<PAGE>
Exhibit 99.1
Index to Audited Financial Statements of SpringBank Networks, Inc.
(a development stage company)
Report of Ernst & Young LLP, Independent Auditors.................. 1
Audited Financial Statements
Balance Sheet...................................................... 2
Statement of Operations............................................ 3
Statement of Stockholders' Equity (Deficit)........................ 4
Statement of Cash Flows............................................ 5
Notes to the Financial Statements.................................. 6-13
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
SpringBank Networks, Inc.
We have audited the accompanying balance sheet of SpringBank Networks, Inc. (a
development stage company) as of June 5, 2000, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the period from
December 22, 1999 (inception) through June 5, 2000. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SpringBank Networks, Inc. at
June 5, 2000, and the results of its operations and its cash flows for the
period from December 22, 1999 (inception) through June 5, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
July 21, 2000
1
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SpringBank Networks, Inc.
(a development stage company)
Balance Sheet
June 5, 2000
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 332,563
--------------
Total current assets 332,563
Property and equipment, net 42,883
Other assets 20,300
--------------
Total assets $ 395,746
==============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 4,813
Accrued payroll and related benefits 7,734,883
Other accrued liabilities 159,100
--------------
Total current liabilities 7,898,796
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, 1,200,000 shares authorized,
issuable in series:
Series A convertible stock, $0.001 par value; 1,200,000 shares
designated; 1,102,941 shares issued and outstanding
(liquidation preference of $600,000) 1,103
Common stock, $0.001 par value; 15,000,000 shares authorized;
12,538,500 shares issued and outstanding 12,539
Additional paid-in capital 73,051,234
Notes receivable from stockholders (489,557)
Deferred stock compensation (69,266,619)
Deficit accumulated during the development stage (10,811,750)
--------------
Total stockholders' equity (deficit) (7,503,050)
--------------
Total liabilities and stockholders' equity (deficit) $ 395,746
==============
</TABLE>
See accompanying notes to the financial statements.
2
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SpringBank Networks, Inc.
(a development stage company)
Statement of Operations
Period from December 22, 1999 (inception) through June 5, 2000
<TABLE>
<S> <C>
Revenues $ --
Cost and expenses:
Research and development 6,534,004
Sales and marketing 277,015
General and administrative 1,422,612
Stock compensation 2,585,456
-----------------
Total cost and expenses 10,819,087
-----------------
Loss from operations (10,819,087)
-----------------
Interest income 7,337
-----------------
Net loss $(10,811,750)
=================
</TABLE>
See accompanying notes to the financial statements.
3
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SpringBank Networks, Inc.
(a development stage company)
Statement of Stockholders' Equity
Period from December 22, 1999 (inception) through
June 5, 2000
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
--------------------- ---------------------- Paid-in
Shares Amount Shares Amount Capital
---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to founders in December 1999 - $ - 6,250,000 $ 6,250 $ -
Issuance of Series A convertible preferred stock, at $0.544
per share in February 2000, net of issuance costs of $22,299 1,102,941 1,103 - - 576,598
Exercise of stock options by employees - - 5,975,000 5,975 591,525
Exercise of stock options by nonemployees - - 313,500 314 31,036
Issuance of notes receivable to stockholders - - - - -
Accrue interest on notes receivable from stockholders - - - - -
Deferred compensation related to stock-based awards - - - - 71,852,075
Amortization of deferred compensation - - - - -
Net and comprehensive loss - - - - -
---------- --------- ---------- ---------- -----------
Balances at June 5, 2000 1,102,941 $ 1,103 12,538,500 $ 12,539 $73,051,234
========== ========= ========== ========== ===========
<CAPTION>
Deficit
Accumulated
Notes Deferred During the
Receivable from Stock Development
Stockholders Compensation Stage Total
--------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock to founders in December 1999 $ - $ - $ - $ 6,250
Issuance of Series A convertible preferred stock, at $0.544
per share in February 2000, net of issuance costs of $22,299 - - - 577,701
Exercise of stock options by employees - - - 597,500
Exercise of stock options by nonemployees - - - 31,350
Issuance of notes receivable to stockholders (487,575) - - (487,575)
Accrue interest on notes receivable from stockholders (1,982) - - (1,982)
Deferred compensation related to stock-based awards - (71,852,075) - -
Amortization of deferred compensation - 2,585,456 - 2,585,456
Net and comprehensive loss - - (10,811,750) (10,811,750)
--------------- ------------- -------------- ------------
Balances at June 5, 2000 $ (489,557) $(69,266,619) $ (10,811,750) $ (7,503,050)
=============== ============= ============== ============
</TABLE>
See accompanying notes to the financial statements.
4
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SpringBank Networks, Inc.
(a development stage company)
Statement of Cash Flows
Period from December 22, 1999 (inception) through June 5, 2000
<TABLE>
<CAPTION>
Operating activities
<S> <C>
Net loss $(10,811,750)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,800
Amortization of deferred stock compensation expense 2,585,456
Changes in operating assets and liabilities:
Other assets (20,300)
Accounts payable 4,813
Accrued liabilities 7,893,983
----------------
Net cash used in operating activities (344,998)
Investing activities
Purchase of property and equipment (45,683)
----------------
Net cash used in investing activities (45,683)
Financing activities
Proceeds from issuance of common stock 145,543
Proceeds from issuance of preferred stock 577,701
---------------
Net cash provided by financing activities 723,244
Increase in cash and cash equivalents 332,563
Cash and cash equivalents at beginning of period -
---------------
Cash and cash equivalents at end of period $ 332,563
===============
Supplemental disclosures
Noncash investing and financing activities
Notes issued to stockholders and related interest $ 489,557
===============
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
SpringBank Networks, Inc.
(a development stage company)
Notes to the Financial Statements
1. Description of the Business
SpringBank Networks, Inc. (the "Company") was incorporated in Delaware in
December 22, 1999. The Company was established to develop, market, and sell a
networking appliance that accelerates and intelligently manages the flow of
Internet data traffic.
The Company is a development stage company, which has devoted substantially all
of its efforts to recruiting personnel to conduct research and product
development and sales and marketing and has not yet generated any revenues.
On June 5, 2000, the Company was acquired by CacheFlow Inc. (see Note 6).
Basis of presentation
For the period ended June 5, 2000, the Company incurred a net loss of
$10,811,750 and had a working capital deficiency of $7,566,233. This normally
raises substantial doubt as to the Company's ability to continue as a going
concern. However, the Company was acquired by CacheFlow Inc. on June 5, 2000.
(See Note 6).
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
Property and equipment
Property and equipment primarily consists of furniture and computer equipment
that are stated at cost, less accumulated depreciation. Depreciation is provided
using the straight-line method over three years, which is the estimated useful
life of the respective assets.
6
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Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
option grants to employees. The Company has also elected to follow the
"disclosure only" alternative prescribed by the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (FAS 123).
3. Balance Sheet Details
Property and equipment
Property and equipment, net consisted of the following at June 5, 2000:
<TABLE>
<S> <C>
Computer equipment $39,897
Office equipment 5,786
------------
45,683
Less accumulated depreciation (2,800)
------------
$42,883
============
</TABLE>
Accrued payroll and related benefits
Accrued payroll and related benefits consisted of the following at June 5, 2000:
<TABLE>
<S> <C>
Accrued salaries and wages $7,596,960
Payroll taxes payable 124,499
Accrued vacation 13,424
------------
$7,734,883
============
</TABLE>
Operating leases commitments
The Company leases its primary facility under a month-to-month operating lease
agreement, which began in May 2000. Rent expense was approximately $3,000 for
the period from December 22, 1999 (inception) through June 5, 2000.
4. Income Taxes
There has been no provision for U.S. federal, U.S. state, or foreign income
taxes as the Company has incurred an operating loss in the period 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
7
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used for income tax purposes. Significant components of the Company's deferred
tax assets are as follows:
<TABLE>
<CAPTION>
June 5, 2000
-----------------
Deferred tax assets:
<S> <C>
NOL $ 2,664,834
Other 63,640
-----------------
Total deferred tax assets 2,728,474
Valuation allowance (2,728,474)
-----------------
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 $2,728,474 during the period from December
22, 1999 (inception) to June 5, 2000. As of June 5, 2000, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$7,614,000 which expire in 2020. The Company also had net operating loss
carryforwards for state income tax purposes of approximately $7,614,000 expiring
in 2008.
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.
5. Stockholders' Equity (Deficit)
Preferred stock
Convertible preferred stock consisted of the following at June 5, 2000:
<TABLE>
<CAPTION>
Series Shares Shares Issued Liquidation
Authorized and Outstanding Preference
------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Series A convertible preferred
stock 1,200,000 1,102,941 $600,000
</TABLE>
8
<PAGE>
Under the Company's Articles of Incorporation, preferred stock is issuable in
series and the Board of Directors is authorized to determine the rights,
preferences, and terms of each series.
Dividends
The holders of Series A convertible preferred stock are entitled to receive
noncumulative annual dividends per share at the rate of $0.04352 per annum when,
and if, declared by the Board of Directors. These dividends are in preference to
any declaration or payment of any dividends on common stock of the Company.
Conversion
Each share of Series A convertible preferred stock, at the option of the holder,
is convertible into the number of fully-paid and nonassessable shares of common
stock at the conversion rate. The initial conversion rate per share of the
Series A convertible preferred stock is 1 to 1. The conversion rates are subject
to adjustment from time to time. Each share of Series A convertible preferred
stock will automatically be converted into shares of common stock, based on the
then-effective conversion price, immediately upon the earlier of (i) the closing
of a firmly underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, for aggregate proceeds
of not less than $20,000,000, after the deduction of underwriting commissions
and expenses, or (ii) the date specified by written consent or agreement of the
holders of a majority of the then outstanding shares of Series A convertible
preferred stock.
9
<PAGE>
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of Series A convertible preferred
stock are entitled to receive, prior and in preference to any distribution of
any of the assets of the Company to the holders of common stock, by reason of
their ownership, an amount equal to the sum of $0.544 for each share of Series A
convertible preferred stock plus any declared but unpaid dividends with respect
to such shares. After payment of the full liquidation preference of the
preferred stockholders, any remaining assets of the Company legally available
are to be distributed ratably to the holders of common in proportion to the
shares of common stock then held by them.
In the event of (i) a sale of substantially all the assets of the Company; or
(ii) any acquisition of the Company by merger in which outstanding shares of the
Company are exchanged for securities of the acquiring entity and which results
in the transfer of 50% or more of the Company's voting power to any person or
entity, the holders of the Series A preferred stock are entitled to receive from
the proceeds, prior and in preference to any distribution of the proceeds to the
holders of the common stock by reason of their ownership thereof, an amount per
share of Series A preferred stock equal to $0.544. After the distribution of the
preference set forth above has been made, the entire remaining assets and funds
of the Company legally available for distribution, if any, shall be distributed
among the holders of common stock in proportion to the shares of common stock
then held by them.
Voting
The holders of Series A convertible preferred stock are entitled to the number
of votes equal to the number of shares of common stock into which each share of
Series A convertible preferred stock could be converted, and having voting
rights and powers equal to the voting right and power of the common stock.
Common stock
The Company has entered into Stock Purchase Agreements in connection with the
sale of common stock to the Company's employees, directors, and certain
consultants. The Company has the right to repurchase, at the original issue
price, a declining percentage of the shares of common stock based on the service
period of each employee, director, or consultant. The repurchase right
generally declines on a percentage basis over four years based on the length of
each stockholder's continued employment or service with the Company. As of June
5, 2000, 10,894,000 shares of common stock issued under these agreements were
subject to repurchase.
Shares of common stock reserved for future issuance
Common stock reserved for future issuance consisted of the following:
10
<PAGE>
<TABLE>
<CAPTION>
June 5,
2000
--------------
<S> <C>
Common stock reserved for:
Preferred stock 1,102,941
2000 Stock Incentive Plan 1,011,500
--------------
2,114,441
==============
</TABLE>
Notes receivable from stockholders
During May 2000, the Company entered into promissory notes totaling $487,575
with employees and consultants for the purchase of common stock. The notes bear
interest at 6.2% and the notes and related interest are payable in full in May
2004. These notes are secured by the underlying common stock and are full
recourse.
Stock options
In March 2000, the Company adopted the 2000 Stock Incentive Plan ("2000 Plan")
and reserved 7,300,000 shares of common stock for the issuance of stock purchase
options to employees, officers, directors, and consultants.
The incentive stock options (ISOs) may be granted at a price per share not less
than the fair market value on the date of the grant. In the case of options that
do not constitute ISOs the price per share should not be less than eighty-five
percent of the fair value of the stock at the time the option is granted. The
plan will be terminated and no further common stock may be granted after 10
years from the date that the plan was adopted. Options granted under the plan
are exercisable over a maximum term of ten years from the date of grant and
generally vest over a period of up to four years.
Options issued under the 2000 Plan are immediately exercisable, and shares
issued upon exercise of 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 over the four-year
vesting period of each option grant. As of June 5, 2000, 6,200,000 common
shares issued via the exercise of stock options were subject to repurchase.
11
<PAGE>
A summary of the Company's stock option activity is set forth below:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Number of Price
Shares per Share
-----------------------------------
<S> <C> <C>
Outstanding at December 22, 1999 (inception) - -
Granted 6,673,500 $0.12
Exercised (6,288,500) $0.10
--------------- ---------------
Outstanding at June 5, 2000 385,000
==============
Exercisable at June 5, 2000 385,000
==============
Available for grant under the Plan at June 5, 2000 626,500
==============
</TABLE>
At June 5, 2000, the weighted-average remaining contractual life and exercise
price of stock options outstanding is ten years and $0.50 per share,
respectively.
Stock compensation
For the period December 22, 1999 (inception) through June 5, 2000, the Company
recorded deferred stock compensation of $71,852,075. This amount represents the
difference between the purchase price and the deemed fair value of the Company's
common stock on the date such stock awards were granted, which primarily include
stock options and founder's stock which is subject to certain vesting and
repurchase rights. For the period from December 22, 1999 (inception) through
June 5, 2000 the Company recorded amortization of stock compensation of
$2,585,456. At June 5, 2000, the Company had $69,266,619 of remaining
unamortized deferred compensation. Such amounts are included as a reduction of
stockholders' equity (deficit) and are being amortized using the straight-line
method over the vesting period of each respective stock award.
Stock Options issued to Service Providers
In May of 2000, the Company issued a total of 328,500 options to outside parties
to purchase common stock at exercise prices ranging from $0.10 to $0.50 per
share in exchange for services. The options were immediately exercisable and
expire 10 years from date of grant. The value of the options was estimated using
the Black-Scholes option pricing model with the following assumptions: weighted
average risk free interest rate of 6.00%, weighted average contractual life of
10 years, 70% volatility and no dividend yield. The Company calculated a value
of $3,489,825, which is included in deferred stock compensation. Of this amount,
$1,215,137 has been recognized as compensation expense in the period from
December 22, 1999 (inception) through June 5, 2000. The remaining balance is
being amortized over the shorter of the term of each respective consulting
agreement or the vesting period of each option grant.
12
<PAGE>
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-based awards under the fair
value method of FAS 123. The fair value for these stock-based awards was
estimated at the date of grant using the minimum value method with the
following weighted-average assumptions: a risk-free interest rate of 6.25% for
the period ended June 5, 2000, a volatility factor of the expected market
price of zero, and no dividend yield.
The option valuation models were developed for use in estimating 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-based awards 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-based awards.
The effect of applying the fair value method under FAS 123 to the Company's
stock-based awards results in a pro forma net loss of $11,881,227 for the period
from December 22, 1999 (inception) through June 5, 2000.
The weighted-average fair value of stock-based awards granted, which is the
value assigned to the awards under FAS 123, was $5.44 for awards granted during
the period from December 22, 1999 (inception) through June 5, 2000.
The pro-forma impact of stock-based awards on the net loss for the period
ended June 5, 2000 is not representative of the effects on net income (loss)
for future years, as future years will include the effects of stock-based
awards vesting as well as the impact of multiple years of stock option grants.
6. Subsequent Event
On June 5, 2000, CacheFlow Inc., a provider of content intelligent networking
solutions, acquired the Company for total purchase consideration of
approximately $177 million. The merger was structured as a tax-free, stock-for-
stock exchange. CacheFlow Inc. issued approximately 2.7 million shares of
unregistered common stock, assumed approximately $7 million in liabilities, and
incurred approximately $1.7 million in transaction fees. The purchase
transaction was accounted for as a purchase, and the purchase price of the
assets acquired was allocated to the tangible and intangible assets in
proportion to their fair values. The purchase transaction was closed on June 5,
2000. Under the merger agreement a total of 385,000 options granted by the
Company to employees and outside consultants which were outstanding as of June
5, 2000 were assumed by CacheFlow.
13
