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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-66661
3,000,000 Shares
INKTOMI CORPORATION
[INKTOMI LOGO]
Common Stock
----------------
Inktomi Corporation is offering 300,000 shares to be sold in the offering.
The selling stockholders identified in this prospectus are offering an
additional 2,700,000 shares. Except as otherwise set forth in "Use of
Proceeds", Inktomi will not receive any of the proceeds from the sale of shares
by the selling stockholders.
Inktomi's Common Stock is traded on the Nasdaq National Market under the
symbol "INKT". On November 19, 1998, the last reported sale price for the
Common Stock on the Nasdaq National Market was $143.25 per share.
See "Risk Factors" beginning on page 4 to read about certain factors you
should consider before buying shares of the Common Stock.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial public offering price....................... $140.00 $420,000,000
Underwriting discount............................... $ 5.60 $ 16,800,000
Proceeds, before expenses, to Inktomi............... $134.40 $ 40,320,000
Proceeds, before expenses, to the selling
stockholders....................................... $134.40 $362,880,000
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 450,000 shares from Inktomi at the initial public offering price
less the underwriting discount.
----------------
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on November 25, 1998.
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
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Prospectus dated November 19, 1998.
<PAGE>
INSIDE FRONT COVER
Short description of the company with the "Inktomi" logo. Background includes
names of partners: Yahoo!, RealNetworks, C/Net, GeoCities, HotBot, Grolier,
@Home Network, Digex, Sun Microsystems, Telenor, Microsoft, NTT, Compaq/Digital
and America Online.
"Inktomi develops and markets scalable software designed for use by the
world's largest Internet infrastructure and media companies. Inktomi'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 the world's largest search
engines, online comparison shopping solutions and carrier-class network cache
software."
[ART WORK]
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Common Stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus.
INKTOMI CORPORATION
We are a leading provider of software applications designed to address the
challenges posed by the explosive growth in the number of end users, documents,
transactions and services on the Internet and private networks. We currently
have three software applications. Traffic Server, our large-scale network
cache, is designed to help Internet service providers and telecommunications
carriers alleviate capacity constraints on their networks by storing frequently
requested data closer to end users. Our powerful, award-winning search
engine enables Internet portals and other web site customers to provide a vari-
ety of search services to end users. Our newest software application, an
Internet shopping engine that we recently acquired, is expected to be commer-
cially available in the first calendar quarter of 1999. We are designing the
shopping engine to enable Internet portals and other web site customers to of-
fer a comparative shopping experience for end users, including the ability to
access product information, compare prices and make purchases online.
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by Inktomi to purchase additional shares in the offering. See
"Underwriting".
<TABLE>
<S> <C>
Shares offered by Inktomi..................................... 300,000 shares
Shares offered by the selling stockholders.................... 2,700,000 shares
</TABLE>
<TABLE>
<S> <C>
Shares to be outstanding after the offering(1).............. 23,688,372 shares
Nasdaq National Market symbol............................... "INKT"
Use of proceeds............................................. For general
corporate purposes,
principally working
capital and capital
expenditures.
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 2, 1996 SEPTEMBER 30,
(INCEPTION) TO ------------------
CONSOLIDATED STATEMENT OF OPERATIONS SEPTEMBER 30, 1996 1997 1998
DATA: ------------------ -------- --------
<S> <C> <C> <C>
Total revenues......................... $ 530 $ 5,785 $ 20,426
Operating loss......................... (3,431) (10,181) (22,782)
Net loss............................... (3,534) (10,377) (22,355)
Basic and diluted net loss per
share(2).............................. $ (0.80) $ (1.15)
Shares used in computing basic and di-
luted net loss per share(2)........... 12,977 19,360
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED(3)
CONSOLIDATED BALANCE SHEET DATA: ------- --------------
<S> <C> <C>
Cash, cash equivalents, and short-term investments..... $47,436 $87,156
Working capital........................................ 34,393 74,113
Total assets........................................... 70,641 110,361
Debt and capital lease obligations, less current por-
tion.................................................. 8,696 8,696
Total stockholders' equity............................. 43,270 82,990
</TABLE>
- -------
(1) The following information is based on shares outstanding as of September
30, 1998. It excludes 3,289,510 shares of Common Stock reserved for
issuance under Inktomi's stock option and stock purchase plans, of which
2,682,360 shares were subject to outstanding options as of September 30,
1998, and 729,806 shares of Common Stock issuable upon exercise of
outstanding warrants. See "Capitalization", "Management--Incentive Stock
Plans", "Description of Capital Stock" and Notes 9 and 10 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.
(3) As adjusted reflects the application of the net proceeds from the sale of
300,000 shares of Common Stock by Inktomi in this offering and after
deducting the underwriting discount and estimated offering expenses.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our Common Stock could decline, and you may
lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this prospectus.
LIMITED OPERATING HISTORY
Inktomi was founded in February 1996 and has a limited operating history. An
investor in our Common Stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. These risks include our:
. substantial dependence on products with only limited market acceptance;
. need to expand our sales and support organizations;
. competition;
. need to manage changing operations;
. customer concentration;
. reliance on strategic relationships; and
. dependence upon key personnel.
We also depend on the growing use of the Internet for commerce and
communication and on general economic conditions. We cannot be certain that our
business strategy will be successful or that we will successfully address these
risks.
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
We incurred net losses of $3.5 million for the period from inception through
September 30, 1996, $10.4 million for the year ended September 30, 1997, and
$22.4 million for the year ended September 30, 1998. As of September 30, 1998,
we had an accumulated deficit of $36.3 million. We have not achieved
profitability and expect to continue to incur net losses for at least the next
several quarters. We expect to continue to incur significant sales and
marketing, product development and administrative expenses and, as a result,
will need to generate significant revenues to achieve and maintain
profitability. Although our revenues have grown in recent quarters, we cannot
be certain that we will achieve sufficient revenues for profitability. If we do
achieve profitability, we cannot be certain that we can sustain or increase
profitability 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
Our future growth substantially depends on the commercial success of our
Traffic Server network cache product, which we have licensed to only a small
number of customers. We are initially targeting telecommunications carriers and
Internet service providers for our Traffic Server product. The market for
large-scale network caching is in its infancy, and we are not certain that our
target customers will widely adopt and deploy caching technology throughout
their networks. Even if they do so, they may not choose our Traffic Server
network cache product for technical, cost, support or other reasons. Although
we have tested our Traffic Server product prior to making it available to
customers, we cannot be certain that we have found and fixed all significant
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performance errors. If our target customers do not widely adopt and purchase
our Traffic Server product, our business, financial condition and results of
operations will be adversely affected.
LONG SALES CYCLE FOR TRAFFIC SERVER
To date, our customers have taken a long time to evaluate Traffic Server and
many people have been involved in the process. Along with our distribution
partners, we spend a lot of time educating and providing information to our
prospective customers regarding the use and benefits of Traffic Server. Even
after purchase, our customers tend to deploy Traffic Server slowly and
deliberately, depending on the skill set of the customer, the size of the
deployment, the complexity of the customer's network environment, and the
quantity of hardware and the degree of hardware configuration necessary to
deploy Traffic Server. The long sales and implementation cycles for Traffic
Server may cause license revenues and operating results to vary significantly
from period to period.
NEED TO EXPAND SALES AND SUPPORT ORGANIZATIONS
We will need to substantially expand our direct and indirect sales
operations, both domestically and internationally, in order to increase market
awareness and sales of our products. Our products and services require a
sophisticated sales effort targeted at several people within our prospective
customers. We have recently expanded our direct sales force and plan to hire
additional sales personnel. Competition for qualified sales personnel is
intense, and we might not be able to hire the kind and number of sales
personnel we are targeting. In addition, we believe that our future success is
dependent upon establishing successful relationships with a variety of
distribution partners. We have entered into agreements with only a small number
of distribution partners. We cannot be certain that we will be able to reach
agreement with additional distribution partners on a timely basis or at all, or
that these distribution partners will devote adequate resources to selling our
products.
Similarly, the complexity of our products and the difficulty of installing
them require highly trained customer service and support personnel. We
currently have a small customer service and support organization and will need
to increase our staff to support new customers and the expanding needs of
existing customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
RISKS ASSOCIATED WITH INTERNET SEARCH ENGINE SERVICE
Our search services revenues result primarily from the number of end-user
searches that are processed by our search engine and the level of advertising
revenue generated by our Internet portal and other web site customers. Our
agreements with customers do not require them to direct end users to our search
services or to use the search service at all. Accordingly, revenues from search
services are highly dependent upon the willingness of customers to promote and
use the search services we provide, the ability of our customers to attract end
users to their online services, the volume of end-user searches that are
processed by our search engine, and the ability and willingness of customers to
sell advertisements on the Internet pages viewed by end users.
Our search contracts require us to meet specific requirements, including the
features provided, performance, the size of the Internet database maintained,
the frequency of updating the search database and reliability. If we do not
meet these specifications, customers may cancel our service. We provide our
search engine services from multiple data centers. Circumstances outside of our
control such as fires, earthquakes, power failures, telecommunications
failures, sabotage and similar events could occur that may bring down one or
more of our data centers. For example, in June 1998, lightning struck the
facility housing our data center in Virginia and interrupted service from this
center. Service interruptions for any reason would reduce our
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revenues and could result in contract cancellations.
QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:
. demand for our products and services;
. the timing of sales of our products and services;
. changes in the growth rate of Internet usage;
. delays in introducing new products and services;
. new product introductions by competitors;
. changes in our pricing policies or the pricing policies of our competitors;
. the mix of products and services sold;
. the mix of sales channels through which our products and services are sold;
. the mix of domestic and international sales;
. costs related to acquisitions of technology or businesses; and
. economic conditions generally as well as those specific to the Internet and
related industries.
Quarterly revenues and operating results generated by our search engine
business generally depend on per-query fees and shared advertising revenues
received from our search engine customers within the quarter. Advertising
revenues generated by our customers are 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 our search
engine. Reduced advertising sales, a low level of usage by end users or the
cancellation or deferral of any customer contract would reduce our expected
revenues, which could adversely affect our quarterly financial performance.
We expect that a significant portion of our future revenues will come from
licenses of Traffic Server. We further expect that such revenues will come from
licenses of Traffic Server to a small number of customers. The volume and
timing of orders are difficult to predict because the market for Traffic Server
is in its infancy and the sales cycle may vary substantially from customer to
customer. The cancellation or deferral of even a small number of licenses of
Traffic Server would reduce our expected revenues, which would adversely affect
our quarterly financial performance. To the extent significant sales occur
earlier than expected, operating results for later quarters may not compare
favorably with operating results from earlier quarters.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our customer support capabilities, establish
new search engine data centers, develop new distribution channels, and fund
greater levels of research and development. Our operating expenses are largely
based on anticipated revenue trends and a high percentage of our expenses are
fixed in the short term. As a result, a delay in generating or recognizing
revenue for the reasons set forth above or for any other reason could cause
significant variations in our operating results from quarter to quarter and
could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarter, our operating results may be below
the expectations of public market analysts and investors. In this event, the
price of our Common Stock may fall.
OUR MARKETS ARE HIGHLY COMPETITIVE
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition in the overall network infrastructure
market as well as the network cache and Internet search segments of this
market. In addition, we have recently entered the online comparison shopping
business and expect to face competition in this market as well. We have
experienced and expect to continue to experience increased competition from
current and potential competitors, many of which have significantly greater
financial, technical, marketing and other resources.
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In the network cache market, we compete with several companies, including
CacheFlow, Inc., Cisco Systems, Inc., Microsoft Corporation, Mirror Image
Internet, Inc., Netscape Communications Corp., Network Appliance, Inc., Novell,
Inc., and Spyglass, Inc. We also compete against freeware caching solutions
including CERN, Harvest and Squid. We are aware of numerous other major
software developers as well as smaller entrepreneurial companies that are
focusing significant resources on developing and marketing products and
services that will compete with Traffic Server. We believe that Traffic Server
may face competition from other providers of hardware and software offering
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, Hewlett-Packard Company,
Intel Corporation, Motorola, Inc. and Sun Microsystems, Inc.;
telecommunications providers such as AT&T, Inc., MCI Worldcom, Inc., and
regional Bell operating companies; cable TV/communications providers such as
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 Systems, 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 we compete.
We compete with a number of companies to provide Internet search services,
many of which have operated services in the market for a longer period, have
greater financial resources, have established marketing relationships with
leading online services and advertisers, and have secured greater presence in
distribution channels. Competitors that offer search services to online service
providers include Digital Equipment (Alta Vista), Excite, Inc., Infoseek
Corporation, Lycos Corporation, and Northern Light, Inc., among others. In
addition, large media companies such as The Walt Disney Company and NBC
Enterprises have recently made investments in Internet search engine companies
and we believe that other large media enterprises may enter or expand their
presence in the Internet search engine market, either directly or indirectly
through collaborations or other strategic alliances.
The market for our shopping engine application is rapidly evolving and
intensely competitive. Our current and potential competitors include other
providers of shopping technologies and services including Jango.com, owned by
Excite, Junglee, recently acquired by Amazon.com, Inc., and mySimon.com, Inc.;
and various online retailers and aggregators of merchandise including
Amazon.com, Bottom Dollar, owned by WebCentric, Inc., eBay, Inc.,
InfoSpace.com, Inc. and Yahoo! Inc. We believe the principal factors that will
draw end users to an online shopping application include brand availability,
selection, personalized services, convenience, price, accessibility, customer
services, quality of search tools, quality of content, and reliability and
speed of fulfillment for products ordered. We will have little or no control
over many of these factors.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition, our
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 us. Also, current and
potential competitors have greater name recognition, more extensive customer
bases that could be leveraged, and access to proprietary content. Increased
competition could result in price reductions, fewer customer orders, fewer
search queries served, reduced gross margins and loss of market share.
RISKS ASSOCIATED WITH INTERNET SHOPPING ENGINE
In September 1998, we acquired C/2/B Technologies Inc. to accelerate our
entry into
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the online comparison shopping business. Our Internet shopping engine is still
under development and is not yet commercially available. Like our Internet
search engine, we plan to make our Internet shopping engine available to
Internet portals and other web site customers and will not develop our own
branded online shopping site. We are developing the shopping engine to enable
Internet portals and other web site customers to provide shopping services to
their end users. This is our first acquisition and we are in the process of
integrating the operations of our two companies, including the approximately 30
former employees of C/2/B Technologies.
We are still developing the business model for our shopping engine and
anticipate that revenues will be generated from revenue sharing arrangements
with online merchants, and Internet portals and other web site customers using
the shopping engine. The success of our shopping engine will depend on our
ability to establish strong relationships with customers and online merchants,
the dollar volume of online purchases generated by participating merchants, and
the level of advertising revenues generated by customers. In addition, the
shopping engine will need to collect and organize vast amounts of electronic
information from online merchants and publishers of comparative product
information, which is a highly complex task. Developing these capabilities and
other required features for the shopping engine will require significant
additional expenses and management and development resources. We cannot be
certain that our entry into the online shopping business will be successful.
NEED TO MANAGE CHANGING OPERATIONS
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We continue to increase the scope of our operations
domestically and internationally and have grown our headcount substantially. At
September 30, 1997, we had a total of 67 employees and at September 30, 1998 we
had a total of 185 employees. This growth has placed, and our anticipated
future operations will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and will need to continue to expand, train and manage our work
force worldwide. Furthermore, we expect that we will be required to manage
multiple relationships with various customers and other third parties.
In October 1998, we entered into an 11-year lease for 177,000 square feet of
new office space in Foster City, California. We anticipate that the lease will
commence in June 1999. The lease is for substantially more space than we will
need for the next several years. The commercial real estate market in San Mateo
County, California is volatile and unpredictable in terms of rental fees,
occupancy rates and preferred locations. If we fail to sublease a significant
portion or all of our existing space or a substantial portion of our new space,
we will incur substantial additional operating expense during the lease term.
DEPENDENCE UPON KEY PERSONNEL
We intend to hire a significant number of additional sales, support,
marketing, and research and development personnel in calendar 1999 and beyond.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Our future success also depends upon the continued service of our
executive officers and other key sales, marketing and support personnel. In
addition, our products and technologies are complex and we are substantially
dependent upon the continued service of our existing engineering personnel, and
especially our founders. None of our officers or key employees is bound by an
employment agreement for any specific term. Our relationships with these
officers and key employees are at will. We do not have "key person" life
insurance policies covering any of our employees.
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CUSTOMER CONCENTRATION
We have generated a substantial portion of our historical search services
revenues and network applications revenues from a limited number of customers.
We expect that a small number of customers will continue to account for a
substantial portion of revenues for the foreseeable future. As a result, if we
lose a major customer, or in the case of our search engine business, if there
is a decline in usage of any customer's search service, our revenues would be
adversely affected. In addition, we cannot be certain 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.
RISKS OF INFRINGEMENT AND PROPRIETARY RIGHTS
Our products and services operate in part by making copies of material
available on the Internet and other networks and making this material available
to end users from a central location. This creates the potential for claims to
be made against us (either directly or through contractual indemnification
provisions with customers) for defamation, negligence, copyright or trademark
infringement, personal injury, invasion of privacy or other legal theories
based on the nature, content or copying of these materials. These claims have
been threatened against us from time to time, and have been brought, and
sometimes successfully pressed, against online service providers in the past.
It is also possible that if any information provided through our search engine
or shopping engine, 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
us for losses incurred in reliance on this information. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to protect us from all liability that may be
imposed.
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
patent, copyright, trade secret and trademark law. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and we cannot be certain that the steps we have
taken will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.
Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that software products may be increasingly subject
to third-party infringement claims as the number of competitors in our 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
may bring actions against companies that it believes are infringing this patent
in the future. We also believe that many of our competitors in the network
cache business have filed or intend to file patent applications covering
aspects of their technology that they may claim our technology infringes. We
cannot be certain that Lycos or other third parties will not make a claim of
infringement against us with respect to our products and technology. Any
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 us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
acceptable terms, if at all. A successful claim of product infringement against
us and our failure or inability to license the infringed or similar technology
could adversely affect our business.
DEPENDENCE ON STRATEGIC RELATIONSHIPS
We believe that our success in penetrating our target markets depends in part
on our ability to develop and maintain strategic
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relationships with key hardware and software vendors, distribution partners and
customers. We believe these relationships are important in order to validate
our technology, facilitate broad market acceptance of our products, and enhance
our sales, marketing and distribution capabilities. If we are unable to develop
key relationships or maintain and enhance existing relationships, we may have
difficulty selling our products and services.
In July 1997, we entered into a series of agreements with Microsoft whereby
Microsoft selected our technology as the basis for the Internet search services
to be provided by Microsoft. Federal and state regulatory authorities have
recently initiated broad antitrust actions against Microsoft. We cannot predict
to what extent these antitrust actions may affect our relationship with
Microsoft, although these actions may narrow the scope of Internet sites and
applications where Microsoft may incorporate our Internet search engine
services.
We have from time to time licensed minor components from others such as
reporting functions and security features and incorporated them into our
products. If these licensed components are not maintained, it could impair the
functionality of our products and require us to obtain alternative products
from other sources or to develop this software internally, either of which
could involve costs and delays as well as diversion of engineering resources.
RAPID TECHNOLOGICAL CHANGE
The network infrastructure market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards could render our
existing products obsolete. Our future success will depend upon our ability to
develop and introduce a variety of new products and product enhancements to
address the increasingly sophisticated needs of our customers. We have
experienced delays in releasing new products and product enhancements and may
experience similar delays in the future. Material delays in introducing new
products and enhancements may cause customers to forego purchases of our
products and purchase those of our competitors.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
We market and sell our products in the United States and internationally. We
have established a subsidiary located in England to market and sell our
products in Europe. We have offices in Germany and Japan to market and sell our
products in those countries and surrounding regions. We plan to establish
additional facilities in other parts of the world. The expansion of our
existing international operations and entry into additional international
markets will require significant management attention and financial resources.
We cannot be certain that our investments in establishing facilities in other
countries will produce desired levels of revenue. We currently have limited
experience in developing localized versions of our products and marketing and
distributing our products internationally. In addition, international
operations are subject to other inherent risks, including:
. the impact of recessions in economies outside the United States;
. greater difficulty in accounts receivable collection and longer collection
periods;
. 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.
Our international revenues are generally denominated in local currencies. We
do not currently engage in currency hedging activities. Although exposure to
currency fluctuations to date has been insignificant, future fluctuations in
currency exchange rates may adversely affect revenues from international sales.
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YEAR 2000 RISKS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We are in the early stages of assessing our Year 2000 readiness. We have only
conducted a preliminary investigation and performed limited testing to
determine whether our Traffic Server and search engine software are Year 2000
compliant. We have not performed any evaluation regarding our shopping engine
application. Our software products operate in complex network environments and
directly and indirectly interact with a number of other hardware and software
systems. Despite preliminary investigation and testing by us and our partners,
our software products and the underlying systems and protocols running our
products may contain errors or defects associated with Year 2000 date
functions. We are unable to predict to what extent our business may be affected
if our software or the systems that operate in conjunction with our software
experience a material Year 2000 failure. Known or unknown errors or defects
that affect the operation of our software could result in delay or loss of
revenue, interruption of search or shopping services, cancellation of customer
contracts, diversion of development resources, damage to our reputation,
increased service and warranty costs, and litigation costs, any of which could
adversely affect our business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
We intend to make investments in complementary companies, products or
technologies. If we buy a company, we could have difficulty in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in assimilating the acquired technology
or products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for
any future acquisitions, the issuance of which could be dilutive to Inktomi or
our existing stockholders.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply tothe Internet. In addition, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business.
DISCRETION AS TO USE OF PROCEEDS
Our management can spend most of the proceeds from this offering in ways with
which the stockholders may not agree. We cannot predict that the proceeds will
be invested to yield a favorable return. See "Use of Proceeds".
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of our Common Stock has fluctuated in the past and is likely
to fluctuate in the future. In addition, the securities markets have
experienced significant price and volume fluctuations and the market prices of
11
<PAGE>
the securities of Internet-related companies have been especially volatile.
Investors may be unable to resell their shares of our Common Stock at or above
the offering price. In the past, companies that have experienced volatility in
the market price of their stock have been the object of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of management's attention and
resources. See "Price Range of Common Stock".
CONTROL BY OFFICERS AND DIRECTORS
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately 35.6% of our 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 our stockholders, 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 SELLING STOCKHOLDERS
Several of our stockholders are selling shares in this offering. The average
price per share paid by existing Inktomi stockholders is $3.52. The net price
per share paid to the selling stockholders in this offering is $134.40.
Therefore, the average realized gain per share to the selling stockholders is
$130.88.
ANTITAKEOVER PROVISIONS
Provisions of our Amended and Restated Certificate of Incorporation, Bylaws,
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. See "Description of
Capital Stock".
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our Common Stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market following this offering, the market price of our Common Stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
23,688,372 shares of Common Stock (based upon shares outstanding as of
September 30, 1998), assuming no exercise of the Underwriters' over- allotment
option and no exercise of outstanding options or warrants after September 30,
1998. Of these shares, the 3,000,000 shares sold in this offering, together
with the 2,592,100 shares sold in our initial public offering in June 1998 and
the 791,540 shares that were released from the initial public offering lock-up
agreements in October 1998, are freely tradable. This leaves 17,304,732 shares
eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ---------------------------------------------
<C> <S>
3,535,655........ December 8, 1998
9,735,271........ 90 days from the date of this prospectus
2,685,433........ At various times thereafter through June 1999
964,022.......... September 25, 1999
</TABLE>
The table above excludes 384,351 shares held by employees that are subject to
repurchase in the event of termination of employment. The repurchase option
lapses over time in accordance with the vesting schedule for each employee. See
"Management--Incentive Stock Plans", "Shares Eligible for Future Sale" and
"Underwriting".
NO INTENTION TO PAY DIVIDENDS
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy".
12
<PAGE>
USE OF PROCEEDS
The net proceeds to Inktomi from the sale of the 300,000 shares of Common
Stock offered by Inktomi are estimated to be $39,720,000 at the initial public
offering price of $140.00 per share, after deducting the underwriting discount
and estimated offering expenses payable by Inktomi ($100,200,000 if the over-
allotment option is exercised in full).
Inktomi expects to use the net proceeds from this offering for working cap-
ital and general corporate purposes. In addition, Inktomi may use a portion of
the net proceeds to acquire complementary products, technologies or business-
es; 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, Inktomi intends to invest the net proceeds in
interest-bearing, investment-grade securities. Inktomi will not receive any
proceeds from the sale of the shares being sold by the selling stockholders,
with the exception of proceeds to be paid by certain selling stockholders in
accordance with the requirements of Section 16 of the Securities Exchange Act
of 1934, as amended. See "Certain Transactions" and "Principal and Selling
Stockholders".
PRICE RANGE OF COMMON STOCK
Inktomi's Common Stock has been quoted on the Nasdaq National Market under
the symbol INKT since Inktomi's initial public offering on June 10, 1998.
Prior to such time, there was no public market for the Common Stock of
Inktomi. The following table sets forth, for the periods indicated, the high
and low sale prices per share of the Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
FISCAL YEAR 1998
Third Quarter (from June 10, 1998)........................... $ 45.75 $ 18.00
Fourth Quarter............................................... $ 88.75 $ 39.00
FISCAL YEAR 1999
First Quarter (through November 19, 1998).................... $158.50 $ 53.125
</TABLE>
On November 19, 1998, the reported last sale price of the Common Stock on
the Nasdaq National Market was $143.25 per share. As of September 30, 1998,
there were approximately 356 stockholders of record of the Common Stock.
DIVIDEND POLICY
Inktomi has never declared or paid any dividends on its capital stock.
Inktomi 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 Inktomi under
its existing line of credit prohibit the payment of dividends.
CORPORATE INFORMATION
Inktomi was incorporated in California in February 1996 and was
reincorporated in Delaware in February 1998. References in this prospectus to
"Inktomi", "we", "our", and "us" refer to Inktomi Corporation, a Delaware
corporation; its predecessor, Inktomi Corporation, a California corporation;
Inktomi Limited, its wholly owned subsidiary located in England; and C/2/B
Technologies Inc. Inktomi's principal executive offices are located at 1900 S.
Norfolk Street, Suite 310, San Mateo, California 94403 and Inktomi's telephone
number is (650) 653-2800. Information contained on Inktomi's web site does not
constitute part of this prospectus.
Inktomi and the Inktomi logo are registered trademarks of Inktomi. Traffic
Server and Scaling the Internet are trademarks of Inktomi. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Inktomi as of September
30, 1998 on an actual basis and on an as adjusted basis to give effect to the
receipt by Inktomi of the estimated net proceeds from the sale of 300,000
shares of Common Stock offered by Inktomi hereby at the initial public offering
price of $140.00 per share:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion........ $ 8,696 $ 8,696
Stockholders' equity:
Common Stock: $0.001 par value; authorized:
100,000,000; issued and outstanding: 23,388,372,
actual; 23,688,372, as adjusted(1).............. 23 24
Additional paid-in capital......................... 82,385 122,104
Deferred compensation and other.................... (2,871) (2,871)
Accumulated deficit................................ (36,267) (36,267)
----------- -----------
Total stockholders' equity......................... 43,270 82,990
----------- -----------
Total capitalization............................... $ 51,966 $ 91,686
=========== ===========
</TABLE>
- --------
(1) Excludes 3,289,510 shares of Common Stock reserved for issuance under
Inktomi's stock option and stock purchase plans, of which 2,682,360 shares
were subject to outstanding options as of September 30, 1998, and 729,806
shares of Common Stock issuable upon exercise of outstanding warrants. See
"Management--Incentive Stock Plans", "Description of Capital Stock" and
Notes 9 and 10 of Notes to Consolidated Financial Statements.
14
<PAGE>
DILUTION
The net tangible book value of Inktomi as of September 30, 1998 was $43.3
million or approximately $1.85 per share. Net tangible book value per share
represents the amount of Inktomi's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
Dilution in 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 300,000 shares of Common Stock offered by Inktomi hereby at the
initial public offering price of $140.00 per share and after deducting the
underwriting discount and estimated offering expenses payable by Inktomi, the
net tangible book value of Inktomi at September 30, 1998 would have been $83.0
million or approximately $3.50 per share. This represents an immediate increase
in net tangible book value of $1.65 per share to existing stockholders and an
immediate dilution of $136.50 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>
Public offering price per share.................................... $140.00
Net tangible book value per share as of September 30, 1998....... $1.85
Increase per share attributable to new investors(1).............. 1.65
-----
Net tangible book value per share after the offering(1)............ 3.50
-------
Dilution per share to new investors(1)............................. $136.50
=======
</TABLE>
- --------
(1) This table excludes 3,289,510 shares of Common Stock reserved for issuance
under Inktomi's stock option and stock purchase plans, of which 2,682,360
shares were subject to outstanding options as of September 30, 1998, and
729,806 shares of Common Stock were issuable upon exercise of outstanding
warrants. See "Capitalization", "Management--Incentive Stock Plans",
"Description of Capital Stock" and Notes 9 and 10 of Notes to Consolidated
Financial Statements.
The following table sets forth, as of September 30, 1998, the differences
between the number of shares of Common Stock purchased from Inktomi, 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 estimated offering expenses payable by Inktomi, at the initial
public offering price of $140.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED AVERAGE PRICE
--------------------- TOTAL CONSIDERATION --------------------
NUMBER PERCENTAGE AMOUNT (IN THOUSANDS) PERCENTAGE PER SHARE
---------- ---------- --------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ 23,388,372 98.7% $ 82,408 66.2% $ 3.52
New investors(1)........ 300,000 1.3 42,000 33.8 140.00
---------- ----- -------- -----
Total................. 23,688,372 100.0% $124,408 100.0%
========== ===== ======== =====
</TABLE>
- --------
(1) Sales by the selling stockholders in this offering will reduce the number
of shares of Common Stock held by existing stockholders to 20,688,372 or
approximately 87.3% (approximately 85.7%, 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 3,000,000 or approximately
12.7% (3,450,000 shares, or approximately 14.3%, 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".
15
<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 of Inktomi
Corporation and the Notes thereto 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 years ended September
30, 1997 and 1998 have been derived from the audited financial statements of
Inktomi Corporation included elsewhere in this prospectus, which have been
audited by PricewaterhouseCoopers LLP, Independent Accountants. 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>
FEBRUARY 2, 1996
(INCEPTION) TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- --------------------------
1996 1997 1998
--------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Network applications........... $ -- $ 60 $ 7,962
Search services................ 530 5,725 12,464
----------- ------------ ------------
Total revenues............... 530 5,785 20,426
Operating expenses:
Cost of revenues............... 239 1,512 4,816
Sales and marketing............ 898 7,835 21,452
Research and development....... 1,483 5,134 12,173
General and administrative..... 1,341 1,485 3,749
Acquisition-related charges.... -- -- 1,018
----------- ------------ ------------
Total operating expenses..... 3,961 15,966 43,208
----------- ------------ ------------
Operating loss................... (3,431) (10,181) (22,782)
Interest income (expense), net... (102) (194) 428
----------- ------------ ------------
Loss before income taxes......... (3,533) (10,375) (22,354)
Provision for income taxes....... 1 2 1
----------- ------------ ------------
Net loss......................... $ (3,534) $ (10,377) $ (22,355)
=========== ============ ============
Basic and diluted net loss per
share(1)........................ $ (0.80) $ (1.15)
============ ============
Weighted average shares outstand-
ing used in computing per share
calculation(1).................. 12,977 19,360
============ ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $47,436
Working capital............................................. 34,393
Total assets................................................ 70,641
Debt and capital lease obligations, less current portion.... 8,696
Total stockholders' equity.................................. 43,270
</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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties. Such forward-
looking statements include, among others, those statements including the words,
"expects", "anticipates", "intends", "believes" and similar language. Inktomi's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not
limited, to the risks discussed in the section titled "Risk Factors" 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, Inktomi's
operations consisted primarily of start-up activities, including research and
development of Inktomi's core coupled cluster software architecture and
dataflow technology, personnel recruiting and capital raising. In May 1996,
Inktomi released the first commercial application based on its core technology,
an Internet search engine that enables customers to provide a variety of online
search services to end users. In December 1997, Inktomi began licensing Traffic
Server, Inktomi's second application, a large-scale network cache designed to
address capacity constraints in high-traffic network routes. In September 1998,
Inktomi acquired C/2/B Technologies, a developer of online shopping technology,
to accelerate its entry into the online comparison shopping business. The
transaction was accounted for as a pooling of interests. Financial results for
all periods have been restated to reflect combined operations.
Network applications revenues are composed of Traffic Server license,
consulting, support and maintenance fees. Traffic Server license fees are
generally recognized upon shipment of the software. Consulting, support and
maintenance fees are recognized ratably over the service period. 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. Online shopping has not generated revenues to date.
Inktomi has a limited operating history. Inktomi incurred a net loss of $3.5
million for the period from inception through September 30, 1996, $10.4 million
for the year ended September 30, 1997, and $22.4 million for the year ended
September 30, 1998. As of September 30, 1998, Inktomi had an accumulated
deficit of $36.3 million. Inktomi has not achieved profitability on a quarterly
or annual basis, and Inktomi anticipates that it will incur net losses for at
least the next several quarters. Inktomi expects to continue to incur
significant sales and marketing, product development and administrative
expenses and, as a result, will need to generate significant quarterly revenues
to achieve and maintain profitability.
Inktomi has generated a substantial portion of its historical search services
revenues and network applications revenues from a limited number of customers.
Inktomi expects that a small number of customers will continue to account for a
substantial portion of revenues for the foreseeable future.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the results of operations for Inktomi
expressed as a percentage of revenues. Inktomi's historical operating results
are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
1997 1998
------ ------
<S> <C> <C>
Revenues:
Network applications........................................ 1 % 39 %
Search services............................................. 99 61
------ ------
Total revenues............................................ 100 100
Operating expenses:
Cost of revenues............................................ 26 24
Sales and marketing......................................... 135 105
Research and development.................................... 89 60
General and administrative.................................. 26 18
Acquisition-related charges................................. -- 5
------ ------
Total operating expenses.................................. 276 212
------ ------
Operating loss................................................ (176) (112)
Interest income (expense), net................................ (3) 2
------ ------
Loss before income taxes...................................... (179) (110)
Provision for income taxes.................................... -- --
------ ------
Net loss...................................................... (179)% (110)%
====== ======
</TABLE>
REVENUES
Total revenues were $20.4 million in the year ended September 30, 1998, an
increase of $14.6 million or 253% over the year ended September 30, 1997. Four
customers each represented over 10% and, in the aggregate, 77% of total
revenues for the year ended September 30, 1998. For the year ended September
30, 1997, two customers accounted for approximately 92% of total revenues.
Network applications revenues totaled $8.0 million in fiscal 1998. Most of
these revenues represented new Traffic Server license sales. There were minimal
network applications revenues in fiscal 1997. Search services revenues totaled
$12.5 million in fiscal 1998, representing a 118% increase over the prior year.
Most of this increase came from the provision of search services to new
customers and, to a lesser extent, an increase in revenues from existing
customers.
A significant portion of search revenues are derived from the HotBot search
service maintained by Inktomi and marketed by Wired Digital, Inc. 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 Inktomi. Barter revenues represented 27% of
total revenues in fiscal 1997 and 9% in fiscal 1998. Inktomi anticipates that
barter revenue will comprise a decreasing percentage of total revenues in
future years.
EXPENSES
COST OF REVENUES
Cost of revenues consists primarily of expenses related to the operation of
Inktomi's search services, which comprise depreciation and network charges.
Cost of revenues was $4.8 million for fiscal 1998, an increase of $3.3 million
or 219% from fiscal 1997. The increase was due primarily to increased
depreciation and network charges resulting from expansions of Inktomi's data
center in California during fiscal 1998, and the addition of a new service
facility in Virginia in the third quarter of fiscal
18
<PAGE>
1998. Inktomi expects cost of revenues to increase substantially in absolute
dollars in the next few quarters as a result of expanded cluster operation
costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of personnel and related costs for
Inktomi'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 Inktomi's support of the HotBot search site.
Sales and marketing expenses were $21.5 million in fiscal 1998, an increase of
$13.6 million or 174% from fiscal 1997. This increase was primarily due to an
increase in the number of sales and marketing personnel in the United States
and abroad, increased HotBot marketing expenses and other customer-related
costs, and expenses incurred in connection with attendance at trade shows and
additional marketing programs. Inktomi expects that sales and marketing
expenses will increase substantially in absolute dollars over the next year as
Inktomi 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 Inktomi's development and technical support efforts. Research and
development expenses were $12.2 million in fiscal 1998, an increase of $7.0
million or 137% over fiscal 1997. The increase was primarily due to an increase
in the number of research and development personnel to support expansion of
Inktomi's search engine and network application businesses, initial online
shopping development, and increases in quality assurance, technical support and
technical publications personnel. Inktomi 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. Inktomi 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
totaled $3.7 million in fiscal 1998, an increase of $2.3 million or 152% over
fiscal 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 activities.
ACQUISITION-RELATED CHARGES
In the fourth quarter of fiscal 1998, Inktomi incurred expenses of $1.0
million related to its merger with C/2/B Technologies. The charge comprised
C/2/B Technologies' financial advisory fees, facilities consolidation costs,
and legal and accounting fees related to the transaction. Of the total charge,
$0.7 million of the expenses were paid in fiscal 1998.
INTEREST INCOME AND EXPENSE, NET
Interest income and expense, net includes income on Inktomi's cash
investments net of expenses related to Inktomi's financing obligations.
Interest income, net totaled $0.4 million of income in fiscal 1998. This total
compares with a net expense of $0.2 million in fiscal 1997. Most of this
increase was generated from interest income on proceeds from Inktomi's June
1998 initial public offering and preferred stock issuances, partially offset by
increased interest charges on debt and capital lease obligations.
INCOME TAXES
As of September 30, 1998, Inktomi had $31.5 million of federal net operating
loss carryforwards for tax reporting purposes available to offset future
taxable income. Such net operating loss carryforwards expire through 2018.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents Inktomi's operating results for each of the
eight quarters in the period ending September 30, 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 Inktomi Corporation 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, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Network applications... $ -- $ -- $ -- $ 60 $ 70 $ 621 $ 3,062 $ 4,209
Search services........ 1,138 1,144 1,521 1,922 2,352 2,834 3,233 4,045
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 1,138 1,144 1,521 1,982 2,422 3,455 6,295 8,254
Operating expenses
Cost of revenues....... 186 280 358 688 794 901 1,276 1,845
Sales and marketing.... 1,660 1,264 2,056 2,855 2,986 3,939 6,410 8,117
Research and
development........... 1,008 1,053 1,232 1,841 2,187 2,507 3,252 4,227
General and
administrative........ 231 371 382 501 795 894 993 1,067
Acquisition-related
charges............... -- -- -- -- -- -- -- 1,018
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,085 2,968 4,028 5,885 6,762 8,241 11,931 16,274
------- ------- ------- ------- ------- ------- ------- -------
Operating loss.......... (1,947) (1,824) (2,507) (3,903) (4,340) (4,786) (5,636) (8,020)
Interest income
(expense), net......... (19) (58) (29) (88) (58) (33) 93 426
------- ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (1,966) (1,882) (2,536) (3,991) (4,398) (4,819) (5,543) (7,594)
Provision for income
taxes.................. -- 1 1 -- 1 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,966) $(1,883) $(2,537) $(3,991) $(4,399) $(4,819) $(5,543) $(7,594)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Inktomi's operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of Inktomi's control.
These factors include demand for Traffic Server, demand for commercial search
services powered by Inktomi's search technology, length of sales cycles,
changes in the growth rate of Internet usage, introduction of new products or
services by Inktomi or its competitors, delays in the introduction or
enhancement of products and services by Inktomi or its competitors, changes in
Inktomi's pricing policy or the pricing policies of its competitors, changes in
the mix of products and services sold, changes in the mix of sales channels
through which products and services are sold, changes in the mix of
international and domestic revenues, costs related to acquisitions of
technology or businesses, and economic conditions generally as well as those
specific to the Internet and related industries. Additionally, as a strategic
response to a changing competitive environment, Inktomi may elect from time to
time to make certain pricing, service, marketing or acquisition decisions that
could have a material adverse effect on Inktomi's quarterly financial
performance.
Quarterly revenues and operating results generated by Inktomi's search engine
business generally depend on per-query fees and shared advertising revenues
received from Inktomi's search engine customers within the quarter. Advertising
revenues generated by Inktomi's search engine customers are 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. Reduced advertising sales, a low level
of usage by end users or the cancellation or deferral of any customer contract
would reduce expected revenues, which could adversely affect Inktomi's
quarterly financial performance.
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Inktomi expects that a significant portion of its future revenues will be
generated by licenses of Traffic Server. Inktomi further expects that such
revenues will come from orders placed by a small number of customers. The
volume and timing of such orders are difficult to predict because the market
for Traffic Server is in its infancy and the sales cycle may vary substantially
from customer to customer. The cancellation or deferral of even a small number
of licenses of Traffic Server would reduce expected revenues, which would
adversely affect quarterly financial performance. To the extent significant
sales occur earlier than expected, operating results for subsequent quarters
may not compare favorably with operating results from earlier quarters.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $47.4 million at
September 30, 1998, up from $7.0 million at September 30, 1997. Most of the
increase came from common and preferred stock sales, partially offset by cash
used in operations and the purchase of property and equipment.
Inktomi used $13.7 million in cash for operations in fiscal 1998, an increase
of $5.5 million from the $8.2 million used in fiscal 1997. The increase was
primarily due to an increase in Inktomi's net loss from $10.4 million in fiscal
1997 to $22.4 million in fiscal 1998, partially offset by increased non-cash
charges in fiscal 1998.
Inktomi has made significant investments in equipment since its inception.
This equipment consists largely of computer servers, workstations and
networking equipment. Inktomi financed $12.7 million in fiscal 1998 and
$6.0 million in fiscal 1997 primarily to further expand its Internet search
engine service capacity. In fiscal 1998, Inktomi sold $0.9 million of fixed
assets to two leasing companies as part of sale-leaseback transactions.
Inktomi has used debt and leases to partially finance its operations and
capital purchases and plans to continue this practice until it begins
generating cash from operations. In fiscal 1998, Inktomi obtained an additional
$2.0 million bank loan to partially fund its increased search capacity and
added $6.9 million in capitalized leases. At September 30, 1998, Inktomi had
$14.6 million in total loans and capitalized lease obligations outstanding. The
loans are collateralized by substantially all of Inktomi's assets.
Approximately $5.0 million of total debt at September 30, 1998 were bank loans.
The bank loans include certain covenants requiring minimum liquidity, tangible
net worth and profitability over time.
In July 1997, Inktomi and Microsoft entered into a series of agreements
whereby Microsoft selected Inktomi'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, Inktomi 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. At September 30, 1998, loans totaling $2.4
million were outstanding.
Inktomi raised approximately $54.8 million, net of issuance costs, from
equity sales in fiscal 1998. This total included approximately $38.8 million
from Inktomi's June 1998 initial public offering, $12.9 million from a February
1998 preferred stock offering and $3.1 million from other stock offerings.
Inktomi also received approximately $5.0 million from option and warrant
conversions. In fiscal 1997, Inktomi raised $10.2 million from a preferred
stock offering.
Inktomi's capital requirements depend on numerous factors, including market
acceptance of Inktomi's products, the resources Inktomi devotes to developing,
marketing, selling and supporting its products, the timing and extent of
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establishing international operations, and other factors. Inktomi 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 Inktomi believes that its current cash balances will be
sufficient to fund its operations for at least the next 12 months, there can be
no assurance that Inktomi will not require additional financing within this
time frame or that such additional funding, if needed, will be available on
terms acceptable to Inktomi, or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
Inktomi is currently conducting a review of the current versions of its
Traffic Server and Internet search engine software to determine Year 2000
compliance. Inktomi has searched through the software code for each of these
applications and believes that it has identified all instances where date
specific information is required. Inktomi has further investigated whether
these date fields contain two or four digits, and has initiated efforts to
upgrade its software when date fields that contain only two digits are
discovered. Based on its preliminary review and the results of limited testing,
Inktomi believes that its Traffic Server and search engine applications, when
configured and used in accordance with its documentation, correctly recognize
and function when used with Year 2000 date codes. Inktomi recently acquired its
shopping engine application and has not yet reviewed the software for this
application for Year 2000 compliance. Inktomi intends to begin its review of
the shopping engine application during the first half of fiscal 1999 to develop
a preliminary assessment as to Year 2000 compliance. Inktomi further intends to
conduct extensive tests on all of its applications during this same time period
to identify areas of deficiency and to develop action plans to correct and
upgrade its software code.
Inktomi's software applications run on several hardware platforms and
associated operating systems, including those provided by Sun Microsystems,
Digital Equipment and Silicon Graphics. In addition, Inktomi's software
operates in accordance with several external Internet protocols, such as HTTP
and NNTP. Inktomi's software is therefore dependent upon the correct processing
of dates by these systems and protocols. Inktomi has reviewed information made
publicly available by its hardware platform partners regarding Year 2000
compliance and researched the date handling capabilities of applicable Internet
protocols. Based on this research, Inktomi does not believe that the underlying
systems and protocols that operate in conjunction with its software
applications contain material Year 2000 deficiencies. However, Inktomi has not
conducted its own tests to determine to what extent its software running on any
of its hardware platforms and in accordance with any of its supported Internet
protocols fails to properly recognize Year 2000 dates.
Inktomi uses multiple software systems for its internal business purposes,
including accounting, email, development, human resources, customer service and
support, and sales tracking systems. All of these applications have been
purchased within the preceding 18 months. Inktomi has made inquiries of vendors
of the systems that Inktomi believes are mission critical to its business
regarding their Year 2000 readiness. Each of these vendors has indicated to
Inktomi that it believes its applications are Year 2000 compliant. However,
Inktomi has not received affirmative documentation in this regard from any of
these vendors, and Inktomi has not performed any operational tests on its
internal systems.
Inktomi is in the early stages of assessing its Year 2000 readiness. To date,
the costs for conducting its assessment have not been material. Despite
preliminary investigation and
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testing by Inktomi and its partners, Inktomi's software applications and the
underlying hardware systems and protocols running the software may contain
undetected errors or defects associated with Year 2000 date functions.
Inktomi's software applications operate in complex network environments and
directly and indirectly interact with a number of other hardware and software
systems. Inktomi is unable to predict to what extent its business may be
affected if its software or the systems that operate in conjunction with its
software experience a material Year 2000 failure. Known or unknown errors or
defects that affect the operation of Inktomi's software could result in delay
or loss of revenue, interruption of search or shopping services, cancellation
of customer contracts, diversion of development resources, damage to Inktomi's
reputation, increased service and warranty costs, and litigation costs, any of
which could adversely affect Inktomi's business, financial condition and
results of operation.
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BUSINESS
INKTOMI
Inktomi develops and markets scalable software applications designed to
significantly enhance the performance and intelligence of large-scale networks.
Inktomi 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 end users accessing
millions of documents.
Currently, Inktomi has three scalable applications based on its software
architecture: a large-scale network cache, an Internet search engine and an
Internet shopping engine. The large-scale network cache application, Traffic
Server, is 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 Inktomi believes comprises a significant portion of network
traffic. Traffic Server is initially being targeted at telecommunications
carriers and 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.
The Internet search engine application is a powerful, award-winning Internet
search engine that enables Internet portals and other web site customers to
provide a variety of online search services 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 customers
with a programming interface and software tools to enable them to design custom
search service user interfaces. Inktomi provides search services to its
customers through four data centers, each consisting of 100 workstations,
located in California and Virginia.
The Internet shopping engine is Inktomi's newest application and was
initiated with the acquisition of C/2/B Technologies in September 1998. Similar
to the search engine application, Inktomi intends to make the shopping engine
available to Internet portals and other web site customers and will not develop
its own branded online shopping site. The shopping engine is being designed to
enable end users to quickly and easily locate products of interest, compare
features and prices among products, and locate and purchase such products
through participating merchants. Inktomi anticipates that the first release of
its shopping engine will be commercially available to customers in the first
calendar quarter of 1999.
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 electronic commerce, online magazines, e-mail services, specialized
news feeds, interactive games, and educational and entertainment applications.
Although primarily text and graphics-based today, information and services
available on the Internet are increasingly
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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.
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, Internet portals and other providers of
online services such as search, electronic commerce, e-mail and chat must scale
and enhance their services to keep pace with the tremendous growth in user
demand and available information. The technical challenges and on-going
investments associated with maintaining and upgrading the systems required to
provide these services are substantial. Continued increases in the volume,
variety and richness of 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.
Internet portals and other online 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
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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.
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 Inktomi'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 Inktomi 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, one or more workstations
can be added on an incremental, "pay-as-you-go" basis. In contrast, when a
mainframe or SMP-based system reaches full capacity, the existing system must
be replaced with a larger system or an additional system must be added 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. Inktomi's search application crawler operates on Intel-based
workstations and its search engine servers operate on Sun Microsystems SPARC
workstations, in both cases running the Solaris operating system. Inktomi's
Traffic Server application operates on Sun Microsystems SPARC workstations
running the Solaris operating system, Digital Equipment Alpha workstations
running the Digital Equipment UNIX operating system, and Silicon Graphics
workstations running the IRIX operating system.
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Inktomi is collaborating with Intel to port its applications to Intel-based
workstations running Windows NT by mid-1999. Inktomi'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.
STRATEGY
Inktomi's strategy 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. 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
Inktomi 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. Inktomi 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. Inktomi 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. Inktomi is initially
targeting telecommunications carriers and Internet service providers 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. Inktomi 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. Inktomi believes
that adoption of Traffic Server by these leading providers will validate
Inktomi's technology and facilitate broad market acceptance, as well as further
Inktomi'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 Inktomi to
establish Traffic Server as the de facto standard through its adoption and
implementation by high profile network providers. Inktomi 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 TECHNOLOGY PROVIDER OF CHOICE TO ONLINE SERVICE PROVIDERS. Inktomi
believes that it can leverage its scalable software architecture to develop and
provide
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multiple service applications to Internet portals and other online service
providers. In the early days of the Internet, online service providers
primarily focused on providing a single service to end users, such as search,
e-mail, online magazines and interactive games. As the Internet has matured,
many online service providers have expanded their service offerings and
fostered online communities in an effort to attract and retain increasing
numbers of end users. The goal of these Internet portals and other online
service providers has been to build brand and user loyalty and to diversify and
enhance their sources of direct and indirect revenue. However, the addition of
new services and the significant increase in the size and complexity of the
Internet requires substantial on-going investments and technological expertise
in order to maintain and upgrade the quality of the services provided. Inktomi
believes these factors will lead many companies to outsource certain services
such as their search and online shopping capabilities rather than develop and
maintain them in-house. Already, companies such as Wired Digital, Yahoo! and
Microsoft have elected to use Inktomi's search technology not only because of
the performance and scalability advantages it provides, but also because it
allows them to retain the critical flexibility to customize the user interface.
Inktomi believes the same performance, scalability and flexibility benefits
will lead customers to choose the Inktomi shopping engine when available. As
Inktomi continues to develop and enhance its technology and back-end service
offerings, Inktomi believes that the incentives will increase for companies to
outsource these services to Inktomi.
DEVELOP DIRECT AND INDIRECT DISTRIBUTION CHANNELS. Inktomi'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 has established a direct sales force covering
the United States and Canada as well as a direct sales force in England to
address the European market. Inktomi intends to increase the size of its direct
sales force and to establish additional sales offices domestically and
internationally. Inktomi plans to complement its direct sales force by
establishing multiple indirect distribution channels including original
equipment manufacturers ("OEMs"), systems integrators, value-added resellers
("VARs") and joint marketing partners. These channels are intended to increase
geographic sales coverage and to address mid-tier Internet service providers
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. Currently, Inktomi has three scalable
network applications based on its software architecture: Traffic Server, a
large-scale network cache; an Internet search engine; and an Internet shopping
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 Internet service providers, both domestically
and internationally. Inktomi has announced licenses of Traffic Server with
America Online, Inc., Ameritech Interactive Media Services, Inc., At Home
Corporation, BellSouth.net, Digex (an Intermedia Communications Company),
Nippon Telegraph and Telephone, and Telenor Nextel.
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.
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[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 Internet service providers. 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.
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 smoothes 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 online experience for the end user.
[DIAGRAM OF NETWORK WITH CACHING]
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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 Microsystems, 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 online experience for the end user. 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.
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
Microsystems, Digital Equipment and Silicon Graphics. 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. In addition, Inktomi has recently partnered with RealNetworks, Inc.
to develop software plug-in components that integrate the audio and video
streaming capabilities of the upcoming RealNetworks RealSystem G2 into Traffic
Server. The solution has been designed to deliver audio and video files to end
users at higher speeds and quality while reducing network congestion.
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 an array of popular Internet protocols, including HTTP, FTP, RTSP,
NNTP, ICP and SNMP.
Traffic Server currently operates on Sun Microsystems SPARC workstations
running the Solaris operating system, Digital Equipment Alpha workstations
running the Digital Equipment UNIX operating system, and Silicon Graphics
workstations running the IRIX 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
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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, support and maintenance services, and the streaming
media plug-in are priced separately. Inktomi's future growth substantially
depends on the commercial success of Traffic Server, which has only been
licensed by a small number of customers. Traffic Server has been installed in
only a few large-scale, commercial deployments, 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 Inktomi's
business, financial condition and results of operations. See "Risk Factors--
Substantial Dependence on Traffic Server; Uncertainty of Market Acceptance" and
"--Long Sales Cycle for Traffic Server".
SEARCH ENGINE
Inktomi 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 Digital. HotBot has garnered broad media acclaim, including PCWorld's
1998 World Class Award as "Best Web Search Site" (June 1998) and selection as
the best Internet search engine by SmartMoney Magazine (April 1998) and by PC
Computing in their "A-List Top Picks" (June 1998). HotBot has also been
designated an "Editor's Choice" in the "Search Engine Shootout" sponsored by
c/net (January 1998), an "Editor's Choice" by PC Magazine (December 1997) and a
"Most Valuable Product" in the search category by PC Computing (November 1997).
In addition to the Wired Digital relationship, Inktomi has announced search
engine agreements with 15 companies, including At Home Corporation, CNet Snap!,
GeoCities, Inc., Goto.com, Microsoft, Nippon Telegraph and Telephone, and
Yahoo!.
Inktomi's Internet search engine technology enables customers to provide a
variety of online search services to end users. Inktomi generally provides
information search services based on its Internet search engine to its
customers, who in turn incorporate these services into online offerings 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 Inktomi to serve multiple customers while continuing to
concentrate on developing its search engine technology.
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Inktomi'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.
[DIAGRAM OF INKTOMI SEARCH ENGINE]
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 online 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 online 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. Inktomi's coupled cluster technology enables Inktomi 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 Inktomi believes is one
of the largest databases of full text and embedded multimedia documents
commercially available.
HIGH AVAILABILITY AND FRESHNESS. High availability of any online 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
Inktomi 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.
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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, Inktomi 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. Inktomi 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. Inktomi'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. Inktomi's contracts do not typically require the
customer to direct its end users to Inktomi's search service or to use the
search service at all. Accordingly, Inktomi is highly dependent on the
willingness of customers to promote and use the search services provided by
Inktomi, the ability of customers to attract end users to their online
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
Inktomi'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 Inktomi, which could have a
material adverse effect on Inktomi's business, financial condition and results
of operations. See "Risk Factors--Risks Associated with Internet Search Engine
Service".
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<PAGE>
SHOPPING ENGINE
The Internet shopping engine is Inktomi's newest application and was
initiated with the acquisition of C/2/B Technologies in September 1998. Inktomi
is developing the shopping engine to provide a comprehensive shopping
experience for online consumers, enabling them to quickly and easily locate
products of interest, compare features and prices among products, and locate
and purchase such products through participating online merchants. Inktomi
believes that its scalable software architecture and associated core
technologies are well-suited to managing the complex challenges of collecting
and organizing vast quantities of electronic product information and presenting
this information to millions of online consumers in a comparative manner.
Similar to the search engine application, Inktomi will not develop its own
branded online shopping site; rather, Inktomi intends to make the shopping
engine available to Internet portals and other web site customers who can, in
turn, provide online shopping services through their sites to end users.
Inktomi intends to provide Internet portals and other web site customers with
tools and protocols to enable them to customize the shopping interface
presented to their end users and to seamlessly connect with the back-end
shopping engine. Inktomi will provide and manage all hardware, software and
operational aspects of the shopping engine and will collect and organize the
associated database of product libraries, product reviews and purchasing
locations. Inktomi anticipates that the first release of its shopping engine
will be available to customers in the first calendar quarter of 1999.
[DIAGRAM OF INKTOMI SHOPPING ENGINE]
Inktomi is still developing the business model for its shopping engine and
anticipates that revenues will be generated from revenue sharing arrangements
with online merchants, Internet portals and other web site customers using the
shopping engine. The success of our shopping engine will depend on our ability
to establish strong relationships with customers and online merchants, the
dollar volume of online purchases generated by participating merchants, and the
level of advertising revenues generated by customers. In addition, Inktomi's
shopping engine will need to collect and organize vast amounts of electronic
information from online merchants and publishers of comparative product
information, which is a highly complex task. Developing these capabilities and
other required features for the shopping engine will require significant
additional expenses and management and development resources. Inktomi cannot be
certain that its entry into the online shopping business will be successful.
See "Risk Factors--Risks Associated with Internet Shopping Engine".
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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 early work, which Inktomi has significantly modified
and enhanced. Inktomi developed its dataflow technology internally.
Inktomi'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. Inktomi 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, Inktomi has developed technologies in
several important related areas, including information retrieval, secure remote
cluster management and object databases for network caches. Inktomi 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
Inktomi'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 maintains direct sales personnel in California, Colorado, Georgia,
Virginia, Germany and England. The direct sales force is organized into
individual account teams, each consisting of a sales representative and a
systems engineer. Inktomi generates leads from contacts made through seminars,
conferences, trade shows, customers and an ongoing public relations program.
Inktomi qualifies the leads
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<PAGE>
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, sales of the Traffic Server
application generally include a pilot implementation, successful completion and
testing of which are a pre-requisite to full-scale deployment. Inktomi intends
to increase the size of its direct sales force and to establish additional
sales offices domestically and internationally. Competition for sales personnel
is intense, and there can be no assurance that Inktomi will be able to attract,
assimilate or retain additional qualified personnel in the future.
In order to achieve broad distribution of Inktomi'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 Internet service providers and,
eventually, large corporate customers. Inktomi is in the early stages of
building these channels and currently has entered into written agreements with
a limited number of companies. There can be no assurance that Inktomi 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 Inktomi's products.
Inktomi believes it is important to have a strong international presence and
intends to translate and localize its products to address international
markets. Inktomi intends to employ a mix of channels similar to its U.S. model
through the use of OEMs, system integrators and VARs. The Company has
established a subsidiary in England and a sales office in Germany to address
the European market and is in the process of establishing subsidiaries in Japan
and Korea to support channel partners in the Asia-Pacific region. Inktomi
intends to hire additional sales and marketing personnel in these offices and
to establish additional offices to support its international operations.
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.
Inktomi believes that strategic relationships will assist Inktomi's products
and technology in gaining broad market acceptance as well as enhancing
Inktomi's marketing, sales and distribution capabilities. Inktomi has
informally collaborated with Sun Microsystems since early 1997 regarding a
range of marketing and sales activities relating to Traffic Server. Inktomi has
also partnered with Digital Equipment and Silicon Graphics to port Traffic
Server to run on their equipment, and informally collaborates with these
companies on joint market development activities. Inktomi is currently working
with Intel to port Traffic Server to operate on Intel-based workstations
running Windows NT, and expects to complete the port by mid-1999. In addition,
Inktomi has teamed with RealNetworks to develop the first network cache for
streaming audio and video content. Inktomi intends to pursue other strategic
relationships. See "Risk Factors--Dependence on Strategic Relationships".
CUSTOMER SERVICE AND SUPPORT
Inktomi believes that a high level of customer service and support is
critical to the successful marketing and sale of its products. Inktomi 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, search engine and online shopping applications are deployed across a
range of customers. Inktomi provides support for its products and services
primarily from its San Mateo, California location. Inktomi 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. Inktomi expects to expand the variety of such services as
necessary to meet the growing needs of its customers.
Inktomi 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. Inktomi 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
Inktomi will be able to increase the size of its customer service and support
organization on a timely basis or at all, or that Inktomi 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 Inktomi 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
Inktomi, 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, Inktomi strives to
create and maintain an environment of rapid innovation and product release.
Since inception, Inktomi 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. Inktomi is currently working on completing development on the
first version of its shopping engine, porting its Traffic Server application to
operate on Intel-based workstations running Windows NT, and adding features and
new functionality to its Traffic Server and search engine products. Inktomi's
research and development expenses totaled $12.2 million for the year ended
September 30, 1998, $5.1 million for the year ended September 30, 1997 and $1.5
million for the period from February 2, 1996 (inception) to September 30, 1996.
COMPETITION
Inktomi competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Inktomi faces competition in the overall
network infrastructure market as well as in the network cache and Internet
search segments of this market. Inktomi has experienced and expects to continue
to experience increased competition from current and potential competitors,
many of which have significantly greater financial, technical, marketing and
other resources.
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In the market for network cache solutions, Inktomi competes on the basis of
performance, scalability, data throughput, ease of integration and
manageability. Inktomi competes primarily against several companies including
CacheFlow, Cisco Systems, Microsoft, Mirror Image Internet, Netscape, Network
Appliance, Novell, and Spyglass, among others. Inktomi also competes against
freeware caching solutions including CERN, Harvest and Squid. Inktomi is aware
of numerous other major software developers as well as smaller entrepreneurial
companies that are focusing significant resources on developing and marketing
products and services that will compete with Traffic Server. Inktomi believes
that Traffic Server may face competition from other providers of hardware and
software offering competing solutions to network infrastructure problems,
including networking hardware and companion software manufacturers such as
Ascend Communications, Bay Networks, Ciena and IBM; hardware manufacturers such
as Digital Equipment, Hewlett-Packard, Intel, Motorola and Sun Microsystems;
telecommunications providers such as AT&T, MCI Worldcom, and regional Bell
operating companies; cable TV/communications providers such as Continental
Cablevision, TimeWarner, and regional cable operators; software database
companies such as Informix, Oracle and Sybase; and large diversified software
and technology companies including Microsoft, Netscape and others. Cisco
Systems, 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 Inktomi competes.
In the market for providing outsourced search services, Inktomi competes on
the basis of performance, scalability, price, relevance of results and user
response time. Inktomi competes with a number of companies to provide Internet
search services, many of which have operated services in the market for a
longer period, have greater financial resources, have established marketing
relationships with leading online services and advertisers, and have secured
greater presence in distribution channels. Competitors that offer search
services to online service providers include Digital Equipment (Alta Vista),
Excite, Infoseek, Lycos and Northern Light, among others. In addition, large
media companies such as The Walt Disney Company and NBC Enterprises have
recently made investments in Internet search engine companies, and Inktomi
believes that other large media enterprises may enter or expand their presence
in the Internet search engine market, either directly or indirectly through
collaborations or other strategic alliances.
The market for the shopping engine application is rapidly evolving and
intensely competitive. Inktomi's current and potential competitors include
other providers of shopping technologies and services including Jango.com,
owned by Excite, Junglee, recently acquired by Amazon.com, and mySimon.com; and
various online retailers and aggregators of merchandise including Amazon.com,
Bottom Dollar, owned by WebCentric, eBay, InfoSpace.com and Yahoo!. Inktomi
believes the principal factors that will draw end users to an online shopping
application include brand availability, selection, personalized services,
convenience, price, accessibility, customer services, quality of search tools,
quality of content, and reliability and speed of fulfillment for products
ordered. Inktomi will have little or no control over many of these factors.
Inktomi's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than Inktomi. In addition,
certain of Inktomi'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 Inktomi. Also, certain current and potential competitors have
greater name recognition, more extensive customer bases that could be leveraged
or access to proprietary content, thereby gaining market share to Inktomi's
detriment. Inktomi expects additional competition as other established and
emerging companies enter the network infrastructure
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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
Inktomi's business, financial condition and results of operations.
PROPRIETARY RIGHTS
Inktomi's products and services operate in part by making copies of material
available on the Internet and other networks and making this material available
to end users from a central location. This creates the potential for claims to
be made against Inktomi (either directly or through contractual indemnification
provisions with customers) for defamation, negligence, copyright or trademark
infringement, personal injury, invasion of privacy or other legal theories
based on the nature, content or copying of such materials. Such claims have
been threatened against Inktomi from time to time, and have been brought and
sometimes successfully pressed against online services in the past. It is also
possible that if any information provided through the Inktomi search engine or
shopping engine, 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
Inktomi for losses incurred in reliance on such information. Although Inktomi
carries general liability insurance, Inktomi's insurance may not cover
potential claims of this type or may not be adequate to indemnify Inktomi for
all liability that may be imposed.
Inktomi's success and ability to compete are substantially dependent upon its
internally developed technology. While Inktomi relies on patent, copyright,
trade secret and trademark law to protect its technology, Inktomi 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 Inktomi's technology.
Inktomi 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 Inktomi's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use Inktomi's
products or technology. Policing unauthorized use of Inktomi's products is
difficult, and there can be no assurance that the steps taken by Inktomi will
prevent misappropriation of its technology, particularly in foreign countries
where the laws may not protect Inktomi'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 Inktomi expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in Inktomi'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. In
addition, Inktomi believes that many of its competitors in the network cache
business have filed or intend to file patent applications covering aspects of
their technology that they may claim Inktomi's technology infringes. There can
be no assurance that Lycos or other third parties will not claim infringement
by Inktomi with respect to its products and technology 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 Inktomi to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to Inktomi, if at all. A successful claim of
product infringement against Inktomi and failure or inability of Inktomi to
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license the infringed or similar technology could have a material adverse
effect on Inktomi's business, financial condition and results of operations.
EMPLOYEES
As of September 30, 1998, Inktomi had 185 full-time employees, 84 of whom
were engaged in research and development, 72 in sales and marketing, 10 in
customer support, and 19 in finance, administration and operations. Inktomi'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 Inktomi's key employees could have a
material adverse effect on Inktomi's business, financial condition and results
of operations. Inktomi'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 Inktomi can retain its key personnel in the future. None of
Inktomi's employees is represented by a labor union. Inktomi has not
experienced any work stoppages and considers its relations with its employees
to be good.
TECHNICAL ADVISORY BOARD
Inktomi has assembled a Technical Advisory Board composed 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
Inktomi, 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 Microsystems; 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 48,000 square feet in a single office building
located in San Mateo, California. Approximately 16,400 square feet is leased
pursuant to a sublease that expires February 2000. This 16,400 square feet
becomes the subject of an extension directly with the master landlord upon
expiration of the sublease. This extension expires in October 2002.
Approximately 32,300 square feet of this San Mateo space is leased pursuant to
a lease that expires in October of 2003. Inktomi has also executed a lease for
approximately 177,000 square feet of office space in Foster City, California.
This lease expires 11 years after commencement, which is anticipated to be in
June 1999. This lease provides Inktomi with an option to expand into a total of
approximately 241,000 square feet after five years and provides an option to
purchase the site from months 13 through 59. Inktomi also leases space in
Epsom, England; Atlanta, Georgia; Denver, Colorado; McLean, Virginia; Tokyo,
Japan; and Munich, Germany. The term of any one of these leases is not more
than 12 months. See "Risk Factors--Need to Manage Changing Operations".
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the execu-
tive officers and directors of Inktomi as of October 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------- --- --------------------------------------------
<C> <C> <S>
Chairman of the Board, President and Chief
David C. Peterschmidt(1).... 51 Executive Officer
Dr. Eric A. Brewer.......... 31 Chief Scientist and Director
Paul Gauthier............... 26 Chief Technology Officer
Vice President of Finance, Chief Financial
Jerry M. Kennelly........... 48 Officer and Secretary
Dennis L. McEvoy............ 51 Vice President of Development and Support
Richard B. Pierce........... 39 Vice President of Marketing
Timothy Stevens............. 32 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).. 38 Director
John A. Porter(1)(2)(3)..... 54 Director
Alan F. Shugart(2)(3)....... 68 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 Inktomi since its inception in
February 1996. From February 1996 to December 1997, Dr. Brewer was Chief
Technology Officer of Inktomi and was appointed Chief Scientist in December
1997. From May 1996 to July 1996, he served as interim President and Chief
Executive Officer of Inktomi. 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 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 Inktomi
from February 1996 until his appointment as Chief Technology Officer in
December 1997. From May 1995 to August 1995, Mr. Gauthier served
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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 Inktomi 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 Inktomi 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 degree 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 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,
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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 Bachelor of
Science and Masters degrees in Industrial Engineering from Stanford University.
FREDRIC W. HARMAN joined Inktomi 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 Bachelor of Science and Masters degrees in Electrical Engineering from
Stanford University and a Masters of Business Administration from Harvard
University.
JOHN A. PORTER joined Inktomi 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 MCI 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
previously served on the Board of Directors of WorldCom from 1989 until its
merger with MCI, 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.
ALAN F. SHUGART joined Inktomi as a Director in December 1997. Mr. Shugart
has been Chief Executive Officer of Al Shugart International since September
1998. From 1979 to 1998, Mr. Shugart was Chief Executive Officer of Seagate
Technology, Inc., a manufacturer of disk drives and other computer equipment.
From 1979 until September 1991 and from October 1992 to September 1998,
Mr. Shugart 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
Cypress Semiconductor Corp.
Inktomi'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. Inktomi's Bylaws provide that the authorized
number of directors may be changed only by resolution of the Board of
Directors.
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 Inktomi.
BOARD COMMITTEES
Inktomi has established an Audit Committee, a Compensation Committee and a
Nominating Committee. The Audit Committee reviews the internal accounting
procedures of Inktomi and consults with and reviews the services provided by
Inktomi's independent accountants. The Compensation Committee reviews and
recommends to the Board of Directors the compensation and benefits of all
officers of Inktomi and establishes and reviews general policies relating to
compensation and benefits of employees of Inktomi. The Nominating Committee is
responsible for establishing general qualification guidelines applicable to
nominees to the Board of Directors, and for identifying, interviewing and
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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 Inktomi 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 Inktomi'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 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 Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
earned for services rendered to Inktomi in all capacities for the fiscal years
ended September 30, 1998 and 1997 by Inktomi's Chief Executive Officer and
Inktomi's four next most highly compensated executive officers who earned more
than $100,000 during the fiscal year ended September 30, 1998 (collectively,
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) OPTIONS(#)
---------------------------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
David C. Peterschmidt................ 1998 $ 150,000 $ 125,000 100,000
Chairman of the Board, President and 1997 150,000 280,000(1) --
Chief Executive Officer
Jerry M. Kennelly(2)................. 1998 200,000 73,105 40,000
Vice President of Finance and Chief 1997 184,102 37,045 200,001(3)
Financial Officer
Dennis L. McEvoy(4).................. 1998 200,000 61,507 40,000
Vice President of Development and
Support 1997 66,667 92,210 268,801
Richard B. Pierce(5)................. 1998 185,000 67,916 50,000
Vice President of Marketing 1997 150,016 333,776 233,334(3)
Vince Vannelli(6).................... 1998 150,000 192,065 250,000
Vice President of Worldwide Field
Operations 1997 -- -- --
</TABLE>
- --------
(1) Bonus earned and accrued during the 1997 fiscal year and paid over the
1998 fiscal year.
(2) Mr. Kennelly joined Inktomi in October 1996.
(3) Shares subject to options granted under Inktomi's 1996 Equity Incentive
Plan. Excludes 133,334 shares and 233,334 shares issuable upon exercise of
options granted during the 1997 fiscal year under the 1996 Equity
Incentive Plan to Mr. Kennelly and Mr. Pierce, respectively. Such options
were cancelled during the fiscal year.
(4) Mr. McEvoy joined Inktomi in June 1997.
(5) Mr. Pierce joined Inktomi in November 1996.
(6) Mr. Vannelli joined Inktomi in January 1998.
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<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, 1998. 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 Inktomi'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
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(3)
OPTIONS DURING PRICE EXPIRATION ---------------------
NAME GRANTED(#) PERIOD(1) ($/SHARE)(2) DATE 5% 10%
---- ---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David C. Peterschmidt... 100,000(4) 6.5% $49.00 09/01/08 $3,081,584 $7,809,338
Jerry M. Kennelly....... 40,000(4) 2.6 49.00 09/01/08 1,232,634 3,123,736
Dennis L. McEvoy........ 40,000(4) 2.6 49.00 09/01/08 1,232,634 3,123,736
Richard B. Pierce....... 50,000(4) 3.2 49.00 09/01/08 1,540,792 3,904,670
Vince Vannelli.......... 200,000(5) 12.9 3.33 02/09/08 418,844 1,061,433
50,000(4) 3.2 49.00 09/01/08 1,540,792 3,904,670
</TABLE>
- --------
(1) Based on an aggregate of 1,544,605 options granted by Inktomi during the
fiscal year ended September 30, 1998 to employees of and consultants to
Inktomi, including the Named Executive Officers. Excludes options granted
by C/2/B Technologies during the fiscal year that were assumed by Inktomi
in connection with its acquisition of C/2/B Technologies.
(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 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) Option was granted under Inktomi's 1998 Stock 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 Inktomi
the right in the event of any termination of employment to repurchase all
then unvested shares at cost. 2% of the shares become vested 37 months from
the date of grant and an additional 2% of the shares become vested monthly
thereafter.
(5) Option was granted under Inktomi'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
Inktomi the right in the event of any termination of employment to
repurchase all then unvested shares at cost. 2% of the shares become vested
six months from the date of commencement of employment and 2% of the shares
become vested monthly thereafter. Mr. Vannelli exercised and purchased all
shares under this option in April 1998.
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<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, 1998 and exercisable and
unexercisable options held as of September 30, 1998:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE SEPTEMBER 30, 1998 (#) SEPTEMBER 30, 1998 ($)(2)
NAME EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David C. Peterschmidt... 66,667 $ 4,903,358 750,200(3) -- $50,322,210 --
Jerry M. Kennelly....... -- -- 40,000(4) -- 1,000,000 --
Dennis L. McEvoy........ -- -- 40,000(4) -- 1,000,000 --
Richard B. Pierce....... -- -- 50,000(4) -- 1,250,000 --
Vince Vannelli.......... 200,000(5) 14,134,000 50,000(4) -- 1,250,000 --
</TABLE>
- --------
(1) Based on a value of $74.00 per share, the closing price of Inktomi's stock
on the Nasdaq National Market on September 30, 1998, minus the per share
exercise price, multiplied by the number of shares issued upon exercise of
the option.
(2) Based on a value of $74.00 per share, the closing price of Inktomi's stock
on the Nasdaq National Market on September 30, 1998, minus the per share
exercise price, multiplied by the number of shares underlying the option.
(3) Includes an option to purchase 100,000 shares of Common Stock. All shares
under the option are immediately exercisable; however, as a condition of
exercise, the optionee must enter into a stock restriction agreement giving
Inktomi the right in the event of any termination of employment to
repurchase all then unvested shares at cost. 2% of the shares become vested
37 months following the date of grant and an additional 2% of the shares
become vested monthly thereafter.
(4) All shares under the option are immediately exercisable; however, as a
condition of exercise, the optionee must enter into a stock restriction
agreement giving Inktomi the right in the event of any termination of
employment to repurchase all then unvested shares at cost. 2% of the shares
become vested 37 months following the date of grant and an additional 2% of
the shares become vested monthly thereafter.
(5) As of September 30, 1998, 164,000 of the shares acquired by Mr. Vannelli
were subject to a right of repurchase by Inktomi at cost in the event of
termination of employment with Inktomi. The repurchase option lapses as to
4,000 shares per month.
INCENTIVE STOCK PLANS
1996 EQUITY INCENTIVE PLAN. Inktomi'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 September 30, 1998,
options to purchase 1,784,370 shares of Common Stock were outstanding and
2,589,911 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 Inktomi 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 Inktomi.
For consultants and directors, the right of repurchase generally lapses over
the term of service. Prior to adopting the Incentive Plan, Inktomi granted
nonstatutory stock options to purchase Common Stock to certain employees and
consultants. As of September 30, 1998, options to purchase 75,556 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.
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<PAGE>
C/2/B TECHNOLOGIES 1997 STOCK PLAN. In connection with Inktomi's acquisition
of C/2/B Technologies in September 1998, Inktomi assumed the outstanding stock
options granted under the C/2/B Technologies 1997 Stock Plan (the "C/2/B Stock
Plan"). A total of 129,584 shares of Common Stock has been reserved for
issuance pursuant to the outstanding options assumed. The assumed options will
continue to be governed by the terms of the C/2/B Stock Plan and the related
stock option agreements. Issuances of additional options pursuant to the C/2/B
Stock Plan were discontinued as of the effectiveness of the merger, and no
further options will be granted thereunder. The C/2/B Stock Plan is currently
administered by the Board of Directors, although the Board may designate a
committee to administer the plan. Options granted under the C/2/B Stock 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 Inktomi at the exercise price. For employees, the stock options
typically vest or the right of repurchase generally lapses as to 1/36th of the
granted shares following each month after the first date of employment. In
connection with Inktomi's assumption of the options, each of the employees with
outstanding options under the C/2/B Stock Plan received an additional nine
months of vesting.
1998 STOCK PLAN. Inktomi'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. 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. As of September 30, 1998, options to purchase 692,850 shares of
Common Stock were outstanding and 307,150 shares available for future grant.
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
Inktomi. 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 Inktomi'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. Inktomi's 1998 Employee Stock Purchase
Plan (the "Purchase Plan") provides employees of Inktomi with an opportunity to
purchase Common Stock of Inktomi 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 had been issued at September 30, 1998. 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 Inktomi 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 Inktomi for at
least 20 hours per week and more than five months in any calendar year. Unless
the Board of Directors or its committee determines otherwise, each offering
period will run for 24
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<PAGE>
months and will be divided into four consecutive purchase periods of
approximately six months. The first offering period and the first purchase
period commenced on June 9, 1998, and new 24 month offering periods commence
every six months thereafter. In the event of an acquisition of Inktomi,
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.
401(K) PLAN
In 1996, Inktomi adopted a Retirement Savings and Investment Plan (the
"401(k) Plan") covering Inktomi'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 Inktomi, and the investment earnings
thereon, are not taxable to employees until withdrawn from the 401(k) Plan, and
so that contributions by Inktomi, if any, will be deductible by Inktomi 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 Inktomi on behalf of all participants in the 401(k) Plan. To
date, Inktomi has not made any contributions to the 401(k) Plan.
EMPLOYMENT AGREEMENT
Inktomi 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 Inktomi 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 Inktomi for such time
period.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Inktomi'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.
Inktomi's Certificate of Incorporation and Bylaws provide that Inktomi 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.
Inktomi believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Inktomi'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,
48
<PAGE>
regardless of whether the Bylaws would permit indemnification.
Inktomi has entered into agreements to indemnify its directors and executive
officers, in addition to indemnification provided for in Inktomi's Bylaws.
These agreements, among other things, provide for indemnification of Inktomi'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 Inktomi,
arising out of such person's services as a director or executive officer of
Inktomi, any subsidiary of Inktomi or any other company or enterprise to which
the person provides services at the request of Inktomi. Inktomi believes that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
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CERTAIN TRANSACTIONS
In February 1996, Inktomi issued 751,815 shares of Common Stock to each of
Dr. Eric A. Brewer and Paul Gauthier at a cash price of $0.000075 per share. In
March 1996, Inktomi issued 1,683,168 shares of Common Stock to each of Dr.
Brewer and Mr. Gauthier at a cash price of $0.00075 per share. Dr. Brewer and
Mr. Gauthier are each executive officers of Inktomi, and Dr. Brewer is a
Director of Inktomi.
In March 1996, Inktomi LLC, a California limited liability company whose
members include Dr. Brewer and Mr. Gauthier, and Dr. Brewer and Mr. Gauthier as
individuals, transferred to Inktomi all of their right, title and interest in
certain technology in exchange for $100,000 cash and a promissory note of
Inktomi 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 Inktomi 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 Inktomi's Common
Stock at an exercise price of $0.33 per share and forgave all other
indebtedness under the promissory note.
In July 1996, Inktomi entered into an employment agreement with David C.
Peterschmidt, Inktomi'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 Inktomi 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 Inktomi
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 Inktomi'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 Inktomi. In exchange for consulting services, Inktomi 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 Inktomi full time as Vice President of Development and Support in June
1997.
In April 1997, Inktomi issued and sold to entities affiliated with Oak
Investment Partners ("Oak Partners") 2,405,653 shares of Common Stock at
$3.3255 per share and warrants to purchase 801,884 shares of Common 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). Oak Partners is a 5%
stockholder of Inktomi. Fredric W. Harman is a Managing Partner of the General
Partners of the Oak Partners entities and is a Director of Inktomi.
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 Inktomi's Board of Directors.
In April 1998, Inktomi loaned $666,000 to Vince Vannelli, Vice President of
Worldwide Field Operations, in connection with the exercise of his stock
options. The loan bears interest at the lowest applicable federal
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rate and is secured by the shares issued upon exercise of the stock option.
All principal and accrued interest under the loan is due and payable in April
2002, or within 90 days following any termination of employment.
A total of 400 shares and 1,200 shares of Common Stock, respectively,
included for sale in this offering by Jerry M. Kennelly, Inktomi's Vice
President of Finance and Chief Financial Officer, and Vince Vannelli,
Inktomi's Vice President of Worldwide Field Operations, will be subject to the
short-swing trading liability requirements of Section 16 under the Securities
and Exchange Act of 1934, as amended. These individuals purchased these shares
at a purchase price of $18.00 in connection with Inktomi's initial public
offering in June 1998. Under the provisions of Section 16, Messrs. Kennelly
and Vannelli will be required to pay to Inktomi all "profit" resulting from
the sale of such shares in this offering. For Mr. Kennelly, this "profit" will
be $46,560, and for Mr. Vannelli, this "profit" will be $139,680. Messrs.
Kennelly and Vannelli have agreed that they will pay to Inktomi all such
amounts immediately upon the completion of this offering.
All future transactions, including any loans from Inktomi 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 Inktomi than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to Inktomi with respect to
the beneficial ownership of its Common Stock as of September 30, 1998, and as
adjusted to reflect the sale of Common Stock offered hereby by (i) each
stockholder known by Inktomi to own beneficially more than 5% of the Common
Stock, (ii) each of the Named Executive Officers, (iii) each director of
Inktomi, (iv) all directors and executive officers as a group, and (v) all
other selling stockholders. As of September 30, 1998, there were 23,388,372
shares of Common Stock outstanding.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK TO BE BENEFICIALLY
OWNED BEFORE SALE OWNED AFTER SALE
UNDER THIS UNDER THIS
PROSPECTUS(1) SHARES PROSPECTUS(1)(2)
-------------------- TO BE -----------------------------
NUMBER PERCENTAGE SOLD(2) NUMBER PERCENTAGE
--------- ---------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Oak Investment
Partners(3)............ 3,197,514 13.7% 500,000 2,697,514 11.4%
525 University Avenue,
Suite 1300
Palo Alto, CA 94301
Fredric W. Harman(4).... 3,197,514 13.7 500,000 2,697,514 11.4
525 University Avenue,
Suite 1300
Palo Alto, CA 94301
Dr. Eric A. Brewer(5)... 2,129,765 9.0 100,000 2,029,765 8.5
Inktomi Corporation
1900 S. Norfolk Street,
Suite 310
San Mateo, CA 94403
Paul Gauthier(6)........ 2,072,563 8.8 150,000 1,922,563 8.0
Inktomi Corporation
1900 S. Norfolk Street,
Suite 310
San Mateo, CA 94403
David C.
Peterschmidt(7)........ 956,867 4.0 50,000 906,867 3.7
Jerry M. Kennelly(8).... 316,926 1.4 25,000 291,926 1.2
Dennis L. McEvoy(9)..... 308,801 1.3 26,880 281,921 1.2
Richard B. Pierce(10)... 385,898 1.6 -- 385,898 1.6
Vince Vannelli(11)...... 250,000 1.1 20,000 230,000 1.0
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)........... 9,828,210 39.6 879,180 8,949,030 35.6
Entities affiliated with
Integral Capital
Partners(15)........... 373,336 1.6 73,336 300,000 1.3
Artal Services S.A. .... 314,000 1.3 150,000 164,000 *
Seligman Communications
and Information Fund,
Inc. .................. 314,000 1.3 314,000 -- *
Scott Walchek........... 278,456 1.2 112,500 165,956 *
All other selling
stockholders each
owning less than 1% of
the total voting power
prior to this offering
(82 persons)........... 2,375,963 10.2 1,170,984 1,204,952 5.1
</TABLE>
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<PAGE>
- --------
* Less than 1% of the outstanding shares of Common Stock.
(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 September 30, 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.
(3) Includes 3,056,973 shares held by Oak Investment Partners VII, Limited
Partnership, 78,340 shares held by Oak VII Affiliates Fund, Limited
Partnership, and 62,201 shares held by Oak Associates VII, L.L.C. Oak
Investment Partners VII, Limited Partnership, is selling 427,073 shares in
this offering, Oak VII Affiliates Fund, Limited Partnership, is selling
10,726 shares in this offering and Oak Associates VII, L.L.C. is selling
62,201 shares in this offering.
(4) Includes 3,056,973 shares held by Oak Investment Partners VII, Limited
Partnership, 78,340 shares held by Oak VII Affiliates Fund, Limited
Partnership, and 62,201 shares held by Oak Associates VII, L.L.C. Oak
Investment Partners VII, Limited Partnership, is selling 427,073 shares in
this offering, Oak VII Affiliates Fund, Limited Partnership, is selling
10,726 shares in this offering and Oak Associates VII, L.L.C. is selling
62,201 shares in this offering. Mr. Harman is a Managing Partner of the
general partners of the Oak Partners entities and is a Director of
Inktomi. 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 1,904,331 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
Inktomi. Also includes an option held by Dr. Brewer to purchase 50,000
shares of Common Stock. The option is fully exercisable although as of
September 30, 1998 all shares issuable upon exercise of the option were
subject to a right of repurchase at cost in the event Dr. Brewer ceases to
be an employee of Inktomi.
(6) Includes 1,847,129 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 Inktomi. Also includes
an option held by Mr. Gauthier to purchase 50,000 shares of Common Stock.
The option is fully exercisable although as of September 30, 1998 all of
such shares issuable upon exercise of the option were subject to a right
of repurchase at cost in the event Mr. Gauthier ceases to be an employee
of Inktomi.
(7) 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 are fully vested. Also includes an option held by Mr.
Peterschmidt to purchase 100,000 shares of Common Stock. The option is
fully exercisable although as of September 30, 1998 all shares issuable
upon exercise of the option were subject to a right of repurchase at cost
in the event Mr. Peterschmidt ceases to be an employee of Inktomi.
(8) 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 September 30, 1998, 118,667 of the shares held by Mr. Kennelly were
subject to a right of repurchase by Inktomi at cost in the event
Mr. Kennelly ceases to be an employee of Inktomi. The right of repurchase
lapses at the rate of 4,000 shares per month and lapses in full upon
consummation of an acquisition of Inktomi. Also includes an option held by
Mr. Kennelly to purchase 40,000 shares of Common Stock. The option is
fully exercisable although as of September 30, 1998 all shares issuable
upon exercise of the option were subject to a right of repurchase at cost
in the event Mr. Kennelly ceases to be an employee of Inktomi.
(9) All shares are held by Mr. McEvoy and his wife, Kim Worsencroft. At
September 30, 1998, 123,129 of the shares held by Mr. McEvoy and Ms.
Worsencroft were subject to a right of repurchase by Inktomi at cost in
the event Mr. McEvoy ceases to be an employee of Inktomi. The right of
repurchase lapses at the rate of approximately 3,579 shares per month, and
as to all shares upon consummation of an acquisition of Inktomi. Also
includes an option held by Mr. McEvoy to purchase 40,000 shares of Common
Stock. The option is fully exercisable although as of September 30, 1998
all shares issuable upon exercise of the option were subject to a right of
repurchase at cost in the event Mr. McEvoy ceases to be an employee of
Inktomi.
(10) 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 September 30,
1998, 126,668 of the shares held by the Pierce Family Trust were subject
to a right of repurchase by Inktomi at cost in the event Mr. Pierce ceases
to be an employee of Inktomi. 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. Also includes an option held by Mr. Pierce to purchase
50,000 shares of Common Stock. The option is fully exercisable although as
of September 30, 1998 all shares issuable upon exercise of the option were
subject to a right of repurchase at cost in the event Mr. Pierce ceases to
be an employee of Inktomi.
(11) All shares are held by Mr. Vannelli. As of September 30, 1998, 164,000 of
the shares held by Mr. Vannelli were subject to a right of repurchase by
Inktomi at cost in the event Mr. Vannelli ceases to be an employee of
Inktomi. The right of repurchase lapses at the rate of approximately 4,000
shares per month. Also includes an option held by Mr. Vannelli to purchase
50,000 shares of Common Stock. The option is fully exercisable although as
of September 30, 1998 all shares issuable upon exercise of the option were
subject to a right of repurchase at cost in the event Mr. Vannelli ceases
to be an employee of Inktomi.
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<PAGE>
(12) All shares are held by Integra Holdings, L.P. As of September 30, 1998,
16,667 of the shares held by Integra Holdings were subject to a right of
repurchase by Inktomi at cost in the event Mr. Porter ceases to be a
Director of Inktomi. The right of repurchase lapses at the rate of 2,778
shares per month.
(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 September 30,
1998, 33,333 of the shares issuable upon exercise of the option were
subject to a right of repurchase by Inktomi at cost in the event Mr.
Shugart ceases to be a Director of Inktomi. The right of repurchase lapses
at the rate of 1,389 shares per month.
(14) Includes 350,868 shares issuable upon exercise of warrants and options to
purchase 1,100,200 shares, which options are fully exercisable as of
September 30, 1998.
(15) Includes 304,132 shares held by Integral Capital Partners III, L.P., and
69,204 shares held by Integral Capital Partners International III, L.P.
Integral Capital Partners III, L.P., is selling 59,743 shares in this
offering and Integral Capital Partners International, L.P., is selling
13,593 shares in this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Inktomi is 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 Inktomi's capital stock does not purport to be
complete and is subject to and qualified in its entirety by Inktomi'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 September 30, 1998, there were 23,388,372 shares of Common Stock
outstanding which were held of record by approximately 356 stockholders.
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 Inktomi, 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 Inktomi
without further action by the stockholders. Inktomi has no present plans to
issue any shares of Preferred Stock.
WARRANTS
At September 30, 1998, there were warrants outstanding to purchase a total of
729,806 shares of Common Stock. Warrants to purchase 200,472 shares at $4.99
per share will expire in April 1999, warrants to purchase 5,120 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, warrants to purchase
27,778 shares at $17.55 per share will expire in June 2002, warrants to
purchase 69,445 shares at $35.10 per share will expire in June 2002 and
warrants to purchase 5,956 shares at $5.86 will expire in June 2002.
REGISTRATION RIGHTS
The holders of 11,394,083 shares of Common Stock and the holders of warrants
to purchase 200,472 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 Inktomi and the holders of registrable
securities. Under these registration rights, beginning on
55
<PAGE>
December 8, 1998, holders of at least a majority of the then outstanding
registrable securities may require on one occasion that Inktomi register their
shares for public resale. Inktomi 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 Inktomi register their shares for public resale on Form
S-3 or similar short-form registration, provided Inktomi 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 Inktomi 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 Inktomi 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 Inktomi. All registration rights will terminate on June 9, 2002, or, with
respect to each holder of registrable securities, at such time as the holder is
entitled to sell all of its shares in any three month period under Rule 144 of
the Securities Act.
The holders of 964,022 shares of Common Stock (and their permitted
transferees) received in connection with the acquisition of C/2/B Technologies
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under these registration rights, in the event Inktomi
elects to register any of its shares of Common Stock for purposes of effecting
any public offering, the holders of these registrable securities are entitled
to include their shares of Common Stock in the registration, subject to the
right of Inktomi 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 Inktomi.
All registration rights will terminate on September 25, 1999.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and Inktomi's Certificate of Incorporation
and Bylaws could make more difficult the acquisition of Inktomi 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 Inktomi to first
negotiate with Inktomi. Inktomi believes that the benefits of increased
protection of Inktomi's potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Inktomi outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
Inktomi 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
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<PAGE>
the market price for the shares of Common Stock held by stockholders.
Inktomi'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 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
Inktomi. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of Inktomi. 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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
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 Inktomi'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 Inktomi in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of Inktomi to
raise equity capital in the future.
Upon completion of this offering, Inktomi will have outstanding 23,688,372
shares of Common Stock (based upon shares outstanding as of September 30,
1998), assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options or warrants after September 30, 1998. Of these
shares, the 3,000,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act except for any shares purchased by
"affiliates" of Inktomi as that term is defined in Rule 144 under the
Securities Act. In addition, the 2,592,100 shares sold in Inktomi's initial
public offering in June 1998 and 791,540 shares released from the lock-up
agreements executed by certain stockholders in connection with the initial
public offering are freely tradable.
The remaining 17,304,732 shares of Common Stock held by existing stockholders
are "Restricted Shares" as that term is defined in Rule 144 and may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. On December 8,
1998, the lock-up agreements relating to Inktomi's initial public offering will
expire. On this date, approximately 3,535,655 Restricted Shares will be
eligible for resale, subject in some cases to compliance with the volume
limitations and other restrictions under Rule 144. In addition, on December 8,
1998, the lock-up agreements will expire as to 384,351 shares held by employees
of Inktomi. However, these shares are subject to a right of repurchase in the
event of termination of employment. The repurchase option lapses over time in
accordance with the vesting schedule for each employee. As the repurchase
option lapses, these shares will be eligible for resale in accordance with Rule
701.
Inktomi's officers, directors, the selling stockholders and certain other
stockholders and the underwriters entered into lock-up agreements in connection
with this offering. These lock-up agreements provide that, with certain limited
exceptions, the stockholder will not offer, sell, contract to sell or otherwise
dispose of any securities of Inktomi 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 90 days after the date of this prospectus without
the prior written consent of Goldman, Sachs & Co. Upon expiration of the lock-
up agreements, approximately 9,735,271 Restricted Shares will be eligible for
resale, subject in some cases to compliance with the volume limitations and
other restrictions under Rule 144. Of the remaining 3,649,455 shares, 2,685,433
shares will become eligible for sale at various times from February 1999
through June 1999 and 964,022 shares will become eligible for sale on September
25, 1999, subject in some cases to the volume and manner of sale limitations
under Rule 144. Any early release of the lock-up agreements by Goldman, Sachs &
Co., which, if granted, could permit sales of a substantial number of shares
and could adversely affect the trading price of Inktomi's shares, may not be
accompanied by an advance public announcement by Inktomi. In addition, certain
holders of Common Stock have the right to include their shares in any
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<PAGE>
future registration of securities effected by Inktomi and to require Inktomi to
register their shares for future sale, subject to certain exceptions.
In general, under Rule 144 as currently in effect, 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 236,900 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 Inktomi. Under Rule 144(k), a person who is
not deemed to have been an affiliate of Inktomi 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 Inktomi 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 who have not executed lock-up agreements in connection with
this offering will be able to sell such shares beginning on December 8, 1998.
In October 1998, Inktomi filed a Registration Statement on Form S-8
registering 3,297,218 shares of Common Stock subject to outstanding options or
reserved for future issuance under its stock plans. As of September 30, 1998,
options to purchase a total 2,682,360 shares were outstanding and 3,289,510
shares were reserved for future issuance under Inktomi's stock plans. Common
Stock issued upon exercise of outstanding vested options or issued pursuant to
the Purchase Plan, other than Common Stock issued to affiliates of Inktomi, is
available for immediate resale in the open market.
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<PAGE>
ADDITIONAL INFORMATION
Inktomi 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 Inktomi 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.
Inktomi is subject to the informational requirements of the Exchange Act and,
in accordance therewith, files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information filed
by Inktomi can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also makes
electronic filings publicly available on the Internet within 24 hours of
acceptance. The Commission's Internet address is http://www.sec.gov. The
Commission web site also contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock of Inktomi is quoted on the Nasdaq National
Market. Reports, proxy and information statements and other information
concerning Inktomi may be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
Inktomi 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 Inktomi's
Common Stock.
60
<PAGE>
EXPERTS
The consolidated balance sheets as of September 30, 1996, 1997 and 1998 and
the consolidated statements of operations, changes in stockholders' equity and
cash flows for the period from February 2, 1996 (date of incorporation) through
September 30, 1996 and the years ended September 30, 1997 and 1998 included in
this prospectus have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, Independent Accountants, which report is given on
the authority of that firm as experts in auditing and accounting.
61
<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' 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 Board of Directors and Stockholders of
Inktomi Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Inktomi Corporation and its subsidiaries at September 30, 1997 and 1998, and
the results of their operations and their cash flows for the period from
February 2, 1996 (date of inception) to September 30, 1996, and the years ended
September 30, 1997 and 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
October 16, 1998
F-2
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................. $ 7,043.9 $ 28,944.1
Short-term investments................................ -- 18,491.6
---------- ----------
Total cash and cash equivalents and short-term
investments.......................................... 7,043.9 47,435.7
Accounts receivable, net of allowances of $80.5 and
$631.7, respectively................................. 829.4 5,080.6
Prepaid expenses...................................... 142.3 500.5
Other current assets.................................. 29.1 50.9
---------- ----------
Total current assets.................................. 8,044.7 53,067.7
Property and equipment, net............................ 6,912.7 17,361.6
Other assets........................................... 199.4 211.5
---------- ----------
Total assets.......................................... $ 15,156.8 $ 70,640.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable...................... $ 2,489.6 $ 3,819.6
Current portion of capital lease obligations.......... -- 2,054.3
Accounts payable...................................... 1,028.5 4,884.4
Accrued liabilities................................... 1,147.5 6,601.0
Deferred revenue...................................... 714.9 1,315.4
---------- ----------
Total current liabilities............................. 5,380.5 18,674.7
Notes payable......................................... 5,029.4 4,050.1
Capital lease obligations, less current portion....... -- 4,646.2
---------- ----------
Total liabilities..................................... 10,409.9 27,371.0
Commitments (Note 4 and 14)
Stockholders' equity
Convertible preferred stock, $0.001 par value;
Authorized: 17,080,000 at September 30, 1997 and
10,000,000 at September 30, 1998; Issued and
outstanding: 14,938,121 at September 30, 1997 and
none at September 30, 1998........................... 14.9 --
Common stock, $0.001 par value; Authorized: 50,000,000
at September 30, 1997 and 100,000,000 at September
30, 1998; Outstanding: 5,961,845 at September 30,
1997 and 23,388,372 at September 30, 1998 ........... 6.0 23.4
Additional paid-in capital............................ 17,728.2 82,385.2
Deferred compensation and other....................... 909.5 (2,871.7)
Accumulated deficit................................... (13,911.7) (36,267.1)
---------- ----------
Total stockholders' equity............................ 4,746.9 43,269.8
---------- ----------
Total liabilities and stockholders' equity............ $ 15,156.8 $ 70,640.8
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR ENDED
FEBRUARY 2, 1996 (DATE OF SEPTEMBER 30,
INCEPTION) THROUGH ----------------------
SEPTEMBER 30, 1996 1997 1998
------------------------- ---------- ----------
<S> <C> <C> <C>
Revenues
Network applications........ $ -- $ 60.0 $ 7,962.3
Search services............. 530.1 5,725.1 12,463.6
--------- ---------- ----------
Total revenues........... 530.1 5,785.1 20,425.9
Operating expenses
Cost of revenues............ 238.8 1,511.9 4,816.0
Sales and marketing......... 898.2 7,835.2 21,451.6
Research and development.... 1,482.4 5,133.9 12,172.9
General and administrative.. 1,341.2 1,485.5 3,749.5
Acquisition-related
charges.................... -- -- 1,017.8
--------- ---------- ----------
Total operating
expenses................ 3,960.6 15,966.5 43,207.8
--------- ---------- ----------
Operating loss............... (3,430.5) (10,181.4) (22,781.9)
Interest income (expense),
net......................... (103.1) (194.3) 427.3
--------- ---------- ----------
Loss before income
taxes................... (3,533.6) (10,375.7) (22,354.6)
Provision for income taxes... 0.8 1.6 0.8
--------- ---------- ----------
Net loss................. $(3,534.4) $(10,377.3) $(22,355.4)
========= ========== ==========
Basic and diluted net loss
per share................... $ (1.88) $ (0.80) $ (1.15)
========= ========== ==========
Weighted average shares
outstanding used in
calculating basic and
diluted net loss per common
share....................... 1,884 12,977 19,360
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 2, 1996 (DATE OF INCEPTION)
THROUGH SEPTEMBER 30, 1996, THE YEAR ENDED SEPTEMBER 30, 1997,
AND THE YEAR ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
----------------- ------------- PAID-IN COMPENSATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL AND OTHER DEFICIT TOTAL
-------- ------- ------ ------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transfer of technology.. -- $ -- -- $ -- $ -- $(3,132.8) $ -- $(3,132.8)
Issuance of Common
Stock................... 2,187 2.1 42.9 45.0
Issuance of Preferred
Stock................... 10,072 10.1 4,011.5 4,021.6
Issuance of Common Stock
warrants................ 910.0 910.0
Exercise of Common Stock
warrants................ 280 0.3 350.3 (319.0) 31.6
Net loss................ (3,534.4) (3,534.4)
-------- ------ ------ ----- --------- --------- ---------- ---------
Balance, September 30,
1996.................... 10,072 10.1 2,467 2.4 4,404.7 (2,541.8) (3,534.4) (1,659.0)
Exercise of Common Stock
options................. 1,957 2.0 775.1 777.1
Issuance of Preferred
Stock, net of issuance
costs of $109........... 4,786 4.7 9,671.9 9,676.6
Issuance of Preferred
Stock upon conversion of
note payable............ 80 0.1 199.9 200.0
Forgiveness of note
payable related to
transfer of technology.. 3,132.8 3,132.8
Issuance of Preferred
Stock warrants.......... 490.2 490.2
Stock options granted to
consultants............. 93.2 93.2
Exercise of Common Stock
options in exchange for
note receivable......... 260 0.3 213.4 (213.7) --
Unearned compensation in
connection with issuance
of stock options........ 102.7 (102.7) --
Issuance of Common
Stock................... 1,278 1.3 2,360.5 2,361.8
Issuance of warrant to
lender.................. 51.5 51.5
Net loss................ (10,377.3) (10,377.3)
-------- ------ ------ ----- --------- --------- ---------- ---------
Balance, September 30,
1997.................... 14,938 14.9 5,962 6.0 17,728.2 909.5 (13,911.7) 4,746.9
Issuance of Preferred
Stock, net of issuance
costs of $1,128......... 3,298 3.3 12,883.8 12,887.1
Exercise of Common Stock
options................. 523 0.6 561.7 562.3
Exercise of Common Stock
warrants................ 708 0.7 1,774.6 (1,448.3) 327.0
Exercise of Preferred
Stock warrants.......... 1,225 1.3 4,070.9 4,072.2
Conversion of Preferred
Stock to Common Stock... (19,461) (19.5) 13,038 13.0 6.5 --
Unearned compensation in
connection with issuance
of stock options net of
amortization of $316.... 2,394.8 (2,078.8) 316.0
Issuance of Common
Stock, net of issuance
costs of $727........... 2,900 2.9 41,953.7 41,956.6
Issuance of Common Stock
warrants................ 425.0 425.0
Exercise of Common Stock
option in exchange for
note receivable......... 200 0.2 665.8 (666.0) --
Issuance of Common Stock
for prepaid
advertising............. 40 -- 284.8 284.8
Common Stock options
granted to consultants.. 35.8 35.8
Common Stock options
granted and immediately
exercised by
consultants............. 17 -- 60.4 60.4
Foreign currency
translation............. (48.9) (48.9)
Net loss................ (22,355.4) (22,355.4)
-------- ------ ------ ----- --------- --------- ---------- ---------
Balance, September 30,
1998.................... -- $ -- 23,388 $23.4 $82,385.2 $(2,871.7) $(36,267.1) $43,269.8
======== ====== ====== ===== ========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR ENDED
FEBRUARY 2, 1996 (DATE OF SEPTEMBER 30,
INCEPTION) THROUGH ----------------------
SEPTEMBER 30, 1996 1997 1998
------------------------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(3,534.4) $(10,377.3) $(22,355.4)
Adjustments to reconcile
net loss to net cash used
in operating activities
Depreciation and
amortization.............. 336.1 1,393.4 3,739.3
Provision for doubtful
accounts.................. 50.0 30.5 551.2
Non-cash expenses.......... 390.0 144.7 521.2
Unearned compensation...... -- -- 316.0
Changes in operating
assets and liabilities
Accounts receivable....... (177.8) (732.1) (4,802.4)
Prepaid expenses and
other assets............. (86.4) (284.4) (107.3)
Accounts payable.......... 388.7 226.5 2,383.4
Deferred revenue.......... -- 714.8 600.5
Accrued liabilities and
other.................... 458.2 689.1 5,501.5
--------- ---------- ----------
Net cash used in
operating activities.... (2,175.6) (8,194.8) (13,652.0)
Cash flows from investing
activities:
Purchases of short-term
investments............... -- -- (31,283.2)
Proceeds from maturities of
short-term investments.... -- -- 12,791.6
Purchase of property and
equipment................. (2,226.8) (6,001.9) (6,703.9)
Proceeds from sale of
equipment................. -- -- 927.6
--------- ---------- ----------
Net cash used in
investing activities.... (2,226.8) (6,001.9) (24,267.9)
Cash flows from financing
activities:
Proceeds from notes
payable................... 500.0 9,786.4 2,646.9
Repayments on notes
payable................... (300.0) (2,267.4) (2,296.1)
Payments on obligations
under capital leases...... -- -- (335.9)
Proceeds from issuance of
Preferred Stock, net...... 3,631.6 10,166.7 12,887.1
Proceeds from exercise of
stock options and
warrants.................. 31.5 777.0 4,961.5
Proceeds from issuance of
Common Stock.............. 45.1 2,361.8 41,956.6
Proceeds from issuance of
warrants.................. 910.0 0.3 --
--------- ---------- ----------
Net cash provided by
financing activities.... 4,818.2 20,824.8 59,820.1
--------- ---------- ----------
Increase in cash and cash
equivalents................ 415.8 6,628.1 21,900.2
Cash and cash equivalents at
beginning of period........ -- 415.8 7,043.9
--------- ---------- ----------
Cash and cash equivalents at
end of period.............. $ 415.8 $ 7,043.9 $ 28,944.1
========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Technology acquired for
notes payable.............. $ 3,132.8 $ -- $ --
========= ========== ==========
Accounts payable related to
purchase of property and
equipment.................. $ -- $ 413.4 $ 1,472.5
========= ========== ==========
Foregiveness of note payable
related to technology
acquired................... $ -- $ 3,132.8 $ --
========= ========== ==========
Preferred Stock issued as
compensation for services
received................... $ 390.0 $ -- $ --
========= ========== ==========
Exercise of Common Stock
options in exchange for
note receivable............ $ -- $ 93.2 $ 666.0
========= ========== ==========
Stock options issued as
compensation for services
rendered................... $ -- $ 93.2 $ 35.8
========= ========== ==========
Conversion of note payable
into Preferred Stock....... $ -- $ 200.0 $ --
========= ========== ==========
Assets acquired under
capital lease.............. $ -- $ -- $ 6,939.4
========= ========== ==========
Common Stock issued in
exchange for prepaid
advertising................ $ -- $ -- $ 284.8
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
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, Inktomi's
operations consisted primarily of start-up activities, including research and
development of Inktomi's core coupled cluster software architecture and
dataflow technology, personnel recruiting and capital raising. In May 1996,
Inktomi 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, Inktomi began licensing Traffic
Server, Inktomi's second application, a large-scale network cache designed to
address capacity constraints in high-traffic network routes. In September 1998,
Inktomi initiated its third application through its acquisition of C/2/B
Technologies Inc. ("C/2/B"), a developer of online shopping technology. The
Company issued 1,891,314 shares of its Common Stock in exchange for all of the
outstanding shares of C/2/B. C/2/B recognized no revenues since inception,
raised $5.9 million through various stock issuances, and recorded losses of
$1.7 million and $5.0 million for the years ended September 30, 1997 and 1998
respectively. The transaction was accounted for as a pooling of interests.
Financial results for all periods have been restated to reflect combined
operations.
REVERSE STOCK SPLIT:
In May 1998, the Board of Directors and stockholders approved a 2:3 reverse
stock split of the Company's Common Stock. All share and per share information
in the accompanying consolidated financial statements and notes thereto have
been restated for the 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 subsidiaries, Inktomi Limited, a United Kingdom subsidiary
formed in October 1997, and C/2/B Technologies Inc., incorporated in June 1996.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
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, other debt instruments and money market funds.
SHORT-TERM INVESTMENTS:
Short-term investments are comprised primarily of debt securities and are
classified as available-for-sale investments. Due to the short-term nature of
such investments, carrying value approximates fair value. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity, both of which are included in interest income. Realized
gains and losses are recorded using the specific identification method. All
investments have maturity dates from three to nine months.
F-7
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Any gains or losses on the disposal of property and
equipment are recorded in the year of disposition.
SOFTWARE DEVELOPMENT COSTS:
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or 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 software
development costs and research and development costs to expenses.
INCOME TAXES:
Income taxes are accounted for in accordance with SFAS 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.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of its long-lived assets in
accordance with 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 will
assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable.
REVENUE RECOGNITION:
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. A significant portion of the Company's search advertising revenues
are from a search service that 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.
F-8
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A portion of the advertising on the Wired search site is exchanged for
advertisements on the web 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, and expense from barter transactions is recognized when
advertisements are delivered on the other companies' web sites. Barter revenues
and expenses were approximately $133,000, $1,580,000 and $1,810,000 for the
period from February 2, 1996 (date of inception) through September 30, 1996 and
for the years ended September 30, 1997 and 1998, respectively.
Network applications revenues represent primarily license, maintenance,
upgrade and distribution fees for the Company's Traffic Server product. License
and distribution fees are typically recognized when the software is delivered
and all significant obligations have been met. Maintenance and upgrade revenues
are recognized pro-rata over the life of support and upgrade agreements.
COMPUTATION OF HISTORICAL 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 have not been included as such
shares are anti-dilutive.
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 and such deposits exceed federally insured limits.
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 total revenue.
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 year ended September 30, 1998, four customers represented
35%, 16%, 14% and 12%, respectively, of all revenue generated by the Company,
and 10%, 0%, 22% and 8% of accounts receivable at September 30, 1998,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income. SFAS 130 establishes standards for reporting
comprehensive income and its components in a financial statement. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains/losses on available-for-sale
securities. The difference between net loss, as reported, and comprehensive
income relates solely to the change in the cumulative translation adjustment
for the respective periods which were not material to these financial
statements.
F-9
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information, effective
for the year ended September 30, 1999. The Company is currently determining the
disclosures that may be required under this pronouncement.
(2) PROPERTY AND EQUIPMENT:
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1998
-------- ---------
<S> <C> <C>
Property and equipment, net
Computer equipment..................................... $8,047.1 $21,216.8
Furniture and fixtures................................. 448.9 1,243.8
Leasehold improvements................................. 65.8 289.4
-------- ---------
8,561.8 22,750.0
Less: accumulated depreciation and amortization........ 1,649.1 5,388.4
-------- ---------
$6,912.7 $17,361.6
======== =========
</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 furniture and fixtures and totaled $0
and $6,939,400 (including equipment previously purchased), with related
amortization of $0 and $335,900 as of September 30, 1997 and 1998,
respectively.
(3) INCOME TAXES:
The principal items accounting for the difference between the income tax
benefits computed using the United States statutory rate and the provision for
income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Federal tax benefit at statutory rate....... $(1,201.4) $(2,944.6) $(7,600.6)
State taxes, net of federal tax effect...... (214.8) (526.7) (1,299.6)
Research and experimentation credits........ (56.7) (75.4) (468.6)
Unutilized net operating losses............. 1,473.7 3,548.3 9,369.6
--------- --------- ---------
$ 0.8 $ 1.6 $ 0.8
========= ========= =========
</TABLE>
Net deferred tax assets comprise (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Net operating loss carryforwards--federal and
state............................................. $ 4,005.7 $ 12,576.0
Research and experimentation credit carryforwards.. 132.2 1,087.3
Other liabilities and reserves..................... 83.5 634.0
Property and equipment............................. (210.0) (662.5)
Acquired technology................................ 593.2 173.3
Deferred revenue................................... 356.6 523.8
Valuation allowance................................ (4,961.2) (14,331.9)
--------- ----------
Net deferred tax asset......................... $ -- $ --
========= ==========
</TABLE>
F-10
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
At September 30, 1998, the Company had the following carryforwards available
to reduce future taxable income and income taxes (in thousands):
<TABLE>
<CAPTION>
1998
---------------
FEDERAL STATE
------- -------
<S> <C> <C>
Net operating loss carryforwards............................. $31,524 $31,869
Research and experimentation credit carryforwards............ 718 370
</TABLE>
The federal and state net operating loss carryforwards expire through 2018
and 2003, respectively, and the research and experimentation credits expire
through 2003.
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.
(4) NOTES PAYABLE AND LINE OF CREDIT (IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Bank line (1).......................................... $ -- $ --
Bank equipment notes (2)............................... 1,750.0 3,388.9
Bank term note (3)..................................... 1,833.3 1,166.7
Other bank note (4).................................... -- 490.0
Notes payable (5)...................................... 3,396.4 2,444.1
Other notes payable (6)................................ 539.3 380.0
--------- ---------
7,519.0 7,869.7
Less current portion................................... (2,489.6) (3,819.6)
--------- ---------
$ 5,029.4 $ 4,050.1
========= =========
</TABLE>
- --------
(1) The Company has a $2,500,000 revolving line of credit collateralized by
substantially all assets. Amounts borrowed under the line require monthly
payments at prime (8.5% at September 30, 1998) and any unpaid principal and
interest will be due on May 1, 1999. The Company also has $5,000,000 of
additional unused availability under an equipment loan facility with the
same bank. Borrowings under the facility are repayable in 36 equal monthly
installments plus interest at 0.25% over prime (8.75% at September 30,
1998). At September 30, 1998 the Company had no borrowings outstanding. The
master bank credit agreement requires the Company to comply with certain
financial covenants related to working capital, tangible net worth, debt
service coverage and liquidity coverage. Pursuant to the agreement, the
Company may not distribute cash dividends. As of September 30, 1998, the
Company was in compliance with the covenants.
(2) The bank equipment notes include two loans. The first loan for $1,750,000
has monthly payments of interest only until May 1998 and then payable in
equal monthly payments of $48,611 plus interest at 0.5% over prime (9.0% at
September 30, 1998) through April 2001. The second loan for $2,000,000 has
monthly payments of $55,556 plus interest at 0.25% over prime (8.75% at
September 30, 1998) through June 2001. The notes have collateralization and
covenant requirements consistent with the bank line of credit as described
above.
(3) The bank term note is payable in equal monthly payments of $55,556 plus
interest at 0.5% over prime (9.0% at September 30, 1998) through June 2000.
The note has collateralization and covenant requirements consistent with
the bank line of credit as described above.
(4) The other bank note consists of a term note obtained by C/2/B Technologies
Inc., an Inktomi subsidiary. The maturity of this note was accelerated with
the change of control of C/2/B Technologies in September 1998. The note is
payable in full by November 1998 and requires payment with interest at
prime (8.5% at September 30, 1998).
F-11
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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 proceeds from 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 proceeds from the notes.
Scheduled maturities of long-term debt at September 30, 1998 are as follows:
<TABLE>
<S> <C>
Years ending:
September 30, 1999................................................ $3,819.6
September 30, 2000................................................ 3,151.8
September 30, 2001................................................ 898.3
--------
$7,869.7
========
</TABLE>
The carrying value of notes payable approximated fair value as such debt
agreements were recently negotiated.
(5) ACCRUED LIABILITIES:
Accrued liabilities comprise (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Accrued payroll, vacation and bonuses..................... $1,078.9 $3,814.9
Other accrued liabilities................................. 68.6 2,786.1
-------- --------
Total accrued liabilities............................. $1,147.5 $6,601.0
======== ========
</TABLE>
(6) 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
September 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
Years ending September 30:
1999................................................... $ 4,311.6 $2,694.0
2000................................................... 2,224.2 2,677.6
2001................................................... 1,992.6 2,504.7
2002................................................... 1,480.8 13.9
and thereafter......................................... 1,478.2 --
--------- --------
Total minimum lease payments............................. $11,487.4 7,890.2
=========
Less amount representing interest........................ 1,189.7
--------
Present value of minimum lease payments.................. 6,700.5
Less current portion..................................... 2,054.3
--------
$4,646.2
========
</TABLE>
Rent expense for the period from inception through September 30, 1996 and the
years ended September 30, 1997 and 1998 were $83,886, $372,700 and $1,475,300,
respectively.
F-12
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) STOCKHOLDERS' EQUITY:
In June 1998, all 19.5 million shares of Preferred Stock were converted into
13.0 million shares of Common Stock of the Company.
In June 1998, the stockholders of the Company approved an amendment to the
Company's certificate of incorporation authorizing 10,000,000 shares of
undesignated Preferred Stock of which the Board of Directors has the authority
to issue and to determine the rights, preferences and privileges.
In June 1998, the Company raised $42.0 million, net of issuance costs, from
an initial public offering of 2,356,497 shares of Common Stock and other stock
offerings.
(8) OTHER EQUITY:
Other equity includes (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Deferred Compensation................................... $ (102.7) $(2,181.5)
Warrants issued and options granted to consultants...... 1,225.9 358.4
Shareholder loans....................................... (213.7) (999.7)
Cumulative foreign exchange adjustment.................. -- (48.9)
-------- ---------
Total deferred compensation and equity.............. $ 909.5 $(2,871.7)
======== =========
</TABLE>
(9) WARRANTS:
In 1997 and 1998, the Company issued warrants to purchase Common Stock to
investors, a customer and financial providers. At September 30, 1998 the
following are outstanding:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
COMMON STOCK EXERCISE PRICE EXPIRATION DATES
------------ -------------- -------------------------
<S> <C> <C> <C>
Common Stock.......... 417,701 $ 137,841 April 2002
Common Stock.......... 208,926 $1,082,000 April 1999 to August 2001
Common Stock.......... 103,179 $2,959,937 June 2002
</TABLE>
(10) STOCK OPTIONS:
Pursuant to the Inktomi Corporation 1998 Stock Plan, its 1996 Equity
Incentive Plan and the C/2/B Technologies Inc. 1997 Stock Plan (the "Plans") as
amended, employees, directors and consultants of the Company may be granted
options to purchase shares of Common Stock. At September 30, 1998, 1,000,000
shares of Common Stock were reserved under the 1998 plan. At September 30,
1998, shares were no longer available for issue from the 1996 and 1997 plans.
Options granted under the Plans include incentive stock options and
nonqualified stock options. All stock options granted under the Plans 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 for the
1996 and 1998 plans, and generally over 36 months for the 1997 plan). Prior to
the adoption of the Plans, the Company granted nonqualified stock options to
purchase Common Stock to certain employees and consultants.
F-13
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the activity under all Plans is set forth below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
EXERCISE AGGREGATE WEIGHTED
PRICE PER EXERCISE AVERAGE
SHARES SHARE PRICE EXERCISE PRICE
------ ------------ --------- --------------
<S> <C> <C> <C> <C>
Outstanding at February 2,
1996....................... -- -- $ -- --
Granted..................... 2,361 $0.11- $0.45 899.2 $ 0.381
Canceled.................... (180) $0.11- $0.45 (69.7) 0.387
------ ------------ --------- -------
Outstanding at September 30,
1996....................... 2,181 $0.11- $0.45 829.5 0.380
Granted..................... 2,145 $0.33- $1.95 1,260.0 0.587
Exercised................... (2,217) $0.11- $1.38 (990.8) 0.447
Canceled.................... (174) $0.45 (78.0) 0.451
------ ------------ --------- -------
Outstanding and exercisable
at September 30, 1997...... 1,935 $0.11- $1.95 1,020.7 0.527
Granted..................... 1,666 $3.33-$53.75 36,672.2 22.012
Exercised................... (740) $0.11-$10.50 (1,288.7) 1.741
Canceled.................... (179) $0.45-$18.00 (211.4) 1.181
------ ------------ --------- -------
Outstanding and exercisable
at September 30, 1998...... 2,682 $0.11-$53.75 $36,192.8 $13.495
====== =========
</TABLE>
At September 30, 1998, options to purchase 956,872 shares were fully vested.
Of the stock options exercised, 1,714,502 shares were no longer subject to
repurchase.
The following table summarizes information with respect to stock options
outstanding at September 30, 1998:
<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 9/30/98 LIFE (YEARS) PRICE AT 9/30/98 PRICE
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.11-$0.45 1,248 8.08 $ 0.42 1,248 $ 0.42
$1.38-$13.00 738 9.37 $ 6.04 738 $ 6.04
$18.00-$53.75 696 9.88 $44.75 696 $44.75
</TABLE>
The following information concerning the Plans is provided in accordance with
SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounts for
the Plans in accordance with Accounting Principles Board (APB) Opinion No. 25
and related interpretations.
F-14
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each employee and director stock option grant has been
estimated on the date of grant using the minimum value method for grants in the
period February 2, 1996 (date of inception) to September 30, 1996, and the year
ended September 30, 1997. For the year ended September 30, 1998, the fair value
has been estimated using the Black-Scholes Option Pricing Model. The following
assumptions were used in determining the fair value of options granted:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rates................. 6.48%-6.60% 6.00%-6.47% 5.47%-6.60%
Expected Life............................ 5 5 5
Dividends................................ $0 $0 $0
Volatility............................... 0% 0% 140%
</TABLE>
The following comprises the pro forma information pursuant to the provisions
of SFAS No. 123 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Net loss--Historical...................... $(3,534.4) $(10,377.3) $(22,355.4)
Net loss--Pro Forma....................... $(3,575.1) $(10,751.7) $(23,875.8)
</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.
In connection with the completion of the Company's initial public offering,
certain options granted in 1997 and 1998 have been considered to be
compensatory. Compensation associated with such options for the years ended
September 30, 1997 and September 30, 1998 amounted to $102,725 and $2,394,800,
respectively. Of these amounts, $316,000 were charged to operations for the
year ended September 30, 1998 and $2,181,525 will be charged to operations
during the remaining period to 2002.
(11) RELATED PARTY TRANSACTION:
In April 1998, the Company provided a loan to a corporate officer to exercise
Common Stock options. The loan totaled $666,000 and is repayable to the Company
in April 2002, plus interest at a rate of 5.69%. The loan is collateralized by
the underlying Common Stock purchased.
(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, 1998.
F-15
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) EARNINGS PER SHARE ("EPS"):
The following is a reconciliation of the numerator and denominator used to
determine basic and diluted EPS (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FEBRUARY 2, 1996
(DATE OF INCEPTION)
THROUGH YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, --------------------------
1996 1997 1998
------------------- ------------ ------------
<S> <C> <C> <C>
Numerator -- Basic and
Diluted EPS
Net loss................. $(3,534.4) $ (10,377.3) $ (22,355.4)
========= ============ ============
Denominator -- Basic and
Diluted EPS
Weighted average Common
Stock outstanding....... 1,884 12,977 19,360
========= ============ ============
Basic and diluted loss per
common share.............. $ (1.88) $ (0.80) $ (1.15)
========= ============ ============
</TABLE>
(14) SUBSEQUENT EVENTS:
In October 1998, the Company signed a lease for new office space located in
Foster City, California. This lease is anticipated to commence on June 8, 1999,
for a duration of 11 years thereafter. During the term of the lease, Inktomi is
to occupy a total of 177,147 square feet, incurring a minimum lease obligation
of $79,928,000. In connection with this lease agreement, Inktomi paid a cash
security deposit of $1,308,000 in October 1998 and is obligated to provide a
supplemental deposit in the form of a letter of credit in the amount of
$4,844,000 by January 1999.
In October 1998, the Board of Directors authorized management of the Company
to file a Registration Statement with the Securities and Exchange Commission
covering the proposed sale of additional shares of its Common Stock to the
public.
F-16
<PAGE>
UNDERWRITING
Inktomi, the selling stockholders and the underwriters for the offering (the
"Underwriters") named below have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., BT Alex. Brown Incorporated,
Hambrecht & Quist LLC, and Merrill Lynch & Co. are the representatives of the
Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ........................................... 600,000
BT Alex. Brown Incorporated..................................... 600,000
Hambrecht & Quist LLC........................................... 600,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................... 600,000
BancBoston Robertson Stephens Inc. ............................. 125,000
NationsBanc Montgomery Securities LLC........................... 125,000
Advest, Inc. ................................................... 70,000
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated................... 70,000
Jesup & Lamont Securities Corporation........................... 70,000
SoundView Technology Group, Inc. ............................... 70,000
Sutro & Co. Incorporated........................................ 70,000
---------
Total......................................................... 3,000,000
=========
</TABLE>
----------------
The Underwriters are committed to take and pay for all of the shares
indicated in the table above, if any are taken.
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional 450,000
shares from Inktomi to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the Underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Inktomi and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the Underwriters' option to purchase 450,000 additional shares.
<TABLE>
<CAPTION>
Paid by the Company
-------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ 5.60 $ 5.60
Total................................................. $ 1,680,000 $ 4,200,000
<CAPTION>
Paid by the Selling Stockholders
--------------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ 5.60 $ 5.60
Total................................................. $15,120,000 $15,120,000
</TABLE>
BT Alex. Brown Incorporated acted as placement agent in connection with
Inktomi'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 Inktomi
on the same terms as other investors in the private placement, for a total
purchase price of $499,999.75. These shares converted into 78,432 shares of
Common Stock in connection with Inktomi's initial public offering consummated
in June 1998. The purchase of such shares was deemed by the National
Association of Securities Dealers, Inc. to constitute underwriting compensation
in connection with Inktomi's initial public offering in June 1998. As a result,
such affiliates of Hambrecht & Quist LLC agreed that they will not sell,
transfer, assign or hypothecate such shares until June 9, 1999, except to
officers or partners (not directors) of the underwriter and members of the
selling group and/or their officers or partners.
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $3.35 per share from the
U-1
<PAGE>
initial public offering price. Any such securities dealers may resell any
shares purchased from the Underwriters to certain other brokers or dealers at a
discount of up to $0.10 per share from the initial public offering price. If
all the shares are not sold at the initial offering price, the representatives
may change the offering price and the other selling terms.
Inktomi and the selling stockholders have agreed with the Underwriters not to
dispose of or hedge any of their Common Stock or securities convertible into or
exchangeable for shares of Common Stock during the period from the date of this
prospectus continuing through the date 90 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. See "Shares
Available for Future Sale" for a discussion of certain transfer restrictions.
In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Common
Stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a particular
Underwriter repays to the Underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Inktomi estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $600,000.
Inktomi and the selling stockholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market makers' bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
U-2
<PAGE>
Heading: "Inktomi: Scaling the Internet"
[ART WORK]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 4
Use of Proceeds.......................................................... 13
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Corporate Information.................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 41
Certain Transactions..................................................... 50
Principal and Selling Stockholders....................................... 52
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 58
Additional Information................................................... 60
Legal Matters............................................................ 60
Experts.................................................................. 61
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 Shares
INKTOMI CORPORATION
Common Stock
----------------
[INKTOMI LOGO]
----------------
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
