<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed Pursuant to Rule 424(a)
Registration No. 333-50247
SUBJECT TO COMPLETION, DATED MAY 22, 1998
2,260,000 SHARES
[LOGO OF INKTOMI] INKTOMI CORPORATION
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
-----------
Of the 2,260,000 shares of Common Stock offered hereby, 2,000,000 are being
sold by Inktomi Corporation ("Inktomi" or the "Company") and 260,000 are being
sold by the Selling Stockholders. See "Principal and Selling Stockholders". The
Company will not receive any of the proceeds from the sale of the shares being
sold by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $12.00 and $14.00 per share. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "INKT".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total (3).......... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deducting estimated expenses of $700,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 339,000 shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount, proceeds to Company and
proceeds to Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
HAMBRECHT & QUIST
-----------
The date of this Prospectus is , 1998.
<PAGE>
INSIDE FRONT COVER
Short description of the Company with the "Inktomi" logo. Background to
include names of partners: NTT, Sun, CNET, Digital, Digex, Microsoft, AOL and
Yahoo.
Text:
- ----
"Inktomi develops and markets scalable software applications designed for use
by the world's largest Internet infrastructure and media companies. The
Company's innovative software delivers high performance and scalability at a
significant cost savings by leveraging Inktomi's coupled cluster software
architecture and dataflow technology. Inktomi's applications include carrier-
class network cache systems and the world's largest search engines."
[ART WORK]
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
LEFT PAGE: "SEARCH PRODUCT FAMILY" WITH TEXT AND GRAPHICS APPEARING IN TWO
COLUMNS.
Centered heading: "Search Product Family."
- -----------------
Caption: "Inktomi's award-winning Internet search engine technology enables
customers to provide a variety of on-line search services to end users. The
Company provides information search services based on its Internet search engine
to its customers who in turn incoporate these services into on-line offerings to
end users."
First column heading: "Search Engine Site Partners"
Short descriptions appear in the first column next to each screen graphic
- -------------------------------------------------------------------------
appearing in the second column:
- ------------------------------
"Snap!. CNET's network of Internet sites and television programming provides
authoritative information about computers, the Internet, and future technology.
CNET's search and navigation service, Snap!, provides users with fast access to
desired information on the Internet." [CNET LOGO]
"msn. The Microsoft Network. A comprehensive Internet start site from Microsoft
targeting consumers will be available toward the end of 1998." [MICROSOFT
LOGO]
"goo. The goo search engine, operated by Nippon Telegraph and Telephone, is one
of the most successful web sites in Japan." [GOO LOGO]
"Wired. Wired's HotBot service, recipient of numerous industry awards, provides
search access to over 110 million web pages." [WIRED LOGO]
"Yahoo!. Yahoo! has selected Inktomi as its default World Wide Web search engine
partner."
Second column
Graphics of Snap, msn, goo and Wired screen shots of search page. Goo site is in
Japanese script.
<PAGE>
RIGHT PAGE: "TRAFFIC SERVER PRODUCT FAMILY" WITH TEXT AND GRAPHICS APPEARING IN
TWO COLUMNS.
Centered heading: "Traffic Server Product Family"
- -----------------
Caption under centered heading:
- -------------------------------
"Inktomi's Traffic Server is the first large-scale, high-performance network
cache specifically designed to reduce Internet congestion and increase overall
network efficiency. Traffic Server alleviates network congestion and increases
network performance by storing frequently requested information in proximity to
users, thereby greatly reducing the transmission of redundant Internet
data."
First column
Heading: "Traffic Server Partners"
- --------
Caption:
- --------
"Inktomi has licensed Traffic Server to America Online, Inc., Digex, Inc.,
Knology Holdings, Inc., and Nippon Telegraph and Telephone."
Logos of America Online, Digex, Knology and NTT appear below caption.
Bar chart illustrating Traffic Server scalability.
Heading: "Traffic Server Scalability"
- --------
The three bars on the graph show the number of operations per second that can be
supported by one, four or sixteen nodes as indicated by the following table.
----------------------------------
Nodes Ops/Sec
----------------------------------
One 330
----------------------------------
Four 1,134
----------------------------------
Sixteen 3,488
----------------------------------
Caption to bar graph:
- ---------------------
"In an audited benchmark study jointly conducted by Inktomi and Sun
Microsystems, Inc., Traffic Server configured with 16 nodes, 1/2 terabyte of
cache and a 40% cache hit rate achieved 3,488 operations per second. This
performance metric implies that Traffic Server can support more than 300 million
hits per day."
Second column
Heading: "Traffic Server Platform Partners"
- --------
Caption to graphic:
- ------------------
"Inktomi's Traffic Server currently operates on the Sun Solaris operating system
and on the Digital Equipment Corp. UNIX operating system. Inktomi is
collaborating with Intel Corp. to port Traffic Server to Intel-based servers
running on the Windows NT operating system."
Logos of Sun Microsystems and Digital appear below caption.
Graphic of Traffic Server CD, jewel case and user documentation
Caption to graphic appearing above the graphs:
- ---------------------------------------------
"Traffic Server is designed to be highly scalable, enabling very large cache
sizes. The ability to incrementally expand cache size on a "pay-as-you-go" basis
enables Traffic Server customers to respond rapidly to changes in network
traffic patterns and increases in the number of users without losing performance
or efficiency."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Prospective investors should consider
carefully the information discussed under "Risk Factors". This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Inktomi develops and markets scalable software applications designed to
significantly enhance the performance and intelligence of large-scale networks.
The Company has pioneered the commercial use of parallel processing-based
coupled cluster technology, a software architecture that enables true
scalability, high system availability and fault tolerance, and superior
price/performance compared to traditional mainframe or symmetric multi-
processing-based systems. This architecture and associated core technologies,
which enable multiple workstations collaborating via high-speed connections to
function as one extremely powerful computer, have been designed and developed
specifically to address the challenges of distributed data management posed by
a global information network that consists of millions of users accessing
millions of documents.
In recent years, the dramatic growth in the number of Internet users and the
availability of powerful new tools for the development and distribution of
Internet content have led to a proliferation of richer information and services
on the Internet, including on-line magazines, e-mail services, specialized news
feeds, interactive games, educational and entertainment applications and
electronic commerce. The availability of richer content and services is
attracting greater numbers of Internet users, fueling a cycle of tremendous
growth wherein more users demand more information, and more information
attracts more users. To accommodate and manage increasing data traffic, network
providers must continually expand and upgrade their networks as well as improve
connectivity to other regional networks. Similarly, providers of services such
as search, e-mail and chat must scale and enhance their services to keep pace
with the tremendous growth in user demand and available information. Continued
increases in the volume, variety and richness of this information will magnify
these challenges.
Inktomi believes that in order for the Internet to scale cost-effectively,
network and service providers must deploy a new layer of high-performance
software throughout the network infrastructure. This software must efficiently
leverage the Internet's existing and future network hardware infrastructure to
intelligently locate, retrieve, manage and distribute increasingly richer
content.
Inktomi has developed two scalable network applications based on its software
architecture: a large-scale network cache and an Internet search engine. The
Company's initial application is its powerful, award-winning Internet search
engine. The Company believes that its search engine covers the largest number
of full text and embedded multimedia documents on the Internet, offering
customers fast, scalable and customizable Internet search services. Inktomi
currently provides the search technology underlying services provided by CNET,
Inc., Goto.com, OzEmail, Ltd., Nippon Telegraph and Telephone Corporation,
Southam, Inc., Wired Digital, Inc., and Universo On-Line S/A. In addition, the
Company has entered into contracts to provide services based on its Internet
search engine to Microsoft Corporation, N/2/H/2/, Inc., and Yahoo!, Inc.
Inktomi's second application, Traffic Server, is a large-scale network cache
designed to address capacity constraints in high-traffic network routes.
Traffic Server alleviates network congestion and increases network performance
by storing frequently requested information in proximity to users, thereby
eliminating or greatly reducing the transmission of redundant Internet data,
which the Company believes comprises a significant portion of network traffic.
Traffic Server is initially being targeted at telecommunications carriers and
large Internet Service Providers, which are currently addressing the explosive
growth in the demand for data bandwidth primarily through significant capital
expenditures on network equipment and infrastructure. To date, the Company has
licensed Traffic Server to America Online, Inc., Digex, Inc., Knology Holdings,
Inc. and Nippon Telegraph and Telephone Corporation.
The Company's objective is to establish itself as the leading provider of
scalable software applications specifically designed to address the distributed
data management challenges posed by rapidly growing global information
networks. The key elements of the Company's strategy are to: (i) leverage the
Company's core coupled-cluster and dataflow technology to develop multiple
applications; (ii) market Traffic Server to telecommunications carriers and
Internet Service Providers; (iii) establish Traffic Server as the de facto
standard for network cache; (iv) establish the Company as the Internet search
engine vendor of choice; and (v) develop direct and indirect distribution
channels for Inktomi's search services and Traffic Server.
The Company was incorporated in California in February 1996 and was
reincorporated in Delaware in February 1998. Unless the context otherwise
requires, references in this Prospectus to "Inktomi" and the "Company" refer to
Inktomi Corporation, a Delaware corporation, its predecessor, Inktomi
Corporation, a California corporation, and Inktomi Limited, its wholly owned
subsidiary located in the United Kingdom. The Company's principal executive
offices are located at 1900 S. Norfolk Street, Suite 310, San Mateo, California
94403, and its telephone number is (650) 653-2800.
Inktomi(TM), Traffic Server(TM), Scaling the Internet(TM), and the Inktomi
logo are trademarks of the Company. This Prospectus also contains trademarks of
other companies. Information contained on the Company's Web site does not
constitute part of this Prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 2,000,000 shares
Common Stock offered by the Selling
Stockholders............................ 260,000 shares
Common Stock to be outstanding after the
offering................................ 20,531,813 shares(1)
Use of proceeds.......................... For general corporate purposes
including working capital and capital
expenditures
Proposed Nasdaq National Market symbol... "INKT"
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 2, 1996 FISCAL YEAR MARCH 31,
(INCEPTION) TO ENDED (UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30, ------------------
1996 1997 1997 1998
---------------- ------------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues.............. $ 530 $ 5,785 $ 2,282 $ 5,876
Gross profit................ 291 4,273 1,816 4,181
Operating loss ............. (3,431) (8,466) (3,112) (7,793)
Net loss.................... (3,534) (8,662) (3,191) (7,877)
Pro forma basic and diluted
net loss per share(2)...... $ (0.72) $ (0.46)
Shares used in computing pro
forma basic and diluted net
loss per share(2).......... 12,030 17,135
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 (UNAUDITED)
-----------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $17,133 $17,406 $40,385
Working capital............................ 11,980 12,252 35,731
Total assets............................... 25,294 25,567 49,046
Debt and capital lease obligations, less
current portion........................... 5,191 5,191 5,191
Total stockholders' equity................. 13,261 13,534 37,013
</TABLE>
- -------
(1) Based on shares outstanding as of March 31, 1998. Includes 562,446 shares
of Common Stock expected to be issued upon the exercise of certain
outstanding warrants prior to completion of this offering. Excludes
3,323,320 shares of Common Stock reserved for issuance under the Company's
stock option and stock purchase plans, of which 2,023,320 shares were
subject to outstanding options as of March 31, 1998, and 813,826 shares of
Common Stock issuable upon exercise of outstanding warrants. Subsequent to
March 31, 1998, warrants to purchase 1,528 shares of Common Stock have
expired, warrants to purchase 134,616 shares of Common Stock have been
issued, options to purchase 414,322 shares have been exercised, 8,533
shares of Common Stock have been repurchased, and options to purchase 3,334
shares of Common Stock have been granted. See "Capitalization",
"Management--Incentive Stock Plans", "Description of Capital Stock" and
Notes 10 and 11 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share
data. The pro forma data is unaudited.
(3) Pro forma reflects the conversion of all outstanding shares of Preferred
Stock to Common Stock and the exercise of certain outstanding warrants to
purchase 562,446 shares of Common Stock prior to or upon the closing of
this offering.
(4) As adjusted reflects the application of the net proceeds from the sale of
the 2,000,000 shares of Common Stock offered hereby by the Company and
after deducting the underwriting discount and estimated offering expenses.
--------------
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting". Except
as otherwise noted, all information in this Prospectus has been adjusted to
give effect to a two-for-three reverse split of the Company's outstanding
Common Stock approved by the Board of Directors of the Company in April 1998,
for the automatic conversion of the Preferred Stock into Common Stock, for the
exercise of certain outstanding warrants to purchase 562,446 shares of Common
Stock, and for certain changes to the authorized capital stock of the Company
to be effected upon completion of this offering. See "Capitalization",
"Description of Capital Stock" and Note 8 of Notes to Consolidated Financial
Statements.
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the Common Stock
offered hereby should carefully review the following risk factors as well as
the other information set forth in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company was founded in February 1996 and has a limited operating history
upon which it can be evaluated. Any investment in the Company must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development in new and rapidly
evolving markets. These risks include the Company's substantial dependence on
two products with only limited market acceptance, need to expand its sales and
support organizations, competition, need to manage changing operations,
customer concentration, reliance on strategic relationships and dependence
upon key personnel, as well as dependence upon the Internet and general
economic conditions. There can be no assurance that the Company will be
successful in addressing such risks. The Company incurred a net loss of $3.5
million for the period from inception through September 30, 1996, $8.6 million
for the year ended September 30, 1997, and $7.9 million for the six months
ended March 31, 1998. As of March 31, 1998, the Company had an accumulated
deficit of $20.1 million. The Company has not achieved profitability on a
quarterly or annual basis, and the Company anticipates that it will incur net
losses for at least the next several quarters. The Company expects to continue
to incur significant product development, sales and marketing, and
administrative expenses and, as a result, will need to generate significant
quarterly revenues to achieve and maintain profitability. There can be no
assurance that any of the Company's business strategies will be successful or
that significant revenues or profitability will ever be achieved or, if they
are achieved, that they can be consistently sustained or increased on a
quarterly or annual basis in the future. See "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
SUBSTANTIAL DEPENDENCE ON TRAFFIC SERVER; UNCERTAINTY OF MARKET ACCEPTANCE;
LENGTHY SALES CYCLE
The Company's future growth substantially depends on the commercial success
of its Traffic Server network cache product, which the Company first licensed
in December 1997 and has licensed to four customers to date. The Company is
initially targeting large telecommunications carriers and Internet Service
Providers ("ISPs") for its Traffic Server product. There can be no assurance
that these potential customers will adopt and implement caching technology
throughout their networks. Even if caching technology is adopted, Traffic
Server may not be accepted and implemented on a timely basis or at all. To
date, Traffic Server has not been installed in a large-scale, commercial
deployment, and there can be no assurance that the product will perform
desired functions, offer sufficient price/performance benefits or meet the
technical or other requirements of customers. Despite testing of the Traffic
Server product prior to its initial commercial release, there can be no
assurance that all performance errors or deficiencies have been discovered and
remedied, that additional errors or deficiencies will not occur, or that if
they occur, the Company will be able to correct such errors and deficiencies.
The Company believes that license of Traffic Server will involve an
enterprise-wide decision-making process and that the Company or its
distribution partners will need to provide a significant level of education
and information to prospective customers regarding the use and benefits of
Traffic Server. In addition, the Company believes that the time required to
deploy Traffic Server will vary significantly depending on a number of
factors, including the needs and skill set of the customer, the size of the
deployment, the complexity of the customer's network environment, the quantity
of hardware and degree of hardware configuration necessary to deploy Traffic
Server, and the customer's
5
<PAGE>
installation schedule. For these and other reasons, the license and deployment
of Traffic Server may be characterized by lengthy sales and implementation
cycles. Failure of Traffic Server to achieve market acceptance for these or
any other reasons would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Industry Background", "--Products and Customers" and "--Sales and Marketing".
NEED TO EXPAND SALES AND SUPPORT ORGANIZATIONS
To date, the Company has sold its products exclusively through its direct
sales organization, which as of March 31, 1998 consisted of 14 individuals.
The Company believes that its future success is dependent upon substantially
increasing the size of its direct sales force, both domestically and
internationally. Competition for such personnel is intense, and there can be
no assurance that the Company will be able to attract, assimilate or retain
additional qualified sales personnel on a timely basis in the future, or at
all. In addition, the Company believes that its future success is dependent
upon establishing relationships with a variety of distribution partners,
including original equipment manufacturers ("OEMs"), systems integrators,
value added resellers ("VARs") and joint marketing partners. The Company has
had discussions with only a limited number of such distribution partners and
has entered into a written agreement with only one such distributor covering
the territory of Japan. There can be no assurance that the Company will be
able to enter into agreements or establish relationships with desired
distribution partners on a timely basis or at all, or that such distributors
will devote adequate resources to selling the Company's products. Failure of
the Company to successfully expand the size of its sales organization or
establish appropriate distribution channels for its products would have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company believes that the complexity of
its products and the large-scale deployments anticipated by its customers will
require a number of highly trained customer service and support personnel. The
Company currently has a small customer service and support organization, which
as of March 31, 1998 consisted of four individuals, and only has limited
experience supporting Traffic Server in commercial deployment. There can be no
assurance that the Company will be able to increase the size of its customer
service and support organization on a timely basis or at all, or that the
Company will be able to provide the high level of support required by its
customers. Failure in either of these regards could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Need to Manage Changing Operations; Dependence
upon Key Personnel", "Business--Strategy", "--Sales and Marketing" and "--
Customer Service and Support".
RISKS ASSOCIATED WITH INTERNET SEARCH ENGINE SERVICE
The Company's search services revenues are primarily based upon the volume
of end-user search queries that are processed by the Inktomi search engine and
the level of advertising revenue generated by customers. The Company's
contracts do not require the customer to direct its users to the Company's
search services or to use the search service at all. Accordingly, the Company
is highly dependent upon the willingness of customers to promote and use the
search services provided by the Company, the ability of customers to attract
users to their on-line services, the volume of end-user search queries that
are processed by the Inktomi search engine, and the ability and willingness of
customers to sell advertisements on Internet pages viewed by end users.
Failure of customers to promote and use the Company's services, a low volume
of end-user search queries processed by the Inktomi search engine and lower
than expected levels of advertising revenues will result in lower levels of
revenue generated by the Company, which could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's contracts require the Company to provide services in accordance with
certain specifications as to the functionality and performance of the search
experience, the size of the Internet database maintained, the frequency of
refreshing the search database, reliability of the service and search response
speeds. Failure of the Company to
6
<PAGE>
perform in accordance with these specifications could result in the
cancellation of one or more customer contracts. The Company will be required
to expand the capacity of its existing data center and/or build out additional
data centers to adequately provide service. These activities require highly
specialized personnel and involve many difficult installation, tuning and
optimization tasks, and will require the Company to expend substantial
financial and management resources. The Company has in the past experienced
difficulties and delays in expanding and stabilizing the cluster of
workstations in its existing data center. As a result, there can be no
assurance that the Company will be able to expand its infrastructure to meet
increased customer demand on a timely basis. The Company houses its data
centers at hosting facilities operated by independent third parties who take
certain precautions to protect the Company's equipment against damage from
fire, earthquakes, floods, power and telecommunications failures, sabotage,
intentional acts of vandalism and similar events. Despite such precautions,
the occurrence of a natural disaster or other unanticipated problems at
current and future data centers of the Company could result in interruptions
in the search services provided by the Company. Such interruptions could
result in reductions in, or terminations of, service provided to the Company's
customers, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Industry Background" and "--Products and Customers".
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of the Company's
control. These factors include demand for Traffic Server, demand for
commercial search services powered by the Company's search technology, lengthy
sales cycles, changes in the growth rate of Internet usage, customers' capital
expenditures and other costs relating to the expansion of their respective
operations, demand for Internet advertising, seasonal trends in advertising
sales, introduction of new products or services by the Company or its
competitors, delays in the introduction or enhancement of products and
services by the Company or its competitors, customer order deferrals in
anticipation of upgrades and new products, changes in the Company's pricing
policies or those of its competitors, the Company's ability to anticipate and
effectively adapt to developing markets and rapidly changing technologies,
changes in the mix of international and U.S. revenues, changes in foreign
currency exchange rates, mix of products and services sold and the channels
through which those products and services are sold, general economic
conditions and specific economic conditions in Internet and related
industries. Additionally, as a strategic response to a changing competitive
environment, the Company may elect from time to time to make certain pricing,
service, marketing or acquisition decisions that could have a material adverse
effect on the Company's quarterly financial performance.
Quarterly sales and operating results generated by the Company's search
engine application generally depend on per-query fees and advertising revenues
received from the Company's search engine customers within the quarter, which
are difficult to forecast. Advertising revenues generated by the Company's
search engine customers are all pursuant to short-term contracts and are
subject to seasonal trends in advertising sales. Revenues from per-query fees
depend on the volume of end-user search queries processed by the Inktomi
search engine. The Company does not have any substantial historical basis for
predicting the volume of search queries that may be generated by end users of
on-line services provided by many of its customers. Moreover, the Company's
customers are generally under no obligation to direct its users to the
Company's search engine service or use the search service at all. Accordingly,
a low level of usage by end users or the cancellation or deferral of any
customer contract could have a material adverse effect on the Company's
quarterly financial performance.
The Company expects that a significant portion of its future revenues will
be generated by licenses of Traffic Server and further expects that such
revenues will be derived from orders placed by a limited number of customers.
The Company expects that the volume and timing of such orders and their
fulfillment, all of which are difficult to forecast, will cause material
fluctuations in the Company's
7
<PAGE>
operating results, particularly on a quarterly basis. The Company expects that
revenues from Traffic Server will also be difficult to forecast because the
Company's sales cycle, from initial evaluation to product shipment, is
expected to vary substantially from customer to customer. Accordingly, the
cancellation or deferral of even a small number of licenses of Traffic Server
could have a material adverse effect on the Company's quarterly financial
performance. Conversely, to the extent significant sales occur earlier than
expected, operating results for subsequent quarters may not compare favorably
with those of earlier quarters.
The Company plans to significantly increase its operating expenses to expand
its sales and marketing operations, broaden its customer support capabilities,
develop new distribution channels, fund greater levels of research and
development, and establish strategic alliances. Because the Company's
operating expenses are based on anticipated revenue trends and because a high
percentage of the Company's expenses are fixed, a delay in generating or
recognizing revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
result in operating losses. To the extent that such expenses are not
subsequently followed by increased revenues, this could have a material
adverse effect on the Company's business, financial condition and results of
operations. As a result of these and other factors, the Company believes that
period to period comparisons of its operating results may not be meaningful
and should not be relied upon as an indication of future performance. Due to
all of the foregoing factors, it is likely that in some future quarter, the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Risk Factors--Substantial
Dependence on Traffic Server; Uncertainty of Market Acceptance; Lengthy Sales
Cycle", "--Risks Associated with Internet Search Engine Service" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
SUBSTANTIAL COMPETITION
The markets in which the Company competes are new, intensely competitive,
highly fragmented and characterized by rapidly changing technology and
evolving standards. The Company faces competition in the overall network
computing software market as well as each of the market segments in which its
products and services compete. The Company has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of whom have significantly greater financial, technical,
marketing and other resources than the Company.
In the market for network cache solutions, the Company competes with
companies including CacheFlow, Inc., Cisco Systems, Inc. ("Cisco"), Microsoft
Corporation ("Microsoft"), Netscape Communications Corp. ("Netscape"), Network
Appliance, Inc., Novell, Inc., and Spyglass, Inc. among others, as well as
against freeware caching solutions including CERN, Harvest and Squid. In
addition, other companies may embed competing technology into other products
such as server or firewall software. The Company is aware of numerous other
major software developers as well as smaller entrepreneurial companies that
are focusing significant resources on developing and marketing software
products and services that will compete with Traffic Server. The Company
believes that its software may face competition from other providers of
hardware and software claiming to offer competing solutions to network
infrastructure problems, including networking hardware and companion software
manufacturers such as Ascend Communications, Inc., Bay Networks, Inc., Ciena
Corporation and IBM Corporation; hardware manufacturers such as Digital
Equipment Corporation ("Digital"), Hewlett-Packard Company, Intel Corporation
("Intel"), Motorola, Inc. and Sun Microsystems, Inc. ("Sun");
telecommunications providers such as AT&T, Inc., MCI Telecommunications
Corporation, and regional Bell operating companies; cable TV/communications
providers such as @Home Corporation, Continental Cablevision, Inc.,
TimeWarner, Inc. and regional cable operators; software database companies
such as Informix Corporation, Oracle Corporation and Sybase, Inc.; and large
diversified software and technology companies including Microsoft, Netscape
and others. Cisco, Microsoft and
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Netscape provide or have announced their intentions to provide a range of
software and hardware products based on Internet protocols and to compete in
the broad Internet/intranet software market as well as in specific market
segments in which the Company competes. Cisco, Microsoft and Netscape have
often acquired technology and products from other companies to augment their
product lines, in addition to developing their own technology and products.
The Company competes with a number of companies to provide Internet search
services, many of whom have operated services in the market for a longer
period, have greater financial resources, have established marketing
relationships with leading on-line services and advertisers, and have secured
greater presence in distribution channels. Competitors who offer search
services to on-line service providers include Digital (Alta Vista), Excite,
Inc. ("Excite"), Infoseek Corporation ("Infoseek"), Lycos Corporation
("Lycos"), Northern Light, Inc. and Open Text Corporation, among others.
Increased use and visibility of the Company's search engine services depends
on the Company's ability to maintain highly available and reliable services
across multiple data centers and to maintain the freshness of the search
database.
The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Certain of the Company's current and potential competitors may bundle
their products with other software or hardware, including operating systems
and browsers, in a manner that may discourage users from purchasing products
offered by the Company. Also, certain current and potential competitors have
greater name recognition or more extensive customer bases that could be
leveraged, thereby gaining market share to the Company's detriment. Inktomi
expects additional competition as other established and emerging companies
enter the network computing software market and new products and technologies
are introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could materially adversely affect the Company's business, financial condition
and results of operations. Current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability of their products to
address the needs of the Company's prospective customers. The Company's
current or future channel partners may establish cooperative relationships
with current or potential competitors of the Company, thereby limiting the
Company's ability to sell its products through particular distribution
channels. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. Such competition could materially adversely affect the Company's
ability to obtain new contracts and maintenance and support renewals for
existing contracts on terms favorable to the Company. Further, competitive
pressures could require the Company to reduce the prices of its products and
services, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors, and the failure to do so would have a material adverse effect
upon the Company's business, financial condition and results of operations.
See "Business--Competition".
NEED TO MANAGE CHANGING OPERATIONS; DEPENDENCE UPON KEY PERSONNEL
The ability of the Company to successfully offer products and services and
implement its business plan in a rapidly evolving market requires an effective
planning and management process. The Company has recently increased the scope
of its operations domestically, established a subsidiary in the United Kingdom
to support European operations, and has grown from 33 employees as of
March 31, 1997 to 89 employees as of March 31, 1998. This growth has placed,
and the Company's anticipated future operations will continue to place, a
significant strain on the Company's management systems and resources. The
Company expects that it will be required to continue to improve its
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financial and managerial controls and reporting systems and procedures, and
will need to expand, train and manage its work force worldwide. Furthermore,
the Company expects that it will be required to manage multiple relationships
with various customers and other third parties. There can be no assurance that
the Company will be able to effectively manage these tasks, and the failure to
do so could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company intends to hire a
significant number of additional sales, support, marketing, and research and
development personnel in 1998 and beyond. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
attract, assimilate or retain additional highly qualified personnel in the
future. If the Company is unable to hire and retain such personnel,
particularly those in key positions, the Company's business, financial
condition and results of operations may be materially adversely affected. The
Company's future success also depends in significant part upon the continued
service of its executive officers and other key sales, marketing and support
personnel. In addition, the Company's products and technologies are complex
and the Company is substantially dependent upon the continued service of its
existing engineering personnel, and especially the founders of the Company,
many of whom have advanced degrees. None of the Company's officers or
employees are bound by an employment agreement for any specific term and the
relationships of such officers and employees with the Company is, therefore,
at will. The Company does not have "key person" life insurance policies
covering any of its employees. The loss of the services of any of its
executive officers, engineering personnel or other key employees would have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Business--Employees" and "Management".
CUSTOMER CONCENTRATION
The Company has only recently commercially released Traffic Server and, to
date, the Company has generated a substantial portion of its revenues from
contracts with five search engine customers. Of these customers, Wired
Digital, Inc. ("Wired") and Nippon Telegraph and Telephone Corporation ("NTT")
accounted for approximately 79% and 13%, respectively, of total revenues
generated by the Company for the year ended September 30, 1997. For the six
months ended March 31, 1998, Wired, NTT and Microsoft accounted for 59%, 6%
and 20% of total revenues, respectively. The Company expects that a small
number of customers will continue to account for a substantial portion of
revenues for the foreseeable future. As a result, the loss of a major customer
or, in the case of the Company's search engine customers, a decline in the
usage of any such customer's search service, could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that customers that have
accounted for significant revenues in past periods, individually or as a
group, will continue to generate revenues in any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RISKS OF INFRINGEMENT AND PROPRIETARY RIGHTS
Because materials may be downloaded by the search services operated or
facilitated by the Company, or may be copied and stored by customers that have
deployed the Company's Traffic Server product, and, in either case, may be
subsequently distributed to others, there is a potential that claims will be
made against the Company (directly or through contractual indemnification
provisions with customers) for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature, content
or copying of such materials. Such claims have been threatened against the
Company from time to time, and have been brought, and sometimes successfully
pressed, against on-line services in the past. It is also possible that if any
information provided through the search services operated or facilitated by
the Company or information that is copied and stored by customers that have
deployed Traffic Server, such as stock quotes, analyst estimates or other
trading information, contains errors, third parties could make claims against
the Company for losses incurred in reliance on such information. Although the
Company carries general liability insurance, the Company's insurance may not
cover potential claims of this type or may not be
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adequate to indemnify the Company for all liability that may be imposed. Any
imposition of liability or legal defense expenses that are not covered by
insurance or is in excess of insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's success and ability to compete are substantially dependent
upon its internally developed technology. While the Company relies on
copyright, trade secret and trademark law to protect its technology, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, frequent product enhancements and
reliable product maintenance are more essential to establishing and
maintaining a technology leadership position. There can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology. The Company generally enters into confidentiality or
license agreements with its employees, consultants and corporate partners, and
generally controls access to and distribution of its software, documentation
and other proprietary information. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use the Company's products or technology. Policing unauthorized use
of the Company's products is difficult, and there can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology,
particularly in foreign countries where the laws may not protect the Company's
proprietary rights as fully as do the laws of the United States. Substantial
litigation regarding intellectual property rights exists in the software
industry, and the Company expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in the
Company's industry segments grows and the functionality of products in
different industry segments overlaps. Lycos recently announced that it is the
exclusive licensee of a patent covering a method of crawling information on
the Internet, and that it plans to bring actions against companies that it
believes are infringing this patent in the near future. There can be no
assurance that Lycos or other third parties will not claim infringement by the
Company with respect to its software or enhancements thereto. Any such claims,
with or without merit, could be time-consuming to defend, result in costly
litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. A successful claim of
product infringement against the Company and failure or inability of the
Company to license the infringed or similar technology could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Proprietary Rights".
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The Company believes that its success in penetrating markets for its Traffic
Server product and search engine application depends in part on its ability to
develop and maintain strategic relationships with key hardware and software
vendors, distribution partners and customers. The Company further believes
that such relationships are important in order to validate the Company's
technology, facilitate broad market acceptance of the Company's products, and
enhance the Company's sales, marketing and distribution capabilities. The
Company's inability to attract or retain strategic relationships, or the
termination of one or more successful relationships could have a material
adverse effect on the Company's business, financial condition and results of
operations. In July 1997, the Company and Microsoft entered into a series of
agreements whereby Microsoft selected the Company's technology as the basis
for Internet search services to be provided by Microsoft. Federal and state
regulatory authorities have recently initiated broad antitrust actions against
Microsoft. The Company is unable to predict whether or to what extent such
antitrust actions may affect its relationship with Microsoft, although such
actions may delay initiation of the services to be provided by the Company to
Microsoft or narrow the scope of Internet sites and applications where
Microsoft may incorporate the Company's Internet search engine services. In
addition, the Company has from time to time licensed certain minor components
from third parties such as reporting functions and security features and
incorporated them
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into the Company's products. Failure of such third parties to maintain or
enhance their products could impair the functionality of the Company's
products and could require the Company to obtain alternative products from
other sources or to develop such software internally, either of which could
involve costs and delays as well as diversion of engineering resources. See
"Business--Sales and Marketing".
RISKS ASSOCIATED WITH NEW VERSIONS OF SOFTWARE AND NEW PRODUCTS; RAPID
TECHNOLOGICAL CHANGE
The Company's future growth depends on its successful and timely
introduction of new products and services in markets that do not currently
exist or are rapidly evolving. The markets for the Company's products are
characterized by rapid technological change, frequent new product
introductions, changes in customer demands and evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
The Company's future success will depend upon its ability to address the
increasingly sophisticated needs of its customers by developing and
introducing enhancements to its software on a timely basis that keep pace with
technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to its software that respond to
technological change, evolving industry standards or customer requirements,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and sale of such enhancements or that
such enhancements will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. The Company has in the
past experienced delays in the release dates of new products and product
enhancements. Any material delay in the release dates of future products or
enhancements or any failure of such future products or enhancements to achieve
market acceptance when released, could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the introduction or announcement of new product offerings
by the Company or the Company's competitors will not cause customers to defer
or forego purchases of current versions of the Company's software, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company markets and sells its products in the United States and
internationally. The Company recently established a subsidiary located in the
United Kingdom to market and sell the Company's products in Europe and plans
to establish additional facilities in other parts of the world. The Company's
expansion of its existing international operations and entry into additional
international markets will require significant management attention and
financial resources. If international revenues generated by the Company are
not adequate to offset the expense of establishing and maintaining foreign
operations, the Company's business, financial condition and results of
operations would be materially adversely affected. To date, the Company has
only limited experience in developing localized versions of its products and
marketing and distributing its products internationally. There can be no
assurance that the Company will be able to successfully market, sell and
deliver its products in these international markets. International operations
are subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign markets, longer receivables collection periods and
greater difficulty in accounts receivable collection, unexpected changes in
regulatory requirements, difficulties and costs of staffing and managing
foreign operations, reduced protection for intellectual property rights in
some countries, potentially adverse tax consequences and political and
economic instability. There can be no assurance that the Company or its
distribution partners will be able to sustain or increase international
revenues, or that the foregoing factors will not have a material adverse
effect on the Company's future international revenues and, consequently, on
the Company's business, financial condition and results of operations. The
Company's international revenues are generally denominated in local
currencies.
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The Company does not currently engage in currency hedging activities. Although
exposure to currency fluctuations to date has been insignificant, there can be
no assurance that fluctuations in currency exchange rates in the future will
not have a material adverse impact on revenues from international sales and
thus the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Sales and Marketing".
YEAR 2000 RISKS
The potential for software failures due to processing errors arising from
calculations using the year 2000 date is a known risk. The Company recognizes
the need to ensure that its operations, products and services will not be
adversely impacted by Year 2000 software failures. The Company has established
procedures for evaluating and managing the risks and costs associated with
this problem and believes that its internal computer systems, including its
accounting, sales and technical support automation systems, are currently Year
2000 compliant. However, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be able to
handle all Year 2000 problems.
In addition, although the Company believes that its search engine
application and Traffic Server are Year 2000 compliant, there can be no
assurance that the Company's software products contain all necessary date code
changes. Furthermore, many of the Company's customers use Internet protocols
and maintain their Internet operations on servers that may be impacted by Year
2000 complications. Reliance on such Internet protocols or the failure of the
Company's customers to ensure that their servers are Year 2000 compliant could
have a material adverse effect on the Company's customers and the Company's
products and search services, which in turn could have a material adverse
effect on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may in the future pursue acquisitions of complementary products,
technologies or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities and the incurrence of
additional debt and amortization expenses related to goodwill and other
intangible assets, which could adversely affect the Company's results of
operations. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, products and personnel of
the acquired company, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no
direct prior experience, and the potential loss of key employees of the
acquired company. There can be no assurance that the Company will ever
successfully complete an acquisition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations may be
adopted at the local, state, national or international levels with respect to
the Internet, covering issues such as user privacy, pricing, taxation,
advertising, intellectual property rights, information security or the
convergence of traditional communications services with Internet
communications. The Telecommunications Reform Act of 1996 imposes criminal
penalties (via the Communications Decency Act) on anyone who distributes
obscene communications on the Internet knowing that the recipient of the
communications is under 18 years of age. Other nations, including Germany,
have taken actions to restrict the free flow of material deemed to be
objectionable on the Internet. In addition, the applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property
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issues, taxation, libel and personal privacy is uncertain. The vast majority
of such laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Changes to such laws or adoption of
additional laws or regulations intended to address these issues, including
some recently proposed changes, could create uncertainty in the marketplace
which could reduce demand for the Company's products and services, could
increase the Company's cost of doing business as a result of compliance, could
result in litigation or could in some other manner have a material adverse
effect on the Company's business, financial condition and results of
operations.
DISCRETION AS TO USE OF PROCEEDS
The Company's management will have discretion to allocate a large percentage
of the proceeds from this offering to uses which the stockholders may not deem
desirable, and there can be no assurance that the proceeds can or will be
invested to yield a significant return. See "Use of Proceeds".
NO PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or, if one does develop, that it will be maintained. The initial
public offering price, which will be determined through negotiations between
the Company and the Underwriters, may not be indicative of prices that will
prevail in the trading market. In addition, the securities markets have from
time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. The market
prices of the common stock of many publicly held Internet companies have in
the past been, and can in the future be expected to be, especially volatile.
The market price of the Company's Common Stock is likely to be highly volatile
and may be subject to wide fluctuations in response to announcements of
technological innovations or new products by the Company or its competitors,
release of reports by securities analysts, developments or disputes concerning
patents or proprietary rights, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results. See
"Underwriting".
CONTROL BY OFFICERS AND DIRECTORS
The Company anticipates that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
45% of the Company's outstanding Common Stock following the completion of this
offering. These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by the stockholders of
the Company, including the election of directors and the approval of mergers
or other business combination transactions. See "Principal and Selling
Stockholders".
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
This offering will provide substantial benefits to current stockholders of
the Company. Consummation of this offering is expected to create a public
market for the Common Stock held by current stockholders, including executive
officers and directors of the Company. In addition, several of the Company's
stockholders are selling shares in this offering. Existing stockholders paid
approximately $34 million for an aggregate of approximately 18,531,813 shares
of Common Stock as of March 31, 1998. Based upon an assumed initial public
offering price of $13.00 per share, the value of the shares held by such
existing stockholders would be approximately $241 million. Therefore, the
aggregate unrealized gain to existing stockholders of the Company resulting
from the offering would be approximately $207 million. See "Principal and
Selling Stockholders" and "Shares Eligible for Future Sale".
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EFFECT OF CERTAIN CHARTER PROVISIONS; LIMITATION OF LIABILITY OF DIRECTORS;
ANTITAKEOVER EFFECTS OF DELAWARE LAW
Effective upon completion of this offering, the Company will be authorized
to issue 10,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price
of the Common Stock and the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. The Company has no current plans to
issue any shares of Preferred Stock.
Certain provisions of the Company's Certificate of Incorporation and Bylaws
eliminate the right of stockholders to act by written consent without a
meeting, eliminate the right of stockholders to vote cumulatively in the
election of directors (subject to compliance with California corporate law),
and specify certain procedures for nominating directors and submitting
proposals for consideration at stockholder meetings. Such provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions which may
involve an actual or threatened change of control of the Company. Such
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions are also intended to discourage certain tactics that
may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's Common Stock
and, consequently, may also inhibit fluctuations in the market price of the
Company's Common Stock that could result from actual or rumored takeover
attempts. These provisions may also have the effect of preventing changes in
the management of the Company.
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from
engaging, under certain circumstances, in a "business combination" with any
"interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of the Antitakeover
Law, a "business combination" includes, among other things, a merger or
consolidation involving the Company and the interested stockholder and the
sale of more than 10% of the Company's assets. In general, the Antitakeover
Law defines an "interested stockholder" as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the Company and any
entity or person affiliated with or controlling or controlled by such entity
or person. A Delaware corporation may "opt out" of the Antitakeover Law with
an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the company's
outstanding voting shares. The Company has not opted out of the provisions of
the Antitakeover Law. See "Description of Capital Stock".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options and warrants) in the public
market following this offering could
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adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity or equity-related
securities in the future at a time and price that the Company deems
appropriate. In addition to the 2,260,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option and
assuming the exercise of options to purchase 43,334 shares of Common Stock by
a Selling Stockholder), as of April 30, 1998, there were 18,719,410 shares of
Common Stock outstanding, all of which are restricted shares (the "Restricted
Shares") under the Securities Act of 1933, as amended (the "Securities Act").
As of such date, no Restricted Shares will be eligible for sale in the public
market. Following the expiration of the 180-day lock-up agreements with the
representatives of the Underwriters, the Restricted Shares will be eligible
for sale from time to time thereafter upon expiration of applicable holding
periods under Rule 144 under the Securities Act. In addition, as of April 30,
1998, there were options outstanding to purchase 1,612,332 shares of Common
Stock (of which options for 43,334 shares are expected to be exercised on or
before the closing of this offering), and warrants outstanding to purchase
948,442 shares of Common Stock, and all of such options and warrants are
subject to lock-up agreements. Goldman, Sachs & Co. may, in their sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. In addition, the holders of
13,192,523 Restricted Shares and holders of warrants to purchase 222,124
shares of Common Stock are entitled to certain rights with respect to
registration of such shares for sale in the public market. If such holders
sell in the public market, such sales could have a material adverse effect on
the market price of the Company's Common Stock. See "Description of Capital
Stock--Registration Rights", "Shares Eligible for Future Sale" and
"Underwriting".
Immediately after this offering, the Company intends to register
approximately 2,912,332 shares of Common Stock subject to outstanding options
and reserved for issuance under its stock option and purchase plans. See
"Management--Incentive Stock Plans" and "Shares Eligible for Future Sale".
NO INTENTION TO PAY DIVIDENDS; DILUTION
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings for funding
growth and, therefore, does not anticipate paying any dividends in the
foreseeable future. See "Dividend Policy". The initial public offering price
will be substantially higher than the net tangible book value per share of
Common Stock. Investors purchasing shares of Common Stock in this offering
will therefore incur immediate and substantial net tangible book value
dilution. See "Dilution".
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company are estimated to be $23,480,000 at an
assumed initial public offering price of $13.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company ($27,469,700 if the over-allotment option is
exercised in full).
The principal purposes of the offering made hereby are to create a public
market for the Common Stock, to facilitate future access to public capital
markets and to improve the Company's financial position. The Company expects
to use the balance of the net proceeds for working capital and general
corporate purposes. In addition, the Company may use a portion of the net
proceeds to acquire complementary products, technologies or businesses;
however, it currently has no commitments or agreements and is not involved in
any negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, the Company intends to invest the net proceeds in
interest-bearing, investment-grade securities. The Company will not receive
any proceeds from the sale of the shares being sold by the Selling
Stockholders. See "Principal and Selling Stockholders".
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. The covenants made by the Company
under its existing line of credit prohibit the payment of dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis, (ii) on a pro forma basis to reflect the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock upon the closing of this offering and 562,446 shares of Common Stock
expected to be issued upon the exercise of certain outstanding warrants prior
to completion of the offering, and (iii) on an as adjusted basis to give
effect to the receipt by the Company of the estimated net proceeds from the
sale of 2,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $13.00 per share:
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA ADJUSTED
-------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 5,191 $ 5,191 $ 5,191
Stockholders' equity:
Preferred Stock: $.001 par value, 20,680,000
shares authorized, 19,460,485 issued and
outstanding, actual; 10,000,000 shares
authorized, pro forma and as adjusted, none
issued and outstanding....................... 19 -- --
Common Stock: $.001 par value, 50,000,000
shares authorized, 4,931,468 issued and
outstanding, actual; 100,000,000 shares
authorized, 18,531,813 shares issued and
outstanding, pro forma; 20,531,813 shares
issued and outstanding, as adjusted(1)....... 5 19 21
Additional paid-in capital.................... 32,724 33,002 56,479
Other......................................... 587 587 587
Accumulated deficit........................... (20,074) (20,074) (20,074)
-------- -------- --------
Total stockholders' equity.................... 13,261 13,534 37,013
-------- -------- --------
Total capitalization.......................... $ 18,452 $ 18,725 $ 42,204
======== ======== ========
</TABLE>
- --------
(1) Includes 562,446 shares of Common Stock expected to be issued upon the
exercise of certain outstanding warrants prior to completion of this
offering. Excludes 3,323,320 shares of Common Stock reserved for issuance
under the Company's stock option and stock purchase plans, of which
2,023,320 shares were subject to outstanding options as of March 31, 1998,
and 813,826 shares of Common Stock issuable upon exercise of outstanding
warrants. Subsequent to March 31, 1998, warrants to purchase 1,528 shares
of Common Stock have expired, warrants to purchase 134,616 shares of
Common Stock have been issued, options to purchase 414,322 shares have
been exercised, 8,533 shares of Common Stock have been repurchased, and
options to purchase 3,334 shares of Common Stock have been granted. See
"Management--Incentive Stock Plans", "Description of Capital Stock" and
Notes 10 and 11 of Notes to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was $13,308,000 or approximately $0.72 per share. Pro forma net tangible book
value per share represents the amount of the Company's pro forma total
tangible assets less total liabilities, divided by the pro forma number of
shares of Common Stock outstanding. Dilution in pro forma net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of Common Stock in the offering made hereby and the net
tangible book value per share of Common Stock immediately after the completion
of this offering. After giving effect to the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $13.00 per share and after deducting the estimated
underwriting discounts and offering expenses payable by the Company, the pro
forma net tangible book value of the Company at March 31, 1998 would have been
$37,013,000 or approximately $1.79 per share. This represents an immediate
increase in pro forma net tangible book value of $1.07 per share to existing
stockholders and an immediate dilution in net tangible book value of $11.21
per share to new investors of Common Stock in this offering. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $13.00
Pro forma net tangible book value per share as of March 31, 1998.. $0.72
Increase per share attributable to new investors(1)............... 1.07
-----
Pro forma net tangible book value per share after the offering(1). 1.79
------
Dilution in net tangible book value per share to new investors(1). $11.21
======
</TABLE>
- --------
(1) The foregoing table includes 562,446 shares of Common Stock expected to be
issued upon the exercise of certain outstanding warrants prior to
completion of this offering. The foregoing table excludes 3,323,320 shares
of Common Stock reserved for issuance under the Company's stock option and
stock purchase plans, of which 2,023,320 shares were subject to
outstanding options as of March 31, 1998, and 813,826 shares of Common
Stock were issuable upon exercise of outstanding warrants. Subsequent to
March 31, 1998, warrants to purchase 1,528 shares of Common Stock have
expired, warrants to purchase 134,616 shares of Common Stock have been
issued, options to purchase 414,322 shares have been exercised, 8,533
shares of Common Stock have been repurchased, and options to purchase
3,334 shares of Common Stock have been granted. See "Capitalization",
"Management--Incentive Stock Plans", "Description of Capital Stock" and
Notes 10 and 11 of Notes to Consolidated Financial Statements.
The following table sets forth, on a pro forma basis as of March 31, 1998,
the differences between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by existing holders of Common Stock and by the new investors, before deducting
the underwriting discount and offering expenses payable by the Company, at an
assumed public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 18,532 90.3% $ 35,013 57.4% $ 1.89
New investors(1)............. 2,000 9.7 26,000 42.6 13.00
-------- ------- ---------- --------
Total...................... 20,532 100.0% $ 61,013 100.0%
======== ======= ========== ========
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares of Common Stock held by existing stockholders to 18,271,813 or
approximately 89.0% (approximately 87.5%, if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of
Common Stock outstanding upon the closing of this offering, and the number
of shares held by new public investors will be 2,260,000 or approximately
11.0% (2,599,000 shares, or approximately 12.5%, if the Underwriters'
over-allotment option is exercised in full) of the total number of shares
of Common Stock outstanding after this offering. See "Principal and
Selling Stockholders".
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto of the Company included elsewhere in this Prospectus. The
statement of operations data set forth below for the period from February 2,
1996 (inception) to September 30, 1996 and for the fiscal year ended September
30, 1997 have been derived from the audited financial statements of the
Company included elsewhere in this Prospectus, which have been audited by
Coopers & Lybrand L.L.P., Independent Accountants. The selected consolidated
financial data for the six months ended March 31, 1997 and 1998 have been
derived from unaudited consolidated financial statements prepared by the
Company on a basis consistent with the Company's audited Consolidated
Financial Statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the results of such periods. The historical results are
not necessarily indicative of results to be expected for any future period.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 2, 1996 FISCAL YEAR MARCH 31,
(INCEPTION) TO ENDED (UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30, ------------------
1996 1997 1997 1998
---------------- ------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
Network applications...... $ -- $ 60 $ -- $ 691
Search services........... 530 5,725 2,282 5,185
------- ------- -------- --------
Total revenues.......... 530 5,785 2,282 5,876
Cost of revenues........... 239 1,512 466 1,695
------- ------- -------- --------
Gross profit.............. 291 4,273 1,816 4,181
Operating expenses:
Sales and marketing....... 898 7,043 2,661 6,521
Research and development.. 1,483 4,210 1,665 3,814
General and
administrative........... 1,341 1,486 602 1,639
------- ------- -------- --------
Total operating
expenses............... 3,722 12,739 4,928 11,974
------- ------- -------- --------
Operating loss............. (3,431) (8,466) (3,112) (7,793)
Interest expense, net...... 102 194 78 83
------- ------- -------- --------
Loss before income taxes... (3,533) (8,660) (3,190) (7,876)
Provision for income taxes. 1 2 1 1
------- ------- -------- --------
Net loss................... $(3,534) $(8,662) $ (3,191) $ (7,877)
======= ======= ======== ========
Pro forma basic and diluted
net loss per share(1)..... $ (0.72) $ (0.46)
======= ========
Weighted average shares
outstanding used in pro
forma per share
calculation(1)............ 12,030 17,135
======= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents...................................... $17,133
Working capital................................................ 11,980
Total assets................................................... 25,294
Debt and capital lease obligations, less current portion....... 5,191
Total stockholders' equity..................................... 13,261
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the weighted average common and common
equivalent shares used to compute net loss per share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon
current expectations that involve risks and uncertainties. The Company's
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
Inktomi was incorporated in February 1996 to develop and market scalable
software applications designed to significantly enhance the performance and
intelligence of large-scale networks. From February 1996 to May 1996, the
Company's operations consisted primarily of start-up activities, including
research and development of the Company's core coupled cluster software
architecture and dataflow technology, personnel recruiting and capital
raising. In May 1996, the Company released the first commercial application
based on its core technology, a search engine that enables customers to
provide a variety of Internet search services to end users. In December 1997,
the Company first licensed Traffic Server, the Company's second application, a
large-scale network cache designed to address capacity constraints in high-
traffic network routes.
Inktomi generates search services revenues through a variety of contractual
arrangements, which include per-query search fees, search service hosting
fees, advertising revenue, license fees and/or maintenance fees. Per-query,
hosting and maintenance fees revenues are recognized in the period earned, and
advertising revenues are recognized in the period that the advertisement is
displayed.
Network applications revenues are composed of Traffic Server license,
consulting, support and maintenance fees. Traffic Server license fees are
recognized upon shipment of the software. Consulting, support and maintenance
fees are recognized ratably over the service period.
The Company has only recently commercially released Traffic Server and has
generated only limited revenues from licenses of the product. To date, the
Company has generated substantially all of its revenues from contracts with
five search engine customers. Of these customers, Wired and NTT accounted for
approximately 79% and 13%, respectively, of total revenues generated by the
Company for the fiscal year ended September 30, 1997. For the six months ended
March 31, 1998, Wired, NTT and Microsoft accounted for 59%, 6% and 20% of
total revenues, respectively. The Company expects that a small number of
customers will continue to account for a substantial portion of revenues for
the foreseeable future. As a result, the loss of a major customer or, in the
case of the Company's search engine customers, a decline in the usage of any
such customer's search service, could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, there can be no assurance that customers that have accounted for
significant revenues in past periods, individually or as a group, will
continue to generate revenues in any future period.
The Company has a limited operating history upon which it may be evaluated.
Any investment in the Company must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early
stage of development in new and rapidly evolving markets. These risks include
the Company's substantial dependence on two products with only limited market
acceptance, need to expand its sales and support organizations, competition,
need to manage changing operations, customer concentration, reliance on
strategic personnel and dependence upon key personnel, as well as dependence
upon the Internet, general economic conditions and other factors. There can be
no assurance that the Company will be successful in addressing such risks. The
Company incurred a net
21
<PAGE>
loss of $3.5 million for the period from inception through September 30, 1996,
$8.7 million for the fiscal year ended September 30, 1997, and $7.9 million
for the six months ended March 31, 1998. As of March 31, 1998, the Company had
an accumulated deficit of $20.1 million. The Company has not achieved
profitability on a quarterly or annual basis and the Company anticipates that
it will incur net losses for at least the next several quarters. The Company
expects to continue to incur significant product development, sales and
marketing, and administrative expenses and, as a result, will need to generate
significant quarterly revenues to achieve and maintain profitability. There
can be no assurance that any of the Company's business strategies will be
successful or that significant revenues or profitability will ever be achieved
or, if they are achieved, that they can be consistently sustained or increased
on a quarterly or annual basis in the future.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the Company
expressed as a percentage of revenues. The Company's historical operating
results are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 2, 1996 FISCAL YEAR MARCH 31,
(INCEPTION) TO ENDED (UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30, -------------
1996 1997 1997 1998
---------------- ------------- ----- -----
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C>
Revenues:
Network applications............ 0% 1% 0% 12%
Search services................. 100 99 100 88
---- ---- ----- -----
Total revenues................ 100 100 100 100
Cost of revenues................. 45 26 20 29
---- ---- ----- -----
Gross profit.................... 55 74 80 71
---- ---- ----- -----
Operating expenses:
Sales and marketing............. 169 122 117 111
Research and development........ 280 73 73 65
General and administrative...... 253 26 27 28
---- ---- ----- -----
Total operating expenses...... 702 221 217 204
---- ---- ----- -----
Operating loss................... (647) (147) (137) (133)
Interest expense, net............ 20 3 3 1
---- ---- ----- -----
Loss before income taxes......... (667) (150) (140) (134)
Provision for income taxes....... 0 0 0 0
---- ---- ----- -----
Net loss......................... (667)% (150)% (140)% (134)%
==== ==== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES
Search services revenues comprise search advertising, licensing and
maintenance fees. A significant portion of advertising revenues are derived
from the HotBot search service maintained by the Company and marketed by
Wired.
Total revenues increased to $5.9 million for the six months ended March 31,
1998 from $2.3 million for the same period of 1997. This increase was due to
increased revenues from its HotBot search service, as well as revenues
generated through additional contract signings and search service launches and
revenues generated from the Company's Traffic Server product first licensed in
early
22
<PAGE>
fiscal year 1998. Traffic Server revenues comprised 12% of total revenues in
the six months ended March 31, 1998. Search services revenues represented 88%
of total revenues during the same period. In the six months ended March 31,
1997, substantially all revenues were generated by the Company's search
services. A portion of the advertising on the HotBot site is exchanged for
advertisements on the Internet sites of other companies. The value of these
advertisements is recognized as barter revenue by the Company. Barter revenues
represented 15% and 32% of total revenues for the six-month periods ended
March 31, 1998 and 1997, respectively. The Company anticipates that barter
revenue will comprise a decreasing percentage of total revenues in future
years.
COST OF REVENUES
Cost of revenues consists primarily of expenses related to the operation of
the Company's search services, which comprise depreciation and network
charges. Cost of revenues increased to $1.7 million for the six months ended
March 31, 1998 from $0.5 million for the six months ended March 31, 1997. The
increase was due primarily to increased depreciation and network charges
resulting from an expansion of the Company's data center in California during
fiscal year 1997. The Company expects cost of revenues to increase
substantially in absolute dollars in fiscal year 1998 as a result of a full
year of expanded cluster operation costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of personnel and related costs for the
Company's direct sales force and marketing staff and marketing programs,
including trade shows and advertising. Sales and marketing expenses also
include marketing costs related to the Company's support of the HotBot search
site. Sales and marketing expenses increased to $6.5 million for the six
months ended March 31, 1998 from $2.7 million for the six months ended March
31, 1997. The increase was primarily due to an increase in the number of sales
and marketing personnel, increased HotBot marketing expenses, and expenses
incurred in connection with attendance at trade shows and marketing programs.
The Company expects that sales and marketing expenses will increase
substantially in absolute dollars over the next 12 months as the Company hires
additional sales and marketing personnel, initiates additional marketing
programs to support its Traffic Server product and establishes sales offices
in additional domestic and international locations.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel and related
costs for the Company's development and technical support efforts. Research
and development expenses increased to $3.8 million for the six months ended
March 31, 1998 from $1.7 million for the same period in 1997. The increase was
primarily due to an increase in the number of research and development
personnel to support expansion of the Company's search engine business,
creation of the Company's Traffic Server product, and increases in quality
assurance and technical publications personnel. The Company believes
significant investment in research and development is essential to its future
success and expects that research and development expenses will increase in
absolute dollars in future periods. The Company has not capitalized any
software development expenses to date.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
human resources, facilities and legal. General and administrative expenses
increased to $1.6 million for the six months ended March 31, 1998 from $0.6
million for the same period of 1997. This increase was due primarily to an
increase in the number of general and administrative personnel and increased
legal and accounting costs incurred in connection with business and financing
activities.
23
<PAGE>
INTEREST EXPENSE, NET
Interest expense, net includes income from the Company's cash and
investments, and expenses related to the Company's financing obligations.
Interest expense was $0.1 million for the six months ended March 31, 1998,
consistent with the prior year.
YEAR AND PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
The Company's fiscal year runs from October 1 through September 30. The
Company was incorporated in February 1996 and, accordingly, fiscal year 1996
includes only eight months of financial results. Consequently, all revenue and
expense categories for fiscal year 1997 have increased due to a full year of
revenues and expenses incurred in fiscal year 1997 compared to a partial year
in fiscal year 1996.
REVENUES
Total revenues increased to $5.8 million for the year ended September 30,
1997 from $0.5 million for the eight months ended September 30, 1996. This
increase was due primarily to increased search services revenues generated by
Wired through a higher volume of activity on the HotBot search service, as
well as revenues generated through additional contract signings and search
service launches during fiscal year 1997. Advertising revenues represented 89%
and 90% of total revenues for the year ended September 30, 1997 and the eight
months ended September 30, 1996, respectively. Barter revenues represented 27%
and 25% of total revenues for the year ended September 30, 1997 and the eight
months ended September 30, 1996, respectively. All barter revenues were
generated from the Company's agreement with Wired. The Company anticipates
that advertising revenues will comprise a decreasing percentage of total
revenues in future years.
COST OF REVENUES
Cost of revenues consists primarily of expenses related to the operation of
the Company's search services, which comprise depreciation and network
charges. To date, cost of revenues related to the Company's Traffic Server
product has been immaterial. Cost of revenues increased to $1.5 million for
the year ended September 30, 1997 from $0.2 million for the eight months ended
September 30, 1996. The increase was due primarily to increased depreciation
and network charges resulting from an expansion of the Company's California
data center during fiscal year 1997, and expenses incurred in connection with
the relocation of the master cluster from the Company's former premises
located in Berkeley, California to a third-party hosting site located in Santa
Clara, California. The Company expects cost of revenues to increase
substantially in absolute dollars in fiscal year 1998 as a result of a full
year of expanded cluster operation costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of personnel and related costs for the
Company's direct sales force and marketing staff and marketing programs. Sales
and marketing expenses also include marketing costs related to the Company's
support of the HotBot search site. Sales and marketing expenses increased to
$7.0 million for the year ended September 30, 1997 from $0.9 million for the
eight months ended September 30, 1996. The increase was primarily due to an
increase in the number of sales and marketing personnel, increased HotBot
marketing expenses and expenses incurred in connection with attendance at
trade shows and marketing programs. The Company expects that sales and
marketing expenses will increase substantially in absolute dollars in fiscal
year 1998 as the Company hires additional sales and marketing personnel,
initiates additional marketing programs to support its Traffic Server product
and establishes sales offices in additional domestic and international
locations.
24
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel and related
costs for the Company's development and technical support efforts. Research
and development expenses increased to $4.2 million for the year ended
September 30, 1997 from $1.5 million for the eight months ended September 30,
1996. The increase was primarily due to an increase in the number of research
and development personnel to support expansion of the Company's search engine
business, creation of the Company's Traffic Server product, and increases in
quality assurance and technical publications personnel. The Company believes
that significant investment in research and development is essential to its
future success and expects that research and development expenses will
increase in absolute dollars in future periods. The Company has not
capitalized any software development expenses to date.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
human resources, facilities and legal. General and administrative expenses
increased to $1.5 million for fiscal year 1997 from $1.3 million for fiscal
year 1996. This increase was due primarily to an increase in the number of
general and administrative personnel and increased legal and accounting costs
incurred in connection with business and financing activities.
INTEREST EXPENSE, NET
Interest expense, net includes income from the Company's cash and
investments, and expenses related to the Company's financing obligations.
Interest expense, net increased to $0.2 million for the year ended September
30, 1997 from $0.1 million for the eight months ended September 30, 1996. The
increase was due primarily to higher interest charges incurred by the Company
resulting from larger debt balances maintained during the year ended September
30, 1997.
INCOME TAXES
As of September 30, 1997, the Company had approximately $9.9 million of
federal net operating loss carryforwards for tax reporting purposes available
to offset future taxable income. Such net operating loss carryforwards expire
through 2012.
25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's operating results for each of the
six quarters in the period ended March 31, 1998. The information for each of
these quarters is unaudited and has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Prospectus. In the
opinion of management, all necessary adjustments (consisting only of normal
recurring adjustments) have been included to present fairly the unaudited
quarterly results when read in conjunction with the audited Consolidated
Financial Statements of the Company and the Notes thereto appearing elsewhere
in this Prospectus. These operating results are not necessarily indicative of
the results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1997 1997 1997 1997 1998
-------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Network applications... $ -- $ -- $ -- $ 60 $ 70 $ 621
Search services........ 1,138 1,144 1,521 1,922 2,351 2,834
------- ------- ------- ------- ------- -------
Total revenues........ 1,138 1,144 1,521 1,982 2,421 3,455
Cost of revenues........ 186 280 358 688 794 901
------- ------- ------- ------- ------- -------
Gross profit........... 952 864 1,163 1,294 1,627 2,554
Operating expenses:
Sales and marketing.... 1,529 1,132 1,792 2,590 2,816 3,705
Research and develop-
ment.................. 744 921 1,100 1,445 1,814 2,000
General and administra-
tive.................. 231 371 383 501 795 844
------- ------- ------- ------- ------- -------
Total operating ex-
penses............... 2,504 2,424 3,275 4,536 5,425 6,549
------- ------- ------- ------- ------- -------
Operating loss.......... (1,552) (1,560) (2,112) (3,242) (3,798) (3,995)
Interest expense, net... 19 59 28 88 54 29
------- ------- ------- ------- ------- -------
Loss before income tax-
es..................... (1,571) (1,619) (2,140) (3,330) (3,852) (4,024)
Provision for income
taxes.................. -- 1 1 -- 1 --
------- ------- ------- ------- ------- -------
Net loss................ $(1,571) $(1,620) $(2,141) $(3,330) $(3,853) $(4,024)
======= ======= ======= ======= ======= =======
</TABLE>
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of the Company's
control. These factors include demand for Traffic Server, demand for
commercial search services powered by the Company's search technology, lengthy
sales cycles, changes in the growth rate of Internet usage, customers' capital
expenditures and other costs relating to the expansion of their respective
operations, demand for Internet advertising, seasonal trends in advertising
sales, introduction of new products or services by the Company or its
competitors, delays in the introduction or enhancement of products and
services by the Company or its competitors, customer order deferrals in
anticipation of upgrades and new products, changes in the Company's pricing
policies or those of its competitors, the Company's ability to anticipate and
effectively adapt to developing markets and rapidly changing technologies,
changes in the mix of international and U.S. revenues, changes in foreign
currency exchange rates, mix of products and services sold and the channels
through which those products and services are sold, general economic
conditions and specific economic conditions in Internet and related
industries. Additionally, as a strategic response to a changing competitive
environment, the Company may elect from time to time to make certain pricing,
service, marketing or acquisition decisions that could have a material adverse
effect on the Company's quarterly financial performance.
Quarterly sales and operating results generated by the Company's search
engine application generally depend on per-query fees and advertising revenues
received from the Company's search
26
<PAGE>
engine customers within the quarter, which are difficult to forecast.
Advertising revenues generated by the Company's search engine customers are
all pursuant to short-term contracts and are subject to seasonal trends in
advertising sales. Revenues from per-query fees depend on the volume of end-
user search queries processed by the Inktomi search engine. The Company does
not have any substantial historical basis for predicting the volume of search
queries that may be generated by end users of on-line services provided by
many of its customers. Moreover, the Company's customers are generally under
no obligation to direct their users to the Company's search engine service or
use the search service at all. Accordingly, a low level of usage by end users
or the cancellation or deferral of any customer contract could have a material
adverse effect on the Company's quarterly financial performance.
The Company expects that a significant portion of its future revenues will
be generated by licenses of Traffic Server and further expects that such
revenues will be derived from orders placed by a limited number of customers.
The Company expects that the volume and timing of such orders and their
fulfillment, all of which are difficult to forecast, will cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. The Company expects that revenues from Traffic Server will also be
difficult to forecast because the Company's sales cycle, from initial
evaluation to product shipment, is expected to vary substantially from
customer to customer. Accordingly, the cancellation or deferral of even a
small number of licenses of Traffic Server could have a material adverse
effect on the Company's quarterly financial performance. Conversely, to the
extent significant sales occur earlier than expected, operating results for
subsequent quarters may not compare favorably with those of earlier quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through the
private placement of its equity securities, equipment lease financing, and
bank and investor borrowings. As of March 31, 1998, the Company had
approximately $17.1 million of cash and cash equivalents. Cash used in
operating activities increased from $2.2 million in the eight months ended
September 30, 1996 to $6.6 million in the year ended September 30, 1997,
reflecting increasing net losses principally related to increased research and
development, and sales and marketing expenditures. Cash used in operations for
the six months ended March 31, 1998 was $5.8 million, compared to $1.6 million
in the six months ended March 31, 1997.
The Company has made significant investments in equipment since its
inception. This equipment consists largely of computer servers, workstations
and networking equipment. In 1996, the Company invested $2.2 million in fixed
assets, primarily to establish and expand its Internet search engine service.
The Company spent $5.9 million in 1997 and $0.5 million in the six months
ended March 31, 1998 primarily to further expand its Internet search engine
service capacity. In the six months ended March 31, 1998, the Company sold
$0.9 million of fixed assets to two leasing companies as part of sale-
leaseback transactions.
The Company has raised approximately $32.7 million, net of issuance costs,
from equity sales since its inception through March 31, 1998. In 1996, $4.6
million were raised primarily from sales of preferred stock and warrants for
preferred and common stock. In 1997, $10.9 million was raised primarily from
preferred stock sales and to a lesser extent the exercise of common stock
options and warrants. In the six months ended March 31, 1998, the Company
raised $12.8 million from preferred stock sales, with an additional $4.3
million generated primarily from the exercise of preferred stock warrants.
The Company has used debt to partially finance its operations and capital
purchases. In 1996, $0.5 million of loans were obtained, with $0.3 million
repaid during the same period. In May 1997, the Company obtained a bank line
of credit and used a portion of the $3.7 million proceeds to pay down
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existing debt and finance the Company's operations. As of March 31, 1998, the
total amount outstanding under the loan, representing equipment loan and term
loan advances, was $3.3 million. In addition, the Company has provided a
letter of credit, drawn against the Company's bank line of credit, in the
amount of $500,000 to the lessor of the Company's facilities. The loans are
collateralized by substantially all of the Company's assets, except for those
assets purchased with the proceeds from loans provided by Microsoft. The bank
loans include certain covenants requiring minimum liquidity, tangible net
worth and profitability over time. The term portion of the bank loan had $1.5
million outstanding at March 31, 1998 and equal principal payments are made
monthly with the final payment due in June 1999. The equipment loan portion
had $1.8 million outstanding at March 31, 1998. Under the equipment loan, the
Company paid interest only on a monthly basis until February 1998, at which
time the Company began to make equal monthly principal payments of $48,611
plus interest through February 2001.
In July 1997, the Company and Microsoft entered into a series of agreements
whereby Microsoft selected the Company's technology as the basis for Internet
search services to be provided by Microsoft. Under the agreements, Inktomi is
responsible for developing and adding certain features to its core search
engine technology and providing search results to Microsoft using the
customized search engine technology. In addition, the Company is responsible
for hosting the search engine software and purchasing and operating the
cluster on which the software runs. Among other matters, Microsoft is
obligated to loan the price of new workstations and related hardware and
software purchased to service Microsoft's capacity needs. During the fiscal
year ended September 30, 1997 and for the six months ended March 31, 1998,
Microsoft provided loans of $4.0 million and $0.1 million, respectively. The
loans are collateralized by the purchased equipment, repayable in equal
monthly payments over 36 months from the date of the loan and bear interest at
the lowest applicable federal rate. Microsoft pays an amount equal to the loan
burden on a monthly basis to the Company as partial compensation for the
hosting services provided by the Company. As of March 31, 1998, loans totaling
$3.0 million were outstanding.
The Company had $1.3 million of other leveraged lease agreements outstanding
at March 31, 1998 and may expand the use of such leases in the future. The
Company also had other notes payable totaling $0.4 million at March 31, 1998.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's products, the resources the Company devotes
to developing, marketing, selling and supporting its products, the timing and
extent of establishing international operations, and other factors. The
Company expects to devote substantial capital resources to hire and expand its
sales, support, marketing and product development organizations, to expand
marketing programs, to establish additional facilities worldwide and for other
general corporate activities. Although the Company believes that the net
proceeds from this offering together with existing cash and cash equivalents
will be sufficient to fund its operations for at least the next 12 months,
there can be no assurance that the Company will not require additional
financing within this time frame or that such additional funding, if needed,
will be available on terms acceptable to the Company, or at all. Any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. See "Risk
Factors--Limited Operating History; History of Losses and Expectation of
Future Losses" and "--Substantial Dependence Upon Traffic Server; Uncertainty
of Market Acceptance; Lengthy Sales Cycle".
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BUSINESS
THE COMPANY
Inktomi develops and markets scalable software applications designed to
significantly enhance the performance and intelligence of large-scale
networks. The Company has pioneered the commercial use of parallel processing-
based coupled cluster technology, a software architecture that provides true
scalability, high system availability and fault tolerance, and superior
price/performance compared to traditional mainframe or symmetric multi-
processing ("SMP") based systems. This architecture enables multiple
workstations collaborating via high-speed connections to function as one
extremely powerful computer. Inktomi has designed and developed this
architecture and associated applications specifically to address the
challenges of distributed data management posed by a global information
network that consists of millions of users accessing millions of documents.
To date, Inktomi has developed two scalable network applications based on
its software architecture: a large-scale network cache and an Internet search
engine. The Company's initial application is a powerful, award-winning
Internet search engine that enables Inktomi's customers to provide a variety
of Internet search services to end users. CNET, Inc. ("CNET"), Goto.com,
OzEmail Ltd. ("OzEmail"), NTT, Southam, Inc. ("Southam"), Wired and Universo
On-Line S/A ("UOL") currently provide on-line services that utilize the
Company's Internet search engine, and the Company has entered into contracts
to provide services based on its Internet search engine to Microsoft,
N/2/H/2/, Inc. ("N/2/H/2/") and Yahoo!, Inc. ("Yahoo"). Wired launched its
HotBot service in May 1996, utilizing an Inktomi-hosted cluster of five
dedicated workstations that has grown to 66 dedicated workstations today. The
Company has established a data center in California consisting of a cluster of
166 workstations to provide search services to existing customers and is in
the process of establishing a data center in Virginia consisting of 100
workstations to service future customers.
Inktomi's second application, Traffic Server, is a large-scale network cache
designed to address capacity constraints in high-traffic network routes.
Traffic Server alleviates network congestion and increases network performance
by storing frequently requested information in proximity to users, thereby
eliminating or greatly reducing the transmission of redundant Internet data,
which the Company believes comprises a significant portion of network traffic.
Traffic Server is initially being targeted at telecommunications carriers and
large ISPs, which are currently addressing the explosive growth in the demand
for data bandwidth primarily through significant capital expenditures on
network equipment and infrastructure. To date, the Company has licensed
Traffic Server to America Online, Inc. ("AOL"), Digex, Inc. ("Digex"), Knology
Holdings, Inc. ("Knology") and NTT.
INDUSTRY BACKGROUND
The Internet, a network of hundreds of interconnected, separately-
administered public and private networks, has emerged as a global
communications medium enabling millions of people to share information and
conduct business electronically. International Data Corporation estimates that
there were approximately 69 million users of the Internet at the end of 1997
and that the number of users will grow to 320 million by the end of 2002. The
dramatic growth in the number of Internet users and the availability of
powerful new tools for the development and distribution of Internet content
have led to a proliferation of useful information and services on the
Internet, including on-line magazines, e-mail services, specialized news
feeds, interactive games, educational and entertainment applications and
electronic commerce. Although primarily text and graphics-based today,
information and services available on the Internet are increasingly
incorporating multimedia components such as video and audio clips. The
availability of richer content and services is attracting greater numbers of
Internet users, fueling a cycle of tremendous growth wherein more users demand
more information, and more information attracts more users.
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The network architecture underlying the Internet is based on a centralized
data model in which information is stored once at a single location and
accessed multiple times from that location. A user interested in particular
information must first locate the computer on the network where that
information is stored and then establish contact with that computer. Once
contact is established with the source computer, the information is compiled
and sent over the network to the user's computer. This process is repeated
each time a new user requests that same information, resulting in a large
amount of redundant data traversing the network. As the number of contacts and
the amount of information transmitted increase, information delivery
bottlenecks are created, significantly decreasing network performance. This
problem is exacerbated during peak periods of network usage and bursts in
traffic volumes driven by news and other significant events.
Information delivery bottlenecks are particularly acute internationally,
where public networks are not well-developed or well-connected to other
regional networks. This lack of infrastructure internationally, together with
the high concentration of information on servers located in the United States,
has resulted in a substantial and growing amount of traffic congestion on
international routes.
To accommodate and manage increasing traffic, network providers must
continually expand and upgrade their networks as well as improve connectivity
to other regional networks. Similarly, providers of services such as search,
e-mail and chat must scale and enhance their services to keep pace with the
tremendous growth in user demand and available information. Continued
increases in the volume, variety and richness of this information will magnify
these challenges.
To date, network providers have attempted to meet increasing demand by
installing additional telephone lines, fiber optic cable, routers and
switches, and by deploying data compression and multiplexing technologies.
These equipment-based approaches focus exclusively on expanding bandwidth
capacity by increasing the number of lines over which data can be transmitted
or increasing the volume of data that can be transported over existing lines.
However, these approaches do not address the fundamental architectural
shortcomings of these networks. As a result, they have not generated and
cannot generate sufficient bandwidth to keep pace with the anticipated growth
in traffic. Moreover, these approaches are labor-intensive, slow and costly to
implement.
Other approaches employed by network providers, such as client and proxy
server-based caching, are designed to enhance the efficiency of data
distribution by reducing the amount of redundant network traffic. Web browsers
and proxy servers each contain caches that store data, thereby eliminating the
need to traverse the entire network to reacquire data. Browser-based caches,
however, are small and only address the needs of individual users. Proxy
server-based caches can serve large workgroups, but generally are not scalable
beyond several hundred users and can themselves become network bottlenecks.
Service providers have primarily addressed the tremendous growth in user
demand and available information by deploying larger computing systems to run
their services. At times, this growth has substantially outpaced their ability
to deploy these systems, forcing service providers to limit the availability
or functionality of their services or to reduce the number of users utilizing
the service. Deploying larger computing systems is expensive and difficult to
accomplish on an incremental basis. Limiting the availability or functionality
of the service and reducing the number of users can result in lost revenue and
can alienate end users.
Inktomi believes that in order for the Internet to scale cost-effectively,
network and service providers must deploy a new layer of high-performance
software throughout the network infrastructure. This software must efficiently
leverage the Internet's existing and future network hardware infrastructure to
intelligently manage and distribute increasingly more and richer content.
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THE INKTOMI SOLUTION
Inktomi develops, markets and supports scalable software applications
designed to significantly enhance the performance, intelligence and
manageability of large-scale networks. Utilizing the Company's parallel
processing-based coupled cluster architecture and dataflow technology,
Inktomi's applications are specifically designed to address the challenges
posed by explosive growth in the number of network users, documents and
services, and the resultant increase in traffic volume. Inktomi's architecture
and technology enable the Company to develop network applications that provide
the following benefits:
SCALABILITY. Inktomi's coupled cluster software architecture enables
multiple workstations collaborating via high-speed connections to function as
one extremely powerful computer. The architecture is designed to scale without
limit and without significant deterioration in performance as additional
workstations are added to the cluster. Furthermore, the architecture
facilitates the "hot" addition of incremental workstations, without any
negative impact on existing cluster operations.
EFFICIENCY. Inktomi's dataflow technology enables a single workstation to
efficiently process up to thousands of operations simultaneously, as compared
to traditional software architectures that can only process up to tens or
hundreds of operations simultaneously before experiencing significant
performance degradation. This technology greatly improves the performance of
each workstation within the cluster, thereby increasing the efficiency of data
throughput.
HIGH SYSTEM AVAILABILITY. Inktomi's coupled cluster software architecture
enables its applications to be fault-tolerant. If any workstation within the
cluster fails, the cluster management software reassigns the task load among
the remaining workstations running the application. When the failed
workstation is restored, tasks are intelligently reassigned to the newly
functioning workstation. Since each workstation has its own buses, power
supply and disk drives, the failure of an individual workstation generally
does not cause the failure of the entire cluster, thereby maintaining high
system availability.
PRICE/PERFORMANCE. Clusters consist of relatively inexpensive, commodity
workstations and require a significantly smaller initial hardware investment
than mainframe or SMP-based systems of comparable computing power. When a
coupled cluster system requires additional capacity, the customer can add one
or more workstations on an incremental, "pay-as-you-go" basis. In contrast,
when a mainframe or SMP-based system reaches full capacity, the customer must
replace the existing system with a larger system or add an additional system
with similar capabilities. Each of these alternatives, however, requires a
substantial capital outlay and still may not achieve the same performance
capabilities as a cluster-based system.
INTEROPERABILITY. Inktomi's software architecture is designed to
interoperate with standard central processing unit ("CPU") architectures and
operating systems. The Company's search application crawler operates on Intel-
based workstations and its search engine servers operate on Sun SPARC
workstations, in both cases running the Solaris operating system. The
Company's Traffic Server application operates on Sun SPARC workstations
running the Solaris operating system and Digital Alpha workstations running
the Digital UNIX operating system. The Company is collaborating with Intel to
port its applications to Intel-based workstations running Windows NT by mid-
1999. The Company's approach to network caching is distinguished from that of
hardware vendors that may seek to preserve the market for their network
equipment by supporting only their proprietary operating systems or closed CPU
architectures. Inktomi's architecture also seamlessly supports different
generations of workstations in any given cluster, thereby extending the useful
life of customer hardware investments.
MANAGEABILITY. Inktomi's coupled cluster software architecture was designed
from the outset to manage large clusters of workstations easily from a single
management station. The architecture enables cluster managers to monitor and
configure the entire system, either on-site or remotely, through a standard
Web browser interface.
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STRATEGY
The Company's strategy is to establish itself as the leading provider of
scalable network applications specifically designed to address the distributed
data management challenges posed by rapidly growing global information
networks. Key elements of this strategy are:
LEVERAGE CORE TECHNOLOGY TO DEVELOP MULTIPLE APPLICATIONS. The core of
Inktomi's clustering technology was initially developed by key employees of
the Company at the University of California at Berkeley in 1994, and has been
designed from the start to serve as the foundation for a variety of scalable
network applications. The Company has substantially modified and enhanced this
technology. In addition, Inktomi has invested significant time and resources
in creating a structured product development process and has successfully
recruited computer scientists, engineers and software developers with
expertise and advanced degrees in the areas of massively parallel computing,
coupled cluster computing and software dataflow operations. The Company
believes that its technology, personnel and development process will enable it
to enhance its existing products and to develop new scalable network
applications offering distinct advantages over alternative solutions.
TARGET TRAFFIC SERVER AT LARGE NETWORK PROVIDERS. The Company is initially
targeting telecommunications carriers and ISPs for Traffic Server. Traffic
Server is a high-performance caching solution that is designed to be
sufficiently scalable to handle massive and growing network traffic volumes.
Network providers are spending billions of dollars domestically and
internationally to increase bandwidth through the deployment of expensive
network hardware intended to speed data transfer and increase capacity.
Despite this investment, demand for bandwidth continues to outpace the ability
of network providers to increase capacity. Inktomi believes that Traffic
Server provides a more compelling value proposition for these customers
because it reduces redundant traffic, thereby increasing available bandwidth
at a substantially lower cost.
ESTABLISH TRAFFIC SERVER AS THE DE FACTO STANDARD. Inktomi intends to
establish and maintain Traffic Server as the leading cache solution for large-
scale networks. The Company has initially targeted network providers that
operate the largest and most complex networks, and has designed Traffic Server
to easily integrate into their existing network infrastructures. The Company
believes that adoption of Traffic Server by these leading providers will
validate the Company's technology and facilitate broad market acceptance, as
well as aiding the Company's objective of establishing Traffic Server in the
corporate marketplace. In addition, Inktomi believes that, in the absence of
standardized approaches to network caching, the opportunity currently exists
for the Company to establish Traffic Server as the de facto standard through
its adoption and implementation by high profile network providers. The Company
believes that achieving such status would provide it with a significant
competitive advantage and intends to continue to pursue aggressively those
customers Inktomi believes will enable Traffic Server to be recognized as the
standard network caching solution.
BECOME THE INTERNET SEARCH ENGINE VENDOR OF CHOICE. Inktomi believes it can
leverage its powerful Internet search engine technology to become the search
engine vendor of choice for third-party on-line service providers. As the
Internet has continued to develop, the service offerings of these companies
have also evolved so that search capabilities, while remaining integral, are
no longer the sole sources of direct or indirect revenue generation. At the
same time, the significant increase in the size and complexity of the Internet
requires substantial on-going investments in order to maintain and upgrade
these search capabilities. Inktomi believes that these factors will lead many
companies to choose to outsource their search capabilities rather than develop
and maintain them in-house. Already, companies such as Wired, NTT and
Microsoft have elected to use Inktomi's search technology not only because of
the performance and scalability advantages it provides, but also because they
retain the critical flexibility to customize the user interface to meet their
specific requirements. As the Company continues to develop and enhance its
search technology, Inktomi believes that the incentives will increase for
companies to outsource these services to the Company.
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DEVELOP DIRECT AND INDIRECT DISTRIBUTION CHANNELS. The Company's sales
strategy is to pursue opportunities with large accounts through its direct
sales force, and to penetrate various targeted market segments through
multiple indirect distribution channels. The Company has established a direct
sales force covering the United States and Canada as well as a direct sales
force in the United Kingdom to address the European market. The Company
intends to increase the size of its direct sales force and to establish
additional sales offices domestically and internationally. The Company plans
to complement its direct sales force by establishing multiple indirect
distribution channels including OEMs, systems integrators, VARs and joint
marketing partners. These channels are intended to increase geographic sales
coverage and to address mid-tier ISPs and, eventually, large corporate
customers.
PRODUCTS AND CUSTOMERS
Inktomi develops, markets and supports scalable software applications
designed to significantly enhance the performance, intelligence and
manageability of large-scale networks. Inktomi has developed two scalable
network applications to date: Traffic Server, a large-scale network cache, and
an Internet search engine.
TRAFFIC SERVER
Inktomi's Traffic Server application is a scalable, high-performance network
cache designed to reduce Internet congestion and increase overall network
efficiency. Traffic Server is initially being targeted for use by
telecommunications carriers and large ISPs, both domestically and
internationally. To date, the Company has licensed Traffic Server to AOL,
Digex, Knology and NTT.
Information available on traditional data networks is stored in a single
source location. An end user interested in particular information establishes
contact with the source computer on the network and initiates a request for
the information. Once contact is established with the source computer, the
information is compiled and sent over the network to the end user's computer.
Multiple end users initiating multiple requests leads to redundant
transmission of the same information over the network, resulting in network
congestion and data access and information delivery bottlenecks.
[DIAGRAM OF NETWORK WITHOUT CACHING]
Redundant traffic strains the network and consumes bandwidth. Providing
additional bandwidth and infrastructure requires costly investments by
telecommunications carriers and ISPs. Integrating Traffic Server into the
network leverages the existing network infrastructure. As a result, Traffic
Server increases available bandwidth at a substantially lower cost than
expanding existing infrastructure.
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Traffic Server is based on the premise that it is cheaper to store
information than to move it. Traffic Server stores or "caches" locally copies
of frequently accessed information in dedicated storage systems in proximity
to the user. Requests for information are managed by Traffic Server, which
determines if the requested information is located in the cache. If so, the
information is accessed directly from the cache, thereby avoiding the need to
traverse the entire network. If the information is not located in the cache,
the information is accessed and retrieved from the source computer. The
information is then stored in the cache and is thus made available to
subsequent users. In this way, Traffic Server intelligently eliminates
redundant traffic and smooths traffic patterns, thereby leveraging and
enhancing existing bandwidth within the network. In addition, Traffic Server
is designed to be particularly effective in alleviating information delivery
bottlenecks during peak periods of network usage and bursts in traffic volume
driven by news and other significant events, thereby significantly enhancing
the on-line experience for the end user.
[DIAGRAM OF NETWORK WITH CACHING]
Traffic Server offers several key benefits to customers:
PERFORMANCE. Traffic Server is the first large-scale, high performance
network cache specifically designed to improve network efficiency in high-
traffic network routes. In an audited benchmark study jointly conducted by
Inktomi and Sun, Traffic Server configured with 16 nodes, 1/2 terabyte of
cache and a 40% cache hit rate achieved 3,488 operations per second. This
performance metric implies that Traffic Server can support more than 300
million hits per day, a level of performance that Inktomi believes is capable
of addressing the demands of today's most congested Internet traffic routes.
INTELLIGENCE. Traffic Server enables the intelligent management of data.
Traffic Server is designed so that end users determine the composition of the
content included within the cache through their information requests. Traffic
Server's algorithms are designed to automatically maintain the freshness of
this information and to discard information that is no longer needed. This
feature enables Traffic Server to manage the time or event-driven spikes of
network usage that typify Internet traffic patterns. In addition, through its
logging capabilities, Traffic Server tracks cumulative and current information
regarding all transactions in the cache, enabling advertising statistics to be
accurately reported.
SCALABILITY. Traffic Server is designed to be highly scalable, enabling very
large cache sizes. Larger cache size generally increases the probability of
the requested data being present in the cache, thereby reducing the need to
traverse the network to retrieve the data from the source computer and
enhancing the on-line experience for the end user. The ability to
incrementally expand cache size on
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a "pay-as-you-go" basis enables Traffic Server customers to respond rapidly to
changes in network traffic patterns and increases in the number of users
without losing performance or efficiency.
MANAGEABILITY. Traffic Server is designed to be easily configured and
monitored by network administrators. Traffic Server offers a graphical control
panel accessible from anywhere on the network through a standard Web browser.
Through the "dashboard" control panel, an administrator can configure Traffic
Server to pre-load the cache with certain content, avoid caching certain
content, and change logging and security features. In addition, an
administrator can monitor Traffic Server to determine the status and
performance of single or multiple caches spread across a network, and make any
adjustments necessary to enhance overall performance.
ADAPTABILITY. Traffic Server is designed and architected to run on standard
off-the-shelf hardware servers that today include those made by Sun and
Digital. Each of these server platforms operates with standard, open operating
systems. This open platform approach permits Inktomi or third parties to
extend or add new Traffic Server functions or services. Examples include
manipulating the stored or cached information according to user-specific
profiles or supporting new data protocols. Moreover, future versions of
Traffic Server will support audio and video streaming technologies.
EASE OF INTEGRATION. Traffic Server has been designed to integrate quickly
and easily into existing network infrastructures. It interoperates with
standard Internet network equipment, is compatible with standard Web browsers
and supports the HTTP and FTP protocols.
Traffic Server currently operates on Sun SPARC workstations running the
Solaris operating system and Digital Alpha workstations running the Digital
UNIX operating system. Inktomi is collaborating with Intel to port Traffic
Server to operate on Intel-based workstations running Windows NT by mid-1999.
Inktomi intends to port Traffic Server to other systems consistent with market
demand and partner opportunity. Inktomi licenses Traffic Server based on the
number of CPUs running the software. Upgrade subscriptions and support and
maintenance services are priced separately. Inktomi's future growth
substantially depends on the commercial success of Traffic Server. Traffic
Server has only recently been launched commercially and has been licensed by
four customers. Traffic Server has not been installed in a large-scale,
commercial deployment, and there can be no assurance that the product will
perform desired functions, offer sufficient price/performance benefits or meet
the technical or other requirements of target customers. Failure of Traffic
Server to achieve market acceptance for these or other reasons could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Substantial Dependence on Traffic
Server; Uncertainty of Market Acceptance; Lengthy Sales Cycle".
SEARCH ENGINE
The Company entered the Internet search engine market in May 1996 with the
launch of HotBot, a search service powered by Inktomi's search engine and
marketed by Wired. HotBot has garnered broad media acclaim, including an
"Editor's Choice" designation in the "Search Engine Shootout" sponsored by
c/net (January 1998) and in PC Magazine (December 1997) and a "Most Valuable
Product" designation in the search category from PC Computing (November 1997).
HotBot also won the "Internet Search Engine Shootout" sponsored by PC
Computing (September 1997) and received the highest rating among Internet
search engines by Internet World (September 1997). Inktomi's search engine
technology also underlies search services provided by CNET (Snap!), Goto.com
(GoTo), OzEmail (Anzwers), NTT (goo), Southam (canada.com) and UOL (Radar). In
addition, the Company has entered into contracts to provide services based on
its Internet search engine to Microsoft, N/2/H/2/ and Yahoo.
Inktomi's Internet search engine technology enables customers to provide a
variety of on-line search services to end users. The Company generally
provides information search services based on its Internet search engine to
its customers, who in turn incorporate these services into on-line offerings
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to end users. Inktomi provides and manages all hardware, software and
operational aspects of its search engine and the associated database of
Internet content. Inktomi also provides the customer with a programming
interface and software tools to enable the customer to custom design its
search service user interface. The user interface communicates with the
Inktomi search engine via a communication protocol (the "Inktomi Data
Protocol"). Separating the user interface enables this portion of the service
to reside in a different physical location from the Inktomi search engine and
to run on the customer's choice of computing equipment. In addition, the
customer can customize the user interface as to look and feel and
functionality and can change the user interface at any time without affecting
the operation of the Inktomi search engine. This turn-key model allows the
Company to serve multiple customers while continuing to concentrate on
developing its search engine technology.
[DIAGRAM OF INKTOMI SEARCH ENGINE]
The Company's search engine application consists of a crawler, an indexer
and search engine servers. The crawler and indexer are software programs that
collect and organize information, and store that information on the cluster of
search engine servers. The search engine servers are a collection of
workstations that are linked together as a coupled cluster through the use of
Inktomi's software. The search engine servers provide powerful full-text query
operations, including full Boolean support, phrase and adjacency searching,
date restrictions and the recognition of multimedia files and other embedded
objects. Search results are relevance-ranked using state-of-the-art text
indexing methods.
Inktomi's search engine technology offers several key benefits to customers:
SERVICE FOCUS. By offering turn-key search engine services, Inktomi enables
customers to outsource search services rather than develop and manage these
services in-house. Inktomi enables its customers to provide powerful search
capabilities to end users of their on-line services without incurring the on-
going development, support and maintenance obligations associated therewith.
This approach enables Inktomi's customers to concentrate on administering key
aspects of their on-line business, including branding, advertising sales, end-
user marketing and publicity, and business development. In addition, the ease
of developing and modifying the user interface to the Inktomi search engine
allows the customer to remain flexible in the face of changing user
requirements.
SCALABILITY AND SPEED. The growth in the number of users and documents on
the Internet places a premium on delivering search services that respond to
end-user queries quickly and with results that are compiled from the largest
available database. The Company's coupled cluster
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technology enables the Company to scale its search engine incrementally as the
Internet grows to maintain speed of response and increase the size of the
database. Although search query speeds depend upon the complexity of the
search, Inktomi has maintained search response times on average of below one
second, and has grown its search database to in excess of 110 million
documents, which the Company believes is the largest database of full text and
embedded multimedia documents of all commercially available Internet search
services.
HIGH AVAILABILITY AND FRESHNESS. High availability of any on-line service is
critical to the success of the service, and the ability to constantly replace
outdated and changed information in an Internet database is important to the
popularity of a search service. Inktomi's coupled clustered technology enables
the Company to provide a highly reliable search service 24 hours a day, seven
days a week, with minimal downtime, and its dataflow technology enables its
crawling software to collect, sort, classify and index a large number of
documents quickly and efficiently. These attributes in turn enable Inktomi's
customers to provide highly reliable services and fresh information to their
end users.
TECHNOLOGY AND SERVICE ENHANCEMENTS. Inktomi expends substantial time and
resources enhancing its core search engine technology and developing new
functionality and service offerings for its customers. In addition to its core
search services, the Company has developed and offers premium private searches
involving the crawling, indexing and hosting of specific sets of content
specified by the customer, and advanced searching features allow end users to
specify the number and types of responses to a search query and to submit
specific documents not currently indexed to the Inktomi database. The Company
is also in the process of developing automated directory capabilities to its
search engine technology which will automatically categorize Internet
information based upon a customer specified taxonomy.
Inktomi generates search service revenues through a variety of contractual
arrangements, which include per-query search fees, search service hosting
fees, advertising revenue sharing plans, license fees and maintenance fees.
The Company's search service revenues are primarily based on the volume of
end-user queries processed by the Inktomi search engine and the level of
advertising revenue generated by customers. The Company's contracts do not
typically require the customer to direct its end users to the Company's search
service or to use the search service at all. Accordingly, the Company is
highly dependent on the willingness of customers to promote and use the search
services provided by the Company, the ability of customers to attract users to
their on-line services, the number of end-user search queries processed by the
Inktomi search engine, and the ability and willingness of customers to sell
advertisements on Internet pages viewed by end users. Failure of customers to
promote and use the Company's services, low volumes of end-user search queries
processed by the Inktomi search engine and lower than expected levels of
advertising revenues will result in low levels of revenues generated by the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Risks
Associated with Internet Search Engine Service".
TECHNOLOGY
Inktomi's coupled cluster software architecture and dataflow technology have
been designed to serve as the foundation for a variety of scalable network
applications. Inktomi's coupled cluster software architecture enables multiple
workstations to function together as one extremely powerful computer and its
dataflow technology enhances the operating efficiency of individual
workstations within the cluster. Certain key employees of Inktomi initiated
their work on cluster computing at the University of California at Berkeley in
1994 under a grant from the U.S. Department of Defense Advanced Research
Projects Agency to develop networks of workstations with the performance
capabilities of supercomputers, but at substantially lower cost. Inktomi has
licensed aspects of this
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early work, which the Company has significantly modified and enhanced. The
Company developed its dataflow technology internally.
The Company's coupled cluster software architecture provides the foundation
for the scalability, high availability, fault tolerance and high
price/performance characteristics of Inktomi's network applications. Inktomi's
coupled cluster architecture is based on sophisticated parallel processing
techniques that disaggregate tasks and assign them to individual workstations
(or nodes) within the cluster. In order to maximize performance, nodes within
a cluster are connected to each other through a high-speed local area network.
Inktomi has developed complementary proprietary software that enables the
cluster to be managed as if it were a single node, ensuring consistent
configurations and reducing both administrative costs and the possibility of
error. The management software also enables centralized monitoring (via a
standard Web browser) of the full cluster through any individual node. In the
event of a node failure, that node's responsibilities and IP address are
automatically reassigned to other nodes. In addition, nodes may be added or
swapped without interrupting the operations of the cluster and any changes are
automatically recognized and incorporated by the management software. These
two features contribute to enhanced scalability, significantly greater system
availability and reduced administrative costs.
Inktomi's dataflow technology provides a framework for building applications
that focus on input/output ("I/O") and data movement. It bypasses the
operating system to directly handle management tasks such as CPU scheduling,
network I/O and memory allocation. The Company has designed its dataflow
technology from the ground up to address the unique problems of accessing data
over variable-speed Internet connections. This technology is capable of
supporting thousands of simultaneous operations per node, thus maintaining
high CPU and memory utilization despite hundreds of slow network connections.
This capability greatly improves the performance of individual nodes as they
are able to process several operations while waiting for responses to earlier
commands or queries, thereby substantially eliminating idle time.
In addition to the coupled cluster architecture and dataflow technology that
comprise Inktomi's core technologies, the Company has developed technologies
in several important related areas, including information retrieval, secure
remote cluster management and object databases for network caches. The Company
intends to continue to develop new technologies, as well as enhance and extend
its core technology, in order to bring to market new scalable network
applications.
SALES AND MARKETING
The Company's sales strategy is to pursue opportunities with large accounts
through its direct sales force, and to penetrate various targeted market
segments through multiple indirect distribution channels.
Inktomi's worldwide direct sales organization consisted of 14 individuals as
of March 31, 1998, nine of whom are located at the Company's San Mateo,
California headquarters and five of whom are located at the Company's
subsidiary office in the United Kingdom. The direct sales force is organized
into individual account teams, each consisting of a sales representative and a
systems engineer. The Company generates leads from contacts made through
seminars, conferences, trade shows, customers and an ongoing public relations
program. Inktomi qualifies the leads and assigns an account team to major
prospective customers. The account team then initiates the sales process,
which generally involves multiple presentations to information technology and
business professionals within the prospective customer's organization. In
addition, Inktomi expects that sales of the Traffic Server application will
generally include a pilot implementation, successful completion and testing of
which will be a pre-requisite to full-scale deployment. The Company intends to
increase the size of its direct sales force and to establish additional sales
offices domestically and internationally. Competition for sales
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personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain additional qualified personnel in the
future.
In order to achieve broad distribution of the Company's products and
services, Inktomi intends to complement its direct sales force by establishing
multiple indirect distribution channels, including OEMs, systems integrators,
VARs and joint marketing partners. These channels are intended to increase
geographic sales coverage and to address mid-tier ISPs and, eventually, large
corporate customers. Inktomi is in the early stages of building these channels
and currently has entered into a written agreement with one such distributor
covering the territory of Japan. There can be no assurance that the Company
will be able to enter into agreements or establish relationships with desired
distribution partners on a timely basis, or at all, or that such distribution
partners will devote adequate resources to selling the Company's products.
The Company believes it is important to have a strong international presence
and intends to translate and localize its products to address international
markets. The Company intends to employ a mix of channels similar to its U.S.
model through the use of OEMs, system integrators and VARs. In October 1997,
the Company established a subsidiary in the United Kingdom to address the
European market. Inktomi has hired a general manager to run the subsidiary and
intends to hire additional sales and marketing personnel.
The Company's marketing group consisted of 11 individuals at March 31, 1998,
all of whom are located at the Company's San Mateo, California headquarters.
Inktomi conducts a variety of programs worldwide to stimulate market demand
for its products, including public relations activities, advertising, trade
shows and collateral development. These programs are focused on Inktomi's
target markets and are designed to create awareness and generate sales leads.
The Company believes that strategic relationships will assist Inktomi's
products and technology in gaining broad market acceptance as well as
enhancing the Company's marketing, sales and distribution capabilities. The
Company has informally collaborated with Sun since early 1997 regarding a
range of marketing and sales activities relating to Traffic Server. Inktomi's
sales force and Sun's sales force have worked together and participated in
joint sales calls to several large ISPs and other network providers. The
companies have also worked together to conduct joint marketing activities,
including public relations, sales seminars and field marketing. In August
1997, Inktomi and Digital entered into a software porting agreement in which
Digital provided funds and loaned equipment to Inktomi to enable Inktomi to
port its Traffic Server application to run on Digital equipment. Inktomi and
Digital are also informally collaborating on joint market development
activities. In September 1997, Inktomi and Intel entered into a strategic
development agreement in which Inktomi agreed to port its Traffic Server
application to run on Intel architecture and Intel agreed to provide Inktomi
with porting assistance and access to Intel's tuning and optimization lab. At
the same time, Intel made an equity investment in Inktomi. Intel has the right
to distribute the ported application as an OEM and as a VAR, and Intel has
agreed to use reasonable efforts to introduce Inktomi to other OEMs. Inktomi
intends to pursue other strategic relationships. See "Risk Factors--Dependence
on Strategic Relationships".
CUSTOMER SERVICE AND SUPPORT
The Company believes that a high level of customer service and support is
critical to the successful marketing and sale of its products. The Company is
developing a comprehensive service and support organization to manage customer
accounts and expects to provide an increasing level of support as its Traffic
Server and search engine applications are deployed across a range of
customers. The Company's service and support organization consisted of four
individuals at March 31, 1998, all of whom are located at Inktomi's San Mateo,
California headquarters. The Company plans to establish additional service and
support sites internationally commensurate with customer needs.
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Inktomi provides a base level of technical support to its customers through
maintenance and support agreements. The base level of support includes
assistance with installation, configuration and initial set-up of the
application, run-time support, and software maintenance releases. For an
additional fee, a customer may choose to receive software upgrades, training
and support during extended hours. Inktomi generally provides its base level
of support via e-mail, the Internet, fax and telephone.
Inktomi also provides a variety of value-added services to its customers.
These services include customer network evaluation and implementation
guidance, assistance with installation, configuration and initial set-up of
the application at the customer's facility, and cluster growth and other
scaling recommendations.
The Company believes that the complexity of its products and the large-scale
deployments anticipated by customers will require a number of highly trained
customer service and support personnel. The Company currently has a small
customer service and support organization, and only limited experience
supporting Traffic Server in a commercial deployment. There can be no
assurance that the Company will be able to increase the size of its customer
service and support organization on a timely basis or at all, or that the
Company will be able to provide the high level of support required by its
customers. See "Risk Factors--Need to Expand Sales and Support Organizations".
RESEARCH AND DEVELOPMENT
Inktomi believes that strong product development capabilities are essential
to its strategy of enhancing its core technology, developing additional
applications incorporating that technology, and maintaining the
competitiveness of its product and service offerings. Inktomi has invested
significant time and resources in creating a structured process for
undertaking all product development projects. This process involves all
functional groups and all levels within the Company and is designed to provide
the framework for defining and addressing the steps, tasks and activities
required to bring product concepts and development projects to market
successfully. In addition, Inktomi has actively recruited key computer
scientists, engineers and software developers with expertise and degrees in
the areas of massively parallel computing, coupled cluster computing, and
software dataflow operations to work for the Company, and has complemented
these individuals by hiring senior management with extensive backgrounds in
the network infrastructure, enterprise software and Internet industries.
Through this mix of personnel, the Company strives to create and maintain an
environment of rapid innovation and product release.
Since inception, the Company has focused its research and development
efforts on developing and enhancing its coupled cluster software architecture
and dataflow technology and on applying these technologies to its search
engine and network cache products. The Company is currently working to add
features and new functionality to its existing products, port its products to
operate on Intel-based workstations running Windows NT, and develop new
Internet products and services. The Company's research and development
expenses totaled $3.8 million, $4.2 million and $1.5 million for the six
months ended March 31, 1998, for the fiscal year ended September 30, 1997 and
for the period from February 2, 1996 (inception) to September 30, 1996,
respectively. As of March 31, 1998, the Company had 46 individuals engaged in
research and development.
COMPETITION
The markets in which the Company competes are new, intensely competitive,
highly fragmented and characterized by rapidly changing technology and
evolving standards. The Company faces competition in the overall network
computing software market as well as in each of the market segments in which
its products and services compete. The Company has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of whom have significantly greater financial, technical,
marketing and other resources than the Company.
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In the market for network cache solutions, the Company competes on the basis
of performance, scalability, data throughput, ease of integration and
manageability. The Company competes primarily against companies including
CacheFlow, Inc., Cisco, Microsoft, Netscape, Network Appliance, Inc., Novell,
Inc. and Spyglass, Inc. among others, as well as against freeware caching
solutions including CERN, Harvest and Squid. In addition, other companies may
embed competing technology into other products such as server or firewall
software. The Company is aware of numerous other major software developers as
well as smaller entrepreneurial companies that are focusing significant
resources on developing and marketing software products and services that will
compete with Traffic Server. The Company believes that its software may face
competition from other providers of hardware and software claiming to offer
competing solutions to network infrastructure problems, including networking
hardware and companion software manufacturers such as Ascend Communications,
Inc., Bay Networks, Inc., Ciena Corporation and IBM Corporation; hardware
manufacturers such as Digital, Hewlett-Packard Company, Intel, Motorola, Inc.
and Sun; telecommunications providers such as AT&T, Inc., MCI
Telecommunications Corporation, and regional Bell operating companies; cable
TV/communications providers such as @Home Corporation, Continental
Cablevision, Inc., TimeWarner, Inc. and regional cable operators; software
database companies such as Informix Corporation, Oracle Corporation and
Sybase, Inc.; and large diversified software and technology companies
including Microsoft, Netscape and others. Cisco, Microsoft and Netscape
provide or have announced their intentions to provide a range of software and
hardware products based on Internet protocols and to compete in the broad
Internet/intranet software market as well as in specific market segments in
which the Company competes. Cisco, Microsoft and Netscape have often acquired
technology and products from other companies to augment their product lines,
in addition to developing their own technology and products.
In the market for providing turn-key search services, the Company competes
on the basis of performance, scalability, price, relevance of results and user
response time. The Company competes with a number of companies to provide
Internet search services, many of whom have operated services in the market
for a longer period, have greater financial resources, have established
marketing relationships with leading on-line services and advertisers, and
have secured greater presence in distribution channels. Competitors who offer
search services to on-line service providers include Digital (Alta Vista),
Excite, Infoseek, Lycos, Northern Light, Inc. and Open Text Corporation, among
others. Increased use and visibility of the Company's search engine services
depends on the Company's ability to maintain highly available and reliable
services across multiple data centers and to maintain the freshness of the
search database.
The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Certain of the Company's current and potential competitors may bundle
their products with other software or hardware, including operating systems
and browsers, in a manner that may discourage users from purchasing products
offered by the Company. Also, certain current and potential competitors have
greater name recognition or more extensive customer bases that could be
leveraged, thereby gaining market share to the Company's detriment. Inktomi
expects additional competition as other established and emerging companies
enter the network computing software market and new products and technologies
are introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could materially adversely affect the Company's business, financial condition
and results of operations. Current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability of their products to
address the needs of the Company's prospective customers. The Company's
current or future channel partners may establish cooperative relationships
with current or potential competitors of the Company, thereby limiting the
Company's ability to sell its products through particular distribution
channels. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. Such competition
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could materially adversely affect the Company's ability to obtain new
contracts and maintenance and support renewals for existing contracts on terms
favorable to the Company. Further, competitive pressures could require the
Company to reduce the prices of its products and services, which could
materially adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against current and future competitors, and the
failure to do so would have a material adverse effect upon the Company's
business, financial condition and results of operations.
PROPRIETARY RIGHTS
Because materials may be downloaded by the search services operated or
facilitated by the Company, or may be copied and stored by customers that have
deployed the Company's Traffic Server product, and, in either case, may be
subsequently distributed to others, there is a potential that claims will be
made against the Company (directly or through contractual indemnification
provisions with customers) for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature, content
or copying of such materials. Such claims have been threatened against the
Company from time to time, and have been brought and sometimes successfully
pressed against on-line services in the past. It is also possible that if any
information provided through the search services operated or facilitated by
the Company or information that is copied and stored by customers that have
deployed Traffic Server, such as stock quotes, analyst estimates or other
trading information, contains errors, third parties could make claims against
the Company for losses incurred in reliance on such information. Although the
Company carries general liability insurance, the Company's insurance may not
cover potential claims of this type or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability or
legal defense expenses that are not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's success and ability to compete are substantially dependent
upon its internally developed technology. While the Company relies on
copyright, trade secret and trademark law to protect its technology, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, frequent product enhancements and
reliable product maintenance are more essential to establishing and
maintaining a technology leadership position. There can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology. The Company generally enters into confidentiality or
license agreements with its employees, consultants and corporate partners, and
generally controls access to and distribution of its software, documentation
and other proprietary information. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use the Company's products or technology. Policing unauthorized use
of the Company's products is difficult, and there can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology,
particularly in foreign countries where the laws may not protect the Company's
proprietary rights as fully as do the laws of the United States. Substantial
litigation regarding intellectual property rights exists in the software
industry, and the Company expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in the
Company's industry segments grows and the functionality of products in
different industry segments overlaps. Lycos recently announced that it is the
exclusive licensee of a patent covering a method of crawling information on
the Internet, and that it plans to bring actions against companies that it
believes are infringing this patent in the near future. There can be no
assurance that Lycos or other third parties will not claim infringement by the
Company with respect to its software or enhancements thereto. Any such claims,
with or without merit, could be time-consuming to defend, result in costly
litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. A successful claim of
product infringement
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against the Company and failure or inability of the Company to license the
infringed or similar technology could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1998, Inktomi had 89 full-time employees, 46 of whom were
engaged in research and development, 25 in sales and marketing, four in
customer support, and 14 in finance, administration and operations. The
Company's future performance depends in significant part upon the continued
service of its key technical, sales and senior management personnel, none of
whom is bound by an employment agreement requiring service for any defined
period of time. The loss of the services of one or more of the Company's key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's future success
also depends on its continuing ability to attract, train and retain highly
qualified technical, sales and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can
retain its key personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
TECHNICAL ADVISORY BOARD
The Company has assembled a Technical Advisory Board comprised of experts in
the fields of clustering and networking technology. The Technical Advisory
Board meets quarterly to review Inktomi design plans and products and provide
specific feedback on technology applications and business market focus. The
Technical Advisory Board is chaired by Dr. Eric A. Brewer, Chief Scientist of
the Company, and includes as members Dr. David Black, a technology partner at
Oak Investment Partners and Chief Technology Officer of PaySys International,
Inc.; Dr. David E. Culler, associate professor of Electrical Engineering and
Computer Science at the University of California, Berkeley; Dr. Greg
Papadopolous, Chief Technology Officer at Sun; Dr. Lawrence A. Rowe, professor
of Electrical Engineering and Computer Science at the University of
California, Berkeley; and Justin Rattner, senior fellow at Intel.
FACILITIES
Inktomi leases approximately 32,000 square feet of office space in a single
office building located in San Mateo, California. Approximately 16,400 square
feet of space is leased pursuant to a sublease agreement which expires in
February 2000 and approximately 15,600 square feet of space is leased pursuant
to a lease agreement which expires in October 2002. The Company has secured an
extension from the master landlord for the subleased office space. The term of
this extension is from the expiration of the sublease through September 2001.
The Company believes its current facilities will be adequate through calendar
1998 and is currently searching for additional space. The Company also
subleases approximately 1,300 square feet of office space in the United
Kingdom and leases approximately 2,900 square feet of office space in
Virginia. The UK sublease expires in October 1999 and the Virginia lease
expires in June 2003.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of March 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David C. Peterschmidt(1)....... 50 Chairman of the Board, President and
Chief Executive Officer
Dr. Eric A. Brewer............. 31 Chief Scientist and Director
Paul Gauthier.................. 25 Chief Technology Officer
Jerry M. Kennelly.............. 47 Vice President of Finance, Chief Financial
Officer and Secretary
Dennis L. McEvoy............... 50 Vice President of Development and Support
Richard B. Pierce.............. 39 Vice President of Marketing
Timothy Stevens................ 31 Vice President of Corporate and Legal
Affairs, General Counsel and Assistant
Secretary
Vince Vannelli................. 39 Vice President of Worldwide Field Operations
Fredric W. Harman(1)(2)(3)..... 37 Director
John A. Porter(1)(2)(3)........ 54 Director
Alan F. Shugart(2)(3).......... 67 Director
</TABLE>
- --------
(1) Member of Nominating Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
DAVID C. PETERSCHMIDT has served as President, Chief Executive Officer and a
Director of Inktomi since July 1996. He was appointed Chairman of the Board in
December 1997. From 1991 until joining Inktomi, he served as Chief Operating
Officer and Executive Vice President of Sybase, Inc., a database company. From
1988 to 1991, Mr. Peterschmidt was a consultant with The Kappa Group, a
management consulting firm, where he provided senior level sales and marketing
training to a variety of companies. From 1987 to 1988, he served as Vice
President of Sales and Marketing for System Industries, Inc., a manufacturer
of storage subsystems for Digital Equipment Corporation computers. From 1984
to 1987, Mr. Peterschmidt was Vice President of Sales and Marketing for LEX
Computer Systems. Mr. Peterschmidt also served as a Captain in the United
States Air Force for nine years, where he was Lead Contract Negotiator on the
B1 Bomber Program at Rockwell International, Inc. Mr. Peterschmidt holds a
Bachelor of Arts degree in Political Science from the University of Missouri
and a Masters of Business Administration from Chapman College.
DR. ERIC A. BREWER has served as a Director of the Company since its
inception in February 1996. From February 1996 to December 1997, Dr. Brewer
was Chief Technology Officer of the Company and was appointed Chief Scientist
in December 1997. From May 1996 to July 1996, he served as interim President
and Chief Executive Officer of the Company. Dr. Brewer has been an Assistant
Professor in the Computer Science Division at the University of California,
Berkeley since July 1994, and a consultant to the Idea Group since August
1990. Dr. Brewer served as a research assistant at the Massachusetts Institute
of Technology from September 1989 to August 1994. From June 1986 to November
1992, Dr. Brewer was a software engineer at CADAM, Inc. Dr. Brewer holds a
Bachelor of
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Science degree in Computer Science from the University of California, Berkeley
and a doctorate degree in Computer Science from the Massachusetts Institute of
Technology.
PAUL GAUTHIER served as Vice President of Research and Development of the
Company from February 1996 until his appointment as Chief Technology Officer
in December 1997. From May 1995 to August 1995, Mr. Gauthier served as an
intern at Digital Equipment Corporation's Systems Research Center. Mr.
Gauthier served as a programmer analyst for Seimac Limited from May 1994 to
July 1994. From July 1989 to April 1994, Mr. Gauthier served as Technical
Director for Worthington Software Company. Mr. Gauthier served as a programmer
at Dymaxion Research from June 1987 to July 1989. Mr. Gauthier holds a
Bachelor of Science degree, with honors, in Computer Science from Dallhousie
University.
JERRY M. KENNELLY joined the Company as Vice President of Finance and Chief
Financial Officer in October 1996. From June 1990 until joining Inktomi, Mr.
Kennelly worked for Sybase, Inc. in a number of senior financial positions.
Most recently, he served as Vice President of Corporate Finance. From November
1988 to May 1990, Mr. Kennelly served as the Controller for U.S. Operations at
Oracle Corporation. From December 1980 to October 1988, he served as World
Wide Sales and Marketing Controller at Tandem Computers, Inc. Mr. Kennelly
holds a Bachelor of Arts degree in Political Economy from Williams College and
a Masters degree in Accounting from the New York University Graduate School of
Business Administration. He is also a Certified Public Accountant.
DENNIS L. MCEVOY joined the Company as a consultant in March 1997 and as
Vice President of Development and Support in June 1997. From October 1996 to
February 1997, Mr. McEvoy served as Executive Vice President of Products and
Services at Verity, Inc., a provider of information search, retrieval and push
software for corporate intranets and the Internet. From October 1994 to
September 1996, he served in several executive management positions at Sybase,
Inc., most recently as President, Enterprise Business Group. Prior to joining
Sybase, in January 1989, Mr. McEvoy co-founded and served as President and
Chief Executive Officer of Cooperative Solutions, Inc., a client/server
software company focused on development tools and production software for
mission-critical applications. Cooperative Solutions was acquired by Bachman
Information Services, Inc. in August 1993, whereupon Mr. McEvoy joined Bachman
as a Vice President and served in such capacity until August 1994. From
December 1974 to June 1988, Mr. McEvoy worked at Tandem Computers, Inc., most
recently as Vice President, Software Division. Mr. McEvoy holds a Bachelor of
Science in Mathematics from Carnegie-Mellon University.
RICHARD B. PIERCE joined Inktomi as its Vice President of Marketing in
November 1996. From December 1981 until joining Inktomi, Mr. Pierce worked at
Intel Corporation where he held a variety of marketing, strategic planning and
operations management positions. Most recently, he was marketing director of
Intel's mobile and handheld products group. Mr. Pierce holds a Bachelor of
Science degree in Electrical Engineering from Purdue University.
TIMOTHY STEVENS joined Inktomi as its Vice President of Corporate and Legal
Affairs and General Counsel in July 1997. Prior to joining Inktomi, Mr.
Stevens was an attorney with Wilson Sonsini Goodrich & Rosati, where he served
as primary outside counsel for more than thirty private and public companies,
specifically in the areas of venture capital and corporate financing, public
offerings, mergers and acquisitions, and securities and intellectual property
law. Mr. Stevens holds Bachelor of Science degrees in Finance and Management
from the University of Oregon and a Juris Doctor degree from the University of
California, Davis.
VINCE VANNELLI joined Inktomi as Vice President of Worldwide Field
Operations in January 1998. Prior to joining Inktomi, Mr. Vannelli was most
recently the Vice President and General Manager for U.S. Operations for
Hitachi Data Systems, Inc., a computer services and equipment company. Mr.
Vannelli worked for Hitachi for eight years, first as a District Sales Manager
in Northern California, then as the
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Regional Manager of the Mid-Atlantic states, then as the Eastern Division
Manager. Following these assignments, Mr. Vannelli returned to the West Coast
to assist the Chief Executive Officer of Hitachi in re-engineering worldwide
sales and marketing, then after a brief period running the Western Division,
was named Vice President and General Manager for U.S. Operations. Prior to
working for Hitachi, Mr. Vannelli was employed by IBM Corporation for eight
years in a variety of sales and sales management roles. Mr. Vannelli holds a
Bachelor of Science and a Masters degree in Industrial Engineering from
Stanford University.
FREDRIC W. HARMAN joined the Company as a Director in April 1997. Since July
1994, Mr. Harman has served as a Managing Member of the General Partners of
venture capital funds affiliated with Oak Investment Partners. From April 1991
to June 1994, he served as a General Partner of Morgan Stanley Venture
Capital, L.P. Mr. Harman is a director of ILOG, S.A., SPSS, Inc. and
International Manufacturing Services, Inc. and several privately held
companies. Mr. Harman holds a Bachelor of Science and Masters degree in
Electrical Engineering from Stanford University and a Masters of Business
Administration from Harvard University.
JOHN A. PORTER joined the Company as a Director in March 1997. Mr. Porter is
currently actively involved in a variety of private investment and business
ventures. He is a director of WorldCom, Inc., a full-service
telecommunications provider and, through its wholly owned subsidiary UUNet,
Inc., the largest Internet Service Provider in the United States. Mr. Porter
has served on the Board of Directors of WorldCom since 1989, serving as
Chairman of the Board from 1989 to 1993 and as Vice Chairman from 1993 to
1996. Mr. Porter also serves as Chairman of the Board and Chief Executive
Officer of Industrial Electric Manufacturing, Inc., a switch gear
manufacturer, which he joined in 1995, and Chairman of the Board and Chief
Executive Officer of Phillips & Brooks Gladwin, Inc., a full-service provider
of public communications equipment and national outsourced services, which he
joined in 1989. He is also a director of Uniroyal Technologies, Inc. and
XLConnect, Inc.
ALAN F. SHUGART joined the Company as a Director in December 1997. Since
1979, Mr. Shugart has been Chief Executive Officer of Seagate Technology,
Inc., a manufacturer of disk drives and other computer equipment. From 1979
until September 1991 and since October 1992, Mr. Shugart has also served as
Chairman of the Board of Seagate. He also served as President of Seagate from
September 1991 until September 1997 and Chief Operating Officer of Seagate
from September 1991 until March 1995. Mr. Shugart is currently a director of
Valence Technology, Inc., SanDisk Corporation and Seagate Software, Inc., a
subsidiary of Seagate.
The Company's Board of Directors currently consists of five members. In
addition, both Intel and Microsoft have observation rights to attend Board
meetings. At each annual meeting of stockholders, the successors to directors
will be elected to serve from the time of election and qualification until the
next annual meeting following election. The Company's Bylaws provide that the
authorized number of directors may be changed only by resolution of the Board
of Directors.
46
<PAGE>
Executive officers are elected by the Board of Directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationships among any of the directors, officers or key
employees of the Company.
BOARD COMMITTEES
The Company has established an Audit Committee, a Compensation Committee and
a Nominating Committee. The Audit Committee reviews the internal accounting
procedures of the Company and consults with and reviews the services provided
by the Company's independent accountants. The Compensation Committee reviews
and recommends to the Board of Directors the compensation and benefits of all
officers of the Company and establishes and reviews general policies relating
to compensation and benefits of employees of the Company. The Nominating
Committee is responsible for establishing general qualification guidelines
applicable to nominees to the Board of Directors, and for identifying,
interviewing and recommending persons meeting such guidelines to serve as
members of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established its Compensation Committee in December
1997. Prior to establishing the Compensation Committee, the Board of Directors
as a whole performed the functions delegated to the Compensation Committee.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Under the Company's 1998 Stock Plan, nonemployee directors
are eligible to receive stock option grants at the discretion of the Board of
Directors or other administrator of the plan. See "--Incentive Stock Plans".
In January 1997, the Board of Directors granted an option to purchase 66,667
shares of Common Stock at $1.95 per share to John Porter in connection with
his appointment as a member of the Company's Board of Directors. This option
was subsequently repriced to $0.45 per share in connection with the stock
option repricing program approved by the Board of Directors in May 1997. In
December 1997, the Board of Directors granted an option to purchase 50,000
shares of Common Stock at $3.33 per share to Alan F. Shugart in connection
with his appointment as a member of the Company's Board of Directors.
47
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
earned for services rendered to the Company in all capacities for the fiscal
year ended September 30, 1997 by the Company's Chief Executive Officer and the
Company's four next most highly compensated executive officers who earned more
than $100,000 during the fiscal year ended September 30, 1997 (collectively,
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- -------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY($) BONUS($) OPTIONS(#)(1)
---------------------------- ---------- --------- -------------
<S> <C> <C> <C>
David C. Peterschmidt.................... $ 150,000 $ 280,000(2) --
President and Chief Executive Officer
Paul Gauthier............................ 105,000 14,977 --
Chief Technology Officer
Jerry M. Kennelly(3)..................... 184,102 37,045 200,001
Vice President of Finance and Chief
Financial Officer
Dennis L. McEvoy(4)...................... 66,667 92,210 268,801
Vice President of Development and
Support
Richard B. Pierce(5)..................... 150,016 333,776 233,334
Vice President of Marketing
</TABLE>
- --------
(1) Shares subject to options granted under the Company's 1996 Equity
Incentive Plan. Excludes 133,334 shares and 233,334 shares issuable upon
exercise of options granted during the fiscal year under the 1996 Equity
Incentive Plan to Mr. Kennelly and Mr. Pierce, respectively. Such options
were cancelled during the fiscal year.
(2) Bonus earned and accrued during the fiscal year ended September 30, 1997.
Bonus to be paid over fiscal 1998.
(3) Mr. Kennelly joined the Company in October 1996.
(4) Mr. McEvoy joined the Company in June 1997.
(5) Mr. Pierce joined the Company in November 1996.
48
<PAGE>
OPTION GRANTS. The following table sets forth certain information with
respect to stock options granted to each of the Named Executive Officers
during the fiscal year ended September 30, 1997. In accordance with the rules
of the Securities and Exchange Commission, also shown below is the potential
realizable value over the term of the option (the period from the grant date
to the expiration date) based on assumed rates of stock appreciation of 5% and
10%, compounded annually. These amounts are based on certain assumed rates of
appreciation and do not represent the Company's estimate of future stock
price. Actual gains, if any, on stock option exercises will be dependent on
the future performance of the Common Stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(#) DURING PERIOD(1) ($/SHARE)(2) DATE 5% 10%
---- ---------- ---------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David C. Peterschmidt... -- -- -- -- -- --
Paul Gauthier........... -- -- -- -- -- --
Jerry M. Kennelly....... 133,334 (4) 6.0%(5) $1.95 (4) $ 163,513 $ 414,375
133,334 (6) 6.4 0.45 05/15/07 37,734 95,625
66,667 (6) 3.2 0.45 06/30/07 18,867 47,813
Dennis L. McEvoy........ 2,134 (7) 0.1 0.45 06/30/07 604 1,530
266,667 (8) 12.8 0.45 06/30/07 75,467 191,249
Richard B. Pierce....... 166,667 (4) 7.4 (5) 1.95 (4) 204,391 517,967
66,667 (4) 3.1 (5) 1.95 (4) 81,757 207,188
166,667 (9) 8.0 0.45 05/15/07 47,167 119,531
66,667(10) 3.2 0.45 05/15/07 18,867 47,813
</TABLE>
- --------
(1) Based on an aggregate of 2,078,052 options granted by the Company during
the fiscal year ended September 30, 1997 to employees of and consultants
to the Company, including the Named Executive Officers.
(2) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price.
(4) Options were granted in November 1996 and cancelled and regranted in
connection with a stock option repricing program in May 1997.
(5) Percentage calculated as if options granted and subsequently cancelled
remained outstanding as of the end of the fiscal year.
(6) Option was granted under the Company's 1996 Equity Incentive Plan. All
shares under the option are immediately exercisable; however, as a
condition of exercise the optionee must enter into a stock restriction
agreement giving the Company the right in the event of any termination of
employment to repurchase all then unvested shares at cost. 12% of the
shares become vested six months following the date of commencement of
employment and 2% of the shares become vested monthly thereafter,
provided however that all shares become vested in the event of an
acquisition of the Company. Mr. Kennelly exercised and purchased all
shares under this option in July 1997.
(7) Option was granted under the Company's 1996 Equity Incentive Plan. All
shares under the option are immediately exercisable and fully vested. Mr.
McEvoy exercised and purchased all shares under this option in July 1997.
(8) Option was granted under the Company's 1996 Equity Incentive Plan. All
shares under the option are immediately exercisable; however, as a
condition of exercise the optionee must enter into a stock restriction
agreement giving the Company the right in the event of any termination of
employment to repurchase all then unvested shares at cost. 12% of the
shares become vested six months following the date of commencement of
employment and 2% of the shares become vested monthly thereafter,
provided however that 25% of the shares become vested upon consummation
of this offering and all shares become vested in the event of an
acquisition of the Company. Mr. McEvoy exercised and purchased all shares
under this option in July 1997.
(9) Option was granted under the Company's 1996 Equity Incentive Plan. All
shares under the option are immediately exercisable; however, as a
condition of exercise the optionee must enter into a stock restriction
agreement giving the Company the right in the event of any termination of
employment to repurchase all then unvested shares at cost. 12% of the
shares become vested six months following the date of commencement of
employment and 2% of the shares become vested monthly thereafter. Mr.
Pierce exercised and purchased all shares under this option in July 1997.
(10) Option was granted under the Company's 1996 Equity Incentive Plan. All
shares under the option are immediately exercisable; however, as a
condition of exercise the optionee must enter into a stock restriction
agreement giving the Company the right in the event of any termination of
employment to repurchase all then unvested shares at cost. 50% of the
shares become vested one year following the date of commencement of
employment and the remaining 50% of the shares become vested two years
following the date of commencement of employment. Mr. Pierce exercised
and purchased all shares under this option in July 1997.
49
<PAGE>
AGGREGATE OPTION EXERCISES AND OPTION VALUES. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended September 30, 1997 and exercisable and
unexercisable options held as of September 30, 1997:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED SEPTEMBER 30, 1997(#) SEPTEMBER 30, 1997($)(2)
ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David C. Peterschmidt
(3).................... 266,667 $768,001 716,867 -- $2,064,577 --
Paul Gauthier........... -- -- -- -- -- --
Jerry M. Kennelly (4)... 200,001 576,003 -- -- -- --
Dennis L. McEvoy (5).... 268,801 774,147 -- -- -- --
Richard B. Pierce (6)... 233,334 672,002 -- -- -- --
</TABLE>
- --------
(1) Based on a value of $3.33 per share, the deemed fair market value at
September 30, 1997, minus the per share exercise price, multiplied by the
number of shares issued upon exercise of the option.
(2) Based on a value of $3.33 per share, the deemed fair market value at
September 30, 1997, minus the per share exercise price, multiplied by the
number of shares underlying the option.
(3) All shares subject to unexercised options held by Mr. Peterschmidt become
fully vested and exercisable upon consummation of the offering, and are
therefore included in the Exercisable column above.
(4) As of March 31, 1998, 142,667 of the shares acquired by Mr. Kennelly were
subject to a right of repurchase by the Company at cost in the event of
termination of employment with the Company. The repurchase option lapses
at the rate of 4,000 shares per month, provided however that the
repurchase option lapses in full in the event of an acquisition of the
Company.
(5) As of March 31, 1998, 213,334 of the shares acquired by Mr. McEvoy were
subject to a right of repurchase by the Company at cost in the event of
termination of employment with the Company. The repurchase option lapses
as to 66,667 shares upon consummation of the offering and at the rate of
approximately 3,667 additional shares per month thereafter, provided
however that the repurchase option lapses in full in the event of an
acquisition of the Company.
(6) As of March 31, 1998, 146,668 of the shares acquired by Mr. Pierce were
subject to a right of repurchase by the Company at cost in the event of
termination of employment with the Company. The repurchase option lapses
as to 3,333 shares per month and as to an additional 33,333 shares on
November 18, 1998.
INCENTIVE STOCK PLANS
1996 EQUITY INCENTIVE PLAN. The Company's 1996 Equity Incentive Plan (the
"Incentive Plan") provides for the grant of incentive stock options to
employees and nonstatutory stock options, stock purchase rights and stock
bonus rights to employees, directors and consultants. As of March 31, 1998,
options to purchase 1,947,763 shares of Common Stock were outstanding and
2,143,355 shares had been issued upon exercise of outstanding options. Options
granted under the Incentive Plan are exercisable in full when granted; however
to the extent unvested the shares issuable upon exercise of an option are
subject to a right of repurchase in favor of the Company at the exercise
price. For employees, the stock options typically vest or the right of
repurchase generally lapses as to 12% of the granted shares six months
following the first date of employment and as to an additional 2% of the
granted shares at the end of each full month thereafter, subject to continued
employment with the Company. For consultants and directors, the right of
repurchase generally lapses over the term of service. Prior to adopting the
Incentive Plan, the Company granted nonstatutory stock options to
50
<PAGE>
purchase Common Stock to certain employees and consultants. As of March 31,
1998, options to purchase 75,557 shares were outstanding and options to
purchase 317,676 shares had been issued upon exercise of options. These
options carry substantially the same provisions as the options granted under
the Incentive Plan. Options granted under the Incentive Plan will remain
outstanding in accordance with their terms, but the Board of Directors has
determined that no further options or other awards will be granted under the
Incentive Plan.
1998 STOCK PLAN. The Company's 1998 Stock Plan (the "Stock Plan") provides
for the grant of incentive stock options to employees and nonstatutory stock
options and stock purchase rights to employees, directors and consultants. A
total of 1,000,000 shares of Common Stock has been reserved for issuance under
the Stock Plan, all of which are currently available for grant. The number of
shares reserved for issuance under the Stock Plan will be subject to an annual
increase every April equal to that number of shares necessary to ensure that
1,000,000 shares are available for issuance thereunder. The Stock Plan is
currently administered by the Board of Directors, although the Board may
designate certain committees to administer the Stock Plan with respect to
different groups of service providers. Options and stock purchase rights
granted under the Stock Plan will vest as determined by the relevant
administrator, and if not assumed or substituted by a successor corporation
will accelerate and become fully vested in the event of an acquisition of the
Company. The exercise price of options and stock purchase rights granted under
the Stock Plan will be as determined by the relevant administrator, although
the exercise price of incentive stock options must be at least equal to the
fair market value of the Company's Common Stock on the date of grant. The
Board of Directors may amend, modify or terminate the Stock Plan at any time
as long as such amendment, modification or termination does not impair vesting
rights of plan participants. The Stock Plan will terminate in April 2008,
unless terminated earlier by the Board of Directors.
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") provides employees of the Company with an
opportunity to purchase Common Stock of the Company through accumulated
payroll deductions. A total of 300,000 shares of Common Stock have been
reserved for issuance under the Purchase Plan, none of which have been issued.
The number of shares reserved for issuance under the Purchase Plan will be
subject to an annual increase every April equal to that number of shares
necessary to ensure that 300,000 shares are available for issuance thereunder.
The Purchase Plan will be administered by the Board of Directors of the
Company or by a committee appointed by the Board. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions of up
to 20% of an employee's compensation for the first offering period, and up to
15% of an employee's compensation for subsequent offering periods, up to a
maximum of $25,000 for all purchases ending within the same calendar year.
Employees are eligible to participate if they are customarily employed by the
Company for at least 20 hours per week and more than five months in any
calendar year. Unless the Board of Directors or its committee determine
otherwise, each offering period will run for 24 months and will be divided
into four consecutive purchase periods of approximately six months. The first
offering period and the first purchase period commence on the date of this
Prospectus, and new 24 month offering periods will commence every six months
thereafter. In the event of an acquisition of the Company, offering and
purchase periods then in progress will be shortened and all options
automatically exercised. The price at which Common Stock will be purchased
under the Purchase Plan is equal to 85% of the fair market value of the Common
Stock on the first day of the applicable offering period or the last day of
the applicable purchase period, whichever is lower. Employees may end their
participation in the offering period at any time, and participation
automatically ends on termination of employment. The Board may amend, modify
or terminate the Purchase Plan at any time as long as such amendment,
modification or termination does not impair vesting rights of plan
participants. The Purchase Plan will terminate in April 2008, unless
terminated earlier in accordance with its provisions.
51
<PAGE>
401(k) PLAN
In 1996, the Company adopted a Retirement Savings and Investment Plan (the
"401(k) Plan") covering the Company's full-time employees located in the
United States. The 401(k) Plan is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"), so that
contributions to the 401(k) Plan by employees or by the Company, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made. Pursuant to the 401(k) Plan, employees
may elect to reduce their current compensation by up to the statutorily
prescribed annual limit ($10,000 in 1998) and to have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does
not require, additional matching contributions to the 401(k) Plan by the
Company on behalf of all participants in the 401(k) Plan. To date, the Company
has not made any contributions to the 401(k) Plan.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with David C. Peterschmidt, its
President and Chief Executive Officer. The agreement provides for an initial
annual salary of $150,000. The agreement is for no specified length of term,
and either party has the right to terminate the agreement at any time with or
without cause. The agreement does not provide for any mandatory severance,
although the Company has the right to continue to pay Mr. Peterschmidt his
then current salary for up to 12 months following termination of employment,
in which case Mr. Peterschmidt may not compete against the Company for such
time period.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchases or redemptions, or (iv) any transaction from
which the director derived an improper personal benefit. Such limitation of
liability does not apply to liabilities arising under the federal securities
laws and does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company's Certificate of Incorporation and Bylaws provide that the
Company shall indemnify its directors and executive officers and may indemnify
its other officers and employees and other agents to the fullest extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. The Company's Bylaws also permit it to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether the Bylaws would
permit indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, provide for
indemnification of the Company's directors and executive officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action
by or in the right of the Company, arising out of such person's services as a
director or executive officer of the Company, any subsidiary of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
52
<PAGE>
CERTAIN TRANSACTIONS
In February 1996, the Company issued 751,815, 751,815 and 283,038 shares of
Common Stock to Dr. Eric A. Brewer, Paul Gauthier and David A. Brewer,
respectively, at a cash price of $0.000075 per share. In March 1996, the
Company issued 1,683,168, 1,683,168, and 633,664 shares of Series A Preferred
Stock to Dr. Brewer, Mr. Gauthier and Mr. Brewer, respectively, at a cash
price of $0.00075 per share. Dr. Brewer and Mr. Gauthier are each executive
officers of the Company, and Dr. Brewer is a Director of the Company. Mr.
Brewer is a 5% stockholder of the Company.
In March 1996, Inktomi LLC, a California limited liability company whose
members consist of Dr. Brewer, Mr. Gauthier and Mr. Brewer, and Dr. Brewer,
Mr. Gauthier and Mr. Brewer as individuals, transferred to the Company all of
their right, title and interest in certain technology in exchange for $100,000
cash and a promissory note of the Company in the principal amount of
$3,132,759. The assigned technology included all technology developed by any
of them directly or indirectly related to scalable web servers built out of
commodity workstations and the Myrinet network, a search engine utilizing
these scalable Web servers, a "crawler" that scans the Web to locate Web pages
for indexing into the search engine database, and any other applications of
parallel processing to Web servers, search engines, "crawlers", and related
products which have been conceived by any of them. In April 1997, Inktomi LLC
and the Company entered into an agreement in which Inktomi LLC converted
approximately $43,800 of the outstanding principal of the promissory note into
a warrant to purchase 417,701 shares of the Company's Common Stock at an
exercise price of $0.33 per share and forgave all other indebtedness under the
promissory note.
In July 1996, the Company entered into an employment agreement with David C.
Peterschmidt, the Company's President and Chief Executive Officer. The
agreement provides for an initial annual salary of $150,000. The agreement is
for no specified length of term, and either party has the right to terminate
the agreement at any time with or without cause. The agreement does not
provide for any mandatory severance, although the Company has the right to
continue to pay Mr. Peterschmidt his then current salary for up to twelve
months following termination of employment, in which case Mr. Peterschmidt may
not compete against the Company for such time period.
In January 1997, the Board of Directors granted an option to purchase 66,667
shares of Common Stock at $1.95 per share to John A. Porter in connection with
his appointment as a member of the Company's Board of Directors. This option
was subsequently repriced to $0.45 per share in connection with the stock
option repricing program approved by the Board of Directors in May 1997.
From March 1997 to June 1997, Dennis L. McEvoy worked as a part-time
consultant to the Company. In exchange for consulting services, the Company
issued to Mr. McEvoy a stock option to purchase 2,134 shares of Common Stock
at $0.45 per share. Mr. McEvoy exercised the stock option in full in July
1997. Mr. McEvoy joined the Company full time as Vice President of Development
and Support in June 1997.
In April 1997, the Company issued and sold to entities affiliated with Oak
Investment Partners ("Oak Partners") 2,405,653 shares of Series D Preferred
Stock at $3.3255 per share and warrants to purchase 801,884 shares of Series
D1 Preferred Stock at $4.98825 per share. Oak Partners exercised its warrants
in full in March 1998 (after assigning warrants to purchase 10,024 shares to a
technology partner of Oak Partners, which warrants were subsequently
exercised). Each outstanding share of Series D Preferred Stock and Series D1
Preferred Stock will convert into one share of Common Stock upon consummation
of the offering. Oak Partners is a 5% stockholder of the Company. Fredric W.
Harman is a Managing Partner of the General Partners of the Oak Partners
entities and is a director of the Company.
In December 1997, the Board of Directors granted an option to purchase
50,000 shares of Common Stock at $3.33 per share to Alan F. Shugart in
connection with his appointment as a member of the Company's Board of
Directors.
53
<PAGE>
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by
a majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
54
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of March 31, 1998, and as
adjusted to reflect the sale of Common Stock offered hereby by (i) each
stockholder known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Named Executive Officers, (iii) each director
of the Company, (iv) all directors and executive officers as a group, and (v)
all other Selling Stockholders. As of March 31, 1998, there were 18,531,813
shares of Common Stock outstanding, as adjusted to reflect the conversion of
all outstanding shares of Preferred Stock upon closing of this offering and
the issuance of 562,446 shares of Common Stock upon the exercise of warrants
held by certain stockholders on or before the closing of this offering.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
PRIOR TO OFFERING(1) SHARES AFTER OFFERING(1)(2)
----------------------- BEING -----------------------
NUMBER PERCENT OFFERED(2) NUMBER PERCENT
------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Oak Investment
Partners(3)............ 3,197,514 17.3% -- 3,197,514 15.6%
525 University Avenue,
Suite 1300
Palo Alto, CA 94301
Fredric W. Harman(4).... 3,197,514 17.3 -- 3,197,514 15.6
525 University Avenue,
Suite 1300
Palo Alto, CA 94301
Dr. Eric A. Brewer(5)... 2,347,983 12.6 -- 2,347,983 11.3
1900 S. Norfolk St.,
Suite 310
San Mateo, CA 94403
Paul Gauthier(6)........ 2,147,429 11.5 -- 2,147,429 10.4
1900 S. Norfolk St.,
Suite 310
San Mateo, CA 94403
David A. Brewer(7)...... 956,871 5.1 50,000 906,871 4.4
941 West Moana Lane
Reno, NV 89509
David C.
Peterschmidt(8)........ 856,867 4.5 -- 856,867 4.0
Jerry M. Kennelly(9).... 276,926 1.5 276,926 1.3
Dennis L. McEvoy(10).... 268,801 1.5 -- 268,801 1.3
Richard B. Pierce(11)... 335,898 1.8 -- 335,898 1.6
John A. Porter(12)...... 66,667 * -- 66,667 *
Alan F. Shugart(13)..... 50,000 * -- 50,000 *
All directors and
executive officers as a
group (11 persons)(14). 9,821,294 49.6 -- 9,821,294 45.1
United Capital Group
L.P. .................. 848,294 4.6 100,000 748,294 3.6
c/o Mattei Motorsports
LLC
6007 Victory Lane
Harrisburg, NC 28075
Thomas Lamar............ 129,830 * 35,936 93,894 *
100 S. Ellsworth
Avenue, Suite 900
San Mateo, CA 94401
Adam Sah................ 55,468 * 5,000 50,468 *
2224 Grant Street, Apt.
B
Berkeley, CA 94704
Pittiglio Rabin Todd &
McGrath(15)............ 43,334 * 43,334 -- --
1503 Grant Road, Suite
200
Mountain View, CA 94040
Templar Corporation..... 18,994 * 17,332 1,662 *
c/o Patriot Advisor,
Inc.
43 Deshon Avenue
Bronxville, NY 10708
Carl Lindell, Jr........ 5,065 * 5,065 -- --
3900 W. Kennedy Blvd.
Tampa, FL 33609
David Bernstein......... 4,459 * 1,333 3,126 *
129 Lauren Circle
Scotts Valley, CA 95066
Christopher R. Hoehn-
Saric.................. 4,000 * 2,000 2,000 *
622 Magothy Road, Box
74
Gibson Island, MD 21056
</TABLE>
- -------
* Less than 1%
55
<PAGE>
(1) Assumes no exercise of Underwriters' over-allotment option.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or will become exercisable
within 60 days after March 31, 1998 are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percentage
ownership of any other person. Unless otherwise indicated in the
footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Unless
otherwise indicated in the table above, the address of each of the
individuals listed in the table is Inktomi Corporation, 1900 South
Norfolk Street, Suite 310, San Mateo, California 94403.
(3) Includes 3,119,174 shares held by Oak Investment Partners VII, Limited
Partnership, and 78,340 shares held by Oak VII Affiliates Fund, Limited
Partnership.
(4) Includes 3,119,174 shares held by Oak Investment Partners VII, Limited
Partnership, and 78,340 shares held by Oak VII Affiliates Fund, Limited
Partnership. Mr. Harman is a Managing Partner of the General Partners of
the Oak Partners entities and is a director of the Company. He disclaims
beneficial ownership of the shares held by the Oak Partners entities
except to the extent of his proportionate partnership interest therein.
(5) Includes 2,172,549 shares held by Dr. Brewer and his wife, Lisa M.
Sardegna. Also includes Dr. Brewer's pro rata interest in a warrant held
by Inktomi LLC, which pro rata interest equals 175,434 shares. All such
shares and warrants are fully vested and are not subject to repurchase by
the Company. Also includes 123,333 shares of Common Stock transferred by
Dr. Brewer and his wife subsequent to March 31,1998 and 66,667 shares of
Common Stock subject to a right of purchase by certain other stockholders
of the Company at the initial price to public set forth on the cover page
of this Prospectus, which right expires 15 days following the date of
this Prospectus.
(6) Includes 1,971,995 shares held by Mr. Gauthier. Also includes Mr.
Gauthier's pro rata interest in a warrant held by Inktomi LLC, which pro
rata interest equals 175,434 shares. All such shares and warrants are
fully vested and are not subject to repurchase by the Company. Also
includes 45,333 shares of Common Stock transferred by Mr. Gauthier
subsequent to March 31, 1998 and 80,000 shares of Common Stock subject to
a right of purchase by certain other stockholders of the Company at the
initial price to public set forth on the cover page of this Prospectus,
which right expires 15 days following the date of this Prospectus.
(7) Includes 890,038 shares held by Mr. Brewer. Also includes Mr. Brewer's
pro rata interest in a warrant held by Inktomi LLC, which pro rata
interest equals 66,833 shares. Also includes 40,000 shares of Common
Stock subject to a right of purchase by certain other stockholders of the
Company at the initial price to public set forth on the cover page of
this Prospectus, which right expires 15 days following the date of this
Prospectus.
(8) Includes 206,667 shares held by David C. Peterschmidt and Roxanne N.
Peterschmidt, Trustees of the Peterschmidt Family Trust U/D/T Dtd
12/30/91. Also includes 650,200 shares issuable upon exercise of stock
options that vest in full upon completion of the offering.
(9) Includes 667 shares held by William Kennelly, Dorothy Kennelly and Jerry
Kennelly, as joint tenants, 6,667 shares held by Jerry Kennelly, as
trustee for Christopher Kennelly, 6,667 shares held by Jerry Kennelly, as
trustee for Michael Kennelly, and 262,925 shares held by Mr. Kennelly. As
of March 31, 1998, 142,667 of the shares held by Mr. Kennelly were
subject to a right of repurchase by the Company at cost in the event Mr.
Kennelly ceases to be an employee of the Company. The right of repurchase
lapses at the rate of 4,000 shares per month and lapses in full upon
consummation of an acquisition of the Company.
(10) All shares are held by Mr. McEvoy and his wife, Kim Worsencroft. At March
31, 1998, 213,334 of the shares held by Mr. McEvoy and Ms. Worsencroft
were subject to a right of repurchase by the Company at cost in the event
Mr. McEvoy ceases to be an employee of the Company. The right of
repurchase lapses as to 66,667 shares upon completion of the offering, as
to the remaining shares at the rate of approximately 3,667 shares per
month, and as to all shares upon consummation of an acquisition of the
Company.
(11) Includes 44,444 shares held by UTMA: Richard B. Pierce Custodian for
Garrett Dean Pierce, 44,444 shares held by UTMA: Audrey Jean Brandt
Custodian for Adrianna Jean Brandt Pierce, and 247,010 shares held by The
Richard Pierce and Audrey Brandt-Pierce Family Trust. As of March 31,
1998, 146,668 of the shares held by the Pierce Family Trust were subject
to a right of repurchase by the Company at cost in the event Mr. Pierce
ceases to be an employee of the Company. The right of repurchase lapses
at the rate of 3,333 shares per month and as to an additional 33,333
shares on November 18, 1998.
(12) All shares are held by Integra Holdings, L.P. As of March 31, 1998,
33,334 of the shares held by Integra Holdings were subject to a right of
repurchase by the Company at cost in the event Mr. Porter ceases to be a
director of the Company. The right of repurchase lapses at the rate of
2,778 shares per month.
56
<PAGE>
(13) Consists of an option held by Mr. Shugart to purchase 50,000 shares of
Common Stock. The option is fully exercisable although as of March 31,
1998, 33,332 of the shares issuable upon exercise of the option are
subject to a right of repurchase by the Company at cost in the event Mr.
Shugart ceases to be a director of the Company. The right of repurchase
lapses at the rate of 2,778 shares per month.
(14) Includes 350,868 shares issuable upon exercise of warrants and options to
purchase 900,200 shares, which options are immediately exercisable as of
March 31, 1998. Also includes 168,666 shares of Common Stock transferred
by officers and 3,334 shares of Common Stock acquired by an officer
subsequent to March 31, 1998, and 146,667 shares of Common Stock subject
to a right of purchase by certain other stockholders of the Company at
the initial price to public set forth on the cover page of this
Prospectus, which right expires 15 days following the date of this
Prospectus.
(15) Includes 43,334 shares of Common Stock issuable upon exercise of options.
These options are expected to be exercised prior to the closing of this
offering.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, the Company will be authorized to
issue 100,000,000 shares of Common Stock, $0.001 par value, and 10,000,000
shares of undesignated Preferred Stock, $0.001 par value. The following
description of the Company's capital stock does not purport to be complete and
is subject to and qualified in its entirety by the Company's Certificate of
Incorporation and Bylaws, which are included as exhibits to the Registration
Statement of which this Prospectus forms a part, and by the provisions of
applicable Delaware law.
COMMON STOCK
As of March 31, 1998, there were 18,531,813 shares of Common Stock
outstanding which were held of record by approximately 250 stockholders, as
adjusted to reflect the conversion of all outstanding shares of Preferred
Stock upon closing of this offering and the issuance of 562,446 shares of
Common Stock upon the exercise of warrants held by certain stockholders on or
before the closing of this offering.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy". In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable, and the shares of Common Stock to be issued upon
the closing of this offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the Common Stock. It is not
possible to state the actual effect of the issuance of any shares of Preferred
Stock upon the rights of holders of the Common Stock until the Board of
Directors determines the specific rights of the holders of such Preferred
Stock. However, the effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
impairing the liquidation rights of the Common Stock and delaying or
preventing a change in control of the Company without further action by the
stockholders. The Company has no present plans to issue any shares of
Preferred Stock.
WARRANTS
At March 31, 1998, there were warrants outstanding to purchase a total of
1,376,272 shares of Common Stock. The Company anticipates that warrants to
purchase 562,446 shares at a weighted average exercise price of $0.48 per
share will be exercised on or before completion of this offering. Warrants to
purchase 200,472 shares at $4.99 per share will expire in April 1999, warrants
to purchase 170,667 shares at $11.25 per share will expire in October 1999,
warrants to purchase 3,334 shares at $7.50 per share will expire in August
2001, warrants to purchase 417,701 shares at $0.33 per share will expire in
April 2002 and warrants to purchase 21,652 shares at $3.33 per share will
expire in February 2007. Subsequent to March 31, 1998, the Company issued
warrants to purchase 38,462 shares of Common Stock at $12.675 per share and
warrants to purchase 96,154 shares of Common Stock at $25.35 per share. These
warrants expire in June 2002.
58
<PAGE>
REGISTRATION RIGHTS
The holders of 13,192,523 shares of Common Stock and the holders of warrants
to purchase 222,124 shares of Common Stock (the "registrable securities") or
their permitted transferees are entitled to certain rights with respect to
registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the Company and the holders
of registrable securities. Under these registration rights, beginning 180 days
following the date of this Prospectus, holders of at least a majority of the
then outstanding registrable securities may require on one occasion that the
Company register their shares for public resale. The Company is obligated to
register these shares if the holders of a majority of such shares request
registration and only if the shares to be registered constitute at least 50%
of the then outstanding registrable securities or have an anticipated public
offering price of at least $2,000,000. In addition, holders of registrable
securities may require on five separate occasions that the Company register
their shares for public resale on Form S-3 or similar short-form registration,
provided the Company is eligible to use Form S-3 or similar short-form
registration and provided further that the value of the securities to be
registered is at least $500,000. Furthermore, in the event the Company elects
to register any of its shares of Common Stock for purposes of effecting any
public offering, the holders of registrable securities are entitled to include
their shares of Common Stock in the registration, subject however to the right
of the Company to reduce the number of shares proposed to be registered in
view of market conditions. All expenses in connection with any registration
(other than underwriting discounts and commissions) will be borne by the
Company. All registration rights will terminate four years following the
consummation of this offering, or, with respect to each holder of registrable
securities, at such time as the Company's shares are publicly traded and the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise and the
removal of incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire
control of the Company to first negotiate with the Company. The Company
believes that the benefits of increased protection of the Company's potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure the Company outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
The Company is subject to Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless (with certain exceptions) the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected
to have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held
by stockholders.
The Company's Certificate of Incorporation eliminates the right of
stockholders to act by written consent without a meeting. The Certificate of
Incorporation and Bylaws do not provide for cumulative voting in the election
of directors. The authorization of undesignated Preferred Stock makes it
possible
59
<PAGE>
for the Board of Directors to issue Preferred Stock with voting or other
rights or preferences that could impede the success of any attempt to change
control of the Company. These and other provisions may have the effect of
deferring hostile takeovers or delaying changes in control or management of
the Company. The amendment of any of these provisions would require approval
by holders of at least 66 2/3% of the outstanding Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Shareowner
Services, South St. Paul, Minnesota.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company, and there can be no assurance that a significant public market for
the Common Stock will develop or be sustained after this offering. Future
sales of substantial amounts of Common Stock (including shares issued upon
exercise of outstanding options and warrants) in the public market following
this offering could adversely affect market prices prevailing from time to
time and could impair the Company's ability to raise capital through sale of
its equity securities. As described below, no shares currently outstanding
will be available for sale immediately after this offering because of certain
contractual restrictions on resale. Sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding
20,979,410 shares of Common Stock (based upon shares outstanding as of April
30, 1998 and assuming the exercise of options to purchase 43,334 shares by a
certain Selling Stockholder), assuming no exercise of the Underwriters' over-
allotment option and no exercise of outstanding options or warrants that do
not expire prior to completion of this offering. Of these shares, the
2,260,000 shares sold in this offering will be freely tradable without
restriction under the Securities Act except for any shares purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 18,719,410 shares of Common Stock held by
existing stockholders are "Restricted Shares" as that term is defined in Rule
144. All such Restricted Shares are subject to lock-up agreements providing
that, with certain limited exceptions, the stockholder will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company that
are substantially similar to the Common Stock, including but not limited to
any securities that are convertible into or exchangeable for, or that
represent the right to receive, Common Stock or any such substantially similar
securities (other than pursuant to employee stock option plans existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of the lock-up agreement) for a period of 180 days
after the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. As a result of these lock-up agreements, notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144,
144(k) and 701, none of these shares will be salable until 181 days after the
date of this Prospectus. Beginning 181 days after the date of this Prospectus,
approximately 14,684,676 Restricted Shares will be eligible for sale in the
public market, all of which are subject to volume limitations under Rule 144,
except 4,265,793 shares. Thereafter, approximately 3,417,312 Restricted Shares
will become eligible for sale between the end of the lock-up period and March
31, 1999 and the remaining 617,422 Restricted Shares will become eligible for
sale one year from the date of this Prospectus. In addition, as of April 30,
1998, there were outstanding 1,612,332 options (of which options for 43,334
shares are expected to be exercised on or before the closing of this offering)
and 948,442 warrants to purchase Common Stock. All such options and warrants
are subject to lock-up agreements. Goldman, Sachs & Co. may, in their sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements.
60
<PAGE>
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 200,000 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to the Company who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders
of Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, all Rule 701 shares are
subject to lock-up agreements and will only become eligible for sale at the
earlier of the expiration of the 180-day lock-up agreements or no sooner than
90 days after the offering upon obtaining the prior written consent of
Goldman, Sachs & Co.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the 1996 Equity Incentive Plan, the 1998 Stock Plan
and the 1998 Employee Stock Purchase Plan (collectively the "Incentive Stock
Plans"). See "Management--Incentive Stock Plans". Based on the number of
shares subject to outstanding options as of April 30, 1998 and currently
reserved for issuance under the Incentive Stock Plans, such registration
statement would cover approximately 2,912,332 shares. Such registration
statement will automatically become effective upon filing. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market immediately after the 180-day lock-up agreements expire.
Also beginning six months after the date of this offering, holders of
13,192,523 Restricted Shares and holders of warrants to purchase 222,124
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares for sale in the public market. See "Description of
Capital Stock--Registration Rights". Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
affiliates) immediately upon the effectiveness of such registration.
61
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The Commission maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California. As of the date of this prospectus, WS Investment Company 97A, an
investment partnership composed of certain current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, beneficially owns an aggregate of 12,829 shares of the Company's
Common Stock.
EXPERTS
The consolidated balance sheets as of September 30, 1996 and 1997 and the
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for the period from February 2, 1996 (date of incorporation)
through September 30, 1996 and the year ended September 30, 1997 included in
this Prospectus have been included herein in reliance on the report of Coopers
& Lybrand L.L.P., Independent Accountants, which report is given on the
authority of that firm as experts in auditing and accounting.
62
<PAGE>
INKTOMI CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Changes in Stockholders' (Deficiency) Equity..... F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Inktomi Corporation:
We have audited the accompanying balance sheets of Inktomi Corporation as of
September 30, 1996 and 1997, and the related statements of operations, changes
in stockholders' (deficiency) equity, and cash flows for the period from
February 2, 1996 (date of inception) through September 30, 1996 and the year
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inktomi Corporation as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for the period from February 2, 1996 (date of inception) through
September 30, 1996 and the year ended September 30, 1997, in conformity with
generally accepted accounting principles.
San Francisco, California
November 3, 1997
- --------
The foregoing report is in the form that will be signed upon the completion of
the 2:3 reverse stock split as described in Note 1 to the Consolidated
Financial Statements.
San Francisco, California
April 15, 1998
F-2
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 1998
1996 1997 1998 PRO FORMA
------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 415,847 $ 6,323,895 $ 17,133,295 $17,405,519
Accounts receivable,
net of allowances of
$50,000, $80,519 and
$174,458,
respectively.......... 127,798 829,427 1,186,365 1,186,365
Prepaid expenses....... 37,574 142,255 477,274 477,274
Other current assets... -- 20,431 25,155 25,155
----------- ------------ ------------ ------------
Total current assets... 581,219 7,316,008 18,822,089 19,094,313
Property and equipment,
net.................... 1,890,717 6,808,469 6,414,178 6,414,178
Other assets............ 48,860 192,320 58,126 58,126
----------- ------------ ------------ ------------
Total assets........... $ 2,520,796 $ 14,316,797 $ 25,294,393 $ 25,566,617
=========== ============ ============ ============
LIABILITIES AND
STOCKHOLDERS'
(DEFICIENCY) EQUITY
Current liabilities:
Current portion of
notes payable......... $ 3,332,759 $ 2,449,601 $ 2,514,764 $ 2,514,764
Current portion of
capital lease
obligations........... -- -- 331,228 331,228
Accounts payable....... 388,665 927,044 1,266,311 1,266,311
Accrued liabilities.... 458,295 1,147,217 1,935,753 1,935,753
Deferred revenue....... -- 714,822 794,309 794,309
----------- ------------ ------------ ------------
Total current
liabilities........... 4,179,719 5,238,684 6,842,365 6,842,365
Notes payable........... -- 5,029,411 4,189,042 4,189,042
Capital lease
obligations, less
current portion........ -- -- 1,001,546 1,001,546
----------- ------------ ------------ ------------
Total liabilities...... 4,179,719 10,268,095 12,032,953 12,032,953
----------- ------------ ------------ ------------
Commitments (Note 4)
Stockholders'
(deficiency) equity:
Series A through E
convertible Preferred
Stock, $.001 par
value:
Authorized: 14,000,000
shares in 1996,
17,080,000 shares in
1997, 20,680,000
shares at March 31,
1998 (unaudited) and
no pro forma shares
(unaudited); Issued
and outstanding:
10,072,468 shares in
1996, 14,938,121
shares in 1997,
19,460,486 shares at
March 31, 1998
(unaudited) and no pro
forma shares
(unaudited);
(liquidation value:
$21,408,156 at March
31,1998).............. 10,073 14,938 19,461 --
Common Stock, $.001 par
value:
Authorized: 33,333,333
shares in 1996 and
1997, 33,666,667
shares at March 31,
1998 (unaudited) and
33,666,667 shares pro
forma (unaudited);
Issued and
outstanding: 2,467,137
shares in 1996,
4,632,208 shares in
1997, 4,931,468 shares
at March 31, 1998
(unaudited) and
18,531,813 shares pro
forma (unaudited)..... 2,467 4,632 4,931 18,532
Additional paid-in
capital............... 4,404,725 15,635,127 32,724,110 33,002,194
Other.................. (2,541,757) 590,662 586,711 586,711
Accumulated deficit.... (3,534,431) (12,196,657) (20,073,773) (20,073,773)
----------- ------------ ------------ ------------
Total stockholders'
(deficiency) equity... (1,658,923) 4,048,702 13,261,440 13,533,664
----------- ------------ ------------ ------------
Total liabilities and
stockholders'
(deficiency) equity.. $ 2,520,796 $ 14,316,797 $ 25,294,393 $ 25,566,617
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FEBRUARY 2, 1996 FOR THE SIX
(DATE OF INCEPTION) FOR THE YEAR MONTHS ENDED
THROUGH ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, ------------------------
1996 1997 1997 1998
------------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Network applications... -- $ 60,000 -- $ 690,688
Search services........ $ 530,088 5,725,120 $2,282,341 5,185,215
---------- ---------- ---------- ----------
Total revenues...... 530,088 5,785,120 2,282,341 5,875,903
Cost of revenues........ 238,756 1,511,933 466,103 1,694,849
---------- ---------- ---------- ----------
Gross profit........ 291,332 4,273,187 1,816,238 4,181,054
Operating expenses:
Sales and marketing.... 898,227 7,043,494 2,661,186 6,521,317
Research and
development........... 1,482,406 4,210,482 1,665,203 3,813,823
General and
administrative........ 1,341,244 1,485,539 601,957 1,638,480
---------- ---------- ---------- ----------
Operating loss...... 3,430,545 8,466,328 3,112,108 7,792,566
Interest income......... (6,841) (175,108) (14,523) (148,589)
Interest expense........ 109,927 369,356 92,218 232,339
---------- ---------- ---------- ----------
Loss before income
taxes.............. 3,533,631 8,660,576 3,189,803 7,876,316
Provision for income
taxes.................. 800 1,650 850 800
---------- ---------- ---------- ----------
Net loss............ $3,534,431 $8,662,226 $3,190,653 $7,877,116
========== ========== ========== ==========
Basic and diluted net
loss per share......... $ (1.88) $ (2.96) $ (1.29) $ (1.65)
========== ========== ========== ==========
Weighted average shares
outstanding used in per
share calculation...... 1,883,701 2,927,318 2,477,045 4,765,532
========== ========== ========== ==========
Pro forma basic and
diluted net loss per
share.................. $ (0.72) $ (0.46)
========== ==========
Weighted average shares
outstanding used in pro
forma per share
calculation............ 12,029,713 17,135,058
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE PERIOD FROM FEBRUARY 2, 1996 (DATE OF INCEPTION)
THROUGH SEPTEMBER 30, 1996, THE YEAR ENDED SEPTEMBER 30, 1997
AND THE SIX MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL OTHER DEFICIT TOTAL
---------- ------- --------- ------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transfer of technology.. $(3,132,759) $(3,132,759)
Issuance of Common
Stock................... 2,186,470 $2,186 $ 42,948 45,134
Issuance of Preferred
Stock................... 10,072,468 $10,073 4,011,513 4,021,586
Issuance of Common Stock
warrants................ 910,000 910,000
Conversion of warrants
to Common Stock......... 280,667 281 350,264 (318,998) 31,547
Net loss................ $ (3,534,431) (3,534,431)
---------- ------- --------- ------ ----------- ----------- ------------ -----------
Balance, September 30,
1996.................... 10,072,468 10,073 2,467,137 2,467 4,404,725 (2,541,757) (3,534,431) (1,658,923)
Exercise of stock
options................. 1,956,904 1,957 775,056 777,013
Issuance of Preferred
Stock, net of issuance
costs of $109,471....... 4,785,653 4,785 10,161,959 10,166,744
Issuance of Preferred
Stock upon conversion of
note payable............ 80,000 80 199,920 200,000
Forgiveness of note
payable related to
transfer of technology.. 3,132,759 3,132,759
Issuance of Preferred
Stock warrants.......... 160 160
Stock options granted to
consultants............. 93,175 93,175
Exercise of stock
options in exchange for
note receivable......... 208,167 208 93,467 (93,675) --
Net loss................ (8,662,226) (8,662,226)
---------- ------- --------- ------ ----------- ----------- ------------ -----------
Balance, September 30,
1997.................... 14,938,121 14,938 4,632,208 4,632 15,635,127 590,662 (12,196,657) 4,048,702
Exercise of stock
options................. 295,927 296 201,396 201,692
Exercise of Common Stock
warrants................ 3,333 3 24,997 25,000
Exercise of Preferred
Stock warrants.......... 1,224,545 1,225 4,070,994 4,072,219
Issuance of Preferred
Stock, net of issuance
costs of $1,220,847..... 3,297,820 3,298 12,791,596 12,794,894
Foreign currency
translation............. (3,951) (3,951)
Net loss................ (7,877,116) (7,877,116)
---------- ------- --------- ------ ----------- ----------- ------------ -----------
Balance, March 31, 1998
(unaudited)............. 19,460,486 $19,461 4,931,468 $4,931 $32,724,110 $ 586,711 $(20,073,773) $13,261,440
========== ======= ========= ====== =========== =========== ============ ===========
</TABLE>
F-5
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FEBRUARY 2, 1996 FOR THE YEAR FOR THE SIX MONTHS
(DATE OF INCEPTION) ENDED ENDED MARCH 31,
THROUGH SEPTEMBER 30, ------------------------
SEPTEMBER 30, 1996 1997 1997 1998
------------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(3,534,431) $(8,662,226) $(3,190,653) $(7,877,116)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 336,115 1,384,570 445,541 1,387,276
Noncash consulting
services............. 390,000 93,175 93,175 --
Other................. -- -- -- (3,951)
Change in assets and
liabilities:
Increase in accounts
receivable.......... (127,798) (701,629) (88,998) (356,938)
Increase in prepaid
expenses and other
assets.............. (86,434) (268,572) (9,362) (205,549)
Increase in accounts
payable............. 388,665 124,980 698,266 339,267
Increase in accrued
liabilities......... 458,295 688,922 205,593 788,536
Increase in deferred
revenue............. -- 714,822 215,562 79,487
----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (2,175,588) (6,625,958) (1,630,876) (5,848,988)
----------- ----------- ----------- -----------
Cash flows used in
(provided by)
investing activities:
Purchase of property
and equipment........ (2,226,832) (5,888,923) (464,466) (468,072)
Proceeds from sale of
equipment............ -- -- -- 927,627
----------- ----------- ----------- -----------
Net cash used in
(provided by)
investing
activities......... (2,226,832) (5,888,923) (464,466) 459,555
Cash flows from
financing activities:
Proceeds from note
payable.............. 500,000 7,746,424 2,600,000 156,893
Repayments on notes
payable.............. -- (267,412) (223,846) (932,099)
Payments on
obligations under
capital lease........ -- -- -- (119,766)
Proceeds from issuance
of unsecured
promissory note...... -- 2,000,000 -- --
Repayments of
unsecured promissory
note................. -- (2,000,000) -- --
Payments of
convertible notes
payable.............. (300,000) -- -- --
Proceeds from issuance
of Preferred Stock,
net of issuance
costs................ 3,631,586 10,166,744 233,235 12,794,894
Proceeds from exercise
of stock options and
warrants............. 31,547 777,013 12,000 4,298,911
Proceeds from issuance
of Common Stock...... 45,134 -- -- --
Proceeds from issuance
of Common and
Preferred Stock
warrants............. 910,000 160 -- --
----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 4,818,267 18,422,929 2,621,389 16,198,833
----------- ----------- ----------- -----------
Increase in cash and
cash equivalents...... 415,847 5,908,048 526,047 10,809,400
Cash and cash
equivalents at
beginning of period... -- 415,847 415,847 6,323,895
----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 415,847 $ 6,323,895 $ 941,894 $17,133,295
=========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest............. $ -- $ 380,487 $ -- $ 202,665
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE
OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Technology acquired for
notes payable......... $ 3,132,759 $ -- $ -- $ --
=========== =========== =========== ===========
Accounts payable
related to purchase of
PP&E.................. $ -- $ 413,399 $ 398,910 $ 126,160
=========== =========== =========== ===========
Forgiveness of note
payable related to
technology acquired... $ -- $ 3,132,759 $ -- $ --
=========== =========== =========== ===========
Series B Preferred
Stock issued as
compensation for
services received..... $ 390,000 $ -- $ -- $ --
=========== =========== =========== ===========
Exercise of Common
Stock options in
exchange for note
receivable............ $ -- $ 93,675 $ -- $ --
=========== =========== =========== ===========
Stock options issued as
compensation for
services rendered..... $ -- $ 93,175 $ -- $ --
=========== =========== =========== ===========
Conversion of note
payable into Preferred
Stock................. $ -- $ 200,000 $ 200,000 $ --
=========== =========== =========== ===========
Assets acquired under
capital lease......... $ -- $ -- $ -- $ 524,913
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
(1) SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
Inktomi was formed in February 1996 to develop and market scalable software
applications designed to significantly enhance the performance and
intelligence of large-scale networks. In May 1996, the Company released the
first commercial application based on its core technology, a search engine
that enables customers to provide a variety of Internet search services to end
users. In December 1997, the Company first licensed Traffic Server, the
Company's second application, which is a network cache product designed to
address capacity constraints in high-traffic network routes.
REVERSE STOCK SPLIT:
In April 1998, the Board of Directors approved a 2:3 reverse stock split of
the Company's Common Stock which is subject to stockholder approval. All share
and per share information in the accompanying consolidated financial
statements and notes thereto have been restated for such stock split.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Inktomi Limited, which was formed in October
1997. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
REVENUE RECOGNITION:
Search service revenues are comprised of search advertising, licensing, and
maintenance fees. Advertising revenues are recognized in the period that the
advertisement is displayed and comprised 90%, 89%, 82% and 69% of total
revenues for the period from February 2, 1996 (date of inception) through
September 30, 1996, for the year ended September 30, 1997 and for the six
months ended March 31, 1997 and 1998, respectively. A significant portion of
the Company's advertising revenues are from a search service which is
maintained by the Company and marketed by Wired Digital, Inc. ("Wired").
Revenues from this agreement are recorded in full and amounts allocable to the
partner for marketing costs are included in sales and marketing expenses.
Search license revenues are recognized as amounts are earned under the terms
of applicable agreements, provided no significant Company obligations exist
and collection of the resulting receivable is probable. Fees for maintenance
and support services are deferred and recognized ratably over the service
period.
A portion of the advertising on the Wired search site is exchanged for
advertisements on the Internet sites of other companies. These revenues and
marketing expenses are recorded at the fair value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered
on the Wired site,
F-7
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
and expense from barter transactions is recognized when advertisements are
delivered on the other companies' Internet sites. Barter revenues and expenses
were approximately $133,000, $1,580,000, $738,801 and $864,961 for the period
from February 2, 1996 (date of inception) through September 30, 1996, for the
year ended September 30, 1997 and for the six months ended March 31, 1997 and
1998, respectively.
Network application revenues for the year ended September 30, 1997
represented fees for the modification of the Company's Traffic Server product
to run on a hardware partner's platform. Revenue is recognized as contractual
and developmental milestones are achieved.
COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER
SHARE:
Basic and diluted net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares, comprising the incremental common shares issuable
upon the exercise of stock options and warrants and upon conversion of
convertible Preferred Stock, have not been included, except as provided below,
as such shares are anti-dilutive.
Pro forma net loss per share for the period from February 2, 1996 through
September 30, 1996, the year ended September 30, 1997 and the six months ended
March 31, 1998 assumes that the common shares issuable upon conversion of the
outstanding convertible Preferred Stock and certain warrants had been
outstanding during such period.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents are stated at cost, which approximates fair value.
The Company includes in cash equivalents all highly liquid investments which
mature within three months of their purchase date. Cash equivalents consist
primarily of commercial paper and other debt instruments, money market funds
and U.S. Treasury bills.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three years.
INCOME TAXES:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense is the tax payable for the period
and the change during the period in deferred tax assets and liabilities.
SOFTWARE DEVELOPMENT COSTS:
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or
F-8
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
Otherwise Marketed. Under the standard, capitalization of software development
costs begins upon the establishment of technological feasibility which, for
the Company, is upon completion of a working model. To date, all such amounts
have been insignificant, and accordingly, the Company has charged all such
costs to research and development expenses.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. SFAS No. 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. No such impairments have
been identified to date. The Company assesses the impairment of long-lived
assets when events or changes in circumstances indicate they the carrying
value of an asset may not be recoverable.
BUSINESS RISK AND CONCENTRATION OF CREDIT RISK:
The Company operates in the Internet industry, which is new, rapidly
evolving and intensely competitive.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
(including money market accounts). The Company places its temporary cash
investments with two major financial institutions.
The Company performs ongoing credit evaluations, does not require
collateral, and maintains reserves for potential credit losses on customer
accounts when deemed necessary. For the period from February 2, 1996 (date of
inception) through September 30, 1996, one customer accounted for 90% of
revenues, and at September 30, 1996, this customer accounted for 100% of
accounts receivable. For the year ended September 30, 1997, three customers
accounted for approximately 79%, 6% and 13%, respectively, of all revenue
generated by the Company, and 62%, 37% and 0% of accounts receivable at
September 30, 1997, respectively. For the six months ended March 31, 1997 the
same customers accounted for approximately 77%, 22% and 0%, respectively, of
all revenues generated by the Company. For the six months ended March 31,
1998, the same customers accounted for 59%, 6% and 20%, respectively, of all
revenues generated by the Company, and 26%, 1% and 8% of accounts receivable
at March 31, 1998, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
During 1997, the Financial Accounting Standards Board released Statements of
Financial Accounting Standards No. 128, No. 129, Disclosure of Information
About Capital Structure, No. 130, Reporting Comprehensive Income, and No. 131,
Disclosure About Segments of an Enterprise and Related Information, all
effective for the year ended September 30, 1999. The Company is currently
determining the disclosures which may be required under these pronouncements.
F-9
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
(2) PROPERTY AND EQUIPMENT:
Property and equipment consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
------------- ------------- ----------
<S> <C> <C> <C>
Computer equipment................... $2,047,029 $7,956,960 $8,601,101
Office equipment, furniture and fix-
tures............................... 99,779 448,512 739,302
Leasehold improvements............... 80,024 43,225 101,279
---------- ---------- ----------
2,226,832 8,448,697 9,441,682
Less accumulated depreciation and am-
ortization.......................... 336,115 1,640,228 3,027,504
---------- ---------- ----------
Property and equipment, net.......... $1,890,717 $6,808,469 $6,414,178
========== ========== ==========
</TABLE>
In May 1997, the Company recognized a loss for the abandonment of leasehold
improvements with a cost of $80,457 and accumulated amortization of $34,542
due to a corporate relocation. Assets acquired under capitalized lease
obligations are included in computer equipment and office equipment and
totaled $0, $0 and $1,452,540 (including equipment previously purchased), with
related amortization of $0, $0 and $119,766, as of September 30, 1996 and 1997
and March 31, 1998, respectively.
(3) INCOME TAXES:
Net deferred tax assets comprise:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Net operating loss carryforwards -- federal and
state......................................... $ 1,586,755 $ 4,005,740
Research and experimentation credit
carryforwards................................. 56,740 132,168
Other liabilities and reserves................. 36,453 83,548
Property and equipment......................... 21,127 (209,967)
Acquired technology............................ 1,012,977 593,215
Deferred revenue............................... -- 356,513
Valuation allowance............................ (2,714,052) (4,961,217)
----------- -----------
Net deferred tax asset..................... -- --
=========== ===========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. Differences
between the federal statutory and effective tax rates were primarily due to
the nonrealizability of net operating losses.
At September 30, 1997, the Company had the following carryforwards available
to reduce future taxable income and income taxes:
<TABLE>
<CAPTION>
1997
---------------------
FEDERAL STATE
---------- ----------
<S> <C> <C>
Net operating loss carryforwards....................... $9,885,167 $9,927,603
Research and experimentation credit carryforwards...... 83,636 48,532
</TABLE>
The federal and state net operating loss carryforwards expire through 2012
and 2005, respectively, and the research and experimentation credits expire in
2002.
For federal and state tax purposes, the Company's net operating loss and
research and experimentation credit carryforwards could be subject to certain
limitations on annual utilization if certain changes in ownership were to
occur, as defined by federal and state tax laws.
F-10
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
(4) COMMITMENTS:
The Company has entered into noncancellable operating leases for office
space and equipment and capital leases for equipment with original terms
ranging from six to 60 months. The future minimum lease payments under these
leases at March 31, 1998, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Six months ending September 30, 1998................ $ 477,157 $293,807
Years ending:
September 30, 1999................................. 1,246,068 587,613
September 30, 2000................................. 1,130,417 587,613
September 30, 2001................................. 782,662 373,062
September 30, 2002................................. 778,662 --
and thereafter..................................... 64,889 --
---------- ----------
Total minimum lease payments.......................... $4,479,855 1,842,095
==========
Less amount representing interest..................... (509,321)
----------
Present value of minimum lease payments............... 1,332,774
Less current portion.................................. (331,228)
----------
$1,001,546
==========
</TABLE>
Rent expense for the period from inception through September 30, 1996 was
$83,886, and for the year ended September 30, 1997 was $312,660 and for the
six months ended March 31, 1997 and 1998 was $134,636 and $680,126,
respectively.
F-11
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
(5) NOTES PAYABLE AND LINE OF CREDIT:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
------------- ------------- -----------
<S> <C> <C> <C>
Note payable to stockholders (1)... $ 3,332,759 $ -- $ --
Line of credit (2)................. -- -- --
Bank equipment note (3)............ -- 1,750,000 1,750,000
Bank term note (4)................. -- 1,833,334 1,500,000
Notes payable (5).................. -- 3,396,423 3,031,459
Other notes payable (6)............ -- 499,255 422,347
----------- ----------- -----------
3,332,759 7,479,012 6,703,806
Less current portion............... (3,332,759) (2,449,601) (2,514,764)
----------- ----------- -----------
$ -- $ 5,029,411 $ 4,189,042
=========== =========== ===========
</TABLE>
- --------
(1) In February 1996, the Company issued a $500,000 unsecured promissory note
for cash, due on or before January 31, 1997, with a stated interest rate
of 6.0% per annum, convertible (principal and accrued interest) into
Series B Preferred Stock, to certain stockholders of the Company. At
September 30, 1996, $200,000 of principal and $59,935 of accrued interest
was outstanding. In October 1996, the note was converted into 80,000
shares of Series B Preferred Stock.
In connection with the formation of the Company, the founders transferred
technology that was under development in exchange for a promissory note in
the amount of $3,132,759 to the Company which represented in-process
research and development costs with no basis at the date of transfer.
Because the item transferred held no basis, no value was assigned and the
face amount of the note was charged to reduction in capital. The note had
a stated interest rate of 6.0% per annum and was collateralized by
substantially all of the technology under development. In April 1997, the
founders forgave the note payable in exchange for warrants to purchase
417,701 shares of Common Stock exercisable at $0.33 per share. Due to the
related party nature of the transaction, no accounting recognition was
given.
(2) The Company has a $2,500,000 revolving line of credit collateralized by
substantially all assets. The line requires monthly payments of interest
only at prime (8.5% at March 31, 1998) and any unpaid principal and
interest will be due on May 2, 1998. At March 31, 1998, the Company had a
letter of credit of $500,000 outstanding against the line and future draw
downs are contingent upon the Company raising additional financing of at
least $4,000,000. At March 31, 1998 the Company had no borrowings
outstanding. The bank credit agreement requires the Company to comply with
certain financial covenants related to tangible net worth, a ratio of debt
to net worth, debt service coverage, liquidity coverage and quarterly
profitability. Pursuant to the agreement, the Company may not distribute
cash dividends. As of March 31, 1998, the Company was in compliance with
the covenants.
(3) The bank equipment note was interest only until February 1998 and then
payable in equal monthly payments of $48,611 plus interest at 0.5% over
prime (a total of 9.0% at March 31, 1998) through February 2001. The note
has collateralization and covenant requirements consistent with the bank
line of credit as described above.
(4) The bank term note is payable in equal monthly payments of $83,333 plus
interest at 0.5% over prime (9.0% at March 31, 1998) through June 1999.
The note has collateralization and covenant requirements consistent with
the bank line of credit as described above.
(5) The two notes payable are payable in equal monthly payments of $102,895
and $4,741 which includes interest of 5.7% and 5.6% through September 2000
and November 2000, respectively. The notes are collateralized by all
equipment purchased with the notes.
(6) Other notes payable are payable in equal monthly payments totaling $19,680
through March 2000, with a final balloon payment of $60,000. The notes
payments include interest of 18.0%. The notes are collateralized by all
equipment purchased with the notes.
F-12
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
Scheduled maturities of long-term debt at March 31,1998 are as follows:
<TABLE>
<S> <C>
Six months ending September 30, 1998............................ $ 1,274,680
Years ending:
September 30, 1999............................................ 2,622,929
September 30, 2000............................................ 2,484,322
September 30, 2001............................................ 321,875
-----------
$ 6,703,806
===========
</TABLE>
The book value of notes payable approximated fair value as such debt
agreements were recently negotiated.
(6) ACCRUED LIABILITIES:
Accrued liabilities comprise:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
------------- ------------- ----------
<S> <C> <C> <C>
Accrued payroll, vacation and
bonuses............................ $117,394 $1,078,938 $1,265,633
Other accrued liabilities........... 340,901 68,279 670,120
-------- ---------- ----------
Total accrued liabilities....... $458,295 $1,147,217 $1,935,753
======== ========== ==========
</TABLE>
(7) OTHER RELATED PARTY TRANSACTIONS:
In April 1996, the Company entered into a consulting agreement for
management services with certain stockholders in conjunction with a securities
purchase agreement. While no direct compensation was required under the
agreement, the Company made fixed monthly payments through November 1996 of
$17,500 to cover expenses.
F-13
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
(8) EARNINGS PER SHARE:
The following is a reconciliation of the numerator and denominator of basic
and diluted EPS (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
---------------- ------------------
1996 1997 1997 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator--Basic and Diluted EPS
Net loss............................ $(3,534) $(8,662) $ (3,191) $ (7,877)
======= ======= ======== ========
Denominator--Basic and Diluted EPS
Weighted average Common Stock
outstanding........................ 1,884 2,927 2,477 4,766
======= ======= ======== ========
Basic and diluted loss per share...... $ (1.88) $ (2.96) $ (1.29) $ (1.65)
======= ======= ======== ========
Pro forma:
Denominator--Basic and Diluted EPS
Weighted average Common Stock
outstanding........................ 2,927 4,766
Conversion of Preferred Stock and
warrants........................... 9,103 12,369
------- --------
Total weighted average Common Stock
outstanding pro forma.............. 12,030 17,135
======= ========
Basic and diluted pro forma loss per
share................................ $(0.72) $ (0.46)
======= ========
</TABLE>
(9) STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
As of March 31, 1998, the Company had six series of convertible Preferred
Stock authorized and outstanding. The holders of the various Preferred Stock
generally have the same rights unless specified.
Dividends:
The holders of the outstanding Common and Preferred Stock are entitled to
receive in any fiscal year, when and if declared by the Board of Directors,
out of any funds legally available, cash dividends at the same rate per share
for all classes of stock. The right to dividends is not cumulative, and no
dividends have been declared through March 31, 1998.
Conversion Rights:
At the option of the holder, each share of Series D, D1 and E Preferred
Stock is convertible, at any time, into shares of Common Stock. On or after
February 2, 1998, at the option of the holder, each share of Series A, B and C
Preferred Stock is convertible, at any time, into shares of Common Stock.
Series C Preferred Stock is convertible into Common Stock on a .76-for-one
basis. All other preferred shares are convertible into Common Stock on a .67-
for-one basis, subject to adjustment resulting from future capital
transactions.
In addition, each share of Series A, B and C Preferred Stock automatically
converts into Common Stock: (i) immediately prior to the closing of a firm
commitment underwritten public offering, provided
F-14
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
the net proceeds to the Company are at least $7,500,000 and the public
offering price per share is at least $3.75 per share; (ii) upon consolidation
or merger of the Company with or into another corporation in which the holders
of the outstanding shares do not retain stock representing a majority of the
voting power of the surviving corporation; or (iii) upon a sale of all or
substantially all of the assets of the Company. Each share of Series D, D1 and
E Preferred Stock automatically converts into Common Stock immediately prior
to the closing of a firm commitment underwritten public offering, provided the
net proceeds to the Company are at least $15,000,000 and the public offering
price per share is at least $9.57 share.
Liquidation Preference:
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series C, D, D1 and E
Preferred Stock retain liquidation preference over Series A and B Preferred
Stock equal to the original issue price of each series of stock ($5.00,
$2.217, $3.3255 and $4.25 per share, respectively) plus any declared but
unpaid dividends. Series A and B Preferred Stock retain liquidation preference
over Common Stock equal to the original issuance price ($0.0005 per share) for
each series plus declared but unpaid dividends. If there are any available
funds and assets remaining after payments or distributions are made to the
holders of Preferred Stock for their full preferential amounts, then all such
remaining funds and assets will be distributed pro rata among the holders of
the then outstanding Common Stock and Series D, D1 and E Preferred Stock,
until holders of Series D, D1 and E Preferred Stock have received an aggregate
amount equal to $6.651, $9.9765 and $12.75 per share, respectively, after
which the remaining available funds and assets shall be distributed pro rata
among holders of Common Stock.
Voting Rights:
The holders of Series A, D, D1 and E Preferred Stock and the holders of
Common Stock are entitled to notice of any stockholders' meeting and to vote
as a single class upon any matter submitted to the stockholders for a vote, as
follows: (i) each holder of Series A, D, D1 and E Preferred Stock have one
vote for each full share of Common Stock into which their respective shares of
Preferred Stock would be convertible on the record date for the vote, and (ii)
each holder of Common Stock has one vote per share of Common Stock. Except as
otherwise required by law, the holders of shares of Series B and C Preferred
Stock have no voting rights.
(10) WARRANTS:
In 1996 and 1997, the Company issued warrants to purchase Common and
Preferred Stock to investors and an equipment lease provider. At March 31,
1998 such warrants were as follows:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
COMMON STOCK EXERCISE PRICE EXPIRATION DATES
------------ -------------- -----------------------
<C> <C> <C> <S>
Common Stock.............. 3,334 $ 25,000 August 2001
Common Stock.............. 519,586 $ 58,453 Upon closing of an
initial public offering
Common Stock.............. 417,701 $ 137,841 April 2001
Common Stock.............. 170,667 $1,920,000 October 1999
Series D Preferred Stock.. 21,652 $ 71,999 February 2007
Series D1 Preferred Stock. 42,860 $ 213,771 Upon the closing of an
initial public offering
or April 1998, if
earlier.
Series D1 Preferred Stock. 200,472 $1,000,000 April 1999
</TABLE>
F-15
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
The fair value of warrants issued in connection with the various financing
and purchase transactions does not have a material effect on the financial
statements.
The Company has reserved 19,345,462 shares of Common Stock for the exercise
of Common Stock warrants and conversion and/or exercise of Preferred Stock and
Preferred Stock warrants.
(11) STOCK OPTIONS:
Pursuant to the Inktomi Corporation 1996 Equity Incentive Plan (the "Plan")
as amended, employees, directors and consultants of the Company may be granted
options to purchase shares of Common Stock. At March 31, 1998, 4,333,333
shares of Common Stock were reserved for issuance pursuant to the Plan.
Options granted under the Plan include incentive stock options and
nonqualified stock options. All stock options granted under the Plan are
exercisable but subject to repurchase at cost in the event that the individual
ceases to be an employee or provide services to the Company. Repurchase rights
lapse according to various vesting schedules (generally over 50 months). Prior
to adopting the Plan, the Company granted nonqualified stock options to
purchase Common Stock to certain employees and consultants.
A summary of the activity under the Plan is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AGGREGATE AVERAGE
EXERCISE PRICE EXERCISE EXERCISE
SHARES PER SHARE PRICE PRICE
---------- -------------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at February 2,
1996....................... -- -- -- --
Granted..................... 2,450,693 $0.11-$0.45 $ 939,408 $0.384
Canceled.................... (180,000) $0.11-$0.45 $ (69,750) $0.387
---------- ----------- ---------- ------
Outstanding at September 30,
1996....................... 2,270,693 $0.11-$0.45 $ 869,658 $0.384
Granted..................... 1,988,680 $0.33-$1.95 $1,126,906 $0.567
Exercised................... (2,165,071) $0.11-$0.45 $ (870,668) $0.402
Canceled.................... (174,227) $0.45 $ (78,402) $0.45
---------- ----------- ---------- ------
Outstanding and exercisable
at September 30, 1997...... 1,920,075 $0.11-$1.95 $1,047,494 $0.546
========== =========== ========== ======
</TABLE>
At September 30, 1997, 1,333,326 shares were no longer subject to
repurchase. Of the stock options exercised, 459,399 shares were no longer
subject to repurchase.
The following table summarizes information with respect to stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 9/30/97 LIFE (YEARS) PRICE AT 9/30/97 PRICE
-------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 143,823 8.62 $0.11 143,823 $0.11
$0.33-$0.45 1,613,587 9.15 $0.44 1,613,587 $0.44
$1.95 162,665 9.94 $1.95 162,667 $1.95
</TABLE>
F-16
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS OF MARCH 31, 1998 AND WITH RESPECT TO THE SIX MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED.
The following information concerning the Plan is provided in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123). The Company accounts for the Plan in accordance
with Accounting Principles Board (APB) Opinion No. 25 and related
Interpretations.
The fair value of each employee and director stock option grant has been
estimated on the date of grant using the minimum value method with the
following weighted average assumptions used for grants in September 30, 1996
and 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Risk-free interest rates......................... 6.48%-6.60% 6.00%-6.47%
Expected life.................................... 5 5
Dividends........................................ $0 $0
</TABLE>
The weighted average fair value per option for employee and director stock
options granted in 1996 and 1997 were $0.105 and $0.15, respectively.
The following comprises the pro forma income information pursuant to the
provisions of SFAS 123:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Net loss--Historical............................. $3,534,431 $8,662,226
Net loss--Pro Forma.............................. $3,576,847 $9,021,251
</TABLE>
These pro forma amounts may not be representative of the effects on pro
forma net income (loss) for future years as options vest over several years
and additional awards are generally made each year.
(12) 401(k) PROFIT SHARING PLAN:
In May 1996, the Company established a 401(k) Profit Sharing Plan (the
"401(k) Plan") which covers substantially all employees. Under the 401(k)
Plan, employees are permitted to contribute up to 20% of gross compensation
not to exceed the annual 402(g) limitation for any plan year. Discretionary
contributions may be made by the Company. No contributions have been made by
the Company during the period ended September 30, 1997.
(13) SUBSEQUENT EVENT:
In April 1998, the Board of Directors authorized management of the Company
to file a Registration Statement with the Securities Exchange Commission
covering the proposed sale of shares of its Common Stock to the public. Upon
completion of this proposed sale, all outstanding shares of the Company's
convertible Preferred Stock will automatically convert into Common Stock.
Unaudited pro forma stockholders' equity, as adjusted for the assumed
conversion of the convertible Preferred Stock and exercise of certain warrants
that would otherwise expire upon the Company's initial public offering, is
disclosed in the accompanying unaudited pro forma balance sheet.
The Board also adopted, subject to stockholder approval, a 1998 Stock Plan
and 1998 Employee Stock Purchase Plan and reserved a total of 1,300,000 shares
of Common Stock for issuance thereunder.
F-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below (the "Underwriters"), for whom Goldman, Sachs & Co.,
BT Alex. Brown Incorporated and Hambrecht & Quist LLC are acting as
representatives (the "Representatives"), and each Underwriter has severally
agreed to purchase from the Company and the Selling Stockholders, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co...............................................
BT Alex. Brown Incorporated.......................................
Hambrecht & Quist LLC.............................................
---------
Total......................................................... 2,260,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 339,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the total number of option
shares of Common Stock offered.
At the request of the Company, the Underwriters have reserved up to 190,000
shares of Common Stock for sale, at the initial public offering price, to
directors, officers, employees and friends of the Company through a directed
share program. The number of shares of Common Stock available for sale to the
general public in the public offering will be reduced to the extent such
persons purchase such reserved shares.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which they exercise discretionary
authority to exceed five percent of the total number of shares of Common Stock
offered by them.
The Company and the Selling Stockholders have agreed that, during the period
from the date of this Prospectus and continuing to and including the date 180
days after the date of this Prospectus, they will not offer, sell, contract to
sell or otherwise dispose of any securities of the Company (other than
pursuant to employee stock option plans existing, or on the conversion or
exchange of convertible or exchangeable securities outstanding, on the date of
this Prospectus) which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Common Stock without the prior written
consent of the representatives, except for the shares of Common Stock offered
in connection with the offering.
U-1
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
BT Alex. Brown Incorporated acted as placement agent in connection with the
Company's Series E Preferred Stock private placement financing in February
1998. In this private placement, certain affiliates of Hambrecht & Quist LLC
purchased an aggregate of 117,647 shares of Series E Preferred Stock of the
Company which are convertible into 78,432 shares of Common Stock on the same
terms as other investors in the private placement, for a total purchase price
of $499,999.75.
In connection with the offering, the Underwriters may purchase and sell
shares of the Company's Common Stock in the open market. These transactions
may include over-allotment and stabilizing transactions, and purchases to
cover syndicate short positions created in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose
of preventing or retarding a decline in the market price of the Common Stock;
and syndicate short positions involve the sale by the Underwriters of a
greater number of shares of Common Stock than they are required to purchase
from the Company and the Selling Stockholders in the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in the offering for their account may be reclaimed by the
syndicate if such shares of Common Stock are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Common Stock, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq National Market in the over-the-counter market
or otherwise.
Prior to this offering, there has been no public market for the shares. The
initial public offering price was negotiated among the Company, the Selling
Stockholders and the representatives. Among the factors considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
U-2
<PAGE>
[LOGO OF INKTOMI APPEARS HERE]
Heading: "Inktomi: Scaling the Internet"
<PAGE>
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- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 29
Management................................................................ 44
Certain Transactions...................................................... 53
Principal and Selling Stockholders........................................ 55
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 60
Additional Information.................................................... 62
Legal Matters............................................................. 62
Experts................................................................... 62
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,260,000 SHARES
INKTOMI CORPORATION
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
----------------
[LOGO OF INKTOMI]
----------------
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
HAMBRECHT & QUIST
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
