<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
____________________
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 000-28139
____________________
CACHEFLOW INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1715963
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION)
INCORPORATION OR ORGANIZATION)
650 ALMANOR AVENUE 94086
SUNNYVALE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 220-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of the issuer's class of common stock,
as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS August 31, 2000
----- ---------------
<S> <C>
Common Stock, par value $0.0001 39,602,863
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 31, 2000 and April 30,
2000 1
Condensed Consolidated Statements of Operations for the three months
ended July 31, 2000 and July 31, 1999 2
Condensed Consolidated Statements of Cash Flows for the three months
ended July 31, 2000 and July 31, 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 22 - 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
i
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CACHEFLOW INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
July 31, April 30,
2000 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,289 $ 91,532
Short-term investments 27,288 33,788
Accounts receiveable, net 8,022 3,112
Inventories 6,656 4,741
Prepaid expenses and other current assets 1,048 1,200
---------- -----------
Total current assets 127,303 134,373
Property and equipment, net 5,821 4,721
Goodwill, net 167,155 -
Other assets 818 1,640
---------- -----------
Total assets $ 301,097 $140,734
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,949 $ 2,465
Accrued payroll and related benefits 2,089 2,611
Deferred revenue 2,423 1,375
Other accrued liabilities 3,989 1,487
---------- -----------
Total current liabilities 11,450 7,938
Deferred revenue 330 166
---------- -----------
Total liabilities 11,780 8,104
Commitments
Stockholders' equity:
Common stock 4 4
Additional paid-in capital 438,896 264,304
Treasury stock (1,055) (570)
Notes receivable from stockholders (4,149) (4,713)
Deferred stock compensation (36,208) (43,489)
Accumulated deficit (108,119) (82,805)
Accumulated other comprehensive loss (52) (101)
---------- -----------
Total stockholders' equity 289,317 132,630
---------- -----------
Total liabilities and stockholders' equity $ 301,097 $140,734
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
1
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CACHEFLOW INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 22,445 $ 3,612
Cost of goods sold 8,300 1,380
--------- ---------
Gross profit 14,145 2,232
Operating expenses:
Research and development 4,722 1,613
Sales and marketing 14,008 3,481
General and administrative 1,965 667
Stock compensation 10,775 2,992
Goodwill amortization 9,833 -
--------- ---------
Total operating expenses 41,303 8,753
--------- ---------
Operating loss (27,158) (6,521)
Interest income(expense), net 1,916 (36)
--------- ---------
Net loss before income taxes (25,242) (6,557)
Provision for income taxes (72) -
--------- ---------
Net loss $ (25,314) $ (6,557)
========= =========
Basic and diluted net loss per common share $ (0.77) $ (0.80)
========= =========
Shares used in computing basic and diluted
net loss per common share 32,723 8,236
========= =========
Pro forma basic and diluted net loss per
common share $ (0.77) $ (0.30)
========= =========
Shares used in computing pro forma basic and
diluted net loss per common share 32,723 21,967
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
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CACHEFLOW INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
-----------------------------
2000 1999
---------- -----------
<S> <C> <C>
Operating Activities
Net loss $ (25,314) $ (6,557)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 382 117
Stock compensation 10,775 2,992
Goodwill amortization 9,833 -
Interest on notes receivable from stockholders (59) (13)
Changes in operating assets and liabilities:
Accounts receivable (4,910) (604)
Inventories (1,915) (789)
Prepaid expenses and other current assets 172 (92)
Other assets 822 71
Accounts payable 479 446
Accrued liabilities (6,403) 484
---------- -----------
Net cash used in operating activities (16,138) (3,945)
Investing Activities
Purchases of property and equipment (1,439) (472)
Purchases of investments, net 6,549 -
Cash aquired in business acquisition 333 -
---------- -----------
Net cash provided by (used in) investing activities 5,443 (472)
Financing Activities
Net proceeds from issuance of preferred stock - 19,976
Net proceeds from issuance of common stock 3,452 7
Repurchase of employee stock - (28)
Payments on debt obligations and line of credit - (4)
---------- -----------
Net cash provided by financing activities 3,452 19,951
---------- -----------
Net (decrease) increase in cash and cash equivalents (7,243) 15,534
Cash and cash equivalents at beginning of period 91,532 2,291
---------- -----------
Cash and cash equivalents at end of period $ 84,289 $ 17,825
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 167
========== ===========
Non-cash investing and financing activities:
Net exercise of stock warrants $ 485 $ -
========== ===========
Issuance of note receivable to stockholder $ - $ (13)
========== ===========
Amounts related to business acquisitions:
Issuance of common stock and assumption of stock options $ 168,275 $ -
========== ===========
Net liabilities assumed $ 7,013 $ -
========== ===========
</TABLE>
See notes to condensed consolidated finanical statements.
3
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CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated. The accompanying condensed consolidated
financial statements and related notes as of July 31, 2000, and for the three-
month period then ended, 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, 2000 are not necessarily indicative of results for the entire
fiscal year or future periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted under the Securities and Exchange Commission's
rules and regulations. These condensed consolidated financial statements and
notes included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes for the year ended April 30, 2000,
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on July 28, 2000.
Note 2. 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 consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Note 3. Revenue Recognition
The Company generally recognizes product revenue upon shipment assuming that
collectibility is probable, unless the Company has future obligations for
installation or must obtain customer acceptance, in which case revenue is
deferred until these obligations are met. Maintenance contract revenue is
initially deferred when the customer purchases a maintenance contract and
recorded evenly over the life of the contract. Maintenance contract revenue for
the three months ended July 31, 2000 and 1999 was not material.
Note 4. 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. Inventories consisted of the following (in thousands):
July 31, April 30,
2000 2000
------- --------
Raw materials $4,331 $2,380
Work-in-process 720 317
Finished goods 1,605 2,044
------- --------
$6,656 $4,741
======= ========
Note 5. Litigation
From time to time and in the ordinary course of business, the Company may be
subject to various claims, charges, and litigation. In the opinion of
management, final judgments from such pending claims, charges, and litigation,
if any, against the Company would not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
4
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CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Business Acquistion
On June 5, 2000, the Company acquired all of the outstanding capital stock of
SpringBank Networks, Inc. ("SpringBank"), through a stock-for-stock merger,
pursuant to which each issued and outstanding share of common stock of
SpringBank was converted into the right to receive 0.2 shares of common stock of
CacheFlow. In addition, each outstanding option to purchase SpringBank Common
Stock was assumed by CacheFlow and converted into an option to purchase shares
of CacheFlow common stock determined pursuant to the exchange ratio in the
Merger Agreement. The exercise price of the options to purchase CacheFlow common
stock was also determined pursuant to the exchange ratio in the Merger
Agreement. Purchase consideration totaled approximately $177 million and
included approximately 2.7 million shares of CacheFlow common stock,
approximately $7 million of assumed liabilities and approximately $2 million in
transaction costs. This transaction was accounted for as a purchase, and the
purchase price was allocated to tangible and intangible assets in proportion to
the fair value of those assets. Specifically, approximately $177 million was
allocated to goodwill, which is being amortized over three years on a straight-
line basis.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the acquisition of Springbank Networks, Inc. had
occurred at the beginning of fiscal year 2001 and does not purport to be
indicative of what would have occurred had the acquisition been made as of the
beginning of fiscal 2001 or of the results which may occur in the future (in
thousands, except per share data).
Three Months
Ended July
31, 2000
------------
Net sales $ 22,445
========
Net loss $(42,331)
========
Basic and diluted net loss per
common share $ (1.20)
========
Number of shares used in pro
forma basic and diluted share
calculation 35,157
========
Note 7. Repayment of Notes Receivable
During June and July 2000, an officer of the Company repaid the Company all
principal and accrued interest owed under an $800,000 promissory note to
purchase a primary residence and a $999,900 promissory note to purchase shares
of common stock.
Note 8. Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Included in other comprehensive
income (loss) for the Company are adjustments to record unrealized gains and
losses on available-for-sale securities. These adjustments are accumulated in
"Accumulated other comprehensive loss" in the stockholder's equity section of
the balance sheet. The comprehensive net loss for the three-month period ended
July 31, 2000 was $25,265,000, which was $49,000 less than the reported net
loss. The comprehensive net loss for the three-month period ended July 31, 1999
did not differ from the reported net loss.
Note 9. Net Loss Per Common Share
5
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CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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, service providers and employees that are subject
to repurchase.
Pro forma basic and diluted net loss per common share, as presented in the
condensed consolidated statements of operations for the three-month period ended
July 31, 1999, 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 expired upon the completion of the Company's
initial public offering of its common stock. The weighted average share amounts
exclude warrants to purchase series B preferred stock, as such warrants remained
outstanding after the initial public offering was complete.
Pro forma basic and diluted net loss per common share for the three-month period
ended July 31, 2000 was the same as basic and diluted net loss per common share
since all preferred stock and warrants had been converted or exercised and were
outstanding for the entire three-month period.
6
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CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
July 31,
------------------------
2000 1999
---------- ---------
<S> <C> <C>
Historical:
Net loss available to common stockholders $ (25,314) $ (6,557)
========= ========
Weighted-average shares of common stock outstanding 37,594 12,692
Less: Weighted-average shares subject to repurchase (4,871) (4,456)
--------- --------
Weighted-average shares used in computing basic and diluted
net loss per common share 32,723 8,236
========= ========
Basic and diluted net loss per common share $ (0.77) $ (0.80)
========= ========
Pro forma:
Shares used above 32,723 8,236
Pro forma adjustment to reflect the weighted effect of the
assumed conversion of preferred stock - 13,059
Pro forma adjustment to reflect the weighted effect of
assumed exercise and conversion of preferred stock warrants - 673
--------- --------
Shares used in computing pro forma basic and diluted net loss
per common share 32,723 21,967
========= ========
Pro forma basic and diluted net loss per common share $ ( 0.77) $ (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 common share because all such securities are
antidilutive for all periods presented.
Note 10. Stockholders' Equity
Common Stock
The Company has entered into Stock Purchase Agreements in connection with the
sale of common stock to employees, directors and service providers. 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 and directors service periods. The repurchase right generally declines
on a percentage basis over four years based on the length of each respective
employee's continued employment with the Company and the director's membership
on the Board of Directors. As of July 31, 2000 and 1999, 5,730,966 and 4,214,276
shares, respectively, of common stock issued under these agreements were subject
to repurchase.
7
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CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Compensation
For the three months ended July 31, 2000 and 1999, the Company recorded deferred
stock compensation of $3,494,000 and $14,223,000, respectively. These amounts
represent 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
three months ended July 31, 2000 and 1999, the Company recorded amortization of
stock compensation of $10,775,000 and $2,992,000, respectively. At July 31, 2000
and April 30, 2000, the Company had $36,208,000 and $43,489,000, respectively,
of remaining unamortized deferred stock compensation. Such amounts are included
as a reduction of stockholders' equity and are being amortized using a graded
method over the vesting period of each respective option.
Note 11. Subsequent Event
During August 2000, shareholders approved a resolution to increase the number of
common shares that are available for future issuance under the 1999 Stock
Incentive Plan by 2,000,000 shares.
8
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CACHEFLOW INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report that are not purely historical are
forward-looking statements, including statements about our expectations,
beliefs, intentions, or strategies regarding the future. All forward-looking
statements included in this document are based upon information available to us
as of the date hereof, and we assume no obligation to update any such forward-
looking statements. Forward-looking statements involve risks and uncertainties,
which could cause actual results to differ materially from those projected.
These and other risks relating to our business are set forth under "Factors
Affecting Future Operating Results" and elsewhere in this report as well as in
our audited financial statements for the year ended April 30, 2000 included in
our Form 10-K filed with the SEC on July 28, 2000.
Overview
The Company is the leading provider of content intelligent networking solutions.
The Company is focused on building a new layer of content intelligent
infrastructure that makes the Internet content-smart. The Company's market
leading caching appliances and innovative content delivery technologies are
specifically designed and focused on managing content in Service Provider,
Enterprise and Content Provider networks and offer customers increased
reliability, performance and scalability, and reduced complexity and cost
compared to current alternatives.
We first began to service this emerging market through the commercial shipment
of our first products, a line of high-performance Internet caching appliances,
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. Substantially all of our net sales through July 31, 2000 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
net sales for the foreseeable future.
The Company recorded deferred stock compensation of approximately $3.5 million
and $14.2 million for the three months ended July 31, 2000 and 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 on the date such stock awards were granted. The Company
recorded stock compensation expense of approximately $10.8 million and $ 3.0
million for the three months ended July 31, 2000 and 1999. Between August 1,
2000 and August 14, 2000, we recorded no additional deferred stock compensation;
however, the Company may record additional compensation in the future if
management decides to grant below-market stock options in order to attract and
retain employees in a highly competitive labor market. Based on options granted
below fair value through August 14, 2000, we expect stock compensation expense,
which is primarily attributable to amortization of deferred compensation
charges, to impact our reported results through April 30, 2004. Given the
balance of deferred stock compensation on the balance sheet and recent grant
history, we expect stock compensation expense to be a significant operating
expense as this deferral is recognized.
We have incurred net losses in each quarter since inception. As of July 31,
2000, we had an accumulated deficit of $108.1 million. Our net loss for the
three months ended July 31, 2000 was $25.3 million. This loss resulted from
significant costs incurred in the development and sale of our products and
services, and from amortization of deferred stock compensation and goodwill. We
expect to experience significant growth in our operating expenses, particularly
research and development and sales and marketing expenses. Due to this growth in
expenses, and the impact of stock compensation expense and goodwill
amortization, we expect to incur losses 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 stage of development, particularly companies in new and
rapidly evolving markets. We may not be successful in addressing these risks and
difficulties.
9
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CACHEFLOW INC.
Results of Operations
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the periods indicated:
Three Months Ended
July 31,
-------------------------------
2000 1999
----------- -----------
Net sales 100.0% 100.0%
Cost of goods sold 37.0 38.2
----------- -----------
Gross margin 63.0 61.8
Operating expenses:
Research and development 21.0 44.7
Sales and marketing 62.4 96.4
General and administrative 8.8 18.5
Stock compensation 48.0 82.8
Goodwill amortization 43.8 -
----------- -----------
Total operating expenses 184.0 242.4
Operating loss (121.0) (180.6)
Interest income (expense), net 8.5 (1.0)
----------- -----------
Net loss before income taxes (112.5) (181.6)
Provision for income taxes (0.3) -
----------- -----------
Net loss (112.8)% (181.6)%
=========== ===========
Net Sales. Net sales increased to $22.4 million for the quarter ended July 31,
2000 from $3.6 million for the quarter ended July 31, 1999. This increase was
primarily attributable to higher sales 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 reflect the introduction and market
acceptance of the 500, 3000 and 5000 Series products, offset by decreased unit
sales of 1000 Series products. During the quarter ended July 31, 2000, no
customer accounted for more than 10% of our net sales, and during the quarter
ended July 31, 1999, two customers combined accounted for an aggregate of 22% of
our net sales. Direct and indirect channel sales accounted for 55% and 45% of
our net sales for the quarter ended July 31, 2000 and 61% and 39% of our net
sales for the quarter ended July 31, 1999. Net sales from international
operations were $10.5 million, or 47% of net sales, for the quarter ended July
31, 2000, and $1.7 million, or 48% of net sales, for the quarter ended July 31,
1999. 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 the quarter-over-quarter growth rate in
our net sales of 521% is not likely to continue in the future.
Gross Profit. Gross profit increased to $14.1 million for the quarter ended July
31, 2000 from $2.2 million for the quarter ended July 31, 1999. This increase in
gross profit was primarily attributable to the introduction of new, higher
margin products and their growing acceptance in the marketplace and higher sales
volumes. Gross margin increased to 63.0% for the quarter ended July 31, 2000
from 61.8% for the quarter ended July 31, 1999. This increase in gross margin
was principally due to the resulting economies of scale from
10
<PAGE>
higher unit production and cost 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.
Research and Development. Research and development expenses consist primarily of
salaries and benefits, and prototype and test equipment costs. Research and
development expenses increased to $4.7 million for the quarter ended July 31,
2000 from $1.6 million for the quarter ended July 31, 1999. This 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
to 98 at July 31, 2000 from 35 at July 31, 1999. As a percentage of net sales,
research and development expenses decreased to 21.0% for the quarter ended July
31, 2000 from 44.7% for the quarter ended July 31, 1999. This decrease in
research and development expenses as a percentage of net sales reflects the fact
that our net sales during these periods 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 in future
periods. Through July 31, 2000, 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. Sales and marketing expenses increased to $14.0
million for the quarter ended July 31, 2000 from $3.5 million for the quarter
ended July 31, 1999. This increase in sales and marketing expense 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 to 203 at July 31, 2000 from 53 at July 31, 1999.
As a percentage of net sales, sales and marketing expenses decreased to 62.4%
for the quarter ended July 31, 2000 from 96.4% for the quarter ended July 31,
1999. This decrease in sales and marketing expenses as a percentage of net sales
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. General and administrative expenses increased to
$2.0 million for the quarter ended July 31, 2000 from $667,000 for the quarter
ended July 31, 1999. This 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 to 43 at July 31, 2000 from 13 at July 31, 1999. As a
percentage of net sales, general and administrative expenses decreased to 8.8%
for the quarter ended July 31, 2000 from 18.5% for the quarter ended July 31,
1999. This decrease in general and administrative expenses as a percentage of
net sales reflects the fact that our net sales during these periods 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.
Stock Compensation. Stock compensation expense increased to $10.8 million for
the quarter ended July 31, 2000 from $3.0 million for the quarter ended July 31,
1999. This increase in stock compensation in absolute dollars primarily reflects
the amortization of deferred compensation incurred on options granted below fair
value during the two-month period prior to the Company's November 1999 initial
public offering.
Goodwill Amortization. Goodwill amortization increased to $9.8 million for the
quarter ended July 31, 2000 from none for the quarter ended July 31, 1999. The
increase is attributable to the Company's acquisition of SpringBank Networks,
Inc. on June 5, 2000, which was accounted for as a purchase business
combination. The $177 million of goodwill that resulted from the transaction is
being amortized over three years on a straight-line basis.
11
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CACHEFLOW INC.
Other Income (Expense), Net. Other income (expense), net increased to net other
income of $1.9 million for the quarter ended July 31, 2000, from net other
expense of $36,000 for the quarter ended July 31, 1999. This increase was
primarily attributable to increased interest income earned on the Company's cash
equivalents and short-term investments, which grew significantly following the
receipt of proceeds upon completion of the Company's initial public offering in
November 1999.
Liquidity and Capital Resources
From inception through November 1999, we financed our operations and the
purchase of property and equipment through private sales of preferred stock,
with net proceeds of $37.9 million, as well as through bank loans and equipment
leases. In November 1999, we financed our operations through an initial public
offering of our common stock, with net proceeds of $126.5 million, net of
underwriting discounts, commissions and estimated offering costs. At July 31,
2000, we had $84.3 million in cash and cash equivalents, $27.3 million in short-
term investments, and $115.9 million in working capital.
Net cash used in operating activities was $16.1 million for the three months
ended July 31, 2000 and $3.9 million for the three months ended July 31, 1999.
We used cash primarily to fund our net losses from operations.
Net cash provided by investing activities was $5.4 million for the three months
ended July 31, 2000 and net cash used in investing activities was $472,000 for
the three months ended July 31, 1999. Net cash provided by investing activities
for the three months ended July 31, 2000 was primarily attributable to net sales
of short-term securities, offset by purchases of property, plant and equipment.
We expect that, in the future, any cash in excess of current requirements will
continue to be invested in high quality, interest-bearing securities.
Capital expenditures were $1.4 million for the three months ended July 31, 2000
and $472,000 for the three months ended July 31, 1999. Our capital expenditures
consisted of purchases of plant, equipment and software. We expect that our
capital expenditures will continue to increase in the future.
Net cash provided by financing activities was $3.5 million for the three months
ended July 31, 2000 and $20.0 million for the three months ended July 31, 1999.
Financing activities for the three months ended July 31, 2000 were primarily
attributable to the exercise of employee stock options. For the three months
ended July 31, 1999, we raised approximately $20.0 million in gross proceeds
from the sale of Series C Preferred Stock at $4.575 per share during May 1999.
We believe that working capital 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. Furthermore, if cash is used for acquisitions or other unanticipated
uses, we may need additional capital sooner than expected. In the event
additional financing is required, we may not be able to raise it on acceptable
terms or at all.
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CACHEFLOW INC.
FACTORS AFFECTING FUTURE OPERATING RESULTS
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.
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 "Factors Affecting Future Operating Results" 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 $25.3 million and $6.6 million for the three months
ended July 31, 2000 and 1999. As of July 31, 2000, we had an accumulated deficit
of $108.1 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
and goodwill, which will contribute to our net losses. As of July 31, 2000, we
had an aggregate of $36.2 million of deferred compensation and $167.2 million of
goodwill to be amortized. The Company may record additional compensation expense
in the future if management decides to grant below-market stock options in order
to attract and retain employees in a highly competitive labor market or make
acquisitions that result in the recording of deferred stock compensation.
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 "Factors Affecting Future Operating Results"
section.
We cannot reliably forecast our future quarterly sales for several reasons,
including:
. we have a limited operating history, and the market in which we
compete is relatively new and rapidly evolving;
. 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.
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CACHEFLOW INC.
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 and goodwill, 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, Dell 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 nine
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.
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CACHEFLOW INC.
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 continue to achieve any
significant degree of market acceptance.
If we are unable to introduce new products and services that achieve market
acceptance 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
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CACHEFLOW INC.
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.
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 most of the final assembly and all of the testing of our
products at our headquarters in Sunnyvale, California. We have transitioned
final assembly for some of our products to third parties and we may transition
additional final assembly in the future. If we were 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 any third-party assembler or we
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
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CACHEFLOW INC.
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.
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. Additionally, many members of our senior management team have joined the
company within the past 12 months. 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.
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 369 at July 31, 2000, and we plan to further increase
our headcount. We recently implemented a new enterprise resource planning
software system that replaced substantially all of our business and
manufacturing systems. While we have not had significant problems to date, 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.
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 quarter ended July 31, 2000, approximately 45% 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
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CACHEFLOW INC.
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 quarter ended July 31, 2000, sales to customers outside of the United
States and Canada accounted for approximately 47% 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. If a claim were
brought against us, we may not have sufficient protection from statutory
limitations, or license or contract terms with our customers and any unfavorable
judicial decisions could seriously harm our business. 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.
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Risks Associated with Potential Acquisitions
We consummated a merger with SpringBank Networks in June 2000. If we fail to
develop and integrate SpringBank Networks' technology into our products and
services, our quarterly and annual operating results may be adversely affected.
Other risks we may face with respect to our merger with SpringBank Networks
include the potential disruption of our ongoing business and distraction of
management; the difficulty of assimilating SpringBank Networks' personnel; and
the maintenance of uniform standards, corporate cultures, controls, procedures
and policies. Our inability to address any of these risks successfully could
harm our business.
We may make acquisitions in the future. Acquisitions of companies, products or
technologies entail numerous risks, including an inability to successfully
assimilate acquired operations and products, diversion of management's
attention, loss of key employees of acquired companies and substantial
transaction costs. Some of the products acquired may require significant
additional development before they can be marketed and may not generate revenue
at levels anticipated by us. Moreover, future acquisitions by us may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in significant amortization expense. Any of these
problems or factors could seriously harm our business.
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. 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 presently have several pending United States patent applications and several
pending patent applications in foreign patent offices. Although we have not been
issued any patents to date, one patent application pending before the United
States Patent Office has been allowed and is expected to issue as a United
States patent.
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
patents issued 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.
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
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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.
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, 2000, we had approximately $84.3 million in cash and cash
equivalents and $27.3 million in short-term investments. We believe that these
amounts 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 were 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
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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
be seriously harmed. The resolution of various issues concerning the Internet
will likely affect the use and adoption of the Internet. These issues include
security, reliability, capacity, congestion, cost, ease of access and quality of
service. For example, recently certain popular websites experienced denial-of-
service attacks, which called into question the ability of these and other
websites to ensure the security and reliability of their on-line businesses.
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 Securities Markets
Our stock price is volatile and, as a result, you may have difficulty evaluating
the value of our stock, and the market price of our stock may decline.
Since our initial public offering in November 1999, the market price of our
common stock has fluctuated significantly. 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;
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CACHEFLOW INC.
. 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.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
We develop products in the United States and sell them throughout the world. 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 47% of total net sales for the three-month period ended July 31,
2000.
As of July 31, 2000, we had approximately $102 million invested primarily in
fixed-rate, short-term corporate and U.S. government debt securities which are
subject to interest rate risk and will decrease in value if market U.S. interest
rates increase. We do not hold any equity securities or derivative investments.
As of July 31, 2000, with respect to the above market risks, no significant
changes have occurred since our Annual Report on Form 10-K for the year ended
April 30, 2000.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) Changes in Securities
During the quarter ended July 31, 2000, the Company granted options to purchase
1,474,500 shares of common stock to employees of the Company under the 1999
Stock Option Plan and the 2000 Supplemental Stock Option Plan.
From August 1, 2000 to August 14, 2000, the Company granted options to purchase
627,000 shares of common stock to employees of the Company under the 1999 Stock
Incentive Plan.
During the quarter ended July 31, 2000, employees, consultants and other service
providers of the Company exercised options to purchase 166,664 shares of common
stock.
During the quarter ended July 31, 2000, a service provider of the Company
exercised warrants to purchase 132,496 shares of common stock. After the
transaction was completed, no additional warrants to purchase shares of the
Company's common stock were outstanding.
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CACHEFLOW INC.
On June 5, 2000, the Company acquired all of the outstanding capital stock of
SpringBank Networks, Inc. ("SpringBank"), through a stock-for-stock merger,
pursuant to which each issued and outstanding share of common stock of
SpringBank was converted into the right to receive 0.2 shares of common stock of
CacheFlow. In addition, each outstanding option to purchase SpringBank common
stock was assumed by CacheFlow and converted into an option to purchase shares
of CacheFlow common stock determined pursuant to the exchange ratio in the
Merger Agreement. Specifically, the Company issued 2,728,287 shares of common
stock and assumed 77,000 options to purchase CacheFlow common stock in
connection with the closing of this transaction.
The sale of the above securities was deemed to be exempt from registration under
the Securities Act of 1933 ("the Act") in reliance upon Section 4(2) of the Act
or Rule 701 promulgated under Section 3(b) of the Act.
(d) Use of Proceeds.
On November 19, 1999, the Company completed the initial public offering of its
common stock. The shares of common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (No. 333-87997). The offering closed on November 24, 1999 after we had
sold all of the 5,750,000 shares of common stock registered under the
Registration Statement. The initial public offering price was $24 per share for
an aggregate initial public offering of $138 million. After deducting the
underwriting discounts and commissions and the offering expenses, the net
proceeds to the Company from the offering were approximately $126.5 million,
which have been invested in investment grade securities, and will be used for
general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
Number Exhibit Description
------ -------------------
27.1 Financial Data Schedule
(b) One Form 8-K was filed during the quarter ended July 31, 2000
pertaining to the acquisition of SpringBank Networks, Inc. in June 2000
(file number 000-28139).
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CACHEFLOW INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CACHEFLOW INC.
/s/ Michael Johnson
-------------------
Michael Johnson
Chief Financial and Accounting Officer
Dated: September 8, 2000
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CACHEFLOW INC.
EXHIBIT INDEX
Number Exhibit Description
------ -------------------
27.1 Financial Data Schedule.
