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 JANUARY 31, 2001
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.
OUTSTANDING AT
CLASS February 28, 2001
----- -----------------
Common Stock, par value $0.0001 43,343,725
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 2001 and April
30, 2000 1
Condensed Consolidated Statements of Operations for the three and nine
months ended January 31, 2001 and January 31, 2000 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended January 31, 2001 and January 31, 2000 3
Notes to Condensed Consolidated Financial Statements 3 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9 - 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
i
CACHEFLOW INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, April 30,
2001 2000
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 42,803 $ 91,532
Short-term investments 52,550 33,788
Accounts receivable, net 17,309 3,112
Inventories 14,224 4,741
Prepaid expenses and other current assets 2,252 1,200
--------- --------
Total current assets 129,138 134,373
Property and equipment, net 11,292 4,721
Goodwill, net 481,973 -
Other assets 1,323 1,640
--------- --------
Total assets $ 623,726 $140,734
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,807 $ 2,465
Accrued payroll and related benefits 5,706 2,611
Deferred revenue, short-term 5,892 1,375
Other accrued liabilities 10,785 1,487
--------- --------
Total current liabilities 31,190 7,938
Deferred revenue, long-term 1,228 166
--------- --------
Total liabilities 32,418 8,104
Commitments
Stockholders' equity:
Common stock 4 4
Additional paid-in capital 888,396 264,304
Treasury stock (1,787) (570)
Notes receivable from stockholders (4,072) (4,713)
Deferred stock compensation (36,726) (43,489)
Accumulated deficit (252,961) (82,805)
Accumulated other comprehensive loss (1,546) (101)
--------- --------
Total stockholders' equity 591,308 132,630
--------- --------
Total liabilities and stockholders' equity $ 623,726 $140,734
========= ========
See notes to condensed consolidated finanical statements.
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CACHEFLOW INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------------- -----------------------------
2001 2000 2001 2000
--------- -------- --------- --------
Net sales $ 21,225 $ 8,033 $ 76,218 $ 16,483
Cost of goods sold 7,738 3,082 27,929 6,348
--------- -------- --------- --------
Gross profit 13,487 4,951 48,289 10,135
Operating expenses:
Research and development 7,496 2,744 17,742 6,655
Sales and marketing 22,367 9,255 53,705 17,829
General and administrative 3,425 1,302 7,991 2,798
Stock compensation 38,942 8,634 57,507 26,869
Goodwill amortization 29,718 - 54,299 -
Acquired in-process technology 32,200 - 32,200 -
--------- -------- --------- --------
Total operating expenses 134,148 21,935 223,444 54,151
--------- -------- --------- --------
Operating loss (120,661) (16,984) (175,155) (44,016)
Interest income, net 1,682 1,179 5,395 1,063
--------- -------- --------- --------
Net loss before income taxes (118,979) (15,805) (169,760) (42,953)
Provision for income taxes (227) - (396) -
--------- -------- --------- --------
Net loss (119,206) (15,805) (170,156) (42,953)
Accretion of preferred stock - (1,967) - (1,967)
--------- -------- --------- --------
Net loss available to common stockholders $(119,206) $(17,772) $(170,156) $(44,920)
========= ======== ========= ========
Basic and diluted net loss per common share $ (3.19) $ (0.64) $ (4.89) $ (3.02)
========= ======== ========= ========
Shares used in computing basic and diluted
net loss per common share 37,311 27,603 34,778 14,871
========= ======== ========= ========
Pro forma basic and diluted net loss per
common share $ (3.19) $ (0.59) $ (4.89) $ (1.73)
========= ======== ========= ========
Shares used in computing pro forma basic and
diluted net loss per common share 37,311 30,151 34,778 25,914
========= ======== ========= ========
See notes to condensed consolidated finanical statements.
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CACHEFLOW INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
January 31,
----------------------------
2001 2000
--------- --------
Operating Activities
Net loss $(170,156) $(42,953)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,661 479
Stock compensation 57,507 26,869
Goodwill amortization 54,299 -
Acquired in-process technology 32,200 -
Interest on notes receivable from stockholders (157) (73)
Changes in operating assets and liabilities:
Accounts receivable (14,197) (1,413)
Inventories (9,483) (3,316)
Prepaid expenses and other current assets (881) (397)
Other assets 354 (596)
Accounts payable (815) 1,155
Accrued liabilities 7,058 2,515
--------- --------
Net cash used in operating activities (42,610) (17,730)
Investing Activities
Purchases of property and equipment (7,416) (2,713)
Purchases of investments, net (19,501) (23,620)
Cash acquired in business acquisitions 7,813 -
--------- --------
Net cash used in investing activities (19,104) (26,333)
Financing Activities
Net proceeds from issuance of preferred stock - 23,526
Net proceeds from issuance of common stock 13,053 132,245
Repurchase of employee common stock (68) (157)
Payments on debt obligations and line of credit - (4,753)
--------- --------
Net cash provided by financing activities 12,985 150,861
--------- --------
Net (decrease) increase in cash and cash equivalents (48,729) 106,798
Cash and cash equivalents at beginning of period 91,532 2,291
--------- --------
Cash and cash equivalents at end of period $ 42,803 $109,089
========= ========
Supplemental disclosure of cash flow information
Cash paid for interest $ - $ 309
========= ========
Non-cash investing and financing activities
Purchase of equipment under capital lease $ - $ 110
========= ========
Net exercise of preferred stock warrants $ - $ 509
========= ========
Accretion of preferred stock $ - $ 1,967
========= ========
Issuance of note receivable to stockholder for the
exercise of stock options $ - $ 2,519
========= ========
Amounts related to business acquisitions:
Issuance of common stock and assumption of stock options $ 579,076 $ -
========= ========
Net liabilities assumed $ 7,013 $ -
========= ========
See notes to condensed consolidated finanical statements.
3
CACEHFLOW INC.
Note 1. Basis of Presentation
The accompanying unaudited 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 January 31, 2001, and
for the three- and nine-month periods 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. Operating results for the quarter and nine-month periods ended
January 31, 2001 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- and nine-month periods ended January 31, 2001 and 2000 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):
January 31, April 30,
2001 2000
------------- -----------
(Unaudited)
Raw materials $ 7,377 $ 2,380
Work-in-process 2,862 317
Finished goods 3,985 2,044
------------ -----------
$ 14,224 $ 4,741
============ ===========
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CACEHFLOW INC.
Note 5. Goodwill
Goodwill, which has resulted from business combinations accounted for as
purchases, is recorded at amortized cost and is included in "Goodwill, net" on
the Company's balance sheet. Amortization is computed using the straight-line
method over a period of three years. Management periodically reviews the
carrying amounts of the Company's goodwill for indications of impairment that
include, but are not limited to, trends in turnover of the acquired workforce,
technological obsolescence, the value of goodwill relative to the Company's
market capitalization, and other factors.
Note 6. Long-Lived Assets
The Company evaluates its long-lived assets in accordance with the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations, such as property, equipment and
improvements, and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets.
Note 7. Litigation
From time to time and in the ordinary course of business, the Company is subject
to various claims, charges, and litigation. In the opinion of management, final
judgments from such pending claims, charges, and litigation against the Company
will not have a material adverse effect on its consolidated financial position,
results of operations, or cash flows.
Note 8. Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with 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 stockholders' equity section of the balance sheet.
The comprehensive net losses for the three- and nine-month periods ended January
31, 2001 were $120,740,000 and $171,601,000, respectively. The comprehensive net
losses for the three- and nine-month periods ended January 31, 2000 were
$17,845,000 and $44,993,000, respectively.
Note 9. Net Loss Per Common Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with the FASB's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128), for all periods presented.
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- and nine-month
periods ended January 31, 2000, 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
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CACEHFLOW INC.
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- and nine-
month periods ended January 31, 2001 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- and nine-month periods.
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):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------ ------------------------
2001 2000 2001 2000
--------- -------- --------- ---------
(Unaudited) (Unaudited)
Historical:
Net loss available to common stockholders $(119,206) $(17,772) $(170,156) $(44,920)
========= ======== ========= ========
Weighted-average shares of common stock
outstanding 41,909 32,258 39,750 19,329
Less: Weighted-average shares subject to
repurchase (4,598) (4,655) (4,972) (4,458)
--------- -------- --------- --------
Weighted-average shares used in computing basic
and diluted net loss per common share 37,311 27,603 34,778 14,871
========= ======== ========= ========
Basic and diluted net loss per common share $ (3.19) $ (0.64) $ (4.89) $ (3.02)
========= ======== ========= ========
Pro forma:
Shares used above 37,311 27,603 34,778 14,871
Pro forma adjustment to reflect the weighted
effect of the assumed conversion of preferred
stock - 2,437 - 10,561
Pro forma adjustment to reflect the weighted
effect of assumed exercise and conversion of
preferred stock warrants - 111 - 482
--------- -------- --------- --------
Shares used in computing pro forma basic and
diluted net loss per common share 37,311 30,151 34,778 25,914
--------- -------- --------- --------
Pro forma basic and diluted net loss per common
share $ (3.19) $ (0.59) $ (4.89) $ (1.73)
========= ======== ========= ========
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
6
CACEHFLOW INC.
original issue price, a declining percentage of certain of the shares of common
stock issued based on the service periods of employees, directors, and service
providers. The repurchase right generally declines on a percentage basis over
four years based on the length of either each respective employee's continued
employment with the Company, the director's membership on the Board of
Directors, or the service provider's period of service. As of January 31, 2001
and 2000, 4,387,438 and 4,721,822 shares, respectively, of common stock issued
under these agreements were subject to repurchase.
Stock Compensation
For the three months ended January 31, 2001 and 2000, the Company recorded
deferred stock compensation of $17,802,000 and $24,062,000, respectively. For
the nine months ended January 31, 2001 and 2000, the Company recorded deferred
stock compensation of $21,839,000 and $71,848,000, 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 January 31, 2001 and 2000, the Company recorded amortization
of stock compensation of $38,942,000 and $8,634,000, respectively. For the nine
months ended January 31, 2001 and 2000, the Company recorded amortization of
stock compensation of $57,507,000 and $26,869,000, respectively. The
amortization of deferred stock compensation for the three- and nine-month
periods ended January 31, 2001 includes a non-recurring, non-cash charge of
$28,100,000 related to the acceleration of vesting of certain options held by
the Company's departed chairman. At January 31, 2001 and April 30, 2000, the
Company had $36,726,000 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. Business Acquisition
On December 15, 2000, the Company completed the acquisition of Entera, Inc.
("Entera"), a company that develops standards-based streaming content
distribution and management technologies, in a transaction accounted for as a
purchase. The Company acquired all of the outstanding capital stock of Entera
through a stock-for-stock merger, pursuant to which each issued and outstanding
share of common stock of Entera converted into the right to receive 0.107657
shares of common stock of CacheFlow. In addition, each outstanding option to
purchase Entera common stock was assumed by the Company and converted at the
exchange ratio into an option to purchase shares of CacheFlow common stock.
Purchase consideration was approximately $411.9 million consisting of
approximately 3.4 million shares of CacheFlow common stock with a fair value of
approximately $370.8 million, the assumption of approximately 400,000
outstanding stock options with a fair value of approximately $40 million, and
approximately $1.1 million in transaction costs.
The fair value of the common stock to be issued is based on the average closing
price of CacheFlow's common stock two days before and after the acquisition was
announced on October 10, 2000. The fair value of the Entera options assumed is
based on the Black-Scholes model using the following assumptions:
. Expected lives of 9 years
. Expected volatility factor of 1.54
. Risk-free interest rate of 6.25%
. Expected dividend rate of 0%
The excess of the purchase price over the fair value of the net assets acquired
is valued at $409.1 million. Of this excess, $359.3 million was allocated to
goodwill, $17.6 million was allocated to deferred compensation, and $32.2
million was allocated to in-process research and development based upon a
valuation prepared by an independent third-party appraiser. The amount
allocated to in-process research and development was charged to expense as a
non-recurring charge in the quarter ended January 31, 2001 since the in-process
research and development had not yet reached technological feasibility and had
no alternative future uses. The amount allocated to goodwill is being amortized
on a straight-line basis over
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CACEHFLOW INC.
three years. The amount allocated to deferred compensation is presented as a
reduction to stockholder's equity and is being amortized using a graded method
over the vesting period of each respective option.
In June 2000, the Company also acquired SpringBank Networks, Inc., an Internet
infrastructure company, in a transaction accounted for as a purchase.
Approximately $177.0 million in goodwill resulted from this transaction, which
is being amortized on a straight-line basis over a period of three years.
Further details of this transaction are disclosed in the Company's Form 10-Q for
the quarter ended July 31, 2000.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the acquisition of Entera had occurred at the
beginning of fiscal years 2001 and 2000, after giving effect to certain
adjustments, including amortization of goodwill and deferred compensation, but
excluding the non-recurring charge for the write-off of $32.2 million in
acquired in-process research and development. The pro forma financial
information does not purport to be indicative of what would have occurred had
the acquisition been made as of the beginning of fiscal years 2001 and 2000 or
of the results which may occur in the future (in thousands, except per share
data).
Nine Months Nine Months
Ended January Ended January
31, 2001 31, 2000
------------ -----------
Net sales $ 78,843 $ 16,801
============ ===========
Net loss $(330,136) $(178,849)
============ ===========
Basic and diluted net loss per
common share $ (8.78) $ (9.79)
============ ===========
Note 12. Subsequent Events
Reorganization Plan
In February 2001, the Company announced a reorganization plan and expects to
incur in the quarter ended April 30, 2001 a one-time charge of $2-3 million to
complete this effort, which will primarily include employee severance costs and
certain contract termination and facilities consolidation costs.
Employee Stock Incentive Program
In February 2001, the Company implemented an employee stock incentive program in
which employees could elect to trade in their current option grants in exchange
for a like number of options that will be granted no sooner than six months and
a day from the trade-in date at an exercise price equal to the fair value of the
underlying common stock on that date. Employees electing not to participate in
the exchange will receive an option grant equal to 25% of the number of their
unexercised options that have exercise prices greater than $8 per share. In
connection with this program, 1,698,633 options were cancelled for those
employees who elected to participate in the exchange and 1,553,863 options will
be granted to employees who elected not to participate. The exchange program has
been organized to comply with FASB Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" and is not expected to result in any
additional compensation charges or variable plan accounting. Executive officers
and members of the Company's Board of Directors were not eligible to participate
in this program.
8
CACEHFLOW INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements, including, but not
limited to, statements about CacheFlow's operations and prospects, our
competitive position and business strategies, our expectations, beliefs,
intentions or other strategies regarding the future, including our ability to
sell our products in the future and our likely sources of future revenue, the
demand for and customer acceptance of our products, our business pipeline, our
ability to integrate acquisitions, our need to raise additional capital and the
adoption of content-smart networking solutions. These forward-looking statements
involve risks and uncertainties. Actual results could differ materially.
Important factors that could cause actual results to differ materially include
the level of demand for Cacheflow's products and services; the intensity of
competition; CacheFlow's ability to effectively manage product transitions and
to continue to expand and improve internal infrastructure; risks associated with
acquisitions; and risks related to the adoption of content-smart networking
solutions. For a more detailed discussion of the risks relating to CacheFlow's
business, investors should read the section later in this report entitled
"Factors Affecting Future Operating Results." All forward-looking statements
included in this quarterly report are based upon information available to
CacheFlow as of the date hereof, and CacheFlow assumes no obligation to update
these forward-looking statements.
Overview
The Company is focused on content-smart networking, which is a new layer of
infrastructure for intelligently accelerating, delivering, and managing static,
streaming, dynamic, and application content. CacheFlow's content-smart
networking appliances and services enable enterprises, service providers and
content providers to deliver the right content to the right place at the right
time. The Company began commercial shipment of it's first products, a line of
high-performance Internet caching appliances, in May 1998. Since that time, The
Company has introduced other Internet appliances, which have a variety of
hardware configurations designed for the different price, performance, capacity
and reliability requirements of our customers. The list prices of these
appliances increase as they become more highly configured. Substantially all of
the Company's net sales through January 31, 2001 were attributable to sales of
our Internet appliance products. Management anticipates 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 $17.8 million
and $24.1 million for the three months ended January 31, 2001 and 2000. The
Company recorded deferred stock compensation of approximately $21.8 million and
$71.8 million for the nine months ended January 31, 2001 and 2000. These
amounts represent the difference between the exercise price and the deemed fair
value of stock option and warrant grants issued to employees, consultants,
directors and third parties on the date such stock awards were granted. The
Company recorded stock compensation expense of approximately $38.9 million and
$8.6 million for the three months ended January 31, 2001 and 2000. The Company
recorded stock compensation expense of approximately $57.5 million and $26.9
million for the nine months ended January 31, 2001 and 2000. Stock compensation
expense for the three- and nine-month periods ended January 31, 2001 includes a
non-recurring, non-cash deferred stock compensation charge of $28.1 million in
connection with the accelerated vesting of certain unvested stock options held
by the Company's departed chairman. 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, modify other existing stock awards, or if the Company assumes additional
unvested stock and options in future acquisitions. Given the balance of
deferred stock compensation on the balance sheet and recent grant history,
management expects stock compensation expense to be a significant operating
expense as this deferral is recognized.
The Company has incurred net losses in each quarter since inception. As of
January 31, 2001, the Company had an accumulated deficit of $253.0 million and
net loss for the three months ended January 31, 2001 was $119.2 million. This
loss resulted from significant costs incurred in the development and sale of the
9
CACHEFLOW INC.
Company's products and services, from the amortization of deferred stock
compensation and goodwill, and from a non-cash charge for in-process technology
acquired in the Company's acquisition of Entera. Management expects to
experience continued growth in the Company's operating expenses, particularly
research and development, goodwill amortization, and stock compensation expense.
Due to this growth in expenses, and the impact of stock compensation expense and
goodwill amortization, management expects to incur losses for the foreseeable
future.
The Company's limited operating history makes the prediction of future operating
results difficult. Management believes that period-to-period comparisons of the
Company's operating results should not be relied upon as predictive of future
performance. The Company's 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. The
Company may not be successful in addressing these risks and difficulties. Our
net sales and operating results for the quarter ended January 31, 2001 were
significantly below our internal expectations and the expectations of public
market analysts and investors. The price of our common stock has decreased
significantly as a result.
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 Nine Months Ended
January 31, January 31,
-------------------------- ---------------------------
2001 2000 2001 2000
-------- --------- --------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 36.5 38.4 36.6 38.5
------ ------- ------- -------
Gross margin 63.5 61.6 63.4 61.5
Operating expenses:
Research and development 35.3 34.1 23.3 40.4
Sales and marketing 105.4 115.2 70.5 108.1
General and administrative 16.1 16.2 10.5 17.0
Stock compensation 183.5 107.5 75.5 163.0
Goodwill amortization 140.0 - 71.2 -
Acquired in-process technology 151.7 - 42.2 -
------ ------- ------- -------
Total operating expenses 632.0 273.0 293.2 328.5
Operating loss (568.5) (211.4) (229.8) (267.0)
Interest income, net 7.9 14.6 7.1 6.4
Provision for income taxes (1.0) - (0.5) -
------ ------- ------- -------
Net loss (561.6) (196.8) (223.2) (260.6)
Accretion of preferred stock - (24.4) - (11.9)
------ ------- ------- -------
Net loss available to common
stockholders (561.6)% (221.2)% (223.2)% (272.5)%
====== ======= ======= =======
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CACHEFLOW INC.
Net Sales. Net sales increased to $21.2 million for the quarter ended January
31, 2001 from $8.0 million for the quarter ended January 31, 2000. This increase
was primarily attributable to higher sales volumes resulting from the
introduction of new products, the continued market acceptance of existing
products, and growth in the Company's customer base as management expanded the
Company's sales force. During the quarters ended January 31, 2001 and 2000, no
customer accounted for more than 10% of our net sales. Net sales from
international operations were $19.4 million, or 66% of net sales, for the
quarter ended January 31, 2001, and $3.3 million, or 41% of net sales, for the
quarter ended January 31, 2000.
Net sales increased to $76.2 million for the nine months ended January 31, 2001
from $16.5 million for the nine months ended January 31, 2000. This increase was
primarily attributable to higher sales volumes resulting from the introduction
of new products, the continued market acceptance of existing products, and
growth in the Company's customer base as management expanded the Company's sales
force. During the nine months ended January 31, 2001 and 2000, no customer
accounted for more than 10% of our net sales. Net sales from international
operations were $43.8 million, or 57% of net sales, for the nine months ended
January 31, 2001, and $6.9 million, or 42% of net sales, for the nine months
ended January 31, 2000.
Net sales decreased to $21.2 million for the quarter ended January 31, 2001 from
$32.5 million for the quarter ended October 31, 2000. This decrease was
significantly below our internal expectations and the expectations of public
market analysts and investors.
The Company's net sales are not expected to grow significantly or at all in the
near term due to a general weakening in macroeconomic conditions, a slowdown in
technology infrastructure spending, and lengthened sales cycles as the Company
responds to customer demands for more comprehensive and complex content
management solutions.
Gross Profit. Gross profit increased to $13.5 million for the quarter ended
January 31, 2001 from $5.0 million for the quarter ended January 31, 2000. Gross
profit increased to $48.3 million for the nine months ended January 31, 2001
from $10.1 million for the nine months ended January 31, 2000. These increases
in gross profit were primarily attributable to the introduction of new products
and their growing acceptance in the marketplace and higher sales volumes. Gross
margin increased to 63.5% for the quarter ended January 31, 2001 from 61.6% for
the quarter ended January 31, 2000. Gross margin increased to 63.4% for the nine
months ended January 31, 2001 from 61.5% for the nine months ended January 31,
2000. These increases in gross margin were principally due to the resulting
economies of scale from higher unit production and cost savings achieved by
outsourcing manufacturing of certain of the Company's products. Gross margin has
been and will continue to be affected by a variety of factors, including
competition, fluctuations in demand for the Company's products, the timing and
size of customer orders and product implementations, the mix of direct and
indirect sales, new product introductions and enhancements, component costs,
outsourced and internal 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 $7.5 million for the quarter ended January 31,
2001 from $2.7 million for the quarter ended January 31, 2000. Research and
development expenses increased to $17.7 million for the nine months ended
January 31, 2001 from $6.7 million for the nine months ended January 31, 2000.
These increases in research and development expenses in absolute dollars were
primarily attributable to increased staffing and associated support for
engineers required to expand and enhance our product line, and, to a lesser
extent, expenses related to prototype and test equipment units. As a percentage
of net sales, research and development expenses increased to 35.3% for the
quarter ended January 31, 2001 from 34.1% for the quarter ended January 31,
2000. This increase in research and development expenses as a percentage of net
sales reflects the fact that net sales during this period increased less rapidly
than research and development expenses. As a percentage of net sales, research
and development expenses decreased to 23.3% for the nine months ended January
31, 2001 from 40.4% for the nine months ended January 31, 2000. This decrease in
research and development expenses as a percentage of net sales reflects the fact
that net sales during this period increased more rapidly than research and
development expenses. Management believes 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 January 31, 2001, all research and development costs
have been expensed as incurred.
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CACHEFLOW INC.
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 $22.4
million for the quarter ended January 31, 2001 from $9.3 million for the quarter
ended January 31, 2000. Sales and marketing expenses increased to $53.7 million
for the nine months ended January 31, 2001 from $17.8 million for the nine
months ended January 31, 2000. These increases in sales and marketing expense in
absolute dollars were related to the expansion of the Company's sales and
marketing organization as management hired people and added sales and support
facilities worldwide. As a percentage of net sales, sales and marketing expenses
decreased to 105.4% for the quarter ended January 31, 2001 from 115.2% for the
quarter ended January 31, 2000. As a percentage of net sales, sales and
marketing expenses decreased to 70.5% for the nine months ended January 31, 2001
from 108.1% for the nine months ended January 31, 2000. These decreases in sales
and marketing expenses as a percentage of net sales reflect the fact that net
sales during these periods increased more rapidly than sales and marketing
expenses. In the near term, management expects sales and marketing expenses to
decrease as a result of the Company's February 2001 reduction in force.
General and Administrative. General and administrative expenses increased to
$3.4 million for the quarter ended January 31, 2001 from $1.3 million for the
quarter ended January 31, 2000. General and administrative expenses increased to
$8.0 million for the nine months ended January 31, 2001 from $2.8 million for
the nine months ended January 31, 2000. These increases in general and
administrative expenses in absolute dollars were primarily attributable to
increased staffing and associated expenses necessary to manage and support our
growth. As a percentage of net sales, general and administrative expenses
decreased slightly to 16.1% for the quarter ended January 31, 2001 from 16.2%
for the quarter ended January 31, 2000. As a percentage of net sales, general
and administrative expenses decreased to 10.5% for the nine months ended January
31, 2001 from 17.0% for the nine months ended January 31, 2000. These decreases
in general and administrative expenses as a percentage of net sales reflect the
fact that net sales during these periods increased more rapidly than general and
administrative expenses. In the near term, management expects general and
administrative expenses to decrease as a result of the Company's February 2001
reduction in force.
Stock Compensation. Stock compensation expense increased to $38.9 million for
the quarter ended January 31, 2001 from $8.6 million for the quarter ended
January 31, 2000. This increase in stock compensation in absolute dollars
primarily reflects the fact that during the quarter ended January 31, 2001, the
Company recorded a $28.1 million non-cash charge to stock compensation expense
to reflect the acceleration of vesting of certain stock options granted to the
Company's departed chairman. Stock compensation expense increased to $57.5
million for the nine months ended January 31, 2001 from $26.9 million for the
nine months ended January 31, 2000. Excluding the $28.1 million charge, the
increase in stock compensation in absolute dollars during the three- and nine-
month periods ended January 31, 2001 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,
as well as the amortization of deferred compensation recorded to establish the
value of unvested common stock and stock options assumed in the Company's
acquisition of Entera.
Goodwill Amortization. Goodwill amortization increased to $29.7 million and
$54.3 million for the three and nine-month periods ended January 31, 2001,
respectively, from none in the comparable prior periods. These increases were
attributable to the Company's acquisitions of SpringBank Networks, Inc. on June
5, 2000, and Entera, Inc. on December 15, 2000 which were accounted for as
purchase business combinations. The SpringBank and Entera transactions resulted
in goodwill of $177.0 million and $359.3 million, respectively, and each amount
is being amortized over three years on a straight-line basis.
Acquired in-process technology. The Company recorded a non-recurring, non-cash
$32.2 million charge for the value of in-process technology acquired in the
Entera transaction, which relates to in process technology that has no future
use in the Company's development activities.
Interest Income, Net. Net interest income increased to $1.7 million for the
quarter ended January 31, 2001, from $1.2 million for the quarter ended January
31, 2000. Interest income increased to $5.4 million for the
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CACHEFLOW INC.
nine months ended January 31, 2001, from $1.1 million for the nine months ended
January 31, 2000. These increases were 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, management financed the Company's
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, management financed the Company's
operations through an initial public offering of our common stock, with proceeds
of $126.5 million, net of underwriting discounts, commissions and offering
costs. At January 31, 2001, the Company had $42.8 million in cash and cash
equivalents, $52.6 million in short-term investments, and $97.9 million in
working capital.
Net cash used in operating activities was $42.6 million for the nine months
ended January 31, 2001 and $17.7 million for the nine months ended January 31,
2000. Management used cash primarily to fund the Company's net losses from
operations.
Net cash used in investing activities was $19.1 million for the nine months
ended January 31, 2001 and was $26.3 million for the nine months ended January
31, 2000. Net cash used in investing activities for the nine months ended
January 31, 2001 was primarily attributable to net purchases of short-term
securities, as well as purchases of property, plant and equipment, partially
offset by cash received in the Company's acquisition of Entera. Management
expects 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 $7.4 million for the nine months ended January 31,
2001 and $2.7 million for the nine months ended January 31, 2000. Capital
expenditures consisted of purchases of equipment, furniture and fixtures,
software, and leasehold improvements. Management expects that capital
expenditures will continue to increase in the future.
Net cash provided by financing activities was $13.0 million for the nine months
ended January 31, 2001 and $150.9 million for the nine months ended January 31,
2000. Financing activities for the nine months ended January 31, 2001 were
primarily attributable to proceeds from the exercise of employee stock options.
For the nine months ended January 31, 2000, the Company raised approximately
$20.0 million in net proceeds from the sale of Series C Preferred Stock at
$4.575 per share during May 1999, approximately $3.1 million in net proceeds
from the sale of Series D Preferred Stock at $11.00 per share during November
1999, and approximately $126.5 million in net proceeds from the sale of the
Company's common stock in an initial public offering at $24 per share during
November 1999.
Management believes that working capital will be sufficient to meet working
capital and capital expenditure requirements for at least the next twelve
months. Thereafter, management may find it necessary to obtain additional equity
or debt financing. Furthermore, if cash is used for acquisitions or other
unanticipated uses or if sales do not grow as expected, the Company may need
additional capital sooner than expected. In the event additional financing is
required, the Company may not be able to raise it on acceptable terms or at all.
13
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 "Risk Factors" section. Our business will be seriously harmed if
we do not successfully execute our business strategy or if we do not
successfully address the risks we face.
We have a history of losses, expect to incur future losses and may never achieve
profitability, which could result in the decline of the market price of our
common stock.
We incurred net losses of $119.2 million and $17.8 million for the quarter ended
January 31, 2001 and January 31, 2000. As of January 31, 2001, we had an
accumulated deficit of $253.0 million. We have not had a profitable quarter
since our inception and we expect to continue to incur net losses in the future.
Our net sales and operating results for the quarter ended January 31, 2001 were
significantly below our internal expectations and the expectations of public
market analysts and investors. The price of our common stock has decreased
significantly as a result. It is likely that in some future quarter or quarters,
our operating results will again be below the expectations of public market
analysts or investors. 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 January 31, 2001,
we had an aggregate of $36.7 million of deferred compensation and $482.0 million
of goodwill to be amortized. The Company may record additional compensation
expense in the future if management decides to modify existing option grants,
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. Furthermore, the Company may record
additional goodwill amortization in the future if the Company acquires
additional complementary businesses.
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.
Our operating results were significantly below the expectations of public market
analysts for the quarter ended January 31, 2001. It is likely that in some
future quarter or quarters, our operating results will again be below the
expectations of public market analysts or investors. When this occurs, the price
of our common stock could decrease significantly. A number of factors are likely
to cause variations in our net sales and operating results, including factors
described in this "Risk Factors" section.
We cannot reliably forecast our future quarterly sales for several reasons,
including:
14
CACHEFLOW INC.
. we have a limited operating history, and the market in which we compete
is relatively new and rapidly evolving;
. our sales cycle varies substantially from customer to customer; and
. our sales cycle has been lengthening as the complexity of content-smart
networking solutions continues to increase.
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 content-smart networking 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, we expect
additional competition from other established and emerging companies as the
market for content-smart networking 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. The products of our
competitors may have features and functionality that our products do not have.
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 content-smart networking solutions 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 content-smart networking solutions, 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. 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. The
increasingly complex technological issues
15
CACHEFLOW INC.
associated with content networking and delivery solutions contributed to longer
sales cycles for the quarter ended January 31, 2001 and a resulting decline in
our sequential quarterly sales. We may experience order deferrals or loss of
sales as a result of lengthening sales cycles.
We are entirely dependent on market acceptance of our content-smart networking
solutions and, as a result, a decline in sales or lack of market acceptance of
these solutions could cause our sales to fall.
To date, our content-smart networking products 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. As of
January 31, 2001, the CacheFlow 600, 700, 6000, and 7000 Series products are the
only products that we currently sell. Our CacheFlow 100 and 500 Series products,
which have historically accounted for a substantial portion of our net sales,
have been discontinued and replaced by our CacheFlow 600 and 700 Series products
that were introduced in September 2000. The 6000 and 7000 Series products that
were introduced in November 2000 replaced our CacheFlow 3000 and 5000 Series
products, which have also historically accounted for a significant portion of
our net sales. We cannot be certain that our CacheFlow 600, 700, 6000 or 7000
Series products will continue to achieve any significant degree of market
acceptance.
A continued downturn in macroeconomic conditions could adversely impact our
existing and potential customers' ability and willingness to purchase our
products, which would cause a decline in our sales.
U.S. economic growth slowed significantly in the past several months. In
addition, there is uncertainty relating to the prospects for near-term U.S.
economic growth. This slowdown and uncertainty contributed to delays in
decision-making by our existing and potential customers and a resulting decline
in our sales for the quarter ended January 31, 2001. Continued uncertainty or a
continued slowdown could result in a further decline in our sales and our
operating results could again be below the expectations of public market
analysts and investors. Our stock price has materially declined as a result of
our most recent quarterly operating results, and our stock price may continue to
decline in the event that we fail to meet the expectations of public market
analysts or investors in the future.
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 or our suppliers are unable to manage the relationships with these
manufacturers effectively or if these manufacturers fail to
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CACHEFLOW INC.
meet our future requirements for timely delivery, our business would be
seriously harmed. We have no written agreement with any of these manufacturers
and they fulfill our supply requirements on the basis of individual purchase
orders from us. Accordingly, these manufacturers are not obligated to continue
to fulfill our supply requirements, and the prices we are charged for these
components could be increased on short notice. Any interruption in the
operations of any one of these manufacturers would adversely affect our ability
to meet our scheduled product deliveries to our customers, which could cause the
loss of existing or potential customers and would seriously harm our business.
In addition, the products that these manufacturers build for us may not be
sufficient in quality or in quantity to meet our needs. Our delivery
requirements could exceed the capacity of these manufacturers, which would
likely result in manufacturing delays, which could result in lost sales and the
loss of existing and potential customers. We cannot be certain that these
manufacturers or any other manufacturer will be able to meet the technological
or delivery requirements of our current products or any future products that we
may develop and introduce. The inability of these manufacturers or any other of
our contract manufacturers in the future to provide us with adequate supplies of
high-quality products, or the loss of any of our contract manufacturers in the
future, would cause a delay in our ability to fulfill customer orders while we
attempt to obtain a replacement manufacturer. Delays associated with our
attempting to replace or our inability to replace one of our manufacturers would
seriously harm our business.
We may experience production delays, quality control problems and capacity
constraints in manufacturing and assembling our products, which could result in
a decline of sales.
We currently conduct some of the final assembly and testing of our products at
our headquarters in Sunnyvale, California. We have transitioned manufacturing
and assembly for some of our products to a third party and we may transition
additional manufacturing and assembly to them in the future. If we were unable
to utilize this vendor or identify alternate vendors for manufacturing and
assembly, we would be required to make additional capital investments in new or
existing 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. Our vendors 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 products from limited sources of supply. For example, we purchase custom
power supplies and Intel hardware for use in all of our products. 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, or
result in cancellation charges or penalties, 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
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CACHEFLOW INC.
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 or we could incur cancellation charges or penalties, 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.
Michael Johnson, our vice president and chief financial officer, has announced
his intention to leave our company as soon as his successor is named. We are
currently searching for a replacement for Mr. Johnson. All of our employees are
employed on an "at-will" basis. Our ability to conduct our business also depends
on our continuing ability to attract, hire, train and retain a substantial
number of highly skilled managerial, technical, sales, marketing and customer
support personnel. New hires frequently require extensive training before they
achieve desired levels of productivity, so a high employee turnover rate could
seriously impair our ability to operate and manage our business. We are
particularly dependent on hiring additional personnel to increase our direct
sales and research and development organizations. Competition for personnel is
intense, especially in the San Francisco Bay Area, and we may fail to retain our
key employees, or attract, assimilate or retain other highly qualified personnel
in the future. If so, our business would be seriously harmed.
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 any 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 553 at January 31, 2001. 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.
While we recently reduced our direct sales force in response to current market
conditions, in the future we plan to 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. Any
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.
In the future, we also plan 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
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CACHEFLOW INC.
sales. Our agreements with our indirect channel partners are generally not
exclusive and in many cases may be terminated by either party without cause.
Many of these indirect channel partners do not have minimum purchase or resale
requirements and carry products that are competitive with our products. These
resellers may not give a high priority to the marketing of our products or may
not continue to carry our products. They may give a higher priority to other
products, including the products of competitors. We may not retain any of our
current indirect channel partners or successfully recruit new indirect channel
partners. Events or occurrences of this nature could seriously harm our
business.
If we are unable to expand our customer service and support organization, we may
not be able to retain our existing customers or attract new customers, and our
sales may decline.
We currently have a small customer service and support organization and will
need to increase our capabilities to support new customers and the expanding
needs of our existing customers. If we are unable to expand our customer service
and support organization, we may not be able to retain our existing customers or
attract new customers.
We may not be able to enter into new international markets or generate a
significant level of sales from the international markets in which we currently
operate.
For the quarter ended January 31, 2001, sales to customers outside of the United
States and Canada accounted for approximately 66% 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,
hiring international personnel and recruiting 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 content-smart networking solutions directly into their
network infrastructures. Any errors, defects or other performance problems with
our products could negatively impact the networks of our customers or other
Internet users, resulting in financial or other damages to these groups. These
groups 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. 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 Acquisitions
We consummated mergers with SpringBank Networks in June 2000 and Entera, Inc. in
December 2000. If we fail to develop and integrate the technology of these
companies into our products and services, our quarterly and annual operating
results may be adversely affected. Other risks we may face with respect to our
mergers with these companies include the potential disruption of our ongoing
business and distraction of management; the difficulty of assimilating and
retaining 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 also make additional 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. Several patent
applications pending before the United States Patent Office have been allowed
and are expected to issue as United States patents.
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 or developed, and
integrated into our current product. Any of these delays could seriously harm
our business.
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CACHEFLOW INC.
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 January 31, 2001, we had approximately $42.8 million in cash and cash
equivalents and $52.6 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 content-smart networking solutions 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 Content-Smart Networking Industry
The market for content-smart networking solutions 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 content-smart networking
solutions. The market for content-smart networking solutions is a new and
rapidly evolving market. If the market for content-smart networking solutions
fails to grow as we anticipate, or grows more slowly than we anticipate, our
business will be seriously harmed. In addition, our business will be harmed if
the market for content-smart networking solutions continues to be negatively
impacted by uncertainty surrounding U.S. economic growth. 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 content-smart networking solutions, which has become more
challenging as content-smart networking technologies have become
increasingly complex;
. 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 products operate in part by storing material available on the Internet and
making this material available to end users from our appliance. This creates the
potential for claims to be made against us, either directly or through
contractual indemnification provisions with customers, for defamation,
negligence, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories based on the nature, content or copying of these
materials. It is also possible that if any information provided through any of
our products contains errors, third parties could make claims against us for
losses incurred in reliance on this
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CACHEFLOW INC.
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 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 through February 28, 2001,
the closing market price of our common stock has fluctuated significantly
between $5.84 and $164.69. 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. Quantitative and Qualitative 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 66% of total net sales for the quarter ended January 31, 2001.
As of January 31, 2001, we had approximately $88.4 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 derivative investments or significant equity
securities. As of January 31, 2001, no significant increases have occurred in
interest rates since our Annual Report on Form 10-K for the year ended April 30,
2000.
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CACHEFLOW INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities
During the quarter ended January 31, 2001, we issued an aggregate of 452,062
shares of our common stock upon the exercise of outstanding options to purchase
our common stock. A portion of those shares was issued pursuant to an exemption
under Rule 701 of the Securities Act of 1933.
(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. During the three
months ended January 31, 2001, approximately $5 million of net proceeds were
used for general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
None.
(b) A Current Report on Form 8-K was filed on December 21, 2000 relating
to the Company's acquisition of Entera, Inc.
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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: March 14, 2001
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