 2019.
The Company also had net operating loss carryforwards for state income tax
purposes of approximately $9,620,000, which expire in fiscal year 2006.
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
6. Lines of Credit and Long-Term Debt Obligations
In November 1996, the Company entered into a borrowing arrangement with a
financial institution for a line of credit of $400,000. The borrowings under
the line of credit bear interest at the prime rate plus 2% (10.5% at April 30,
1998) and would have expired in May 1999. In November 1998, the Company
amended the line of credit agreement with the same financial institution such
that the total available credit was increased from $400,000 to $3,000,000. A
portion of the credit line is limited such that the Company may not borrow in
excess of $2,500,000 or 80% of eligible domestic accounts receivable balances
plus 65% of foreign accounts receivable balances. The amended line of credit
expires in November 1999 and bears interest at the financial institution's
prime rate plus 0.75% (8.5% and 8.75% at April 30 and July 31, 1999,
respectively). As of April 30 and July 31, 1999, the outstanding balance under
the amended line of credit was $643,000 and $639,000, respectively. The
remaining $500,000 of available credit, all of which is outstanding as of
April 30 and July 31, 1999, is a three-year term loan which expires in
November 2002 and bears interest at the financial institution's prime rate
plus 1.75% (9.5% and 9.75% at April 30 and July 31, 1999, respectively).
F-16
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company entered into an additional credit agreement
with another financial institution, which provided a total credit facility of
$3,850,000. A portion of the credit facility represents a $3,500,000 three-
year term loan, all of which is outstanding as of April 30 and July 31, 1999.
The remaining $350,000 of available credit is related to an equipment line of
credit, of which no amount was outstanding as of April 30, and July 31, 1999.
The term loan and equipment line of credit are secured by substantially all of
the Company's assets, bear interest at 13% and 11.4% and mature in November
2002 and May 2000, respectively.
The above agreements require the Company to maintain compliance with
certain financial covenants and prohibits the Company from paying dividends on
its common stock. As of April 30, and July 31, 1999 the Company was in
compliance with such financial covenants. As of April 30, and July 31, 1999,
the total amount available under the Company's financial arrangements was
$568,000 and $1,502,000, respectively.
Future payments due on the long-term debt obligations as of April 30, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending April 30,
---------------------
<S> <C>
2000................................................................ $ 789
2001................................................................ 1,675
2002................................................................ 1,289
2003................................................................ 247
------
Total payments........................................................ $4,000
======
</TABLE>
7. Lease Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases. Certain of the Company's facility leases provide for
periodic rent increases based on the general rate of inflation. Future minimum
lease payments under operating leases are as follows (in thousands):
<TABLE>
<S> <C>
Year ending April 30,
---------------------
2000............................................................... $1,384
2001............................................................... 1,386
2002............................................................... 1,431
2003............................................................... 1,357
2004 and thereafter................................................ 1,922
------
Total minimum lease payments......................................... $7,480
======
</TABLE>
Rent expense for the three years ended April 30, 1997, 1998 and 1999 was
$33,000, $329,000 and $1,300,000, respectively.
8. Geographic Information Reporting
The Company operates in one segment to design, develop, market and support
high-performance Internet caching appliances. Total export revenue consisted
of sales from the Company's U.S. operations to non-affiliated customers in
other geographic regions. Sales between geographic areas are accounted for at
prices that provide a profit, and are in accordance with the rules and
regulations of the respective governing authorities. No intraenterprise sales
occurred during fiscal 1999 and no long-lived assets reside in the Company's
foreign locations. No geographical information was provided for 1997 and 1998
as the Company's operations were limited to North America.
F-17
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of revenues by geographic area for the year
ended April 30, 1999 (in thousands):
<TABLE>
<CAPTION>
North
America Europe Japan Other Consolidated
------- ------ ------ ----- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $3,919 $1,376 $1,565 $175 $7,035
====== ====== ====== ==== ======
</TABLE>
9. Subsequent Events (Unaudited)
Note Receivable from Stockholder
In August 1999, the Company entered into a five year non-recourse, non-
interest bearing note for $800,000 with an officer of the Company for the
purchase of a primary residence. The note is secured by the officer's primary
residence.
Employee Stock Purchase Plan
In September 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan. The plan becomes effective upon completion of the
Company's initial public offering of its common stock. A total of 2,500,000
shares of common stock have been reserved for issuance under the plan. Under
the plan, eligible employees may purchase common stock through payroll
deductions, which in any event may not exceed 15% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the common stock at the beginning of each offering period or at the end of
each purchase period. The number of shares reserved under the Employee Stock
Purchase Plan will automatically increase by 500,000 shares annually beginning
January 31, 2000. The Company's Board of Directors, at its discretion, may
reduce the automatic annual increase in reserved shares.
1999 Stock Incentive Plan
In September 1999, the Company's Board of Directors adopted the 1999 Stock
Incentive Plan (the "Incentive Plan") under which 5,000,000 shares have been
reserved for issuance. The plan becomes effective upon the completion of the
Company's initial public offering of its common stock. The number of shares
reserved under the Incentive Plan will automatically increase annually
beginning January 1, 2000 by the lesser of 5% of the total amount of common
stock shares outstanding or 2,000,000 shares. The exercise price for incentive
stock options and non-qualified stock options may not be less than 100% and
85%, respectively, of the fair market value of common stock on the option
grant date.
1999 Director Option Plan
In September 1999, the Company's Board of Directors adopted the 1999
Director Option Plan (the "Directors' Plan") under which 500,000 shares have
been reserved for issuance. The 1999 Director Option Plan became effective on
the date of its adoption. Each non-employee joining the Board of Directors
following the effective date of the initial public offering will automatically
receive options to purchase 25,000 shares of common stock. In addition, each
non-employee director will automatically receive options to purchase 5,000
shares of common stock at each annual meeting of the Board of Directors held
in the year 2000 and thereafter. Each option will have an exercise price equal
to the fair market value of the common stock on the option grant date. The
number of shares reserved under the Directors' Plan will automatically
increase by 100,000 shares annually beginning January 1, 2000. The Company's
Board of Directors, at its discretion, may reduce the automatic annual
increase in reserved shares.
F-18
<PAGE>
CACHEFLOW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation
On September 16, 1999, Nokia IP filed a lawsuit in Santa Clara County
Superior Court naming CacheFlow Inc., and certain officers of the company, as
defendants. These officers were formerly employed by Ipsilon Networks, Inc.,
which was acquired by Nokia in December 1997. Following the acquisition, these
officers became employees of Nokia upon completion of the acquisition. In
essence, Nokia claims that the Company and these officers acted improperly in
hiring Nokia's employees. Nokia also claims that a certain officer of the
Company violated a non-competition provision contained in his employment
agreement with Nokia. Nokia is seeking compensatory and punitive damages and
orders prohibiting the defendants from disclosing or using Nokia's trade
secrets or confidential information and acting in a manner that violates these
officers' contractual and fiduciary duties to Nokia. The Company and other
defendants have filed an answer to this Complaint denying the allegations and
believe that there are meritorious defenses to the asserted claims and intend
to defend the litigation vigorously. However, the outcome of litigation is
inherently unpredictable and the results of the litigation may not be
favorable to the Company or the other defendants and could include monetary
damages and a court order restricting our ability to hire Nokia's employees.
Although the Company believes that the ultimate outcome of the dispute with
Nokia will not have a material adverse effect on the Company's consolidated
financial position, results of operations and cash flows, there can be no
assurance that Nokia IP will not prevail in this dispute. If Nokia IP were to
prevail in this dispute on all of its claims, it could have a material adverse
effect on the Company's consolidated financial position, results of
operations, and cash flows.
Stock Option Grants
Between August 1 and November 1, 1999, the Company granted options to
purchase 4,460,730 shares of common stock. This includes a grant of 677,380
options to a consultant of the Company on October 13, 1999 to purchase common
stock at an exercise price of $4.00 per share. The options were immediately
vested, nonforfeitable and exercisable and were subsequently exercised. The
fair value of the options was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions: risk free rate of 6.0%,
expected life of the options of 0.05 years, 60% volatility and no dividend
yield. The Company calculated a value of approximately $5,379,000 for the
consultant's options and will record this amount in the three months ending
October 31, 1999. The Company recorded additional deferred stock compensation
of approximately $27.2 million with respect to stock option grants made during
this period.
Preferred Stock
On November 1, 1999, the Company authorized and issued 280,953 shares of
series D preferred stock at $11.00 per share. The series D preferred stock has
similar rights and preferences as series A, B, and C preferred stock except
that the noncumulative dividend and liquidation preference per share amounts
are $1.10 and $11.00 per share, respectively. In connection with the issuance
of the series D preferred stock the Company expects to record a stock
compensation expense of approximately $281,000 in the three months ending
January 31, 2000.
F-19
<PAGE>
[CACHEFLOW LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................. $ 20,781
NASD fee......................................................... 7,975
Nasdaq National Market initial listing fee....................... 95,000
Printing and engraving........................................... 300,000
Legal fees and expenses of the Company........................... 400,000
Accounting fees and expenses..................................... 400,000
Directors and Officers Liability Insurance....................... 350,000
Blue sky fees and expenses....................................... 10,000
Transfer agent fees.............................................. 20,000
Miscellaneous.................................................... 96,244
----------
Total.......................................................... $1,700,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VI of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and those serving at the
Registrant's request as directors, officers, employees or agents of other
organizations to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a
form of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers
and directors with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The Registrant maintains liability
insurance for its directors and officers. Reference is also made to Sections 7
and 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities, and Section 1.10 of the Amended and Restated Investors' Rights
Agreement contained in Exhibit 4.1 hereto, indemnifying certain of the
Company's stockholders, including controlling stockholders, against certain
liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since our formation, we have issued and sold the following securities:
(1) From inception through July 31, 1999, the Company granted stock
options to purchase 10,198,980 shares of Common Stock at exercise prices
ranging from $.005 to $2.00 per share to employees, consultants, directors
and other service providers pursuant to its 1996 Stock Option Plan.
Additionally, the Company granted stock options to purchase 1,000,000
shares of its Common Stock at an exercise price of $.50 per share to a
director outside of its 1996 Stock Option Plan.
(2) From inception through July 31, 1999, the Company issued and sold an
aggregate of 8,319,625 shares of its Common Stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $535,000 pursuant to direct issuances or
exercises of options granted outside of its 1996 Stock Option Plan.
(3) From inception through July 31, 1999, the Company issued and sold an
aggregate of 6,208,312 shares of its Common Stock to employees,
consultants, directors and other service providers for aggregate
consideration of $1,584,396 pursuant to exercises of options granted
pursuant to its 1996 Stock Option Plan.
(4) From August 1, 1999 through November 1, 1999, the Company granted
stock options to purchase 3,758,350 shares of its Common Stock at exercise
prices ranging from $4.00 to $6.00 per share to employees, consultants and
directors pursuant to its 1996 Stock Option Plan.
(5) From August 1, 1999 through November 1, 1999, the Company granted
stock options to purchase 702,380 shares of its Common Stock at an exercise
price of $4.00 per share to a consultant and director outside of its 1996
Stock Option Plan.
(6) From August 1, 1999 through November 1, 1999, the Company issued and
sold an aggregate of 723,582 shares of its Common Stock to employees,
consultants, directors and other service providers for aggregate
consideration of $2,973,043 pursuant to exercises of options granted
pursuant to its 1996 Stock Option Plan.
(7) From August 1, 1999 through November 1, 1999, the Company issued and
sold an aggregate of 702,380 shares of its Common Stock to a consultant and
director for aggregate consideration of $2,809,520 pursuant to exercises of
options granted outside of its 1996 Stock Option Plan.
(8) Between April 30, 1996 and June 21, 1996, the Company issued
warrants to purchase 562,850 shares of its Series A Preferred Stock at an
exercise price of $.875 per share.
(9) On October 29, 1996, we issued and sold 5,483,252 shares of Series A
Preferred Stock to a group of 18 investors for an aggregate purchase price
of $4,797,845.50.
(10) On November 13, 1996, we issued and sold an aggregate of 347,688
shares of its Series A Preferred Stock to seven investors for an aggregate
purchase price of $304,227.00
(11) On December 24, 1997, we issued and sold 3,816,376 shares of Series
B Preferred Stock to a group of 14 investors for an aggregate purchase
price of $8,625,009.76.
(12) On February 18, 1998, we issued and sold 323,010 shares of Series B
Preferred Stock to a group of two investors for our aggregate purchase
price of $730,002.60.
(13) On November 18, 1998, the Company issued warrants to purchase
141,842 shares of its Series B Preferred Stock at an exercise price of
$3.4175 per share.
(14) On April 30, 1999, the Company issued warrants to purchase 110,000
shares of its Series C Preferred Stock at an exercise price of $4.575 per
share.
(15) On May 28, 1999, we issued and sold 4,371,586 shares of Series C
Preferred Stock to a group of 27 investors for an aggregate purchase price
of $20,000,005.95.
(16) On November 1, 1999, we issued and sold 280,953 shares of Series D
Preferred Stock to one investor for an aggregate purchase price of
$3,090,483.
II-2
<PAGE>
The sale of the above securities was deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act or Rule 701 promulgated
under Section 3(b) of the Act as transactions by an issuer not involving any
public offering or transactions pursuant to compensation benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
3.1+ Certificate of Incorporation of the Registrant, as amended to date
3.2+ Form of Amended and Restated Certificate of Incorporation of the Registrant, to
be filed upon the closing of the offering made pursuant to this Registration
Statement
3.3+ Bylaws of the Registrant
3.4+ Form of Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made pursuant to this Registration Statement
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2+ Amended and Restated Investors' Rights Agreement, dated May 28, 1999
4.3+ Series C Preferred Stock Purchase Agreement, dated May 28, 1999
4.4+ Amendment No. 1 to Series C Preferred Stock Purchase Agreement, dated October 29,
1999
4.5* Specimen Certificate of the Registrant's Common Stock
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant
10.1+ Form of Indemnification Agreement
10.2+ 1996 Stock Option Plan
10.3+ 1999 Stock Incentive Plan
10.4+ 1999 Director Option Plan
10.5+ 1999 Employee Stock Purchase Plan
10.6+ Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
Perry Foundation, dated July 14, 1998
10.7+ Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
Inc., dated February 19, 1997
10.8+ Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
Corporation Ltd., dated May 1, 1999
10.9+ Offer Letter with Brian NeSmith
10.10+ Offer Letter with Alan Robin
10.11+ Offer Letter with Mike Johnson
16.1+ Letter from Deloitte and Touche LLP, former independent accountants to the
Registrant
16.2+ Letter from PricewaterhouseCoopers LLP, former independent accountants to the
Registrant
21.1+ Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant. Reference is made to Exhibit 5.1
24.1+ Power of Attorney. Reference is made to page II-5
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
+ Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedule
Schedule II--Valuations and Qualifying accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the Underwriting Agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 8th day of November, 1999.
CACHEFLOW INC.
/s/ Brian M. NeSmith
By: _________________________________
Brian M. NeSmith
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Brian M. NeSmith President, Chief Executive November 8, 1999
______________________________________ Officer and Director
Brian M. NeSmith (Principal Executive
Officer)
/s/ Michael J. Johnson Vice President, Chief November 8, 1999
______________________________________ Financial Officer and
Michael J. Johnson Secretary (Principal
Financial and Accounting
Officer)
* Director November 8, 1999
______________________________________
Marc Andreessen
* Director November 8, 1999
______________________________________
David W. Hanna
* Chairman of the Board, November 8, 1999
______________________________________ Director
Michael A. Malcolm
* Director November 8, 1999
______________________________________
Stuart G. Phillips
* Director November 8, 1999
______________________________________
Andrew S. Rachleff
</TABLE>
/s/ Brian M. NeSmith
*By: ____________________________
(Brian M. NeSmith,
Attorney-in-fact)
II-5
<PAGE>
SCHEDULE II
CACHEFLOW INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1997, 1998 AND 1999
AND THREE MONTHS ENDED JULY 31, 1999
Allowance for Doubtful Accounts Receivable
<TABLE>
<CAPTION>
Additions-
Balance at Charged Balance at
Year Ended Beginning of to Costs and Deductions- End of
April 30, Period Expenses Write-offs Period
- ---------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
1997........................... -- -- -- --
1998........................... -- -- -- --
1999........................... -- 121,000 -- 121,000
</TABLE>
<TABLE>
<CAPTION>
Additions-
Balance at Charged Balance at
Three Months Ended Beginning of to Costs and Deductions- End of
July 31, Period Expenses Write-offs Period
- ------------------ ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
1999.......................... 121,000 264,000 85,000 300,000
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
1.1 Form of Underwriting Agreement
3.1+ Certificate of Incorporation of the Registrant, as amended to date
3.2+ Form of Amended and Restated Certificate of Incorporation of the Registrant, to
be filed upon the closing of the offering made pursuant to this Registration
Statement
3.3+ Bylaws of the Registrant
3.4+ Form of Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made pursuant to this Registration Statement
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2+ Amended and Restated Investors' Rights Agreement, dated May 28, 1999
4.3+ Series C Preferred Stock Purchase Agreement, dated May 28, 1999
4.4+ Amendment No. 1 to Series C Preferred Stock Purchase Agreement, dated October 29,
1999
4.5* Specimen Certificate of the Registrant's Common Stock
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant
10.1+ Form of Indemnification Agreement
10.2+ 1996 Stock Option Plan
10.3+ 1999 Stock Incentive Plan
10.4+ 1999 Director Option Plan
10.5+ 1999 Employee Stock Purchase Plan
10.6+ Commercial Lease Agreement between Registrant, the Arrillaga Foundation and the
Perry Foundation, dated July 14, 1998
10.7+ Commercial Lease Agreement between Registrant and Redmond Whitehall Associates,
Inc., dated February 19, 1997
10.8+ Commercial Lease Agreement between CacheFlow Canada and Wiebe Property
Corporation Ltd., dated May 1, 1999
10.9+ Offer Letter with Brian NeSmith
10.10+ Offer Letter with Alan Robin
10.11+ Offer Letter with Mike Johnson
16.1+ Letter from Deloitte and Touche LLP, former independent accountants to the
Registrant
16.2+ Letter from PricewaterhouseCoopers LLP, former independent accountants to the
Registrant
21.1+ Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
to the Registrant. Reference is made to Exhibit 5.1
24.1+ Power of Attorney. Reference is made to page II-5
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 1.1
DRAFT
November 5, 1999
5,000,000 Shares
CACHEFLOW INC.
Common Stock, Par Value $0.0001 Per Share
UNDERWRITING AGREEMENT
[__________], 1999
<PAGE>
[_____________], 1999
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
CacheFlow Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") 5,000,000 shares of its Common Stock, par value $0.0001 per
share (the "Firm Shares"). The Company also proposes to issue and sell to the
several Underwriters not more than an additional 750,000 shares of its Common
Stock, par value $0.0001 per share (the "Additional Shares"), if and to the
extent that you, as Managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares." The
shares of Common Stock, par value $0.0001 per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to
reserve a portion of the Shares to be purchased by it under this Agreement for
sale to the Company's directors, officers, employees and business associates,
holders of the Company's series C preferred stock, and other parties related to
the Company (collectively, "Participants"), as set forth in the Prospectus under
the heading "Underwriters" (the "Directed Share Program"). The Shares to be
sold by Morgan Stanley and its affiliates pursuant to the Directed Share Program
are referred to hereinafter
<PAGE>
as the "Directed Shares". Any Directed Shares not orally confirmed for
purchase by any Participant by the end of the business day on which this
Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
2
<PAGE>
and non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) On the Closing Date (as defined below), the authorized
capital stock of the Company will conform as to legal matters to the
description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued, fully paid
and non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or bylaws of the Company or any agreement or other instrument
binding upon the Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
the Company or any subsidiary, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or,
to the Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
3
<PAGE>
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be required to register as an
"investment company" as such term is defined in the Investment Company Act
of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance
with all terms and conditions of any such permit, license or approval,
except where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for cleanup, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(p) Except as described in the Prospectus, the Company has
reviewed its operations and that of its subsidiaries to evaluate the extent
to which the business or operations of the Company and its subsidiaries,
taken as a whole, will be affected by the Year 2000 Problem (that is, any
significant risk that computer hardware or software applications used by
the Company and its subsidiaries will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January 1,
2000); as a result of such review, (i) the Company has no reason to
believe, and does not believe, that (A) there are any issues related to the
Company's preparedness to address the Year 2000 Problem that are of a
character required to be described or referred to in the Registration
Statement or Prospectus which have not been accurately described in the
Registration Statement or Prospectus and (B) except as described in the
Prospectus, the Year 2000 Problem will have a material adverse effect on
the condition, financial or otherwise, or on the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, or result
in any material loss or interference with the business or operations of the
Company and its subsidiaries, taken as a whole; and
4
<PAGE>
(ii) the Company reasonably believes, after due inquiry, that the
suppliers, vendors, customers or other material third parties used or
served by the Company and such subsidiaries are addressing or will
address the Year 2000 Problem in a timely manner, except to the extent
that a failure to address the Year 2000 Problem by any supplier, vendor,
customer or material third party would not have a material adverse effect
on the condition, financial or otherwise, or on the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
(q) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(r) Except in each case as described in the Prospectus,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) the Company and its
subsidiaries, taken as a whole, have not incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction
not in the ordinary course of business; (ii) except for the repurchase of
shares of its capital stock in connection with the termination of service
by employees, consultants or directors of the Company, the Company has not
purchased any of its outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on its capital
stock; and (iii) there has not been any material change in the capital
stock of the Company or any material change in the consolidated short-term
debt or long-term debt of the Company and its subsidiaries.
(s) Neither the Company nor any of its subsidiaries own any real
property. The Company and its subsidiaries have good and marketable title
to all personal property owned by them which is material to the business of
the Company and its subsidiaries, free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do
not materially affect the value of such property and do not interfere in
any material respect with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere in any material respect with the use
made and proposed to be made of such property and buildings by the Company
and its subsidiaries, in each case except as described in the Prospectus.
(t) The Company and its subsidiaries own or possess adequate
licenses to or other rights to use, or can acquire on reasonable terms, all
material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, and neither the Company
nor any of its subsidiaries has
5
<PAGE>
received any notice of infringement of or conflict with asserted rights
of others with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(u) No material labor dispute with the employees of the Company
or any of its subsidiaries exists, except as described in the Prospectus,
or, to the knowledge of the Company, is imminent; and the Company is not
aware of any existing, threatened or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors
that would have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(v) The Company and its subsidiaries, taken as a whole, are
insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are customary in the businesses in
which they are engaged; neither the Company nor any of its subsidiaries has
been refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, except to the extent that the failure to obtain such
certificates, authorizations and permits would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described the Prospectus.
(x) The Company and each of its subsidiaries, taken as a whole,
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(y) The Company represents and warrants to Morgan Stanley and
its affiliates that (i) the Registration Statement, the Prospectus and
any preliminary prospectus comply
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in all material respects, and any further amendments or supplements
thereto will comply in all material respects, with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or any
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii)
no authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the
securities laws and regulations of foreign jurisdictions in which the
Directed Shares are offered outside the United States.
(z) The Company has not offered, or caused Morgan Stanley and
its affiliates to offer, Shares to any person pursuant to the Directed
Share Program with the specific intent to unlawfully influence (i) a
customer or supplier of the Company to alter the customer's or supplier's
level or type of business with the Company, or (ii) a trade journalist or
publication to write or publish favorable information about the Company or
its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $[______] a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 750,000 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
overallotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
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consequences of ownership of the Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Shares to be sold hereunder, (B) the issuance by
the Company of shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof of
which the Underwriters have been advised in writing, (C) the issuance by the
Company of shares of Common Stock or options to purchase Common Stock pursuant
to the Company's 1996 Stock Plan, its 1999 Equity Incentive Plan and its 1999
Directors' Stock Option Plan, provided in the case of this clause (C) that any
such shares of Common Stock do not vest and any such options do not vest or
become exercisable during such 180-day period, or (D) the issuance by the
Company of shares of Common Stock pursuant to the Company's 1999 Employee
Stock Purchase Plan.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$[_____________] a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of
$[______] a share under the Public Offering Price, and that any Underwriter may
allow, and such dealers may reallow, a concession, not in excess of $[_____] a
share, to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on [____________], 1999, or at
such other time on the same or such other date, not later than [_________],
1999, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than [_______], 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Option Closing Date".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
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5. Conditions to the Underwriters' Obligations. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 4:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
outside counsel for the Company, dated the Closing Date, to the effect
that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of
Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good
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standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, non-assessable and, to such counsel's knowledge, fully paid;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly authorized and are validly
issued, non-assessable and, to such counsel's knowledge, fully paid;
and all such shares of capital stock are owned directly by the
Company, free and clear of all liens, encumbrances, equities or
claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive rights under the
Delaware General Corporation Law or the Company's certificate of
incorporation or bylaws or, to such counsel's knowledge, any similar
rights;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any applicable federal or California law or any
applicable provision of Delaware General Corporation Law or the
certificate of incorporation or bylaws of the Company or, to such
counsel's knowledge, any agreement or other instrument filed as an
exhibit to the Registration Statement, or, to such counsel's
knowledge, any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or governmental agency is required for the
performance by
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the Company of its obligations under this Agreement, except such as
may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares (as to
which such counsel need not opine);
(ix) the statements (A) in the Prospectus under the caption
"Description of Capital Stock" and, to the extent of the description
of this Agreement, under the caption "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(x) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
and
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be required to
register as an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
Such counsel shall also state that, in addition to rendering
legal advice and assistance to the Company in the course of the preparation
of the Registration Statement and the Prospectus, involving, among other
things, discussions and inquiries concerning various legal matters and the
review of certain corporate records, documents and proceedings, such
counsel also participated in conferences with certain officers and other
representatives of the Company, including its independent certified public
accountants, and with the Underwriters and counsel for the Underwriters, at
which the contents of the Registration Statement and the Prospectus and
related matters were discussed; provided, however, that such counsel may
state that, except as set forth in paragraphs (iii) and (ix) above, it has
not independently verified the accuracy, completeness or fairness of the
information contained in the Registration Statement and the Prospectus.
Such counsel shall also state that, based upon its participation
as described in the preceding paragraph, (i) it is of the opinion that the
Registration Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein as to
which such counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (ii) it confirms that it has
no reason to believe that (except
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<PAGE>
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any belief)
the Registration Statement and the prospectus included therein at the
time the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and that it has no reason to believe that (except for
financial statements and schedules and other financial and statistical
data as to which such counsel need not express any belief) the Prospectus
as of its date contained, or as of the date such opinion is delivered
contains, any untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
The opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP described in Section 5(c) above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(d) The Underwriters shall have received on the Closing Date an
opinion of Shearman & Sterling, counsel for the Underwriters, dated the
Closing Date, in form and substance satisfactory to you.
(e) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the
Underwriters, from Ernst & Young LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus; provided that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date hereof.
(f) The "lockup" agreements, each substantially in the form of
Exhibit A hereto (or as otherwise agreed to by Morgan Stanley & Co.
Incorporated on behalf of the Underwriters), between you and certain
stockholders, officers and directors of the Company relating to sales and
certain other dispositions of shares of Common Stock or certain other
securities, delivered to you on or before the date hereof, shall be in full
force and effect on the Closing Date.
(g) The Common Stock shall have been approved for trading on the
Nasdaq National Market, subject only to official notice of issuance.
(h) You shall have received such other documents and
certificates as are reasonably requested by you or your counsel.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may
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<PAGE>
reasonably request with respect to the good standing of the Company, the due
authorization and issuance of the Additional Shares and other matters related
to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering the
twelve-month period ending April 30, 2001 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
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(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause
to be paid all expenses incident to the performance of its obligations
under this Agreement, including: (i) the fees, disbursements and expenses
of the Company's counsel and the Company's accountants in connection with
the registration and delivery of the Shares under the Securities Act and
all other fees or expenses in connection with the preparation and filing of
the Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky
memorandum in connection with the offer and sale of the Shares under state
securities laws and all expenses in connection with the qualification of
the Shares for offer and sale under state securities laws as provided in
Section 6(d) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky memorandum, (iv) all
filing fees and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of
the offering of the Shares by the National Association of Securities
Dealers, Inc., (v) all expenses in connection with any offer and sale of
the Shares outside of the United States, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with offers and sales outside of the United States, (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to listing the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares,
(viii) the costs and charges of any transfer agent, registrar or
depositary, (ix) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation,
expenses associated with the production of road show slides and graphics,
fees and expenses of any consultants engaged in connection with the road
show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company (but
excluding expenses of representatives of the Underwriters) and any such
consultants, and the cost of any aircraft chartered in connection with the
road show, (x) all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program, and (xi) all
other costs and expenses incident to the performance of the obligations of
the Company hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this
Section, Section 7 entitled "Indemnity and Contribution", Section 8
entitled "Directed Share Program Indemnification" and the last paragraph of
Section 10 below, the Underwriters will pay all of their costs and
expenses, including fees and disbursements of their counsel, stock transfer
taxes payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
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(g) That in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the National Association of Securities Dealers, Inc.
(the "NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Morgan Stanley will notify
the Company as to which Participants will need to be so restricted. The
Company will direct the transfer agent to place stop transfer restrictions
upon such securities for such period of time.
(h) That the Company will comply with all applicable securities
and other applicable laws, rules and regulations in each foreign
jurisdiction in which the Directed Shares are offered in connection with
the Directed Share Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any
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amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to information
relating to such Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b), such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7(a), and by the Company, in the case of
parties indemnified pursuant to Section 7(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
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(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall
17
<PAGE>
remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Underwriter or any person controlling any Underwriter or by or on behalf
of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
8. Directed Share Program Indemnification. (a) The Company agrees
to indemnify and hold harmless Morgan Stanley and its affiliates and each
person, if any, who controls Morgan Stanley or its affiliates within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
("Morgan Stanley Entities"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in any material prepared by or with the
consent of the Company for distribution to Participants in connection with the
Directed Share Program or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities, unless such failure is the result of noncompliance by
the Company with Section 6(a) hereof; (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant agreed to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, other than losses, claims, damages
or liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Morgan
Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeing indemnity, shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any others the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Morgan Stanley Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation
18
<PAGE>
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The Company shall not, in respect
of the legal expenses of the Morgan Stanley Entities in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Morgan Stanley Entities. Any such separate firm for the
Morgan Stanley Entities shall be designated in writing by Morgan Stanley. The
Company shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if there be a
final judgment for the plaintiff, the Company agrees to indemnify the Morgan
Stanley Entities from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
a Morgan Stanley Entity shall have requested the Company to reimburse it for
fees and expenses of counsel as contemplated by the second and third sentences
of this paragraph, the Company agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by the Company of
the aforesaid request and (ii) the Company shall not have reimbursed the
Morgan Stanley Entity in accordance with such request prior to the date of
such settlement. The Company shall not, without the prior written consent of
Morgan Stanley, effect any settlement of any pending or threatened proceeding
in respect of which any Morgan Stanley Entity is or could have been a party
and indemnity could have been sought hereunder by such Morgan Stanley Entity,
unless such settlement includes an unconditional release of the Morgan Stanley
Entities from all liability on claims that are the subject matter of such
proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then the Company in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with any statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Morgan Stanley Entities on the other hand in connection with
the offering of the Directed Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Directed Shares (before
deducting expenses) and the total underwriting discounts and commissions
received by the Morgan Stanley Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Directed Shares. If the loss, claim,
damage or liability is caused by an untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley Entities on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement or the omission or alleged omission
relates to information supplied by the Company or by the Morgan
19
<PAGE>
Stanley Entities and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(c). The amount paid or payable by the Morgan Stanley Entities as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the Morgan Stanley Entities in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 8, no
Morgan Stanley Entity shall be required to contribute any amount in excess of
the amount by which the total price at which the Directed Shares distributed to
the public were offered to the public exceeds the amount of any damages that
such Morgan Stanley Entity has otherwise been required to pay. The remedies
provided for in this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
overthecounter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
20
<PAGE>
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you and the Company for the purchase of such Firm Shares are not made within
36 hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. If, on the Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional Shares
and the aggregate number of Additional Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
21
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12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
22
<PAGE>
13. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
CacheFlow Inc.
By:____________________________
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:__________________________
Name:
Title:
23
<PAGE>
SCHEDULE I
Number of
Firm Shares
Underwriter To Be Purchased
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated
[NAMES OF OTHER UNDERWRITERS]
---------------
Total ........
===============
<PAGE>
Exhibit A
[FORM OF LOCK-UP LETTER]
_____________, 199_
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley") proposes to enter into an Underwriting Agreement (the
"Underwriting Agreement") with CacheFlow Inc., a Delaware corporation (the
"Company"), providing for the public offering (the "Public Offering") by the
several Underwriters, including Morgan Stanley (the "Underwriters"), of
5,000,000 shares (the "Shares") of the Common Stock, par value $0.0001 per
share, of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares
to the Underwriters pursuant to the Underwriting Agreement, (b) transactions
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the
<PAGE>
A-2
Public Offering, (c) a bona fide gift or gifts to the undersigned's immediate
family, provided the donee or donees thereof agree in writing to be bound by
the terms of this agreement, (d) a distribution to limited partners or
stockholders of the undersigned after the date of the Underwriting Agreement,
provided that the distributees thereof agree in writing to be bound by the
terms of this agreement, or (e) a transfer to any trust for the benefit of the
undersigned or the undersigned's immediate family, provided that the trustee
of the trust agrees in writing, on behalf of the trust to be bound by the
terms of this agreement. In addition, the undersigned agrees that, without the
prior written consent of Morgan Stanley on behalf of the Underwriters, it will
not, during the period commencing on the date hereof and ending 180 days after
the date of the Prospectus, make any demand for or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 24, 1999 in Amendment No. 2 to the
Registration Statement (Form S-1) and related prospectus of CacheFlow Inc. for
the registration of shares of its common stock.
Our audits also included the consolidated financial statement schedule of
CacheFlow Inc. listed in Schedule II. The schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the consolidated financial statement schedule
referenced to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Walnut Creek, California
November 5, 1999
