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 OCTOBER 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 94085
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 November 30, 2001
----- -----------------
Common Stock, par value $0.0001 43,450,477
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of October 31, 2001 and April
30, 2001 1
Condensed Consolidated Statements of Operations for the three and six
months ended October 31, 2001 and October 31, 2000 2
Condensed Consolidated Statements of Cash Flows for the six months
ended October 31, 2001 and October 31, 2000 3
Notes to Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 25-26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 26
i
CACHEFLOW INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
Oct 31, April 30,
2001 2001
------------- -------------
Note (1)
ASSETS
Current assets:
Cash and cash equivalents $ 24,820 $ 55,356
Short-term investments 36,902 26,208
Restricted investments - 765
Accounts receivable, net 8,041 14,365
Inventories 5,304 7,018
Prepaid expenses and other current assets 1,364 3,240
------------- -------------
Total current assets 76,431 106,952
Property and equipment, net 11,589 12,563
Restricted investments 1,991 1,991
Goodwill, net 17,880 164,264
Other assets 1,381 1,462
------------- -------------
Total assets $ 109,272 $ 287,232
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,179 $ 6,761
Accrued payroll and related benefits 3,603 6,034
Deferred revenue 6,641 7,371
Other accrued liabilities 6,420 8,906
------------- -------------
Total current liabilities 19,843 29,072
Deferred revenue 1,709 1,409
------------- -------------
Total liabilities 21,552 30,481
Commitments
Stockholders' equity:
Common stock 4 4
Additional paid-in capital 888,771 896,773
Treasury stock (3,767) (3,994)
Notes receivable from stockholders (77) (573)
Deferred stock compensation (12,046) (33,348)
Accumulated deficit (784,913) (601,901)
Accumulated other comprehensive loss (252) (210)
------------- -------------
Total stockholders' equity 87,720 256,751
------------- -------------
Total liabilities and stockholders' equity $ 109,272 $ 287,232
============= =============
See notes to condensed consolidated financial statements.
1
CACHEFLOW INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
Three Months Ended Six Months Ended
Oct 31, Oct 31,
-------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- --------------- --------------- ---------------
Net sales $ 13,197 $ 32,548 $ 33,640 $ 54,993
Cost of goods sold 6,191 13,065 14,402 22,786
------------- -------------- -------------- --------------
Gross profit 7,006 19,483 19,238 32,207
Operating expenses:
Research and development 8,944 5,524 18,674 10,246
Sales and marketing 7,603 16,156 16,990 28,743
General and administrative 3,025 2,601 5,176 4,566
Goodwill amortization 9,180 14,748 25,632 24,581
Restructuring 2,558 - 2,558 -
Asset Impairment 58,043 - 120,988 -
Stock compensation 5,311 7,790 13,158 18,565
------------- -------------- -------------- --------------
Total operating expenses 94,664 46,819 203,176 86,701
------------- -------------- -------------- --------------
Operating loss (87,658) (27,336) (183,938) (54,494)
Interest income (expense) and other, net 550 1,797 1,360 3,713
------------- -------------- -------------- --------------
Net loss before income taxes (87,108) (25,539) (182,578) (50,781)
Provision for income taxes (107) (97) (243) (169)
------------- -------------- -------------- --------------
Net loss $ (87,215) $ (25,636) $ (182,821) $ (50,950)
============= ============== ============== ==============
Basic and diluted net loss per common share $ (2.12) $ (0.75) $ (4.47) $ (1.52)
============= ============== ============== ==============
Shares used in computing basic and diluted
net loss per common share 41,213 34,313 40,899 33,517
============= ============== ============== ==============
See notes to condensed consolidated financial statements.
2
CACHEFLOW INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
Oct 31,
-------------------------------
2001 2000
-------------- ---------------
Operating Activities
Net loss $ (182,821) $ (50,950)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,247 886
Stock compensation 13,158 18,565
Goodwill amortization 25,632 24,581
Asset impairment 120,988 -
Interest on notes receivable from stockholders (15) (108)
Changes in operating assets and liabilities:
Accounts receivable 6,324 (12,395)
Inventories 1,714 (2,779)
Prepaid expenses and other current assets 1,876 (93)
Other assets (19) 435
Deferred Revenue (430) -
Accounts payable (3,582) 5,485
Accrued liabilities (4,916) (252)
------------- --------------
Net cash used in operating activities (19,844) (16,625)
Investing Activities
Purchases of property and equipment (1,508) (4,267)
Purchases of investments, net (9,991) (34,789)
Cash aquired in business acquisition - 333
------------- --------------
Net cash used in investing activities (11,499) (38,723)
Financing Activities
Net proceeds from issuance of common stock 771 9,865
Repayment of notes receivable 232 -
Repurchase of employee stock (196) -
------------- --------------
Net cash provided by financing activities 807 9,865
------------- --------------
Net decrease in cash and cash equivalents (30,536) (45,483)
Cash and cash equivalents at beginning of period 55,356 91,532
------------- --------------
Cash and cash equivalents at end of period $ 24,820 $ 46,049
============= ==============
Non-cash investing and financing activities
Treasury stock retirement/cancellation $ 190 $ -
============= ==============
Net exercise of stock warrants - 485
============= ==============
Amounts related to business acquisitions:
Issuance of common stock and assumption of stock options $ - $ 168,275
============= ==============
Net liabilities assumed $ - $ 7,013
============= ==============
See notes to condensed consolidated financial statements.
3
CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2001
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include our accounts and those
of our wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated. The accompanying condensed consolidated financial
statements and related notes as of October 31, 2001, and for the three- and
six-month periods then ended, are unaudited, but include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of its consolidated financial position, operating results,
and cash flows for the interim date and periods presented. Results for the
quarter ended October 31, 2001 are not necessarily indicative of results for the
entire fiscal year or future periods.
Certain prior year amounts in the condensed consolidated statements of
operations have been reclassified to conform to the current period presentation.
These classifications did not affect net income. 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 our audited consolidated financial statements
and notes for the year ended April 30, 2001, included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on July
16, 2001.
We operate primarily in a single operating segment, providing caching appliances
and content delivery technologies that are purpose-built to accelerate and
optimize the delivery of content to end-users over the internet, and private
local and wide area networks. We operate in the United States, Europe and
Asia-Pacific. At October 31, 2001 and 2000, less than 10% of our assets were
located outside the United States.
Net sales information about our business segments was as follows (in thousands):
Three Months Ended Six Months Ended
Oct 31, Oct 31,
------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
North America $ 6,715 $ 13,019 $ 15,104 $ 24,915
Europe 2,237 6,510 6,883 10,550
Asia-Pacific 4,245 13,019 11,653 19,528
-------- -------- -------- --------
Total $ 13,197 $ 32,548 $ 33,640 $ 54,993
======== ======== ======== ========
4
CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2001
(Unaudited)
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
We generally recognize product revenue upon shipment, assuming that evidence of
an arrangement exists, the fee is determinable and collectibility is probable,
unless we have 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 ratably over the life of the contract.
Maintenance contract revenue recognized was $1.9 million and $0.6 million,
respectively, for the three months ended October 31, 2001 and 2000 and $3.5
million and $1.2 million, respectively, for the six months ended October 31,
2001 and 2000.
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 consist of the following (in thousands):
October 31, April 30,
2001 2001
---------- ----------
Raw materials $1,848 $2,631
Work-in-process 569 593
Finished goods 2,887 3,794
---------- ----------
$5,304 $7,018
========== ==========
Note 5. Litigation
Numerous putative securities class action lawsuits have been filed in the U.S.
District Court for the Southern District of New York against certain public
companies, their underwriters, and other individuals arising out of each
company's public offering. The first putative class action complaint against us,
certain of our current and former officers and directors, and certain
underwriters, was filed on June 8, 2001 in the U. S. District Court for the
Southern District of New York, and is captioned Colbert Birnet, L.P. v.
CacheFlow Inc., et al., Civil Action No. 01-CV-5143. Since then four other cases
have been filed in the U.S. District Court for the Southern District of New
York: Powell v. CacheFlow et al., Wesley v. CacheFlow et al, Atlas v. CacheFlow
et al and Fellman v. CacheFlow et al. The Complaints in these cases generally
allege that the underwriters obtained excessive and undisclosed commissions in
connection with the allocation of shares of common stock in our initial public
offering, and maintained artificially high market prices through tie-in
arrangements which required customers to buy shares in the after-market at
pre-determined prices. The complaints allege that the company and our current
and former officers and directors violated Sections 11, 12(2) and 15 of the
Securities Act of 1933, and Sections 10(b) (Rule 10b-5 promulgated thereunder)
and 20(a) of the Securities Act of 1934, by making material false and misleading
statements in the prospectus incorporated in our Form S-1 registration statement
filed with the Securities and Exchange Commission in November 1999. Plaintiffs
seek an unspecified amount of damages on behalf of persons who purchased our
stock between November 18, 1999 and December 6, 2000. We anticipate that further
lawsuits making substantially similar allegations may be filed. As of September
14, 2001 all of these lawsuits have been consolidated and assigned to Hon. Shira
A. Scheindlin in the Southern District of New York. Various plaintiffs have
filed similar actions asserting virtually identical allegations against a large
number of other companies. We intend to defend against the allegations in the
complaints
5
CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2001
(Unaudited)
vigorously. No settlements were recorded in the quarter ended October
31,2001 or prior. We believe the outcome would not have a material adverse
effect on our financial position.
On August 1, 2001, Network Caching Technology L.L.C. filed suit against
CacheFlow and others in the U.S. District Court for the Northern District of
California. The case is captioned Network Caching Technology, L.L.C.,v. Novell,
Inc., Volera, Inc., Akamai Technologies, Inc., CacheFlow, Inc., and Inktomi
Corporation, civil Action No. CV-01-2079. The complaint alleges infringement of
certain U.S. patents. The complaint seeks unspecified compensatory and treble
damages and to permanently enjoin the defendants from infringing the patents in
the future. We intend to defend against the allegations in the complaint
vigorously and believe that the allegations in the lawsuit are without merit;
however, if a judgment were issued against us, it could have a material adverse
effect on our financial position.
From time to time and in the ordinary course of business, we may be subject to
various other claims, charges and litigation. In the opinion of management,
final judgments from such other pending claims, charges and litigation, if any,
against us would not have a material adverse effect on our consolidated
financial position and results of operations.
Note 6. Impairment of Assets
In accordance with our policy, management continues to assess the recoverability
of its long-lived assets. Given the current economic uncertainty and the general
volatility of the financial markets, our market capitalization has fallen below
our net book value for the quarter ended October 31, 2001. Management performed
an impairment assessment of long-lived assets and determined that certain
enterprise level goodwill recorded in connection with our Springbank Networks,
Inc. and Entera, Inc. acquisitions is not fully recoverable. As a result, we
recorded a $57.8 million impairment charge in the second quarter of fiscal 2002
to reduce goodwill to its estimated fair value based on the market value method.
The estimate of fair value was based upon our average market capitalization,
which was calculated using our average closing stock price surrounding October
31, 2001. For the duration of our fiscal year, goodwill will be amortized using
the straight-line method over the remainder of its three-year life. Also, we
recorded a $0.2 million write-down of long-lived assets during the quarter ended
October 31, 2001. No write-downs were recorded during the first quarter of
fiscal year 2002, as well as for the three- and six-month periods ended October
31, 2000.
Note 7. Comprehensive Income (Loss)
We report comprehensive income (loss) in accordance with the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Included in other comprehensive
income (loss) for us are adjustments to record unrealized gains and losses on
available-for-sale securities. These adjustments are accumulated in "Accumulated
other comprehensive loss" in the stockholder's equity section of the balance
sheet. The comprehensive net loss for the three- and six-month periods ended
October 31, 2001 were $87.3 million and $182.9 million, respectively, and for
the three- and six-month periods ended October 31, 2000 were $25.6 million and
$50.9 million, respectively.
Note 8. 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, consultants and employees that are subject to
repurchase.
6
CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2001
(Unaudited)
The following table presents the calculation of basic and diluted net loss per
common share (in thousands, except per share amounts):
Three months ended Six months ended
October 31, October 31,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ------------ ----------
Historical:
Net loss available to common
stockholders $(87,215) $(25,636) $(182,821) $(50,950)
=========== =========== ============ ==========
Weighted-average shares of common stock
outstanding 43,161 39,728 43,274 38,671
Less: Weighted-average shares subject to
repurchase (1,948) (5,415) (2,375) (5,154)
----------- ----------- ------------ ----------
Weighted-average shares used in
computing basic and diluted net loss
per common share 41,213 34,313 40,899 33,517
=========== =========== ============ ==========
Basic and diluted net loss per common
share $ (2.12) $ (0.75) $ (4.47) $ (1.52)
=========== =========== ============ ==========
We have 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 9. Stockholders' Equity
Common Stock
We have entered into Stock Purchase Agreements in connection with the sale of
common stock to employees, directors and third parties. We typically have the
right to repurchase, at the original issue price, a declining percentage of
certain of the shares of common stock issued based on the employee's and
director's service periods. The repurchase right generally declines on a
percentage basis over four years based on the length of each respective
employee's continued employment with us and the director's membership on the
Board of Directors. As of October 31, 2001 and 2000, 1,636,708 and 4,993,449
shares, respectively, of common stock issued under these agreements were subject
to repurchase.
Stock Compensation
Our stock compensation balance generally represents the difference between the
exercise price and the deemed fair value of stock options and warrants granted
to employees, consultants, directors and third parties on the date such stock
awards were granted. However, for the three months ended October 31, 2001, we
recorded a reversal of deferred stock compensation of $4.5 million for the
unamortized portion of the common stock related to terminated employees,
consultants, directors and third parties. Deferred stock compensation for the
quarter ended October 31, 2000 was $0.7 million. Additionally, we have completed
other stock-based transactions that impact deferred stock compensation (such as
acquisitions, in which the outstanding options of the acquired entity are
assumed, or instances where certain modifications are made to the terms and
conditions of option grants subsequent to the grant date). Related stock
compensation expense is recorded over the option vesting period, generally two
to four years, or immediately if there is no vesting period. For the three
months ended October 31, 2001 and 2000, we recorded amortization of stock
compensation of $5.3 million and $7.8 million, respectively. For the six months
ended October 31,
7
CACHEFLOW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2001
(Unaudited)
2001 and 2000, we recorded amortization of stock compensation
of $13.2 million and $18.6 million, respectively. At October 31, 2001 and April
30, 2001, we had $12.1 million and $33.3 million, 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.
Restructuring
In August 2001, we announced a restructuring plan and incurred $2.6 million in
restructuring costs in the quarter ended October 31, 2001 to complete this
effort, which included employee severance costs of approximately $1.7 million
and certain contract termination costs of approximately $0.9 million. We have
also announced a comprehensive restructuring plan in February 2001 and incurred
$1.8 million in restructuring charges, of which $0.9 million was accrued as of
April 30, 2001. These plans were instituted in response to the economic slowdown
that negatively impacted the demand for our products in the fourth quarter of
fiscal year 2001 and first quarter of fiscal year 2002, as potential customers
deferred spending on Internet and intranet infrastructure. These restructuring
plans were designed to more closely align spending with our sales projections
for the respective fiscal year 2001 and for the remainder of the fiscal year
2002. As of October 31, 2001, severance and contract termination payments for
the February 2001 restructuring plan were completed. For the August 2001
restructuring plan, severance payments to domestic employees were substantially
complete at October 31, 2001, and of the $2.6 million restructuring charges,
$1.6 million had been paid, leaving a remaining accrual of $1.0 million for
international severance costs and contract termination fees.
8
CACHEFLOW INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements on our
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to us on the date hereof. We assume no obligation to update any such
forward-looking statements. Our actual results could differ materially from
those indicated in such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in
macroeconomic conditions, fluctuations in quarterly operating results,
uncertainty in future operating results, litigation, product concentration,
competition, technological changes, management of our growth and expansion,
integration of acquisitions, key employee transitions and other risks discussed
in this item under the heading "Factors Affecting Future Operating Results" and
the risks discussed in our other Securities and Exchange Commission filings.
Overview
We design, develop, market and support caching appliances and content delivery
technologies that are purpose-built to accelerate and optimize the delivery of
content to end-users over the internet and private, local and wide area
networks. We were founded in March 1996 and began commercial shipment of our
first caching appliances in May 1998. Since that time, we have introduced other
caching appliances and content delivery technologies, which have a variety of
hardware configurations designed for the different price, performance, capacity
and reliability requirements of our customers. The list prices of our caching
appliances increase as they become more highly configured. Substantially all of
our net sales through October 31, 2001 were attributable to sales and services
of our caching appliance products. We anticipate that these products and
services will continue to account for a substantial portion of our net sales for
the foreseeable future.
We have incurred net losses in each quarter since inception. As of October 31,
2001, we had an accumulated deficit of $784.9 million. Our net loss for the
three months ended October 31, 2001 was $87.2 million. This loss resulted from
costs incurred in the development and sale of our products and services, from
amortization of deferred stock compensation and goodwill, and from charges
related to the impairment of certain assets. Additionally, we experienced a
significant decline in the demand for our products during the quarter ended
October 31, 2001. We believe these decreases substantially resulted from the
weakening global economy and a corresponding reduction in information technology
spending. The decrease for the three months ended October 31, 2001 was also
directly impacted by the terrorist activities in the United States on September
11, 2001. Demand for our products in the directly affected region declined
significantly from prior periods and it may continue to decline. Unless there
are changes in current macroeconomic conditions, we expect the decreased demand
experienced in the last four quarters will continue through the remainder of
fiscal year 2002. As a result, we expect to incur additional operating losses
and continued negative cash flow from operations through at least fiscal year
2002.
Our limited operating history makes the prediction of future operating results
difficult. We believe that period-to-period comparisons of our operating results
should not be relied upon as predictive of future performance. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by companies at an early stage of development, particularly companies in new and
rapidly evolving markets. We may not be successful in addressing these risks and
difficulties.
Results of Operations
The following table sets forth, as a percentage of net sales, consolidated
statements of operations data for the periods indicated:
9
CACHEFLOW INC.
Three Months Ended Six Months Ended
October 31 October 31,
------------------------- ------------------------
2001 2000 2001 2000
--------- --------- ---------- ---------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 46.9 40.10 42.8 41.40
--------- --------- ---------- ---------
Gross profit 53.1 59.9 57.2 58.6
Operating expenses:
Research and development 67.8 17.0 55.5 18.6
Sales and marketing 57.6 49.6 50.5 52.3
General and administrative 22.9 8.0 15.4 8.3
Goodwill amortization 69.6 45.3 76.2 44.7
Restructuring 19.4 - 7.6 -
Asset Impairment 439.8 - 359.7 -
Stock Compensation 40.2 23.9 39.1 33.8
--------- --------- ---------- ---------
Total operating expenses 717.3 143.8 604.0 157.7
--------- --------- ---------- ---------
Operating loss (664.2) (83.9) (546.8) (99.1)
Interest income, net 4.1 5.5 4.0 6.8
--------- --------- ---------- ---------
Net loss before income taxes (660.1) (78.4) (542.8) (92.3)
Provisions for income taxes (0.8) (0.3) (0.7) (0.3)
--------- --------- ---------- ---------
Net loss (660.9) (78.7) (543.5) (92.6)
--------- --------- ---------- ---------
Net loss available to common stockholders (660.9)% (78.7)% (543.5)% (92.6)%
========= ========= ========== =========
Net Sales. Net sales decreased to $13.2 million for the quarter ended October
31, 2001 from $32.5 million for the quarter ended October 31, 2000 and to $33.6
million for the six months ended October 31, 2001 from $55.0 million for the six
months ended October 31, 2000. These decreases were attributable to fewer unit
sales and a trend towards our lower end systems which have lower average sales
prices from our higher end systems, partially offset by increased service and
other product revenue. Also contributing to the lower sales is the impact of the
terrorist attacks of September 11, 2001 on our business in the North East region
of the United States. During the quarters ended October 31, 2001 and 2000, no
customer accounted for more than 10% of our net sales. Unless macroeconomic
conditions improve sooner than anticipated, we believe near-term demand for our
products will remain soft for the remainder of fiscal year 2002.
Net sales information about our business segments was as follows (in thousands):
Three Months Ended Six Months Ended
Oct 31, Oct 31,
------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
North America $ 6,715 $ 13,019 $ 15,104 $ 24,915
Europe 2,237 6,510 6,883 10,550
Asia-Pacific 4,245 13,019 11,653 19,528
-------- -------- -------- --------
Total $ 13,197 $ 32,548 $ 33,640 $ 54,993
======== ======== ======== ========
10
CACHEFLOW INC.
Gross Profit. Gross profit decreased to $7.0 million for the quarter ended
October 31, 2001 from $19.5 million for the quarter ended October 31, 2000 and
to $19.2 million for the six months ended October 31, 2001 from $32.2 million
for the six months ended October 31, 2000. These decreases in gross profit were
primarily attributable to the decrease in sales for the quarter ended October
31, 2001. Gross margin decreased to 53.1% for the quarter ended October 31, 2001
from 59.9% for the quarter ended October 31, 2000 and to 57.2% for the six
months ended October 31, 2001 from 58.6% for the six months ended October 31,
2000. These decreases in gross margin were principally due to the effect of
fixed overhead costs associated with manufacturing on lower volumes.
Our gross margin has been and will continue to be affected by a variety of
factors, including competition, fluctuations in demand for our products, the
timing and size of customer orders and product implementations, the mix of
direct and indirect sales, the mix and average selling prices of products, new
product introductions and enhancements, component costs, manufacturing overhead
costs, service margin and product configuration. 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.
Research and Development. Research and development expenses consist primarily of
salaries and benefits, and prototype and testing costs. Research and development
expenses increased to $8.9 million for the quarter ended October 31, 2001 from
$5.5 million for the quarter ended October 31, 2000 and to $18.7 million for the
six months ended October 31, 2001 from $10.2 million for the six months ended
October 31, 2000. These increases in research and development expenses in
absolute dollars were primarily attributable to increases in staffing and
associated support for engineers required to expand and enhance our product
line, and, to a lesser extent, expenses related to prototype and testing costs.
The restructuring plan implemented in August 2001 resulted in a reduction of
research and development staff in certain engineering areas, while requiring the
addition of staff with other critical skill sets. Research and development
headcount increased to 202 at October 31, 2001 from 109 at October 31, 2000. As
a percentage of net sales, research and development expenses increased to 67.8%
for the quarter ended October 31, 2001 from 17.0% for the quarter ended October
31, 2000 and to 55.5% for the six months ended October 31, 2001 from 18.6% for
the six months ended October 31, 2000. These increases in research and
development expenses as a percentage of net sales result from both the
significant decrease in sales during the first half of fiscal year 2002 and the
significant increase in expenses. Through October 31, 2001, all research and
development costs have been expensed as incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and benefits, commissions and advertising and promotional expenses. Sales and
marketing expenses decreased to $7.6 million for the quarter ended October 31,
2001 from $16.2 million for the quarter ended October 31, 2000 and to $17.0
million for the six months ended October 31, 2001 from $28.7 million for the six
months ended October 31, 2000. These decreases in sales and marketing expenses
in absolute dollars were primarily related to reduced headcount. Sales and
marketing headcount decreased to 105 at October 31, 2001 from 207 at October 31,
2000. As a percentage of net sales, sales and marketing expenses increased to
57.6% for the quarter ended October 31, 2001 from 49.6% for the quarter ended
October 31, 2000. This increase in sales and marketing expenses as a percentage
of net sales results from the decline in sales for the second quarter of our
fiscal year 2001 compared to the second quarter of our fiscal year 2000. As a
percentage of net sales, sales and marketing expenses decreased to 50.5% for the
six months ended October 31, 2001 from 52.3% for the six months ended October
31, 2000. This decrease in sales and marketing expenses as a percentage of net
sales occurred even with the lower revenue experienced in the first six months
of our current fiscal year, reflecting our efforts to lower expenditures to keep
in line with the reduced revenue that we are experiencing. Should growth in
demand for our products resume, and after we realize potential efficiencies
within our sales and marketing organization, we expect to increase our sales and
marketing
11
expenses in absolute dollars in an effort to expand domestic and international
markets, introduce new products and establish and expand new distribution
channels. However, should sales decline further in future periods, we may
implement additional cost-cutting programs to reduce our sales and marketing
expenses.
General and Administrative. General and administrative expenses increased to
$3.0 million for the quarter ended October 31, 2001 from $2.6 million for the
quarter ended October 31, 2000 and to $5.2 million for the six months ended
October 31, 2001 from $4.6 million for the six months ended October 31, 2000.
These increases in general and administrative expenses in absolute dollars were
primarily attributable to increased bad debt expense of $1.0 million partially
offset by the decrease in staffing and associated expenses as the result of the
restructuring in August, 2001. General and administrative headcount decreased to
45 at October 31, 2001 from 53 at October 31, 2000. As a percentage of net
sales, general and administrative expenses increased to 22.9% for the quarter
ended October 31, 2001 from 8.0% for the quarter ended October 31, 2000 and to
15.4% for the six months ended October 31, 2001 from 8.3% for the six months
ended October 31, 2000. These increases in general and administrative expenses
as a percentage of net sales primarily result from the decline in sales for the
second quarter of our fiscal year 2001 compared to the second quarter of our
fiscal year 2000 and the increase in the provision for bad debt expense. Should
growth in demand for our products resume, and after we have realized potential
efficiencies within our current general and administrative organization, we
expect general and administrative expenses to increase in absolute dollars as we
continue to increase headcount to manage expanding operations and facilities.
However, should sales decline further in future periods, we may implement
additional cost-cutting programs to reduce our general and administrative
expenses.
Stock Compensation. Stock compensation expense decreased to $5.3 million for the
quarter ended October 31, 2001 from $7.8 million for the quarter ended October
31, 2000 and to $13.2 million for the six months ended October 31, 2001 from
$18.6 million for the six months ended October 31, 2000. These decreases in
stock compensation expense in absolute dollars result from terminated employees
who had deferred stock compensation charges associated with their employment.
Goodwill Amortization. Goodwill amortization decreased to $9.2 million for the
quarter ended October 31, 2001 from $14.7 million for the quarter ended October
31, 2000. This decrease was primarily attributable to the cumulative $335.2
million impairment of assets written off in the quarters ended April 30, 2001
and July 31, 2001 that substantially decreased our goodwill balance. For the
duration of our fiscal year 2002, goodwill will be amortized using the
straight-line method over the remainder of its three-year life. See "Impairment
of assets" below.
Impairment of assets. As discussed further in note 6 "Impairment of Assets"
above, each quarter management performs an impairment assessment of its tangible
and intangible assets to determine if the enterprise-level goodwill associated
with the acquisitions of SpringBank Networks, Inc. and Entera Inc. are impaired.
As a result, a $57.8 million and $120.7 million impairment charge, respectively,
was recorded to write our net book value down to its market value for the three-
and six-month periods ended October 31, 2001, whereas no impairment charge was
taken in the comparable prior periods. In accordance with our policy, management
will continue to periodically assess the recoverability of its long-lived assets
in the future. Given the current economic uncertainty, the general volatility of
the financial markets and our use of the market value method to determine
impairment charges, if our market capitalization were to again fall below our
net book value for an extended period of time, additional impairment charges may
be recorded.
Interest Income, Net. Interest income, net, decreased to $0.6 million for the
quarter ended October 31, 2001, from $1.8 million for the quarter ended October
31, 2000 and to $1.4 million for the six months ended October 31, 2001, from
$3.7 million for the six months ended October 31, 2000. These decreases were
primarily attributable to lower interest rates and cash balances.
Liquidity and Capital Resources
Since inception, we have financed our operations and the purchase of property
and equipment through private sales of preferred stock, with net proceeds of
$37.9 million, through bank loans and equipment
12
leases, and in November 1999, through an initial public offering of our common
stock, with net proceeds of $126.5 million, net of underwriting discounts,
commissions and estimated offering costs. At October 31, 2001, we had $24.8
million in cash and cash equivalents, $36.9 million in short-term investments,
$2.0 million in restricted investments and $56.6 million in working capital.
Net cash used in operating activities was $19.8 million for the six months ended
October 31, 2001 and $16.6 million for the six months ended October 31, 2000. We
used cash primarily to fund our net losses from operations.
Net cash used in purchases of investments was $10.0 million for the six months
ended October 31, 2001 and $34.8 million for the six months ended October 31,
2000. We used cash primarily to purchase short-term securities and expect that,
in the future, any cash in excess of current requirements will continue to be
invested in high quality, interest-bearing securities.
Capital expenditures were $1.5 million for the six months ended October 31, 2001
and $4.3 million for the six months ended October 31, 2000. Our capital
expenditures consisted of purchases of plant, equipment and software.
Net cash provided by financing activities was $0.8 million for the six months
ended October 31, 2001 and $9.9 million for the six months ended October 31,
2000. Financing activities for the six months ended October 31, 2001 and 2000
were primarily attributable to the exercise of employee stock options.
We believe that working capital will be sufficient to meet our working capital
and capital expenditure requirements for at least the next twelve months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. Furthermore, if cash is required due to unanticipated events, we may
need additional capital sooner than expected. In the event additional financing
is required, we may not be able to raise it on acceptable terms or at all.
New Accounting Pronouncements
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, Business Combinations (Statement 141), and No. 142, Goodwill and Other
Intangible Assets (Statement 142). Statement 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Statement 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of Statement 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001.
Under Statement 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt Statement 142 in their fiscal year beginning after December 15, 2001
(i.e., May 1, 2002 for our fiscal year). Early adoption is permitted for
companies with fiscal years beginning after March 15, 2001 provided that their
first quarter financial statements have not been issued.
The provisions of each statement, which apply to goodwill and certain
intangibles acquired prior to June 30, 2001 will be adopted by us on May 1,
2002. We have not fully assessed the impact of these accounting standards.
Starting with our May 1, 2002 fiscal year, impairment reviews may result in
future periodic write-downs.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 (Statement 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for companies with fiscal year end beginning after
December 15, 2001 (i.e., May 1, 2002 for our fiscal year). Statement 144
supersedes FASB Statement No 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-
13
Lived Assets to Be Disposed Of," and the accounting and reporting provisions
relating to the disposal of a segment of a business of Accounting Principles
Board Opinion No. 30. We have not fully assessed the impact of this accounting
standard.
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 Macroeconomic Conditions
A continued downturn in macroeconomic conditions or continued concern regarding
the recent terrorist activities 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 quarters and the
recent terrorist activities on September 11, 2001 heightened the concern. There
is uncertainty relating to the prospects for near-term U.S. economic growth, as
well as the continued threat of terrorism within the United States and Europe
and the potential for military action. This slowdown and disruption has
contributed to delays in decision-making by our existing and potential customers
and a resulting decline in our sales. Continued disruption 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 may continue to decline in the event that we fail to meet
the expectations of public market analysts or investors in the future.
Risks Related to the Content-Smart Networking Market
The market for content-smart networking solutions is relatively new and rapidly
evolving, and if this market does not develop as we anticipate, our sales may
not grow and may even decline.
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 macro-economic growth. Because this market
is new, we cannot predict its potential size or future growth rate.
The increase in our research and development spending reflects our belief that
to maintain our competitive position in a market characterized by rapid rates of
technological advancement, we must continue to invest significant resources in
research and development. There is no guarantee that we will accurately predict
the direction in which the content-smart networking market will evolve. Failure
on our part to anticipate the direction of the market and develop products that
meet those emerging needs will significantly impair our business and operating
results and our financial condition will be materially adversely affected.
We are entirely dependent on market acceptance of our content-smart networking
solutions and, as a result, 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
October 31, 2001, the CacheFlow 600, 700, 6000, and 7000 Series products and CIQ
Director 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
14
of our net sales. We cannot be certain that our CacheFlow 600, 700, 6000 or 7000
Series products and CIQ Director will continue to achieve any significant degree
of market acceptance.
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. Primary competitive factors
that have typically affected our market include product features such as
response time, capacity, reliability, scalability, and ease of use, as well as
price and customer support. More recently, added functionality that enables
customers to manage and distribute richer, more dynamic forms of Web content
(images, streaming video, etc.) has become an increasingly important competitive
factor in our market. 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 encounter
competition from a variety of companies, including primarily Cisco Systems,
Inktomi, Network Appliance, Volera, 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.
Risks Related to Our Business Execution
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.
15
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.
We have experienced and may continue to experience transition in our management
team. The Chairman of the Board, the Chief Technology Officer, and the Chief
Financial Officer have been in their positions one year or less. 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 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 retaining and potentially hiring additional
personnel to increase our research and development organization. Competition for
personnel is intense, especially in the San Francisco Bay Area, and we may fail
to retain our key employees, or attract, assimilate or retain other highly
qualified personnel in the future. If so, our business would be seriously
harmed.
Our 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 associated with content-smart
networking solutions, combined with the macro-economic slowdown, contribute to
longer sales cycles. We may experience order deferrals or loss of sales as a
result of lengthening sales cycles.
Revenues in any future quarter may be adversely affected to the extent we defer
recognizing revenue from contracts booked in that quarter.
In the future, we may enter into contracts where we recognize only a portion of
the potential revenue under the contract in the quarter in which we enter into
the contract. For example, we may enter into contracts where the recognition of
revenue is conditioned upon delivery of future elements. As a result, revenues
in any given quarter may be adversely affected to the extent we enter into
contracts where revenue under those contracts must be recognized in future
periods.
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 quarters ended January 31, 2001 and October 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. If 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 elsewhere in this "Factors Affecting Future
Operating Results" section.
16
We cannot reliably forecast our future quarterly sales for several reasons,
including:
. we have a limited operating history, and the market in which we compete
is relatively new and rapidly evolving;
. the macro economic environment has slowed significantly and recovery is
uncertain;
. 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 manufacturing
overhead, service and support, 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 and our stock price would likely decline.
If we fail to expand and manage existing sales channels or create additional
sales capabilities, our sales will not grow.
While we recently reduced our direct sales force in response to current market
conditions, we will continually evaluate and modify our current distribution
strategy to meet market requirements. Irrespective of our recent reductions, we
may need to increase the size of our sales channels in the future. Any direct
channel new hire or new distribution partner will require extensive training and
typically take several months to achieve productivity. Competition for qualified
sales personnel and distribution partners is intense, and we might not be able
to hire the kind and number of candidates we are targeting. If we fail to expand
and manage existing sales channels or create additional sales capabilities, our
business will be seriously harmed.
Many of our 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.
We may not be able to enter into new international markets or continue to
generate a significant level of sales from the international markets in which we
currently operate.
For the quarter ended October 31, 2001, sales to customers outside of the United
States and Canada accounted for approximately 49% 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. We have decreased the size of our international
sales force as a part of our reduction in headcount. This may impact our ability
to maintain sales in certain international locations. 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 generate international sales depends on our ability to
maintain our international operations, including efficient use of existing
resources and effective channel management, and recruit additional international
resellers. To the extent we are unable to do so in a timely manner, our growth,
if any, in international sales will be limited and our business could be
seriously harmed. In addition, if we fail to improve our worldwide operational
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.
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.
17
We incurred net losses of $87.2 million and $25.6 million for the quarter ended
October 31, 2001 and 2000, respectively. As of October 31, 2001, we had an
accumulated deficit of $784.9 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. Furthermore, our net sales for the quarter ended
October 31, 2001 were significantly lower than expectations of public market
analysts and investors. It is likely that in some future quarter or quarters,
our operating results will again be below the expectations of public market
analysts and/or investors.
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 October 31, 2001,
we had an aggregate of $12.1 million of deferred compensation and $17.9 million
of goodwill to be amortized. We may record additional compensation expense in
the future if management decides to modify existing option grants, grant
below-market stock options, or make acquisitions that result in the recording of
deferred stock compensation. Furthermore, we may record additional asset
impairment charges in the future if the Company acquires additional
complementary businesses.
If we are unable to raise additional capital, our ability to effectively manage
our growth or enhance our products could be harmed.
At October 31, 2001, we had approximately $24.8 million in cash and cash
equivalents, $36.9 million in short-term investments, and $2.0 million in
restricted investments. We believe that these amounts will enable us to meet our
capital requirements for at least the next twelve months. Thereafter, we may
find it necessary to obtain additional equity or debt financing. Furthermore, if
cash is required due to unanticipated events, we may need additional capital
sooner than expected. The development and marketing of new products 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 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.
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 meet our future
requirements for timely delivery, our business would be seriously harmed. These
manufacturers fulfill our supply requirements on the basis of individual
purchase orders or agreements with 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 be higher than, or lower than, the capacity of
these manufacturers, which would likely result in manufacturing delays, and
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
18
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 most of our products to a third party assembler and we may
transition additional manufacturing and assembly to third party assemblers 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 assembler or we may experience
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 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.
In order to achieve the efficiencies and productivity gains required to achieve
our long-term business model, we will need to improve and implement new systems,
procedures and controls, which could be time-consuming and costly.
While we recently reduced headcount in response to current market conditions, we
will continually evaluate our internal operational needs based upon market
requirements. If this reduction in headcount was not sufficient to respond to
market conditions, we may have to continue to downsize, on the other hand, 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;
19
and Waterloo, 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 407 at October 31, 2001. In February 2000, we
implemented a new enterprise resource planning software system that replaced
substantially all of our business and manufacturing systems and we expect to add
more complementary systems in the future. While we have not had significant
problems to date, we recognize that our personnel, systems, procedures and
controls may still prove to be inadequate to support our future operational
expansion.
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.
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 issued patents and pending United States patent
applications. 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. patents will be issued from these
applications. We cannot assure you that we will be able to detect any
infringement or, if infringement is detected, that patents issued or to be
issuable 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, 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
20
or developed, and integrated into our current product. Any of these delays could
seriously harm our business.
There has been a substantial amount of litigation in the technology industry
regarding intellectual property rights. It is possible that in the future third
parties may claim that we or our current or potential future products infringe
their intellectual property. We expect that companies in the Internet and
networking industries will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any claims,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, may not be available
on terms acceptable to us or at all, which could seriously harm our business.
Our operations could be significantly hindered by the occurrence of a natural
disaster or other catastrophic event.
Our operations are susceptible to outages due to fire, floods, power loss,
telecommunications failures, and other events beyond our control. In addition, a
substantial portion of our facilities, including our headquarters is located in
Northern California, an area susceptible to earthquakes. We do not carry
earthquake insurance for earthquake-related losses. Despite our implementation
of network security measures, our servers are vulnerable to computer viruses,
break-ins, and similar disruptions from unauthorized tampering with our computer
systems. We may not carry sufficient business interruption insurance to
compensate us for losses that may occur as a result of any of these events. Any
such event could have a material adverse effect on our business, operating
results, and financial condition.
Risks Associated with Acquisitions
If we are unable to successfully integrate recently acquired companies, our
ability to execute our business strategy and timely deliver new products to
market could be harmed.
We consummated mergers with SpringBank Networks, Inc. in June 2000 and Entera,
Inc. in December 2000. 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 retaining personnel; and the
maintenance of uniform standards, corporate cultures, controls, procedures and
policies. In addition our inability to retain certain key personnel from these
acquisitions may be harmful to our business. In August of 2001, our Chief
Technology Officer, from the Entera acquisition, and our Senior Vice President
of Engineering, from the Springbank acquisition, left the company; therefore,
our inability to address any of these risks successfully could harm our
business.
We may also make additional acquisitions in the future, although none are
currently planned. 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.
Risks Related to Litigation, Government Regulations, Inquiries or Investigations
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
21
trademark infringement, personal injury, invasion of privacy or other legal
theories based on the nature, content or copying of these materials. It is also
possible that if any information provided through any of our products contains
errors, third parties could make claims against us for losses incurred in
reliance on this information. Our insurance may not cover potential claims of
this type or be adequate to protect us from all liability that may be imposed.
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.
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 service provider 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, in the
past 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.
We are the target of lawsuits, which could result in substantial costs and
divert management attention and resources.
22
Numerous putative securities class action lawsuits have been filed in the U.S.
District Court for the Southern District of New York against certain public
companies, their underwriters, and other individuals arising out of each
company's public offering. The first putative class action complaint against us,
certain of our current and former officers and directors, and certain
underwriters, was filed on June 8, 2001 in the U. S. District Court for the
Southern District of New York, and is captioned Colbert Birnet, L.P. v.
CacheFlow Inc., et al., Civil Action No. 01-CV-5143. Since then, four other
cases have been filed in the U.S. District Court for the Southern District of
New York: Powell v. CacheFlow et al., Wesley v. CacheFlow et al, Atlas v.
CacheFlow et al and Fellman v. CacheFlow et al. The Complaints in these cases
generally allege that the underwriters obtained excessive and undisclosed
commissions in connection with the allocation of shares of common stock in our
initial public offering, and maintained artificially high market prices through
tie-in arrangements which required customers to buy shares in the after-market
at pre-determined prices. The complaints allege that the company and our current
and former officers and directors violated Sections 11, 12(2) and 15 of the
Securities Act of 1933, and Sections 10(b) (Rule 10b-5 promulgated thereunder)
and 20(a) of the Securities Act of 1934, by making material false and misleading
statements in the prospectus incorporated in our Form S-1 registration statement
filed with the Securities and Exchange Commission in November 1999. Plaintiffs
seek an unspecified amount of damages on behalf of persons who purchased our
stock between November 18, 1999 and December 6, 2000. We anticipate that further
lawsuits making substantially similar allegations may be filed. As of September
14, 2001 all of these lawsuits have been consolidated and assigned to Hon. Shira
A. Scheindlin in the Southern District of New York. Various plaintiffs have
filed similar actions asserting virtually identical allegations against a large
number of other companies. We intend to defend against the allegations in the
complaints vigorously. In the future, other types of securities class action
lawsuits could be filed against us. Securities class action litigation could
result in substantial costs and divert our management's attention and resources,
which could seriously harm our business.
On August 1, 2001, Network Caching Technology L.L.C. filed suit against
CacheFlow and others in the U.S. District Court for the Northern District of
California. The case is captioned Network Caching Technology, L.L.C.,v. Novell,
Inc., Volera, Inc., Akamai Technologies, Inc., CacheFlow, Inc., and Inktomi
Corporation, civil Action No. CV-01-2079. The complaint alleges infringement of
certain U.S. patents. The complaint seeks unspecified compensatory and treble
damages and to permanently enjoin the defendants from infringing the patents in
the future. We intend to defend against the allegations in the complaint
vigorously and believe that the allegations in the lawsuit are without merit;
however, if a judgment were issued against us, it could have a material adverse
effect on our financial position.
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 December 7, 2001, the
closing market price of our common stock has fluctuated significantly between
$0.89 and $164.69. The market price of our common stock may fluctuate
significantly in response to the following factors:
. changes in macro-economic conditions;
. variations in our quarterly operating results;
. changes in financial estimates or investment recommendations by
securities analysts;
. changes in market valuations of Internet-related and networking
companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer;
. additions or departures of key personnel; and
. fluctuations in stock market prices and volumes.
23
Substantial sales of our common stock could adversely affect our stock price
Prior to our November 1999 initial public offering, no public market existed for
our common stock. Subsequent to our initial public offering, our stock price and
the daily volume of shares traded have fluctuated significantly. In the future,
the daily volume of shares traded may decline to levels that could heighten the
volatility of our stock price. As a result, sales of a substantial number of
shares of our common stock could adversely affect the market price of our common
stock by potentially introducing a large number of sellers of our common stock
into a market in which our common stock price is already volatile, thus driving
our common stock price down. Substantial sales can result for several reasons,
including a sale of a large block of shares by an institutional shareholder, or
groups of shareholders, directors, executives and employees. In February 2001,
we issued approximately 1 million restricted shares to our employees, of which
fifty percent vested on November 26, 2001 and fifty percent will vest on
February 25, 2002. While in November an immaterial number of shares were sold
immediately, we cannot be certain that in February 2002 many of these shares
will not be sold immediately and without restriction into the public market. Any
one of these transactions could adversely affect our stock price.
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 49% of total net sales for the three-month period ended October 31,
2001.
We are exposed to market price risk on an equity security included in our
short-term investments that was acquired in our acquisition of Entera Inc. This
investment is in a publicly traded company in the volatile high-technology
industry sector. We do not attempt to reduce or eliminate our market exposure on
this security and as a result, the amount of income and cash flow that we
ultimately realize from this investment in future periods may vary materially
from the current unrealized amount. A 50% adverse change in the equity price
would result in an approximate $0.4 million decrease in the fair value of our
equity security as of October 31, 2001.
The hypothetical changes and assumptions discussed above will be different from
what actually occurs in the future. Furthermore, such computations do not
anticipate actions that may be taken by management, should the hypothetical
market changes actually occur over time. As a result, the effect on actual
earnings in the future will differ from those described above.
As of October 31, 2001, we had approximately $62.2 million invested primarily in
certificates of deposit, and fixed-rate, short-term corporate and U.S.
government debt securities which are subject to interest rate risk and will
decrease in value if U.S. market interest rates decrease. We do not hold any
derivative investments and maintain a strict investment policy, which is
intended to ensure the safety and preservation of our invested funds by limiting
default risk, market risk, and reinvestment risk. As of October 31, 2001, no
significant changes in our investment policy have occurred since our Annual
Report on Form 10-K for the year ended April 30, 2001, however, interest rates
have declined significantly and our cash available for investment has declined
to $62.2 million at October 31, 2001 from $82.9 million at April 30, 2001.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Numerous putative securities class action lawsuits have been filed in the U.S.
District Court for the Southern District of New York against certain public
companies, their underwriters, and other individuals arising out of each
company's public offering. The first putative class action complaint against us,
certain of our current and former officers and directors, and certain
underwriters, was filed on June 8, 2001 in the U. S. District Court for the
Southern District of New York, and is captioned Colbert Birnet, L.P. v.
CacheFlow Inc., et al., Civil Action No. 01-CV-5143. Since then, four other
cases have been filed in the U.S. District Court for the Southern District of
New York: Powell v. CacheFlow et al., Wesley v. CacheFlow et al, Atlas v.
CacheFlow et al and Fellman v. CacheFlow et al. The Complaints in these cases
generally allege that the underwriters obtained excessive and undisclosed
commissions in connection with the allocation of shares of common stock in our
initial public offering, and maintained artificially high market prices through
tie-in arrangements which required customers to buy shares in the after-market
at pre-determined prices. The complaints allege that the company and our current
and former officers and directors violated Sections 11, 12(2) and 15 of the
Securities Act of 1933, and Sections 10(b) (Rule 10b-5 promulgated thereunder)
and 20(a) of the Securities Act of 1934, by making material false and misleading
statements in the prospectus incorporated in our Form S-1 registration statement
filed with the Securities and Exchange Commission in November 1999. Plaintiffs
seek an unspecified amount of damages on behalf of persons who purchased our
stock between November 18, 1999 and December 6, 2000. We anticipate that further
lawsuits making substantially similar allegations may be filed. As of September
14, 2001 all of these lawsuits have been consolidated and assigned to Hon. Shira
A. Scheindlin in the Southern District of New York. Various plaintiffs have
filed similar actions asserting virtually identical allegations against a large
number of other companies. We intend to defend against the allegations in the
complaints vigorously. In the future, other types of securities class action
lawsuits could be filed against us. Securities class action litigation could
result in substantial costs and divert our management's attention and resources,
which could seriously harm our business.
On August 1, 2001, Network Caching Technology L.L.C. filed suit against
CacheFlow and others in the U.S. District Court for the Northern District of
California. The case is captioned Network Caching Technology, L.L.C.,v. Novell,
Inc., Volera, Inc., Akamai Technologies, Inc., CacheFlow, Inc., and Inktomi
Corporation, civil Action No. CV-01-2079. The complaint alleges infringement of
certain U.S. patents. The complaint seeks unspecified compensatory and treble
damages and to permanently enjoin the defendants from infringing the patents in
the future. We intend to defend against the allegations in the complaint
vigorously and believe that the allegations in the lawsuit are without merit;
however, if a judgment were issued against us, it could have a material adverse
effect on our financial position.
Item 2. Changes in Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on Wednesday, August 29, 2001 at our
corporate headquarters in Sunnyvale, California. Of the 43,420,426 shares
outstanding as of the record date, 34,584,333 shares were present or represented
by proxy at the meeting. The following matters were submitted to a vote of
security holders:
(1) To elect the following five directors of the Board of Directors to serve
until the next Annual Meeting or until their successors have been duly
elected and qualified:
Votes for Votes Withheld
--------- --------------
Brian M. NeSmith 32,893,626 1,690,707
Marc Andreessen 34,114,622 469,711
David W. Hanna 34,262,501 321,832
25
Philip Koen 34,335,448 248,885
Andrew S. Rachleff 34,331,102 253,231
(2) To ratify our appointment of Ernst & Young LLP as independent accountants
for our fiscal year ending April 30, 2002.
Votes for: 34,543,538
Votes against: 25,138
Votes abstaining: 15,657
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits: None
(b) No Form 8-K was filed during the quarter ended October 31, 2001.
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/ Robert Verheecke
----------------------------
Robert Verheecke
Chief Financial and Accounting Officer
Dated: December 14, 2001
26